Thursday, November 29, 2007

Bioenergy

Just a quick thought -- I watched November's release of this year's TED Talks Presentations. Juan Enriquez on Bioenergy. It's not just for ethanol anymore. The concept of bugs eating coal and tunring it into gaseous hydrocarbons or accelerating the farming of hydrocarbons from plants as "concentrated sunlight" seems a lot more appealing than gutting an entire mountain, but I'm not sold that it's the first best idea--somewhere the policy has to account for global warming, which won't happen when we use organic byproduct.

Dr. Enriquez makes one important economic point though: The instability of oil prices (not their levels) may prove to be a disincentive for innovation, which involves entry to the energy market and a threat to OPEC's profit. One day price is high and it's all well and good for investing in alternative energy (bugs eating coal and creating hydrocarbon gas) because you can make money at it, but suddenly, BAM! OPEC sees competition entering, and suddenly engages a limit pricing strategy to drive out the competition by producing more and allowing the price to plummet. Then, once the coast is clear of credible competitors, they jack the price up again. Since it's never clear which strategy is the best for OPEC in "pure" strategies (setting a high monopoly-like price or a lower, entry-deterring, "limit price"), OPEC oscillates between the two, depending on certain conditions for entry, essentially playing what game theorists call a "mixed strategy." On top of this unpredictability in the outcome in the cooperative side of the game, each country has an "incentive to deviate" or break the cartel agreement by over-producing, which also would tend to lower the price until the cartel re-organizes. Hence, inherent price instability.

More on this tomorrow. I just wanted to give a quick teaser on OPEC and their cartel price/limit price/deviate strategies and how they contribute to the wild fluctuations in energy prices.

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