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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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APPLIED FIELDS OF ECONOMICS
There is a basic theory and facts in economics, in which all economists are interested. However, economics has some main applied fields that deal with specific topics, such as industrial economics, agricultural economics, economics of energy, economics of education, labour economics, etc.
Industrial organization and structure are studied by industrial economics which also analyzes markets for manufactured goods as well as policies of various enterprises. The degree of concentration and barriers against new competitors in the market have already been analyzed by industrial economics for such important branches of economy as mining, gas, and oil industries, etc. The behaviour of firms and companies in an industry is influenced by the structure of the industry. Both profits and losses in any industry are affected by the behaviour of firms and companies engaged in the industry.
The economics of energy is known as another important field of applied economics closely connected with industrial economics. A lot of energy has been used by the modern economy in recent decades. Farms, factories, plants, transportation as well as families have greatly increased the consumption of various sources of energy since new modern equipment and technologies were introduced.
In the past, wood and coal were used as the main sources оf energy. Then, these sources were replaced by gas and oil in most industries. However, in the 1970s energy sources became scarce and there was a rise in energy prices. Since that time serious adjustments have been made by industrial economies in order to cope with the energy scarcity.
For the last few decades the problems of energy economics have been discussed by specialists and governments in many countries. Regular meetings are held by the OPEC 1 formed in order to regulate oil prices.
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1. What topics do applied fields in economics deal with?
2. What does industrial economics study?
3. What influences profits and losses in any industry?
4. Why is economics of energy closely connected with industrial economics?
5. What were the main sources of energy in the past?
6. Why were adjustments made in most industries in the 1970s?
The Economics of Energy: Basic Tren
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 fu els — 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 scar city 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 re- Placed 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, ni’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, espelally in remote regions. The search for gas has also been stimulated as a re- u l t of the removal of some controls on the price of US gas. These added torts have brought some results. However, the marginal revenue of explora- °n continues to decrease. One should expect this since the cheapest, most accessible sources were exploited decades ago. Moreover, it is costlier to trans port 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 bal ance 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 prof itability 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, where as 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.