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Energy: The Transition from Depletable to Renewable Resources Ch 7 - Part II 1 Oil: The Cartel Problem Price controls have been responsible for much mischief in the oil market as well. Most of the world’s oil is produced by a cartel called (OPEC). Members of this organization collude to exercise power over oil production and prices. 2 Seller power over resources due to a lack of effective competition leads to an inefficient allocation. When sellers have market power, they can restrict supply and thus force prices higher than otherwise. 3 A monopolist can extract more scarcity rent from a depletable resource base than competitive suppliers simply by restricting supply. 4 The monopolistic transition results in a slower rate of production and higher prices. The monopolistic transition to a substitute occurs later than a competitive transition. It also reduces the NPV society receives from these resources. 5 The cartelization of the oil suppliers has been very effective. Why? Factors that make oil cartelization possible: • • 1. the price elasticity of demand for OPEC oil in both the long run and the short run; 2. the income elasticity of demand for oil; 6 • • 3. the supply responsiveness of the oil producers who are not OPEC members; and; 4. the compatibility of interests among members of OPEC. 7 1. d Pe Price increases lead to increased revenue d The Pe for oil depends on the opportunities for conservation, as well as on the availability of substitutes. Demand will be more price-elastic in the long run than in the short run. 8 2. d Ie It indicates how sensitive oil demand is to growth in the world economy. As income grows, oil demand should grow. d, The higher the Ie the more sensitive demand is to periods of rapid economic growth or to recessions. 9 3. Non-OPEC Suppliers OPEC produces about 45% of the world’s oil If the remaining producers were able to expand their supply they would increase the amount of oil supplied and cause the prices to fall, which would decrease OPEC’s market share... more competitive allocation. 10 4. Compatibility of interests Conflict of interests Cartel members have a strong incentive to cheat. A cheater, if undetected by the other members, could lower its price and steal part of the market from the others. KSA has frequently exercised a moderating influence on the pricing decisions of OPEC. Why? P.150 11 Fossil Fuels: National Security and Climate Considerations - The Climate Dimension All fossil fuels contain carbon. When these fuels are burned it is released into the atmosphere as carbon dioxide. carbon dioxide is a greenhouse gas, which means that it is a contributor to global warming and climate change. 12 Climate considerations affect energy policy in two ways: • • 1. the level of energy consumption matters (as long as carbon-emitting sources are part of the mix) 2. the mix of energy sources matters (since some emit more carbon than others). 13 emissions of carbon generally involve an externality to the energy user. market choices would involve an inefficient bias toward fuels containing carbon, thereby risking the timing and transition toward fuels that pose less of a climate change threat. 14 • The Other Depletable Sources: Unconventional Oil and Gas, Coal, and Nuclear Energy 15 over the long run, in terms of both climate change and national security issues, the obvious solution involves a transition to domestic renewable sources of energy that do not emit greenhouse gases. 16 Unconventional Oil and Gas Sources refers to sources that are typically more difficult and expensive to extract than conventional sources. i.e. Shale, extraheavy oil,,, Coal, Uranium Read Example: 7.4 p. 166 17 The main concern about these sources is also their environmental impact. It not only takes much more energy to extract these unconventional resources but large amounts of water are also necessary CO2,,, 18 Energy Efficiency In recent years the amount of both private and public money being dedicated to promoting energy efficiency has increased a great deal. • Depending upon the level of energy prices and the discount rate, the economic return on these investments may be too low to justify intervention (costs vs. benefits) • The strongest case for government intervention flows from the existence of externalities. Markets are not likely to internalize these external costs on their own. • Natural security, climate change externalities, pollution, health effects...certainly imply that the market undervalues investments in energy efficiency. The case for policy intervention extends well beyond externalities. Internalizing externalities is a very important, but incomplete policy response. Inadequately informed consumers cannot make rational choice... information is important government policies to improve energy efficiency and the role of consumers Transitioning to Renewables Ultimately our energy needs will have to be fulfilled from renewable energy sources, either because the depletable energy sources have been exhausted or the environmental costs of using the depletable sources have become so high that renewable sources will be cheaper. • If rapidly developing countries (China, India,..) are following the energyintensive, fossil fuel–based path to development pioneered by the industrialized nations, the amount of CO2 released into the air would be unprecedented. A transition away from fossil fuels to other energy forms in both the industrialized and developing nations would be an important component in any strategy to reduce CO2 emissions. Can our institutions manage that transition in a timely and effective manner? Hydroelectric Power Already an important source of clean power, yet: hydroelectric dams can be a significant impediment to fish migrations and water quality What about wind, photovoltaics, ocean tidal power... Debate 7.2 p172