The notion that alternative energy sources will make oil an obsolete energy source ignores economic reality. Even if T. Boone Pickens succeeds in his move to make a major component of our fuel source consist of natural gas, what do you think will be the response by oil suppliers? First of all if they see a major change coming they will lower prices. This is already evident with the recognition that high prices have lowered demand. It inevitably happens that the minute a supplier sees his inventory is not moving as rapidly and he is having a harder time getting rid of it and consequently not getting a revenue stream that pays the bills, he cuts prices. Sometimes intermediate schemes such as coupons and rebates set in but if a real crunch comes prices will fall.
The fantasy the politicians are trying to portray is the oil suppliers will be practically wiped out by alternative sources of energy but they forget that oil can rebound if the alternatives are not viable, have unforeseen costs and/or “glitches”. Businessmen with capital expenditures tied up in oil production and distribution are not going to simply toss in the towel without trying to recoup their business. This applies to foreign producers as well. This is why OPEC has not been able to simply continue to raise prices. They too must consider demand, competition and incoming revenues. It is hardly worth mentioning the nonsense of speculators raising the price of oil now that we see it falling. If speculators has any power to raise the price of oil why wouldn’t you see vast speculation as prices start to fall? Speculators are now primarily betting the price will fall by placing their bids in puts instead of calls. Does that mean they are controlling the drop in the price of oil? Hardly.
This means oil may recapture its dominant role as an energy source because of the large capital expenditures by producers and consumers to adapt to alternative energy sources. Revamping your car or replacing it with a vehicle that uses natural gas will not be cheap. Getting stations located and operational and supplied with natural gas will be expensive. As these are developed ( if they are ) the oil demand will diminish and the price of oil will fall and look more attractive as an energy source. Businessmen will constantly be looking at the cost /benefit ratio of both energy sources and making calculations and taking actions to realize a profit. This is how the market works.
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Enter the government and the scene changes. Subsidies arise and money is spent on energy sources that cannot compete on the open market. This hidden cost is ignored as the ethanol plants rise, the natural gas cars are built and the resulting falling prices of oil make the subsidized source less attractive. The easiest way to see this is to look at the farm subsidies and the extra costs to the taxpayers that is rationalized as government’s “help” to insure an adequate food supply. The cost of milk is higher because of milk support prices. The cost of corn is higher because much of it is diverted to ethanol production which is subsidized by the government. Government intrusion in the market of any commodity affects it in a way that alters the true market price. This skews supply and demand, makes prices rise or fall via government fiat and distorts the ability of businessmen to make the kinds of calculations and projections necessary to satisfy their customers and their profit requirements. As an example you might consider a government edict to purchase cheese for a school lunch program. More cheese is suddenly needed and therefore the demand goes up as prices are raised by government decree to incentivize the farmers to produce more cheese. More cheese is produced and soon there is a surplus because the government , to insure a supply of cheese, subsidizes the price of cheese. More people get into the cheese business because of the price supports and soon there is a need for cheese storage that the government is stockpiling. This can all be empirically observed as already happened. This principle applies not just to cheese but to oil and oil substitutes as well. When the government mandates a move to natural gas the cost of subsidization will be covered up, will add to the national debt, increase deficit spending and oil may very well arise as a cheaper more efficient fuel just as coal has done. Diesel oil replaced the coal burning engines of yesteryear but it did not transform the electricity generating stations to that extent. Coal is still a very big component of electrical generation.
The energy crisis kicked around as a political football is really a crisis in political philosophy. Supply and demand are not allowed to operate freely because of political demagoguery. The government wants to perpetuate the notion that laws can be passed to solve anything. The fact is this is a silly notion and easily disproved by the fact that government cannot operate in a fiscally responsible manner. T. Boone Pickens , like Lee Iacocca did, recognizes the government has a source of capital that can be tapped if the situation is presented as a crisis and in the national interest. This also decreases personal risk and gets favorable press. The problem is it merely increases the tentacles of government and further decreases the role of independent business judgment and distorts the market. However, this cannot eliminate market forces. Black markets arise when the government miscalculates ( which it constantly does ), shortages occur, surpluses occur and the market shutters with the knowledge that government dictates may disrupt another sector, regulate another into oblivion and tax and fine beyond economic viability.
The good news is supply and demand cannot be repealed, only modified and disrupted. This is why oil will not disappear no matter what efforts are made to make it obsolete. It will rebound the minute other energy sources get out of whack either by government decree or falling demand or abundant supply. Those who think the oil supply is limited ignore the ingenuity that has increased its availability and the lack of ability to understand that limits exploration and acquisition and distribution centered in a political philosophy distorted by pandering to groups with anti-energy agendas.
The opinions expressed in this commentary are solely those of the author and are not not necessarily either shared or endorsed by iPatriot.com.