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1、Chapter 8 Energy:The Transition from Depletable to Renewable Resources Chapter 8 is the first chapter in the text to deal with a specific resource question.Primary considerations are the nonrenewable energy sources of oil and natural gas.These two energy sources are depletable and non-recyclable,yet
2、 supply the majority of all energy consumed in the United States.This chapter examines some of the issues associated with the efficient allocation of energy resources and shows how economic analysis can be used in policy making.This is a complex subject and the chapter quickly covers a large amount
3、material and concepts.Given current interest in oil prices and cartel activities as well as in conservation,electricity production,national security and climate considerations and the transition to renewable energy sources,this chapter could be subdivided into two or more lectures.Some basic microec
4、onomic concepts are applied to these topics such as the effect of price controls on natural gas markets,oligopolistic behavior of cartels such as OPEC and the effects of price elasticity of demand for energy products.These will likely be new concepts for students.Applied to specific cases,however,th
5、ey should be relatively intuitive.1.Discuss our dependence on depletable,non-recyclable energy resources and review the efficient extraction path of these resources.2.Discuss whether or not historical allocations have been efficient.3.Present the history of natural gas price regulation.4.Illustrate
6、the effect of price ceilings on the market for natural gas,utilizing the concepts of scarcity rent and marginal user cost.5.Show conceptually and graphically how price controls can hurt consumers and producers in the long run.6.Teach the concept of price elasticity of demand.7.Show how a monopolist
7、can raise prices by restricting output.8.Discuss how OPEC colludes to gain market power and acts as a monopolist.9.Show how inelasticity of demand for oil leads to large gains for the cartel.10.Teach the concept of income elasticity of demand and its potential effect on cartel pricing power.Chapter
8、8 Energy:The Transition from Depletable to Renewable Resources 41 11.Show how the competitive fringe can impact prices.12.Discuss the threats to the stability of cartels,including member incentives to cheat on output agreements.13.Discuss national security and climate concerns,introducing concepts s
9、uch as the vulnerability premium,domestic versus foreign supply,options for reducing dependence on imports,and how emission of carbon generates an externality to the energy user.14.Discuss the environmental impacts of using transition fuels such as coal and uranium and unconventional oil sources.15.
10、Give a brief history of nuclear power and regulation.16.Discuss utility pricing,including average cost pricing.17.Introduce pricing schemes for conservation such as peak load pricing.18.Discuss the current alternatives for the transition to renewable energies I.Natural Gas:Price Controls This sectio
11、n gives a history of natural gas regulation and discusses the effects of price controls on the natural gas market.A.A natural gas shortage of 2 trillion cubic feet,or 10 percent of the marketed production,occurred in 19741975.B.After the invention of the automobile,rising demands for gasoline stimul
12、ated searches for new sources of crude oil which also led to discoveries of large quantities of natural gas.Natural gas then began replacing manufactured gas as an energy source.C.In 1938 the Natural Gas Act was passed.With this Act,the Federal Power Commission(FPC)became a federal regulatory agency
13、 charged with maintaining“just”prices.Price controls were imposed on natural gas shipped across state lines.D.In Phillips Petroleum Co.v.Wisconsin(1954),the Supreme Court forced the FPC to extend its price control regulations to the producers.E.Price ceilings were imposed which prevented prices from
14、 reaching their normal levels.The effects of price ceilings on a market can be illustrated graphically.F.Price ceilings,by holding prices at an artificially low level,led to overconsumption of natural gas,causing shortages.Over time,a price ceiling would cause more of the resource to be used in earl
15、ier years.G.On the supply side,producers who expect price ceilings to be lifted have incentives to slow production and wait for higher prices,thus exacerbating existing shortages.H.Since the price controls on natural gas were imposed only on gas shipped across state lines,gas produced and sold withi
16、n a given state received a higher price than gas sold in other states.Thus,the share of gas sold on the interstate market fell over time.This caused shortages to be concentrated in states dependent on interstate shipments of natural gas.Thus,the price control system caused more damage than would hav
17、e happened otherwise.42 Tietenberg/Lewis Environmental and Natural Resource Economics,Eighth Edition I.The time of transition is earlier under price controls and is abrupt with a sudden jump in price.A discontinuity in the transition places a burden on consumers.J.Artificially low prices of natural
18、gas created a bias toward substitutes that could be blended with natural gas and away from substitutes that could not.This created a system of average cost pricing.This inefficient policy was pursued based on rent-seeking behavior.K.These political incentives can be explained with a simple graph ill
19、ustrating the changes in producer-and consumer-surplus arising from price controls.A supply and demand graph with producer and consumer surpluses highlighted helps to illustrate this point.L.Price ceilings reduce the marginal user cost of natural gas since higher future prices are no longer possible
20、.A lower marginal user cost causes the producers perceived supply curve to be lower.Current consumers are better off.Future consumers are worse off.Producers will stop producing when the marginal extraction cost reaches the price control.Consumers would be willing to pay and producers would sell for
21、 higher prices,but the price ceiling will keep those resources in the ground.M.Congress may impose this type of policy in order to transfer revenue to current consumers.However,in actuality,this is a transfer from future consumers to current consumers.Scarcity rents are important for efficient alloc
22、ations over time.N.Over the long run,price controls hurt consumers.Price controls are politically attractive,however,since current consumers mean current votes.O.The Natural Gas Policy Act was passed on November 9,1978.Natural gas prices began to be decontrolled in the early 1980s,causing rapid pric
23、e rises.By 1993,no sources of natural gas were subject to price controls.P.The demand for natural gas has been rising,and as such prices have also been rising.Q.Imports have also risen,much in the form of Liquefied Natural Gas(LNG).LNG facilities are controversial due to the risks of fires and secur
24、ity risks.II.Oil:The Cartel Problem Price controls are not the only source of inefficiencies in energy resource allocations.Collusion in oil markets has also led to inefficiencies.This section discusses the effects of the oil cartel,OPEC,on oil markets.The concepts of price elasticity of demand,inco
25、me elasticity of demand,and incentives to cheat on agreements are introduced here.A.A monopolist,by restricting supply,can extract more scarcity rent from a depletable resource.Restricted supply results in higher prices.Net benefits to society are reduced.The transition to a substitute will occur la
26、ter.Monopoly power results in inefficient allocations.B.The member countries of the international cartel called the Organization of Petroleum Exporting Countries(OPEC)collude in order to gain monopoly power.C.Conditions that allow for successful cartelization are:1.Price inelasticity of demand for o
27、il in both the long run and the short run a.Price elasticity of demand measures the responsiveness of quantity demanded to price.b.If the price elasticity of demand is less than one in absolute value,price increases lead to increases in total revenue.c.The lower the price elasticity of demand(in abs
28、olute value),the larger the potential gains from cartelization.Chapter 8 Energy:The Transition from Depletable to Renewable Resources 43 d.Oil and oil products are price inelastic.e.Price elasticity of demand depends in part on the availability of substitutes.Thus in the long run,price elasticity of
29、 demand is usually greater.The more substitutes available,the less power the cartel has to raise the price.The prices of available substitutes will set an upper limit on the cartel price.Substitutes for oil are expensive and transition times are long.Solar energy sets a long-run upper limit on the a
30、bility of OPEC to raise prices.2.High income elasticity of demand a.Income elasticity of demand measures the responsiveness of quantity demanded to changes in income.b.At constant prices,as income grows,oil demand should grow.This increase in demand fortifies the ability of OPEC to raise prices.c.Th
31、e higher the income elasticity of demand,the more sensitive demand is to the business cycle.Recessions can thus put pressure on OPEC,and expansions are beneficial to the cartel.3.A small competitive fringe a.Non-OPEC suppliers are called the competitive fringe.b.A cartel will have more market power
32、if it can prevent new suppliers from entering the market and undercutting the price.c.OPEC currently produces approximately two-thirds of the worlds oil.d.OPEC must take non-OPEC members into account when setting prices.e.A cartel would set different prices in the presence of a competitive fringe th
33、an in its absence.f.Pressure on the cartel was evident in the mid-1980s when production was down and prices fell.4.Compatibility of member interests a.Unlike a monopoly,a cartel is dependent on internal cohesion.b.Individual cartel members have incentives to cheat on production agreements.By raising
34、 their own production,they can capture some of the profits from the higher prices.This behavior,however,can cause the collapse of the cartel.c.Price elasticity of demand facing each individual member is higher than for the cartel,because an increase in individual sales at a lower price will mean a r
35、eduction for the other members.With higher price elasticity,lowering price maximizes profit.d.Enforcing the collusive agreement is essential for the success of the cartel.D.Members must also agree on pricing and output decisions.Countries with larger reserves(for example,Saudi Arabia)will have more
36、incentive to preserve their value over the long run.Countries with smaller reserves will be more concerned with the near future and current prices.Disagreements over pricing and output decisions can hurt the cartel.E.Recent high prices have emphasized the difficulty of finding non-OPEC sources.III.F
37、ossil Fuels,National Security,and Climate Considerations A.National security is a public good.The market would generally result in an excessive dependence on imports.B.The long run domestic supply curve of oil reflects increasing availability of domestic oil at higher prices.44 Tietenberg/Lewis Envi
38、ronmental and Natural Resource Economics,Eighth Edition C.The supply curve for imported oil reflects the world price,and assuming the U.S.imports will not affect the world price,the price line is horizontal.A supply curve that reflects the vulnerability premium can be drawn above the world price lin
39、e.The vulnerability premium should include the national security costs of the imports.D.Using this graph,it is easy to show that the efficient allocation including national security costs is less than the market outcome.The market consumes too much oil and domestic production is too small.E.In the s
40、hort run,the domestic supply curve is essentially perfectly vertical at the quantity of resources developed to date.This quantity thus reflects the amount that would be produced and consumed during an embargo.F.The net benefits from self-sufficiency are lower than the optimal allocation.G.The vulner
41、ability premium is lower than the cost of being self-sufficient because 1.Embargoes are not certain events.2.Vulnerability can be reduced.3.Increasing domestic production imposes a cost on future users.H.To reduce the potential damage of an embargo,the U.S.has developed a stockpile called the strate
42、gic petroleum reserve.The strategic petroleum reserve is set up to replace 3 million barrels per day(up to 1 billion barrels).I.Paying the vulnerability premium helps create a balance between the present and the future.J.Conservation can also help decrease reliance on foreign imports.A tax on energy
43、 consumption is one tool that can be used to encourage conservation.This might be a good place to discuss gas taxes.This topic will also come up in later chapters.Energy taxes will not achieve the efficient level of imports since they fall on all energy consumption.K.Domestic subsidies are another p
44、otential tool.L.A final option is the use of tariffs and quotas on imports.The effect of both tariffs and quotas can be represented on the same graph(Figure 8.5)with the result of higher prices to consumers and lower imports.M.Importers usually prefer quotas over tariffs since the value of the quota
45、 is the difference between the cost of oil and the price at which it can be sold.N.Producers of domestic oil would be better off with a tariff or a quota than without,but prices will be higher to consumers.O All fossil fuels contain carbon which is a contributor to global warming.P.Climate considera
46、tions affect energy policy since the level of energy consumption and the mix of energy matters.IV.The Other Depletable Sources:Unconventional Oil,Coal,and Nuclear This section examines the environmental impact of the intermediate period prior to the future transition to renewable energy sources.Coal
47、 and uranium,as intermediate transition fuels,are examined.A.The term“unconventional oil”refers to sources that are typically more difficult and expensive to extract than unconventional oil,for example,extra-heavy oil from Venezuelas Orinoco oil belt region and bitumen.B.Coal is heavily used in elec
48、tricity generation.The main environmental drawbacks to coal use are sulfur dioxide emissions,particulate emissions,and carbon dioxide.Global warming is a long-term effect.Chapter 8 Energy:The Transition from Depletable to Renewable Resources 45 C.Capturing CO2 emissions from coal-fired plants before
49、 they are released into the environment and sequestering the CO2 in underground geologic formation is now feasible.However,it requires expensive modifications to existing power plant technologies.D.Concerns with uranium are nuclear accidents and the storage of nuclear waste.E.Markets are not likely
50、to make correct decisions in the presence of these externalities.F.The risk of nuclear accidents is exemplified by the Chernobyl plant accident in 1986 when a serious core meltdown occurred.G.Demand for new nuclear power plants in the United States has been eliminated due to the expense and increasi