Monday, December 3, 2007

Bioenergy Part Trois

Today, I want to close the loop on the topic I began with Thursday's post, and continued with Friday's post. To review, Juan Enriquez's claim that instability in oil prices may serve as a disincentive for investment in alternative energy may well be true, but his solution of price controls are the wrong policy response because they (1) don't work that well, and; (2) have serious consequences.

Suppose we want more stable prices. Energy prices are not a "simple matter of supply and demand." The "law" of supply and demand, or the basic Week Three Principles of Economics analysis which is all the CEOs corporations remember (or which they hope is all YOU remember), only applies for competitive markets. The concept of a "market supply curve" implies that the firm is a "price taker." A monopolist (or cartel) does not have a "supply curve" in the traditional because their own actions have a tangible influence on price.

Prices in competitive markets tend to be much more stable. So we must ask the question: Why is OPEC able to operate as a cartel? Part of it has to do with ownership. The public (government) ownership of oil production in most oil-exporting countries is a major hindrance to competition and serves as a significant barrier to entry. It ensures that only one firm will produce in each country and makes the coordination aspect of cartel decision-making much easier. So one true way stabilize the price of oil would be multiple private firms for oil production in each country.

Privatization is not feasible for a wide range of political and economic reasons, not the least of which being that the state, with its monopoly over the use of coercive force, will always have an incentive to nationalize oil production. We also do not have the right to dictate policy to other states (except the ones we decide to run over militarily), and besides, our politicians should focus their energies on the great job they do screwing up our OWN economy. Plus, this wouldn't necessarily provide incentives for research in energy alternatives, because a more competitive market would tend to dictate a consistently lower price (and yes, in this case I'm implying that is a bad thing because part of Dr. Enriquez's proposed Policy Objective Bundle was incentives for alternatives to petroleum).

So what are some other options? Well, in oil-importing countries, we do in fact have the opportunity to take some of the pricing power away from the cartel. Governments in oil-importing countries have a monopoly over the right to tax. By taxing the hell out of a foreign monopolist we can divert some of the monopoly power and rents (profits) from the foreign government to our own, all the while maintaining a more stable (albeit uniformly higher) price to offer "incentives" for research in alternative fuels.

The reason we do not tax crude is simple: politics in our own country. Politicians buy votes with their plans to "negotiate" or "encourage" low prices for gasoline and energy. Not one of them has the courage to say "yes, the price of oil is $100/barrel, but it must be taxed to take the power and profits away from foreign oil producers." The first to do this would be out of the race in no time. Instead, politicians console us with ill-gotten plans to subsidize our oil habit. This keeps the power of and profits in the hands of the unstable and corrupt governments.


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