Environmental economics students and certain sectors of the public are very impatient about the switch point when society turns to renewable energy. According to Hotelling's price path (price rises at the rate of interest with competitive markets), when renewable energy costs more than nonrenewables (i.e., fossil fuels), rising fossil fuel prices are necessary to provide an economic incentive to fully develop alternative renewable fuels.
Well, we're observing the highest oil prices since the early 1980s ... so, is the theory correct? Here is some evidence from today's NY Times (Green Tinge is Attracting Seed Money for Ventures):
Ira Ehrenpreis may be a kind of prophet advocating investments in alternative energy companies, but don't accuse him of being noble.
In recent months Mr. Ehrenpreis, a venture capitalist at Technology Partners in Palo Alto, Calif., has been asked any number of times to speak to audiences about "clean tech," a term that encompasses such things as solar energy, water purification systems and alternative automotive fuels.
In Silicon Valley these days, more venture capitalists are following Mr. Ehrenpreis's lead. They are driven in part by the high price of oil, which hovered around $59 a barrel on Tuesday, and the vast unmet demand for electricity in China and India.
"The reason we're allocating dollars to this sector is we think we can deliver attractive returns," said Mr. Ehrenpreis, who also serves as co-chairman of the advisory board of the Cleantech Venture Network. "It's not because we want to do great things for the environment or great things for the world," though he adds that that is a "great byproduct."
Another rational response to high energy prices is for the oil industry to develop new sources of oil that were too costly to develop before prices rose. Here is some evidence from the WSJ's Morning Brief:
A Cambridge Energy Research Associates field-by-field analysis of global petroleum finds that despite current fears that oil will soon run out, world-wide oil production capacity is actually set to increase dramatically over the rest of this decade. As a result, supply could exceed demand by as much as six million barrels to 7.5 million barrels a day later in the decade, "a marked contrast to the razor-sharp balance between strong demand growth and tight supply that is currently reflected in high oil prices hovering around $60 a barrel," CERA says. Global capacity could increase by as much as 16 million barrels a day, or 20%, between 2004 and 2010, according to CERA, which has a strong record of forecasting where the petroleum market will go. Its report says "unconventional" oil will play a much larger role in the growth of supply, including condensates, natural gas liquids, extra heavy oils such as those from Canadian oil sands, and oil pumped from deepwater wells. By 2020, such sources could contribute almost 35% of supply, CERA predicts, up from 22% today.
By the way, when "supply ... exceed[s] demand" surpluses arise and prices fall. So, should we get used to $60 barrels of oil? According to CERA: nope.
