Solve the Energy Problem?
Macroblog has a post on solving the energy problem and points to Andris Piebalgs “plan” to solve the problem. In short the plan is: Increase Refining Capacity. Personall I think this will do nothing. The problem is that when you have a small number of refiners they have an incentive to keep production near the level of “just sufficient”. Building additional capacity is actually not good for profits. But even if we could induce the refiners to add capacity I don’t think it would do all that much.
For example, suppose we have 5 refiners and each refiner can produce upto 21% of the gasoline demanded. That is there is 5% excess capacity. So you order each firm to increase capacity by an additional 3%. This still would not be sufficient to reduce prices and/or volatility of prices. Because if one refinery shuts down the remaining operational refineries would have only enough capacity for 96% of the demand. Even if each refinery increased capacity so that each could in theory meet 25% of the demand, if one firm shuts down, that would leave only 4 and those of use who have suffered through industrial organization know that this would likely increase prices.
What needs to happen, in my view, is that we need not only more capacity, but more competition–i.e. more firms. The reason there are so few firms are the very politicians that are supposedly coming up with the plans to get us out of this mess. Environmental laws on emissions, gasoline blends, etc. all can create barriers to entry and raise the costs for firms in the market already. This can induce firms to shut down existing refineries and keep competitors out. Of course, the upside is that we get cleaner air.
As for the nuclear energy that Macroblog mentions I’m not sure I follow that one. I mean sure, I think it is a good idea in general, but in regards to gasoline and oil it isn’t going to do all that much since nuclear is for making electricity while oil and gasoline are for things like cars, trucks, and so forth. I suppose there is some issue of substitution, but in the short run it is likely to be minimal.