energy

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energy
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oil and natural gas

• supply 62 all energy consumed worldwide
• how to transition to new sources?
• use until mc of further use exceeds mc of
  substitute resources
• More abundant coal
• Or renewable solar
• transition should be smooth
• have allocations been efficient?

3
natural gas

• huge shortages on 1974-75. why?
• rise of automobile
• rise of demand for gasoline
• search for new sources of crude oil
• uncovered large quantities of natural gas
• in the 50s govt put price ceilings

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the effect of price controls
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the effect of price controls

• price ceiling reduces MUC (higher future prices
  no longer possible), decreasing total mc curve
  (supply)
• consumers better off today (gained BC)
• producers not better off
• Overproducing
• giving up scarcity rent could have gotten without
  price controls (area D only measures current
  profit)

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the effect of price controls
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consumers also lose in the future

• as resource depleted, supply curve shifts up
  (reflecting higher extraction costs)
• when mc reaches price ceiling, QS0
• but demand is not zero at that price shortages
• suppliers willing, demanders willing, but price
  control will not allow
• overallocation to current consumers,
  underallocation to future consumers
• losses to future consumers/producers are greater
  than gains to current consumers

8
oil

• similar price control problems
• second source of misallocation OPEC
• restrict supply, raise prices
• why OPEC so effective?
• price elasticity of demand for oil
• inelastic, substitutes exist but are expensive
• income elasticity of demand for oil
• income grows, demand grows
• supply responsiveness of non-OPEC members
• OPEC produces 2/3 only Mexico may have influence

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oil national security problem

• excessive dependence on imports
• national security issue
• dependent on countries with unstable political
  history
• actual price we pay is higher than world price
• when national security is an issue
• market consumes too much oil
• domestic production is too small

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the national security problem
vulnerability premium
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market vs. efficient allocations

• vulnerability premium reflects additional
  national security costs caused by imports
• horizontal because each individual supplier has
  no effect on world price
• market allocation
• demand Q5
• Q1 domestically produced
• Q5-Q1 imported
• efficient allocation
• demand Q4
• Q2 domestically produced
• Q4-Q2 imported

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the national security problem
vulnerability premium
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what would happen during an embargo?

• consume Q1 at price of P2
• supply curve assumes enough time to develop the
  resources
• if embargo hits, not enough time in short run
  supply curve becomes perfectly inelastic at Q1
• price rises to P2 to equate supply demand
• huge loss in CS

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the national security problem
vulnerability premium
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self sufficiency?

• domestic supply domestic demand
• net benefits from Q3 lt net benefits from Q4
  (efficient allocation w/imports)
• Efficiency loss (shaded triangle) because
  foreign mc is lower than domestic mc (supply)
• loss between Q2 and Q4 (where domestic mc gt
  foreign mc)

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still better to import

• vulnerability premium lower than cost of self
  sufficiency
• embargos not certain events
• possible to reduce vulnerability (strategic
  reserves)
• using more domestically incurs user costs by
  lowering amounts available for future
• paying vulnerability premium creates more
  efficient balance btw present/future

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the national security problem
vulnerability premium
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how to achieve efficient consumption (Q4 instead
of Q5)?

• energy conservation, e.g. gas tax
• reduces consumption, but no affect on share of
  imports
• subsidize domestic supply
• reduce imports, but not consumption
• tariff on imports (P1-P0) or quota on imports
  (Q4-Q2)
• price rises to P1, consumption falls to Q4,
  imports Q4-Q2

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transition fuels

• how to transition to renewables?
• fuels receiving most attention coal, uranium
• coal abundant
• uranium not abundant with current reactors
• technology is changing this
• biggest issue btw these environmental impact

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transition fuels environmental problems

• coal air pollution (sulfur, particulates, CO2)
• uranium
• nuclear accidents
• storage of radioactive waste

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energy conservation

• significant role defer capacity expansion
• cost increases are substantial
• by reducing demand for electricity, delay new
  plants, delay rate increases
• current pricing systems rely on AC pricing, lower
  than true MC of new units

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utilities invest in conservation when cheaper

• rebates for conservation measures in homes
• incentives for solar water heaters
• energy audits

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load management

• peak period imposes 2 costs on utilities
• requires firing up special generators during
  those periods (higher MC)
• growth in peak period demand gt capacity
  expansion
• peak load pricing

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the long run renewables

• hydro flowing water
• biomass burning
• solar energy heat to drive turbines
• solar into electricity photovoltaics
• wind energy drive turbines
• hydrogen fuel cars / furnaces
• geothermal from deep in the earth