Thursday, November 10, 2005

Let the market do the work

There are lots of claims that we are too dependent on oil as an energy source, and that the government should step in and tax gasoline to fund research into alternative energy. For an example of this line of thinking, the New York Times today has an editorial calling for a "windfall profits tax" on oil companies used to fund alternative energy. There is also a lot of controversy lately over "price gouging" by the oil companies, as evidenced by the current Senate hearing on the profits of the big oil companies.

The useful thing about markets, though, is that high prices are a signal of the degree of scarcity in the market. High prices of gasoline have decreased the quantity of gasoline demanded by US consumers over the past months. Further, high prices of gasoline spur investment into other energy sources (since the potential profits from alternative energy sources are much higher). In an article in this week's Economist (subscription required), they confirm that the recent high oil prices have led to more investment in alternative energy sources:

GE's wind-turbine business, which was inconsequential a few years ago, made over $2 billion in sales this year. Ethanol, a costly green fuel which in America is usually made from corn, now looks a better buy. And wind and solar power are also back in fashion.

Industry sources reckon that global sales of solar panels this year will reach $11 billion, up from $7 billion last year. America's Energy Conversion Devices, a pioneer in hydrogen storage and solar cells, has seen its shares soar by 50% this year and venture-capitalists are taking an increasing interest in the industry.

All told, reckons Christopher Flavin of the Worldwatch Institute, a green think-tank, investments in “new renewables” (not including big dams, which nobody likes anymore) grew from $24 billion globally in 2003 to $29 billion in 2004—and, he thinks, the pace of growth is even faster this year.

The article goes on to discuss that high oil prices are not only increasing environmentally friendly energy sources, but also alternative sources that are not so "green," like coal.

Overall, the point is that even though high prices of gasoline are painful to pay, those same high prices will help reduce reliance on oil more efficiently than any reasonable government plan could.


Anonymous said...

I agree that as the gas prices increase research into alternative energy will increase. As the prices go higher and higher people will be less willing to pay the gas prices and press harder for new energy sources. If there is one thing americans respond to it is money. If the price of gas stays low most people are not going to care enough to take the time to express the want for alternative energy. Thus companies will not take the time to devote to research for alternative energy. If people don't demand it companies are not going to make it. In this way the gas prices can be seen as good in the long run even if they are making poeple grumpy in the short run.
erin clay

Brian Zabell said...

I don't want to sound political but I think that some of the $250+ billion we've dumped into the oil war should've been spent setting up some R&D for alternative energy instead.

Petroleum is not the only efficient material or method or generating energy.

Japan's energy R&D program is planning to have commercial-scale methane hydrate quantities by 2016

Rebecca said...

An example of how increasing prices has increased research and interest in other energy sources is BP. As gas prices have increased, BP has become increasingly interested in portraying themselves as environmentalist. Their commercials talk about their R&D, and their website discusses how to reduce your carbon emissions. Whether BP is actually intensively researching alternative methods or just using environmentalism as a means of non-price competition, their advertising campaign reflects consumers' interest in other energy sources.

Carl Youngdale said...

I believe high gsaoline costs will have developed countries operating on alternate enrgy sources completely within the next 30 years. But what would the marginal benefit of lowering gasoline prices as much as possible be? I see it this way: if we lower gas prices to ridiculously low levels, we'll run out of crude oil in 50 years or less (well within my lifetime, knock on wood). So, as I fill my tank with purified vegetable oil, I can look down at the rest of society and say, "Ha! Look what you've all done. You have run the supply down to zero." So, in conclusion, marginal benefit = 65-year-old Carl's personal satisfaction for about a couple of hours; marginal cost = the possible decline of civilizaion itself. Stick with high-prices.

Anonymous said...

I think we should put less emphasis on preserving our current oil supply and managing gasoline prices and focus more on developing alternative energy sources. Let economics control the gas market so the government can go about finding a substitute for gasoline. The search for new oil sources, price controls on gasoline, and conflicts about controlling oil supplies are all just ways of avoiding the real energy problem. We will run out of oil someday, and instead of waiting until that time and panicking we should try to get a solution before the problem gets too serious.