Deinonychus antirrhopus

Bad Economics from Economist.com

Thanks to Robert Prather at Insults Unpublished for spotting this link. Anyhow, it is an article on the "addiction" of the West to Middle East oil. What caught my eye was the discussion how much money the OPEC cartel has managed to extract from the U.S. as economic profits (i.e., the amount of money the price (per barrel) of oil over and above the market clearing price) $7 trillion dollars, and externalities from the use of petroleum as a fuel source.

That points to a second sort of cost. According to one American government estimate, OPEC has managed to transfer a staggering $7 trillion in wealth from American consumers to producers over the past three decades by keeping the oil price above its true market-clearing level. That estimate does not include all manner of subsidies doled out to the fossil-fuel industry, ranging from cheap access to oil on government land to the ongoing American military presence in the Middle East.

The final disguised cost of oil is the damage it does to the environment and human health. Unlike power plants, which are few in number and so easier to regulate, cars are ubiquitous and much more difficult to control. The transport sector is a principal source of global emissions of greenhouse gases.

The only long-term solution to this connected set of problems is to reduce the world's reliance on oil. Achieving this once seemed pie-in-the-sky. No longer. Hydrogen fuel cells are at last becoming a viable alternative. These are big batteries that run cleanly for as long as hydrogen is supplied, and which might power anything in or around your home—notably, your car. Hydrogen is a fuel that, like electricity, can be made from a variety of sources: fossil fuels such as coal and natural gas, renewables, even nuclear power. Every big car maker now has a fuel-cell programme, and every big oil firm is busy investigating how best to feed these new cars their hydrogen.

Whomever wrote that article clearly flunked Public Finance 101...badly. When a commodity comes with a negative externality it means that teh price is generally too low. That is, the consumption and/or production of the good imposes costs on others that is not borne by the consumer/producer. This means that the price is too low. for example, by using gasoline in our cars, it results in a lower air quality, but that effect is not reflected in the price of gasoline (how do you put a price on air quality?). Hence the price is too low and you have too much consumption. If the solution hasn't jumped out at you yet, let me point out there is a phrase I have used a few times now, the price is too low.

Thus, the increased price form the formation of OPEC might have actually been good for the environment. So it is kind of strange to see this column which is arguing the price is too high...but not high enough. Talk about totally confused....but it doesn't end there!

Another alternative likely to become available in a few years is “bioethanol”. Many cars (quite a few of them in America) already run on a mixture of petrol and ethanol. The problem here is cost. At the moment, the ethanol has to be heavily subsidised. But that might alter when biotechnology delivers new enzymes that can make ethanol efficiently from just about any sort of plant material. Then, the only limit will be how much plant material is available (see article).

Did the author stop to think about the possible negative externalities of increased agricultural output? If the souces of these fuels are grown in the U.S. then it will mean more intensive use of various forms of pesticides and fertilizers.

Now my area of expertise is not in hydrogen fuel cells (its in economics...unlike the author of this article), but it seems to me that the hydrogen fuel cell idea might be a bit misleading.

Such changes will not occur overnight. It will take a decade or two before either fuel cells or bioethanol make a significant dent in the oil economy. Still, they represent the first serious challenges to petrol in a century. If hydrogen were made from renewable energy (or if the carbon dioxide generated by making it from fossil fuels were sequestered underground), then the cars and power plants of the future would release no local pollution or greenhouse gases.

Now it seems to me that in reading the above part that fossil fuels would still be necessary when using hydrogen fuel cells. If this is the case then the question becomes can you get more energy bang for your energy buck (i.e., will a given amount of oil/gasoline result in more energy with fossil fuels than simply using oil/gasoline directly)? If the answer is no, then I don't see the improvement.

As for the hope for renewables, that is also questionable. If you rely on solar, you can only drive your car on a sunny day. If you rely on wind, will you have developed a perpetual motion machine if you put a windmill on top of your car(sarcasm alert)? Renewables right now are not cost effective. They maybe in the future, but not right now.

What a bad article.