Sunday, December 07, 2008

The side effects of a recession on our energy revolution

While most of you (I am still a pedestrian by choice!) are enjoying historical prices at the pump, the damage of a recession to the energy improvements is as real as possible. Naturally, the first reaction is one of joy & relief after the barrel of crude oil reached $100 this year to see it these days below $50. Moreover, the analysts are expecting a further decrease towards the $30/barrel until the supply cuts will kick in for a rebound in the price. However, this cheap energy hurts the efforts of getting into the renewables and alternative fuels. With these prices, nobody will really look into such issues anymore. Despite what all environmentalists will say or do, NOBODY can beat the powerful effect of INCENTIVES. and PRICES are the most powerful one. and i really love this fact because it stems from pure neoclassical economics showing that, although each one of us is unique, we tend to respond pretty uniformly to incentives. Hence by this rationale, without higher prices for energy we will not move forward on changing our consumption and reducing our oil dependency. Two contingent issues: 1. the bail-out of the auto-makers -> tough issue from a social point of view (jobs will be lost; people will suffer; CEOs will prosper regardless--> no incentives!!) but really easy issue from an economic point of view (NO BAIL-OUT: inefficiencies; low competitiveness; all the wrong incentives & paths are there!); 2. the strategic long term perspective. The Obama administration will hopefully see the long term path to follow and adopt all the right measures to ensure that America would be able to sustain high oil prices (well above $100) and environmental constraints (carbon caps) that are very likely to come back in the news over the next few years. We have to remember that this is just a small break from reality. And that is saying sooner-than-latter we'll reach this threshold.

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