4 ms·

I imagine the following, if the price of clean energy catches up with the price of fossil fuel, the price of fossil fuel will fall and its use will increase.

ncmncm 5y ago
Exploration will decline, and drilling, as expectation of demand falls. We can expect substantial fluctuations as numerous structural boundaries are crossed. Coal demand is collapsing, but price is not, because there is no cheaper way to mine coal. At some level of consumption the cheapest existing wells will suffice. But the owners of those wells have got used to spending a great deal more than the natural price for that oil. Meanwhile, people with more expensive wells have debt payments, and have to sell at whatever the market offers. So, it is more complicated than Econ 101, and will stay that way.
dredmorbius 5y ago
The economic, pricing, and market dynamics are somewhat counterintuitive, though interesting. Note that what we describe with "price" actually encompasses three things: - Consumer value: the benefit derived from consumption. - Producer costs: the actual opportunity costs required to produce some resource. - Market price: the market-clearing price of a good. This is almost always somewhere between cost and value, C <=- P <= V. Where price falls between these values depends on whether we're discussing commodity goods (C ~= P) or rents (P ~= V). That is, for a commodity, price tends toward costs of production (plus some "normal" economic profit), and for rents, the price tends toward all consumer value (think San Francisco apartment rents and start-up / tech-market salaries / compensation). A few years ago, looking at a set of prices for medaeval Britain, one fact that struck me was that the cost of fuelwood and coal was the same, expressed in equivalent energy output. I quickly realised that this was a pretty obvious circumstance: if you could get the same amount of heat at lower cost from the other, with handling and burning characteristics being similar, the two goods were perfect substitutes. It's as easy to burn wood as coal and vice versa. (There's a similar item on HN now: https://medium.com/@zavidovych/what-we-can-learn-by-looking-at-prices-and-wages-in-medieval-england-8dc207cfd20a https://medium.com/@zavidovych/what-we-can-learn-by-looking-... https://news.ycombinator.com/item?id=29882389 https://news.ycombinator.com/item?id=29882389) What adjusts instead is the supply of each fuel. Where it's more difficult to provide wood (say, forests are being cut down faster than they're replenished), foresters are less willing to sell wood (presuming they can find alternative income and/or livelihood), and the net balance of fuel switches to coal. If coal becomes more expensive to mine (say, larger pumps and more fuel are required to drain water), then those costs of production mean less coal is included in the mix. Energy is a fundamental physical attribute, and allowing for capital costs of generating plants, the end consumer doesn't care if electrons are motivated by light, wind, water, coal, gas, oil, atoms, or ambitious hamsters. You turn the switch, you get light. Generators and electrical providers are interested in revenues (billing rates per kWh) and costs (capital + fuel + other expenses). And though it takes time to bring new generating capacity online, given time, it's the capital + fuel costs which tend to dominate. The providers of fossil fuels face their own fixed extraction costs, plus other costs of production (usually interest service on debt for initial drilling or mining, or the purchase of a going concern). Moreover there isn't a single extraction price that covers all fossil fuel sources (any of coal, oil, gas, shale, etc.), but rather, each individual well or mine has a cost structure associated with it. Some are very low (Ghawar Oil Field, the Number One Well, Bahrain, say), some are quite high (a recently-fracked well, a deep-water offshore oil platform). Providers who can extract at low cost are receiving a large natural resource rent, effectively, which is the difference between their own extraction cost and the market price. The marginal producer has the problem that if the market price falls, it will be below their own cost of extraction, and they're selling product at a loss. (I'm ignoring externalities of the form of both pollution caused by the combustion of fossile fuels, which most people are well aware of in causing global warming and climate change, and the natural-resource cost of formation, which can be expressed as the difference between the time it's taken to create fossil fuels, and to consume them. This latter would amount to an increase in price of some fossil fuels, such as petroleum, by a factor of about five million. A rational economic system would include such factors, ours does not.) What happens as the cost of renewable resources, most especially solar and wind power, falls over the long term is that these become increasingly viable and competitive with fossil-based energy sources, and increasingly substitute for them, especially in electrical generation. And whilst the price of fossil-fuel-derived energy falls, the cost function for suppliers does not. Instead, high-cost providers are driven from the market, and their extraction operations (wells or mines) are shut down. Depending on the operation, such shut-downs may be reversable or not. Put another way, a falling price for renewables (an increase in their supply function) induces a reduced demand function for energy (the market price paid will fall), and so against a constant supply function for fossil fuels, the quantity provided of fossil fuels ... actually falls. For there to be an increase in the consumption of fossil fuels, either price or demand would have to increase. The demand increase could occur through more efficient applications of energy. This effectively means that a fixed quantity of energy provides more value (equivalent to a price decrease in energy), and hence a demand increase. But that's not what you've described.

ncmncm 5y ago

Exploration will decline, and drilling, as expectation of demand falls. We can expect substantial fluctuations as numerous structural boundaries are crossed. Coal demand is collapsing, but price is not, because there is no cheaper way to mine coal. At some level of consumption the cheapest existing wells will suffice. But the owners of those wells have got used to spending a great deal more than the natural price for that oil. Meanwhile, people with more expensive wells have debt payments, and have to sell at whatever the market offers. So, it is more complicated than Econ 101, and will stay that way.

dredmorbius 5y ago

The economic, pricing, and market dynamics are somewhat counterintuitive, though interesting. Note that what we describe with "price" actually encompasses three things: - Consumer value: the benefit derived from consumption. - Producer costs: the actual opportunity costs required to produce some resource. - Market price: the market-clearing price of a good. This is almost always somewhere between cost and value, C <=- P <= V. Where price falls between these values depends on whether we're discussing commodity goods (C ~= P) or rents (P ~= V). That is, for a commodity, price tends toward costs of production (plus some "normal" economic profit), and for rents, the price tends toward all consumer value (think San Francisco apartment rents and start-up / tech-market salaries / compensation). A few years ago, looking at a set of prices for medaeval Britain, one fact that struck me was that the cost of fuelwood and coal was the same, expressed in equivalent energy output. I quickly realised that this was a pretty obvious circumstance: if you could get the same amount of heat at lower cost from the other, with handling and burning characteristics being similar, the two goods were perfect substitutes. It's as easy to burn wood as coal and vice versa. (There's a similar item on HN now: https://medium.com/@zavidovych/what-we-can-learn-by-looking-at-prices-and-wages-in-medieval-england-8dc207cfd20a https://medium.com/@zavidovych/what-we-can-learn-by-looking-... https://news.ycombinator.com/item?id=29882389 https://news.ycombinator.com/item?id=29882389) What adjusts instead is the supply of each fuel. Where it's more difficult to provide wood (say, forests are being cut down faster than they're replenished), foresters are less willing to sell wood (presuming they can find alternative income and/or livelihood), and the net balance of fuel switches to coal. If coal becomes more expensive to mine (say, larger pumps and more fuel are required to drain water), then those costs of production mean less coal is included in the mix. Energy is a fundamental physical attribute, and allowing for capital costs of generating plants, the end consumer doesn't care if electrons are motivated by light, wind, water, coal, gas, oil, atoms, or ambitious hamsters. You turn the switch, you get light. Generators and electrical providers are interested in revenues (billing rates per kWh) and costs (capital + fuel + other expenses). And though it takes time to bring new generating capacity online, given time, it's the capital + fuel costs which tend to dominate. The providers of fossil fuels face their own fixed extraction costs, plus other costs of production (usually interest service on debt for initial drilling or mining, or the purchase of a going concern). Moreover there isn't a single extraction price that covers all fossil fuel sources (any of coal, oil, gas, shale, etc.), but rather, each individual well or mine has a cost structure associated with it. Some are very low (Ghawar Oil Field, the Number One Well, Bahrain, say), some are quite high (a recently-fracked well, a deep-water offshore oil platform). Providers who can extract at low cost are receiving a large natural resource rent, effectively, which is the difference between their own extraction cost and the market price. The marginal producer has the problem that if the market price falls, it will be below their own cost of extraction, and they're selling product at a loss. (I'm ignoring externalities of the form of both pollution caused by the combustion of fossile fuels, which most people are well aware of in causing global warming and climate change, and the natural-resource cost of formation, which can be expressed as the difference between the time it's taken to create fossil fuels, and to consume them. This latter would amount to an increase in price of some fossil fuels, such as petroleum, by a factor of about five million. A rational economic system would include such factors, ours does not.) What happens as the cost of renewable resources, most especially solar and wind power, falls over the long term is that these become increasingly viable and competitive with fossil-based energy sources, and increasingly substitute for them, especially in electrical generation. And whilst the price of fossil-fuel-derived energy falls, the cost function for suppliers does not. Instead, high-cost providers are driven from the market, and their extraction operations (wells or mines) are shut down. Depending on the operation, such shut-downs may be reversable or not. Put another way, a falling price for renewables (an increase in their supply function) induces a reduced demand function for energy (the market price paid will fall), and so against a constant supply function for fossil fuels, the quantity provided of fossil fuels ... actually falls. For there to be an increase in the consumption of fossil fuels, either price or demand would have to increase. The demand increase could occur through more efficient applications of energy. This effectively means that a fixed quantity of energy provides more value (equivalent to a price decrease in energy), and hence a demand increase. But that's not what you've described.