Thursday, September 07, 2006

New Oil

Frank Warner has a post on the new Chevron discovery under the Gulf of Mexico. He is generally pleased about it, and so am I. Oil availability is a good thing for us considering our present precarious position. If we use it as a funding source and an insurance policy while transitioning briskly to a less destructive energy paradigm, then it will have been a godsend. Unfortunately, as you might guess, it may end up just enabling our oil addiction. Anyway, here's what I had to say:

Free markets are wonderful at increasing supply when the price is right. People often underestimate that power. All of a sudden we're getting huge "new" deposits, such as the Athabasca oil sands, which just wouldn't exist at $10. If the price went high enough, people would find a way to make oil from banana peels and parking tickets.

The thing that markets won't do for you is control externalities, byproducts that no one pays for. Since CO2 is one of those, it's important to ascertain the long-term cost (or conceivably benefit) of that byproduct to society and impose said cost on the producers. (We can keep the benefit.) If we impose that cost reliably, producers will invent a way to handle it, which could work out well for everyone.

Personally, I would prefer that we have a coherent energy policy that would lead to a sustainable future. The way to do that is to simply overtax less desirable energy sources in order to advantage more desirable ones. IMO, the biggest untapped energy supply in our present economy is conservation. The most important transition source is nuclear energy, which should be subsidized, and the most important ultimate source is energy from nuclear fusion. Alternative energy can play a supporting role.

I'm glad we have new oil from an American source. It will help with the political issues, but in the long run, cheap oil is harmful to sensible planning.

Posted by: jj mollo | September 07, 2006 at 11:23 AM

Loading the externalities onto oil prices is a good idea. Unfortunately, one easy way for the providers to avoid such costs might, I'm hypothetical here, be to preferentially release methane rather than CO2. Another way might be to sequester CO2 in such a way that it isn't released until later, creating a problem for the future, but providing a net present benefit to the producer. Undsoweiter. When you squeeze the tube hard enough, toothpaste will come out of all the holes.

All these things would be secondary externalities related to the tax structure. The complexity becomes such that you have to tax the net-present-greenhouse-impact, which would be hard to do. Since you can't practically impose the greenhouse cost on the producers -- they will find a way around it -- the government needs to establish a comprehensive energy policy that will direct economic activities toward a reasonable future. You may have noticed that there is some argument over what that reasonable future might entail. It would be nice if annual increases in fossil fuel consumption, as presently projected, were part of a reasonable future scenario, but it is not so, at least not without some major technical innovations.

Free markets will, in all probability, lead us into a workable future, but the consequent dislocations could be painful. The US population could drop dramatically, as it did in Russia during the transition from Communism. Transitions can be tough. It's best to plan for such a transition ahead of time, which brings us to another failing in free market systems. Money moves toward the best strategy based on net present value. The market is unconcerned about an uncertain future collapse that must be coming, as long as it can make money before that collapse. Development was taking place in New Orleans right up until the evacuation.

Only insurance companies bother themselves about such stuff. And insurance companies look out for number one. Please note that insurance companies have not taken it upon themselves to rebuild New Orleans. If we expect them to dig us out after some world-wide ecological catastrophe, we are seriously deluded. OK, OK, I know. We are seriously deluded anyway.

9/7/2006 11:49 AM

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At Thursday, September 07, 2006 10:19:00 PM, Blogger mal said...

Another interesting post.

Free Markets are great for many things, but as you stated they do not address the "externalities" piddling things like the Cuyahoga river burning, global warming, ozone depletion etc.. At one time I did not believe in Government intervention in free markets, but I now recognize there is a real need for markets to operate with in "public policy" to address those externalities. I will continue to cite the example that made me a beliver, the CAFE requirements laid on the automakers in the 70's over loud objections

As you stated, I am afraid of a temporarily more ready and less expensive supply derailing our efforts for conservation and long term energy independence. We allowed that to happen to CAFE in the 90's, to our detriment

At Friday, September 08, 2006 12:27:00 AM, Blogger Steve said...

Good comments both.

Back when I was fiddling around on the periphery of electricity demand side management there was much discussion of valuing externalities. Obviously nobody wanted to hear it.

At Friday, September 08, 2006 3:19:00 PM, Blogger jj mollo said...

Supposedly the ability to sue for damages should address the negative externality issue. Unfortunately this is nowhere near as efficient or fair as market driven changes would be. Assessment of costs is very difficult. Damage assessments by juries are highly variable and bizarre in process.

Big problems are that the people who have the knowledge often have no standing, and the people who have been wronged have no means or information. The defence usually has no opportunity to correct their actions because they've often taken place in the distant past, sometimes under another company and different management. Opposing political groups use litigation as a bludgeon, unmodulated for differential impact.

Whenever you see people buying insurance or paying retainers to lawyers, it's an indication that they have little control over the results. They are admitting that they can't measure the relative cost/benefit on a monetary scale, or adequately fund for uncertainty.

CAFE standards were wonderful when initiated. It has been instructive, however, to see how much the behavior of automakers has been distorted by loopholes and arbitrary class distinctions.

At Saturday, September 09, 2006 12:35:00 AM, Blogger jj mollo said...

Next year Ford is going to come out with a Hummer lookalike that has oversized wheels. They're going to classify it as a tractor. You'll be able to get a credit on your income tax for buying a flexible fuel vehicle and work an accelerated depreciation deduction for farm equipment, but only if you have at least an acre and a half. </snark>


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