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85 comments on What should OPEC do?
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85 comments on What should OPEC do?
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What if we had a magic engine which could replace all the engines in every car and truck in America and we could make the switch in just a few years? This engine meant we no longer needed liquid fuel since it ran on unobtainium. The price of unobtainium is the equivalent of $5/gal. What would happen to the price of crude in this situation? Someone pointed out that every 1% drop in demand caused a 15% drop in price. America not using oil means a 25% drop in demand so the price would be slightly higher than pumping costs. People would scream we are throwing away money by buying unobtainium instead of cheap oil. This is why our investments in alternatives and efficiency should not be dependent on the price of oil or any other fossil fuel. We should make these investments because it is the morally right thing to do. It is in our national security interests to make these investments. Eventually oil will become so rare that it will cost too much to use it as fuel. We should be prepared for that eventuality well in advance.
By itself, this is an irrational assumption. Surely there is a supply curve for unobtainium, and $5/gal-of-gas-equivalent is one point on that curve. Now what is the supply elasticity of unobtainium? The answer to "What if we had ... " depends on a lot of extra uncontrained assumptions and could be anything.
If instead of unobtainium, we speculate about synthetic gasoline that is made from biomass via the Fischer-Tropsch Process, I think the scenario is something like this: The current situation is that synthetic gasoline can not be made at a price that competes with real petroleum based gasoline. Over time scarcity rent on petroleum will rise. Eventually, it will make sense for some FT plants to bring synthetic gasoline to market. The synthetic gasoline will gain market share and the scarcity rent portion of real gasoline price will decrease until there is a stable balance or until there starts to be a scarcity rent on the feed stock for synthetic gasoline. The market share for real and synthetic gasoline will be driven by the relative scarcity of the two different feed stocks: biomass and petroleum. The world will be such a different place from what it is now that I think it is useless to speculate on this market share.
This kind of speculation can be extended to a second substitute for gasoline. It will enter the marketplace when scarcity rents on real and synthetic from FT allow a profit from making it at market price. And also for a forth kind, and a fifth kind, etc. This progression of substitutes must end before the Earth becomes so overloaded that it can no longer support life.
My key point is that we should make investments alternatives to fossil fuels no mater what the price difference is. Which alternative to invest the most in should be decided on according to its cost relative to the other alternatives and on net energy factors and not relative to the cost of fossil fuels. As the use of alternatives increases the demand for fossil fuels will fall eventually to near zero. At this point increases in the price of oil, coal, and nat gas also drive up the cost of alternatives. There will never be an extended time when alternatives will cost less than FFs. There may be short periods of a few months to a year when alternatives appear to have the advantage but as the FF price changes work through to other commodities then advantage evaporates.