The Economics of Energy: Basic Trends
The modern economy is known to require vast amounts of energy for farms, factories, homes, and transportation. The modern dependence on fossil fuels especially coal, oil, and natural gas is considered to be a brief episode in human history. Since they took 300 million years to form, these resources will not be replaced to any considerable degree. Even the vast reserves of coal are expected to be used up entirely in a few centuries. As to oil, economists expect all the oil-producing countries known to use up most of their reserves in about 50 years' time. The economic use of fuels begins with the easiest and cheapest sources and then moves to less accessible costlier ones. As the best coal is used up, shafts must be sunk deeper. Similarly, oil and gas must be sought in more inaccessible places, which adds to their production costs. The present variety of sources ranges from shallow Mideast oil wells to expensive capital-intensive solar equipment. The choice of a fuel to be produced amounts to the future opportunity costs of alternative fuel sources. Note that the rising scarcity of fuel is a matter of degree. There exists a great variety of choices from cheap fuels to very expensive ones. Rather than use up all of them at once, the world is expected to move to increasing scarcity, which will take the form of rising energy prices. Moreover, investors will realize the coming scarcity and try to buy the reserves now, which in itself will send up prices. In short, the market anticipates the physical shortages, and the expected future Price increases raise the current price of fuel. Since most fuels can be replaced by others in, at least, some uses, the rise in oil prices, for example, naturally, results in a parallel rise in prices for other fuels, including coal, gas, ""clear fuel, and even firewood. And indeed, there occurred a steep rise of oil Pnces, particularly in the 1970s and 1980s. It stimulated the search for more n deposits. Much of the effort has been focused on the ocean floors, espe- lally in remote regions. The search for gas has also been stimulated as a re- ult of the removal of some controls on the price of US gas. These added torts have brought some results. However, the marginal revenue of exploration continues to decrease. One should expect this since the cheapest, most
accessible sources were exploited decades ago. Moreover, it is costlier to transport the more remote oil and gas reserves to the market. For example, oil and gas pipelines from Alaska and large-investment projects. But eventually, no discovery, however fast, can increase the amount of fuel in the ground. This only makes it possible for us to turn the available reserves to human uses more rapidly. A rapid discovery and use of fossil fuels may, though, destroy the balance of reserves used and those conserved for future use. How much this is desirable depends on the prospects for alternative fuel sources, such as solar energy, nuclear power, fusion processes using water, and ocean tides, the profitability of those future sources is mostly unknown now. Only if other sources are going to be cheap and to meet the demands of growing population, the rapid discovery and use of oil deposits can be considered to be desirable, whereas uncertain prospects for new technology will raise oil prices rapidly now, which will be a disincentive rather than an incentive for speeding up the use of new oil.
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1. Economists believe oil-producing countries to use up most of their oil reserves...
2. The choice of a fuel to be produced in future depends...
3. At present, the price of oil rises because...
4. A rise in oil prices results in...
5. The search for new oil deposits is mainly done in...
6. The marginal revenue of exploration decreases since...
7. The rapid discovery and use of new oil deposits is desirable provided...
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