Apologies if somebody allready posted this link. http://today.reuters.com/business/n...TRIDST_0_BUSINESSPRO-ENERGY-IEA-DEMAND-DC.XML
Kubilai - sorry, I didn't notice your response to my post. Here's my thoughts. Yes. I couldn't agree more. I agree. However, the way you "somehow" attach monetary value to a shared resource is through regulation of markets. You can't force a free market to price in an externality without regulation. The free market for US electricity will not price in the cost of Canadian acid rain all by itself. The free market for coal will not price in the environmental cost of the CO2 produced when the coal is burned. The free market for crude oil will not price in the cost of researching alternative energy sources, at least not until it is too late. As you point out, creating a new market for the exernality is effective at maximizing the economic efficiency of regulation. Good examples are tradable pollution credits, or the FCC's auctions of electromagnetic spectrum. I am a big believer in replacing crude bureaucracies with market forces. Well that brings us back to gasoline taxes. Even today, Americans pay a price for a gallon of gasoline that significantly underrepresents the true cost to society when that gas is burned. I guess you could use a complex market driven scheme to assign pollution credits, carbon credits, alternative fuel research credits, and so on to every gallon of gasoline. Or you could just slap on a $2/gal tax like the Europeans do. Neither way is perfect, but either one is better than a free market which blithely ignores exogenous costs. See also: http://en.wikipedia.org/wiki/Externality Martin
hmmm.... they say oil is an inelastic good..... which basically means that no matter what the price people are still going to consume the same quantitiy. ok, so it isnt perfectly inelastic, but i'd say the average person uses 3/4 of his gas on commuting to work... no matter what the price of gas he's still going to have to pay it. the demand will be there. and gas is still cheaper to other energy sources at the moment.
<i>hmmm.... they say oil is an inelastic good.....</i> Very inelastic in the short run, but quite elastic in the long run. People don't stop driving to work, but they buy more fuel efficient cars, conserve energy at home, manufacturing gets more efficient, nuclear power plants get built, society invests in public transportation, etc. It takes many years, but we saw all of this happen in the '70s. Europe uses half as much oil as the United States per unit GDP, and gas costs two or three times as much there. Since demand is inelastic, I guess that's just a coincidence. Martin
Sparohok, I agree with you that regulation is required to protect the basic rules that keep a free market fair. For one, I don't think the capital markets would be as liquid and efficient as today if there were no protection of private property, and no laws against insider trading and price manipulation. Where we differ is although the rules should be set and enforced by a government, I believe price should never be. Bureaucratic control of prices always leads to porkbarrel behavior and gross inefficiencies. It maybe hard to come up with a free market trading system for environmental damage, but it is being tried around the world and I'd never bet against human ingenuity. As traders, we all know to profit you need to know the direction and the timing. We know the direction of energy production is heading away from fossil fuel, but is this the right time? Trading in the right direction but at the wrong time can bankrupt you, pushing to shift away from cheap fossil fuel too early can hamper your economy. Perhaps this has happened in Europe and Japan. The US has simply chosen to focus on its economy in energy policy and let market prices signal when it is time to start the switch. Having a stronger economy allows you more resources to throw at research and capital investment for alternatives when the time comes too. Rather than trying to mold all nations the same way, competition at the nation level is a good thing too, so you can see who has the better approach and learn from them. Time will tell.
We were talking about taxation. Do you consider consumption taxes to be price fixing? I don't. FWIW I agree that government price fixing (which many Asian countries do with distillate prices) is almost always a bad idea. Taxes are always distortionary and inefficient, granted, but not nearly so much so as price fixing. I do agree that regulated markets for trading environmental costs is a better idea than a consumption tax, and could result in greater economic efficiencies. It may even be more politically expedient with a Republican congress. But it may be impractical for some of the less obvious externalities. I think the most serious problem with a gas tax is one of social equity. But that's another discussion entirely. The reason I put research in the category of an externality is that it takes a long, long time. Basic research isn't very expensive in the grand scheme of things, but the payoff occurs over a 20, 30, 40 year time frame. Markets are poor at making investments on that time scale. By the time oil gets really expensive, it will be way, way too late to start seriously investing in alternative energy. The final externality I didn't mention, but possibly the most significant one, is political. The political and military costs of getting oil from the Middle East are enormous, and we are only just starting to pay those costs in earnest; not just in dollars but in blood. Martin
I consider a fixed consumption tax on oil to be price-fixing. It's price-fixing of the social cost of oil consumption (not overall price). I think it's much preferable for the social cost of oil to be market-driven, similar to carbon emissions trading. For one, the market does a better job of balancing the cost and benefits (of pollution). Second, the market ensures the money extracted from big polluters are used to reward more efficient companies, which drives research and capital investment in pollution reduction. With a government program, I doubt the money taxed would flow significantly to energy research, more likely for it to end up in the welfare fund, or some special interest's pocket. From what I've read about alternative energy research, it appears there are a lot of things that can be mass-deployed within 5-10 years. All that's missing is a massive inflow of capital, which will be provided by current oil prices, if it stays high (I hope). For example, the French has done a great job at applying mass production principles to nuclear reactor design. Their current designs only takes 5 years to build. If oil/gas keeps getting more expensive, eventually the pain will become great enough for people to allow nuclear reactors "in their backyard". Matter of time. Also on the horizon are self-contained, self-regulated small nuclear reactors as described in http://www.atomicinsights.com/AI_03-20-05.html Wired has an interesting article about solar power in http://www.wired.com/wired/archive/13.07/solar.html Again it's almost economical, just need some boost from oil prices to become competitive, even absent subsidies. Anyway, I agree with you that a lot of basic research takes too long to get to market for the private sector to invest in. I just don't think that's the case with energy. As far as the political and human costs of relying on oil, I think that is being priced into the oil market already...
Reducto ad absurdum, all taxes should be replaced by markets for social services applied to the transactions that invoke the externality. For example, when a child is born the parents would have to bid on an insurance package that would pay for their child's incarceration should they turn out to be a criminal. This type of logic may be economically sound but at a certain point it becomes unwieldy. Nothing that can make a significant dent in our oil consumption. We haven't done enough, and we haven't conserved enough, and I think in another decade we're going to be deeply regretting that we didn't take the warning of the oil embargo more seriously. How? Until Exxon starts paying for the US defense budget, that's a pretty crazy assertion. Martin
A little at a time hehe. Everything looks absurd when taken to the idealistic extreme, Marx used that to "prove" Capitalism is absurd too. Not that I'm advocating anything very radical anyway, it's been tried and worked well in some cases. The U.S. did pretty well surviving the 1970s oil shock, I see no reason it should fail on the current one. We can just agree to disagree on that point. I was referring to the "terror premium" on oil right now. All that extra profit is of course fattening the oil exporters and the oil industry big time, with little apparent benefit. Nonethless the benefit is there, other investors seeing the increasing energy cost will try and compete in the market with alternatives. In fact the oil companies, seeing their emminent decline, may well try to engineer their own transformation to a new energy future with their newfound wealth. Ultimately it will reduce American demand in foreign oil with the accompanying political benefits. This is really not a great revelation, it happened before. When the incentive is there, things happen fast in a dynamic economy. Anyway that's about all I want to say about oil. I'm so ignorant in it I can't predict what happens in the next minute let alone the next decade. Better to focus on my stock trading