19 March 2011

Price Discovery

This is a quick follow-up to my previous post. The main argument used by traditional industry apologists/lobbyists (oil, gas, nuclear [fission], coal, etc.) is an economic argument; to wit: these status quo forms of energy currently deliver more kilowatts per dollar than alternative forms of energy (solar, wind, tidal, geothermal, fusion, etc.) currently are capable of delivering.

In the current climate of public argument—policy and political and PR—this passes for authoritative and conclusive. In a free market situation, the cheapest, most efficient producer wins.

The standard response is that traditional forms of energy have been entrenched for so long that they are therefore cheaper and more efficient. Alternative fuel sources are only just beginning to achieve the sorts of economies of scale that these older industries have been able to capitalize on. This is weak.

The second response is that the traditional industries receive vastly greater amounts of funding from public sources—tax payer subsidies, utility company vertical integration, lax and favorable regulation, etc. Both arguments nip at the heels of the real issue, especially the second because it gets closer to the real knock-out punch.

The second point raises the issue of price discovery. In a so-called free market economy, market forces are in a constant tussle to set price points at an equitable, agreeable amount for both producers and consumers. Government subsidies and regulations act as impediments to this process.

Now, traditional energy industries are at the forefront in opposing government regulation—whether it be in the environmental or antitrust or consumer protection areas. They are the first to shout when government seeks to intervene on behalf of consumers or the environment. However, they fight like hell to defend their subsidies—whether it's in the form of tax breaks or regulatory indifference. And, what's more, they don't include those subsidies in their cost calculation.

A further cost they refuse to include—and this is the kicker—is the environmental and climatic costs of their business-as-usual practices. For example, the environmental costs of mountain-top removal are not factored into the price of a kilowatt of coal. The costs—spread over the entire industry—of Three Mile Island or Chernobyl or Fukushima-type situations are not entered on the cost side of their ledgers; the public assumes these and all future risks (though by all actuarial right they are estimably calculable). Neither are the costs of global insecurity due to the by-product of this form of energy: the threat of nuclear war. The costs of increased global warming due to, e.g., ozone depletion caused by pollution from all these forms of energy production can hardly be calculated, though early efforts in the form of carbon taxes are currently being floated. Neither can the costs of global instability caused by the political inequities of propping up oil-friendly, authoritarian regimes in such places as Iraq, Libya, Saudi Arabia, etc. All non-humanitarian foreign aid to these countries should show up on the ledgers of the oil companies. The impact on the health of people who work in these industries and who are effected by them due, e.g., to their proximity to their production facilities also needs to be monetized and charged to their accounts. Why, similarly, are the costs of cleaning up, e.g., Prince William Sound and the Gulf of Mexico not factored into the costs of a barrel of oil? Because the free market mechanism of price discovery is not efficient. Knowledge is not yet perfect. And these industries are in a battle to the death to prevent it from ever becoming so.

Unless and until there is true price discovery, because the ideology of the free market is regnant in American and thus global politics, these traditional energy industries will continue to win the argument and thus the day, and there will never be a level playing field for renewable and sustainable energy industries.

Here's a good general primer on the issue. Here's a piece on the hidden costs of nuclear energy. And here's one on the costs of fossil fuels.


Charles F. Oxtrot said...

Interesting, I need to digest this!

Q: Within the last decade I have noticed the lingo of pop-econ shifting from "price" to "price point." Is there a difference in the two?

Good luck on the run tomorrow!

Frances Madeson said...

On the way to San Francisco I was talking to a Californian who had spent his engineering career delivering high-voltage electricity systems internationally--big projects on all continents, some hard to reach places where his work resulted in power lines reaching communities for the very first time. One of those fascinating air travel encounters that can somewhat balance out the hassle of taking your shoes off for George Bush and having your brand new and not at all cheap tube of Tom's fennel toothpaste thrown in the trashcan because it's over the ounce allotment for liquids. Keep us focused on the picayune, right out of the 1984 playbook. In the course of a long and interesting conversation about some of his more Fitzcarraldoian projects, and how solar panels are actually fabricated and why they're so expensive to make, among other things, he explained that there is a correlation between electricity and population rates. I can't exactly remember the euphemistic way he shyly expressed that when people have lights on at night they do other things than reproduce, but that was essentially it. Seems like a potential factor in price discovery, but also just interesting for its own sake; that there are still virginal places in the world where there is no electricity and never has been.

I have some memorable letters from a friend who served in the Peace Corps in a mountain village in Lesotho a few years back I will try and dig out when I get back. It was such a place. After dark she peed in a tupperware in her tent, because venturing out in the pitch black night was not an option. With all the inconveniences and out and out deprivations and hardships, she misses her life there fiercely.

I'm looking forward to hearing what you have to say about price points. I think it leaked over from basis-point, which is just a fancy way to describe a decimal in financial services industry nomenclature. With the added feature it induces people to self-identify at what level they would like to be sold. More of the trappings of free choice we're supposed to possess as empowered consumers.