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The cost of oil and its competitors

pelicaonoil.JPG

One other way to think about the cost of oil is to recognize what is and isn't in the price of oil. So mega-spills like the Deepwater spill or the spills that happen in other countries are not in the price. Global warming -- which is to say, carbon -- is not in the price. The cost of our military alliance with some petro-states, and military attention to other petro-states, is not in the price. The cost of the pollution is not in the price. All these costs will be paid, but they're not built into what we pay at the pump. Instead, we'll pay them through taxes, or medical bills, or global temperature changes.

But when it comes to immature renewables, there's much more in the price. In particular, you're dealing with massive costs for infrastructure and investment. Some of those costs are simply added into the price of what you're buying. Others are part of the relative inefficiency of what you're buying (these industries need to spend money to scale up their operations). Other are in the inconvenience of what you're buying (if we had built the roads to handle electric cars, charging wouldn't be a problem because plugs would be everywhere). These costs have to be paid before the renewables are really competitive, and so they're being paid by the early adopters.

That is to say, where oil escapes many of the prices associated with its impact on the world and benefits from its entrenched position as the fuel that our transportation sector is built to accommodate, renewables are saddled with massive transition and start-up costs that are built into both the price and the user experience. If oil had to pay its true freight, the difference between it and renewables would narrow dramatically, and the new demand for renewables would speed the down payment on research and transition. But that won't happen in the absence of a concerted policy.

Photo credit: AP Photo/Jay Reeves.

By Ezra Klein  |  May 4, 2010; 11:23 AM ET
Categories:  Climate Change , Energy  
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Comments

Again, this is why we need a simple gas tax which internalizes all of the external costs into the price of gasoline and other petroleum products. The policy shouldn't be so difficult - add up all the external costs, divide by the amount of oil consumed and that's your tax. Then alternative energy can compete.

Since we need to raise tax revenue in any case we might as well do it by taxing oil rather than income.

Posted by: justin84 | May 4, 2010 11:50 AM | Report abuse

I think pricing this risk into nuclear, particularly with the current popularity of terrorism and multiplied across the long half-lives of waste, would basically rule out its use. Nuclear sucks.

Posted by: staticvars | May 4, 2010 11:58 AM | Report abuse

Calculating energy taxes would be relatively straight-forward. Being the party that deliberately raised energy costs for everybody, across the board, which also raised shipping and manufacturing prices, which also raised retail prices, which potentially then costs jobs . . . that's political suicide. Anything that does anything significant to raise energy prices is political suicide for the politicians, and potentially the party, that does it.

That's why I was hoping the Democrats would move on cap and trade right away. ;)

Posted by: Kevin_Willis | May 4, 2010 12:06 PM | Report abuse

"That is to say, where oil escapes many of the prices associated with its impact on the world and benefits from its entrenched position as the fuel that our transportation sector is built to accommodate, renewables are saddled with massive transition and start-up costs that are built into both the price and the user experience"

While true, it seems to imply that fossil fuels did not have start-up costs that were borne slowly, by early adopters (it did) and that renewables (so-called) will not have associated risks and expenses, if and when massively deployed, that are not immediately assessable. Who could have accurately assessed the risk and long-term impact costs we associate with oil today in 1902?

Can you name a renewable that does not functionally depend on an explosion in battery technology? And batteries? And their associated chemicals? To my knowledge, LED technology should provide a safe replacement to the incandescent bulb, but the industry is pushing zinc-laden fluorescents right now. Which have been been written in as mandatory in some regulations, construction codes, etc.

Past that, most renewables consume a hundred times the land per BTU of any fossil fuel (or nuclear) technology, and end up disturbing local ecosystems, wildlife, and (in the case of hydroelectric, which is totally awesome, but we don't want to do any more) dams rivers and displaces whole communities and ecologies. And it doesn't take long for a group to oppose loss of desert lands to miles of solar panels or loss of grasslands to miles of noisy, bird-killing windmills. I'm all for harnessing tidal energy, but that involves displacing and negatively impacting some ocean life, and would effect coral, as well as potentially impacting tides and erosion patterns.

There are a lot of potential costs, beyond infrastructure, involved in renewables, too.

Posted by: Kevin_Willis | May 4, 2010 12:19 PM | Report abuse

Ezra,

All true, and well said and summarized.

But until renewables can power an entire global economy and heat/cool every building and fuel every mode of transport, it is wise for gvmt's to subsidize that which empowers us.

And while idiots like Kevin are concerned only with political calculus instead of the long-term good of the country, I am content there are a few who are willing to nudge the system in the right direction even at cost to their own political careers, in order to help minimize the coming oil/climate shock. This, and short-sighted lunks like Kevin, are one reason I am no longer a Republican.

Posted by: Lomillialor | May 4, 2010 12:45 PM | Report abuse

There also has to be a source of funding for the transition to renewables, since the premise seems to be that renewables will represent a net economic loss for some time into the future.

If you artificially restrict the supply of conventional energy sources, thus driving up the price of everything, where is the additional funding for the as-yet undeveloped renewables going to come from?

A cynic might think that preventing drilling is an end in itself, and all the arguments about climate change and environment are means to the end.

Posted by: tl_houston | May 4, 2010 1:00 PM | Report abuse

There are some other "clean" or "renewable" fuels that have some pricing problems in common with gasoline. Specifically, nuclear and ethanol. Both receive large subsidies and have unpriced externalities.

Posted by: zosima | May 4, 2010 3:19 PM | Report abuse

tl_houston,

A proper carbon tax merely incoroporates external costs which aren't accounted for by market transactions. So the energy tax doesn't 'artificially restrict' the supply of conventional energy sources, it just puts all of the actual costs into the market transaction leading to a more efficient outcome.

Or conversely, the U.S. government could say that it owns the area where BP spilled and demand that BP pay the full cost of cleanup - either way works. As long as the buyer and seller bear all the costs of their transaction.

Where does the funding come from? Well if other energy sources are more expensive, alternatives such as solar energy don't have to be quite as cheap to be competitive. Since solar producers can charge more, that leads to more investment in that sector.

Ending drilling isn't an end in and of itself. I like using energy. That said, if producing and consuming oil creates costs that market participants aren't internalizing in their tranasctions, we will produce and use too much oil. The marginal benefit won't exceed the marginal cost. We'd be better off if less oil was produced and used.

zosima,

Agreed, there are external costs to other sources of energy. To be consistent these external costs should be internalized as well. I'd imagine that this would be good news for solar and energy saving technology.

Posted by: justin84 | May 4, 2010 4:40 PM | Report abuse

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