Depletable, Non-recyclable Energy Resources

1. Depletable, Non-recyclable Energy Resources Oil, gas, coal & uranium

2. Energy: one of the critical resources • Also from food, meat, plants that depend on energy from sun • Raw material from earth’s crust  finished product - with energy • When price peaks – find substitute • Hubbert’s peak: bell shaped? • No idea when oil gets over - think of substitute • Will transition to substitutes be smooth? • Is market mechanism allocating resources efficiently?

3. Natural Gas • 1974-75 severe shortage - people ready to pay more but no supply • In efficient allocation this magnitude of shortage is should not happen. Why? • Source of the problem: govt. control • ⇧ in automobiles - ⇧ demand for gasoline - while exploring for crude oil - also large quantity of natural gas was found – replaced manufactured gas & coal - pipe lines laid - after II WW important source of energy - US:– Natural Gas Act 1938

4. Regulated price – Effect of regulation – no conservation - consumption increased drastically • From supply side – production until its profitable – When MC is higher than the price – no production although there was demand - ∴ distorted allocation: • Time of transition was much earlier under price control - we will not use all gas at the price consumers are willing to pay – transition to substitute before technologies are developed to use it • Transition is abrupt as price rises – jump to new price - technology – burden on consumers

5. Price controls are not permanent – can change with politics – • Ceiling lifted  price rise - if producers are expecting larger rise - stop production and wait for higher prices - consumers have severe problems • Price controls on n-gas created turmoil as it took away economy’s ability to respond to changing situation – regular incidents of control will  collapse of economy - not due to pure market behaviour • Why such behaviour of govt.? • Rent-seeking behaviour

6. When govt. attempts to ↓ security rent through price controls → over allocation to current generation & under-allocation to future generations ∴ they are worse off – transfer from future to current generation • Price controls are politically attractive as current consumers mean current votes - but also inefficient as losses to future population & producers > than gain to current population • In the LR price-controls harm consumers than helping them as controls distort allocation towards present • President Bush: p-decontrol (1989) in stages – by 1993 no p-control - demand is increasing & production has not kept pace - price ⇧ - imports ⇧

7. LNG is attractive from air-quality point of view - storage & transport has potential hazards - burns hotter & spreads more rapidly than oil or gasoline – cannot be put off – can injure the people & damage the property up to a distance from the fire itself • Although safety records have been good, potential for terrorism has raised security concerns – facilities: tempting target for terrorists – high security risks especially at coastal areas – (Mumbai has n-gas pipe lines now and had even in the past) to construct new LNG terminals aroused local opposition – political considerations are affecting & will affect the importing nations and supplying economies.

8. Oil: the cartel problem • Seller power over resources - due to lack of effective competition leads to inefficient allocation • Oil: produced mainly by OPEC countries – monopoly: more scarcity rent than in comp. - force higher price by slower production - monopolistic transition to a substitute later than in competitive transition - ∴ less net present value to the society from these resources • Cartelisation effective - Is its profitability unique to oil? Will oil cartels lead a new wave for natural resource cartelisation?

9. Must isolate the factors that that make cartelisation possible. Many, but 4 stand out: • Price elasticity of demand for OPEC oil in SR & LR – depends on opportunities for conservation & availability of substitutes • Y-elasticity of demand for oil – Y    DD • Supply responsiveness of oil producers who are not OPEC members – want to max their profits • Compatibility of interests amongst OPEC member countries – members may have a strong incentive to cheat – steal the market

10. Transition Fuels • Some day will happen • India – Reva (10 years ago), solar cooker.. • Future: transition to renewable source of energy - what happens in intermediate period? • Some believe that no transition fuel required -transition rapid - no transition fuel required • Most believe that transition fuel will play important role • Transition fuel for future: coal & uranium • Their environment impact is different.

11. Coal: main drawback – air pollution – sulphur dioxide emissions – culprit in acid rain problem – major source of particulate emissions & carbon dioxide – coal users fail to consider env costs • Uranium: used in nuclear electrical generation stations – safety limitation – concerns are for nuclear accidents & storage of radioactive waste • Will market make right decisions? - taking into account current decision making environment: ‘No’ • Many issues involved

12. Electricity by nuclear reactors requires radioactive elements - if elements escape into atmosphere & come in contact with humans - birth defects, cancer, deaths…. • Nuclear accidents – Chernobyl - Hiroshima, Nagasaki – not accidents - very harmful effects • Losers can/must be compensated by gainers • N-power is efficient - gain to gainers > loss to losers • Japan, France: using n-power – Sweden: closed • Disposable sites: nobody wants – ↓ in land value

13. Those consume will be taxed to pay compensation to pay those who stay near disposal sites - if people accept - nuclear power is viable option - costs of disposal borne by consumers - e. g. Naurita, Colorado • If taxes get too high to obtain disposal sites, n-power may become non-competitive. Then it is not an efficient source • Are future generations adequately represented in this transaction? - quick answer ‘no’, although it is not right – ↓ in value of land reflecting risk – if land not cheap will not stay there – accept risk in return for cheaper land values

14. Electricity • Transition fuels – environmental problems • Alternate fuels & solar energy: play increasing role – penetrate market slowly as get more familiar & accessible • How is these transitions are managed by electrical utilities sector? • High prices of oil & n-gas + ↑ cost of generating stations ↓ electrical demand • More conservation is needed – differ capacity expansion • Pricing system of electricity is ill-designed to lead to conservation – MC is > rate - investing in conservation is saving less if the rate is low • Wind or solar? – solar water heating

15. Energy demand is spread over the year • Should be able to satisfy peak period DD & in other periods underutilised • Peak periods – special costs on utilities: • peaking units: higher MC – fired in peak period • need for capacity expansion: base-load plants need expansion due to p-period demand - slowing growth in this DD can delay the need for new & more efficient generating plants can be made • Peak-load pricing – economic load management technique – charge full MC • Costs don’t include all costs of env damage ∴ low priced  highly polluting - TFCs

16. In LR use of renewable energy sources • More pollution if poor countries were using fossil fuel - • Can we manage transition effectively? • Renewable energy in different forms: • Hydropower • Biomass • Energy: Solar, wind, geothermal, wave • How much & which - depends on their relative cost & consumer acceptance • Hydrogen – can ↓ rising water dangers

17. Summary • Relationshipbetween govt & market is not always harmonious & efficient • Price controls  no conservation – discourage exploration & supply – to cause biases in substitution & penalize future consumers – create potential for abrupt, discontinuous transition to renewable resources • Not too much regulation • But govt’s role important