Barely a month after world leaders signed a sweeping agreement to reduce carbon emissions, the global commitment to renewable energy sources faces its first big test as the price of oil collapses.
Buoyed by low gas prices, Americans are largely eschewing electric cars in favor of lower-mileage trucks and sport utility vehicles. Yet the Obama administration has shown no signs of backing off its requirement that automakers nearly double the fuel economy of their vehicles by 2025.
In China, government officials are also taking steps to ensure that the recent plunge in oil prices to under $30 a barrel does not undermine its programs to improve energy efficiency. Earlier this month, the country’s top economic planning agency introduced a new regulation, effective immediately, aimed at deterring oil consumption. ...
In China, the world’s biggest greenhouse gas emitter, the government implemented a new rule that no matter how low world crude oil prices may fall, the price of gasoline and diesel will continue to be set as though the world price of oil were still $40 a barrel. The goal is to prevent gasoline and diesel from becoming so cheap that China’s citizens would start consuming it indiscriminately.
China’s heavily state-owned refining industry will also not be allowed to keep the extra profits from buying crude oil cheaply and selling gasoline and diesel as though the crude oil still cost $40 a barrel. Instead, the Chinese government will take the extra refining profit margin and put the money into a special fund for energy conservation and pollution control.
via www.nytimes.com
Here is an illustration of what might happen (oil prices are in parentheses):
The typical price floor would create a surplus as firms overproduce given the price signal and compete for the scarce consumers (the dotted line). In this case, since oil refineries can't keep the excess profits (area a+b) they might produce at the intersection of demand and supply at (30) and keep the excess production as inventory for when oil prices go back up.
What am I missing?
