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energy. oil and natural gas. supply 62% all energy consumed worldwide how to transition to new sources? use until mc of further use exceeds mc of substitute resources More abundant coal Or renewable solar transition should be smooth have allocations been efficient?. natural gas.

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Energy

energy


Oil and natural gas

oil and natural gas

  • supply 62% all energy consumed worldwide

  • how to transition to new sources?

  • use until mc of further use exceeds mc of substitute resources

    • More abundant coal

    • Or renewable solar

  • transition should be smooth

  • have allocations been efficient?


Natural gas

natural gas

  • huge shortages on 1974-75. why?

    • rise of automobile

    • rise of demand for gasoline

    • search for new sources of crude oil

    • uncovered large quantities of natural gas

  • in the 50’s gov’t put price ceilings


The effect of price controls

the effect of price controls


The effect of price controls1

the effect of price controls

  • price ceiling reduces MUC (higher future prices no longer possible), decreasing total mc curve (supply)

  • consumers better off today (gained BC)

  • producers not better off:

    • Overproducing

    • giving up scarcity rent could have gotten without price controls (area D only measures current profit)


The effect of price controls2

the effect of price controls


Consumers also lose in the future

consumers also lose in the future

  • as resource depleted, supply curve shifts up (reflecting higher extraction costs)

  • when mc reaches price ceiling, QS=0

  • but demand is not zero at that price: shortages

  • suppliers willing, demanders willing, but price control will not allow

  • overallocation to current consumers, underallocation to future consumers

  • losses to future consumers/producers are greater than gains to current consumers


Energy

oil

  • similar price control problems

  • second source of misallocation: OPEC

  • restrict supply, raise prices

  • why OPEC so effective?

    • price elasticity of demand for oil

      • inelastic, substitutes exist but are expensive

    • income elasticity of demand for oil

      • income grows, demand grows

    • supply responsiveness of non-OPEC members

      • OPEC produces 2/3; only Mexico may have influence


Oil national security problem

oil: national security problem

  • excessive dependence on imports

    • national security issue

    • dependent on countries with unstable political history

    • actual price we pay is higher than world price

  • when national security is an issue

    • market consumes too much oil

    • domestic production is too small


The national security problem

the national security problem

vulnerability premium


Market vs efficient allocations

market vs. efficient allocations

  • vulnerability premium reflects additional national security costs caused by imports

  • horizontal because each individual supplier has no effect on world price

  • market allocation

    • demand Q5

    • Q1 domestically produced

    • Q5-Q1 imported

  • efficient allocation

    • demand Q4

    • Q2 domestically produced

    • Q4-Q2 imported


The national security problem1

the national security problem

vulnerability premium


What would happen during an embargo

what would happen during an embargo?

  • consume Q1 at price of P2

  • supply curve assumes enough time to develop the resources

  • if embargo hits, not enough time – in short run supply curve becomes perfectly inelastic at Q1

  • price rises to P2 to equate supply & demand

  • huge loss in CS


The national security problem2

the national security problem

vulnerability premium


Self sufficiency

self sufficiency?

  • domestic supply = domestic demand

  • net benefits from Q3 < net benefits from Q4 (efficient allocation w/imports)

  • Efficiency loss (shaded triangle): because foreign mc is lower than domestic mc (supply)

    • loss between Q2 and Q4 (where domestic mc > foreign mc)


Still better to import

still better to import

  • vulnerability premium lower than cost of self sufficiency

    • embargos not certain events

    • possible to reduce vulnerability (strategic reserves)

    • using more domestically incurs user costs by lowering amounts available for future

  • paying vulnerability premium creates more efficient balance btw present/future


The national security problem3

the national security problem

vulnerability premium


How to achieve efficient consumption q4 instead of q5

how to achieve efficient consumption (Q4 instead of Q5)?

  • energy conservation, e.g. gas tax

    • reduces consumption, but no affect on share of imports

  • subsidize domestic supply

    • reduce imports, but not consumption

  • tariff on imports (P1-P0) or quota on imports (Q4-Q2)

    • price rises to P1, consumption falls to Q4, imports Q4-Q2


Transition fuels

transition fuels

  • how to transition to renewables?

  • fuels receiving most attention: coal, uranium

    • coal: abundant

    • uranium: not abundant with current reactors

      • technology is changing this

  • biggest issue btw these: environmental impact


Transition fuels environmental problems

transition fuels: environmental problems

  • coal: air pollution (sulfur, particulates, CO2)

  • uranium:

    • nuclear accidents

    • storage of radioactive waste


Energy conservation

energy conservation

  • significant role: defer capacity expansion

  • cost increases are substantial

  • by reducing demand for electricity, delay new plants, delay rate increases

  • current pricing systems rely on AC pricing, lower than true MC of new units


Utilities invest in conservation when cheaper

utilities invest in conservation when cheaper

  • rebates for conservation measures in homes

  • incentives for solar water heaters

  • energy audits


Load management

load management

  • peak period imposes 2 costs on utilities

    • requires firing up special generators during those periods (higher MC)

    • growth in peak period demand => capacity expansion

  • peak load pricing


The long run renewables

the long run: renewables

  • hydro: flowing water

  • biomass: burning

  • solar energy: heat to drive turbines

  • solar into electricity: photovoltaics

  • wind energy: drive turbines

  • hydrogen: fuel cars / furnaces

  • geothermal: from deep in the earth


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