Receding horizons in energy economics


in Economics, The environment

Over at The Oil Drum, a reader has expressed an idea they call the ‘Law of Receding Horizons.’ This pertains to the energy industry and holds that, for unconventional fuels like ethanol and the oil sands, higher oil prices are not a guarantee of increased profits. This is because their own costs of production are not insulated from the direct and indirect effects of oil price increases. As such, their costs of production often rise to squeeze away any increased profit margin. Robert Rapier expresses the same idea in his recent post on fuels made using a thermal depolymerization process.

It seems unlikely that this holds true in all cases. Certainly, oil sands producers were a lot more upbeat when oil was around $150 a barrel than they are now that it is around $40. That being said, it may prove to be one reason for which new sources of unconventional fuel do not emerge in a cost-effective way as older and cheaper sources are depleted.

It is also worth mentioning that the costs here exclude any externalities. I maintain that if all the people who are and will be affected by oil sands production offered a dollar value equivalent to the level of harm they suffered to the oil sands producers, in lieu of continuing to produce they would choose to take this settlement. The externalities associated with the oil sands are probably greater than the welfare benefits of the fuel being produced.

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{ 6 comments… read them below or add one }

anon February 1, 2009 at 1:37 am

It seems relatively likely that capitalism would produce almost no wealth if externalities were completely included in all transactions.

Milan February 1, 2009 at 10:10 am

I don’t think that’s true. Do you think the world, overall, is richer than it was thirty, or fifty, or 100 years ago?

If the only entities being considered are people, I think the answer is pretty clearly yes.

anon February 1, 2009 at 12:14 pm

No transactions exist in which all externalities are included. In other words, every transaction is theft. In other words, there is no empirical data to evaluate the claim I made. However, the extent of the externalities, along with the relatively low rate of increase of standard of living since the 60s (i.e. in some studies, negative growth), makes the claim that there is increased wealth overall, quite dubious.

Milan February 2, 2009 at 11:42 pm

Looking only at those alive now, I think there is a lot of unambiguous evidence that the world has grown richer since the 1960s. Look at the mean number of calories consumed per person per day, life expectancy, infant mortality, etc.

If you factor in the costs borne by future generations, that might be untrue. That being said, it is a tricky business to do so. We may well avoid the worst consequences of climate change, by adopting sensible policies in the next few years. In a sense, the sustainability of past actions depends upon that of future ones.

. February 4, 2009 at 3:53 pm

Thou shalt not extract, eh?
By Joseph Romm

The Catholic bishop whose diocese extends over the tar sands has posted a scathing pastoral letter, “The Integrity of Creation and the Athabasca Oil Sands.”

The letter by Bishop Luc Bouchard concludes, “even great financial gain does not justify serious harm to the environment,” and “the present pace and scale of development in the Athabasca oil sands cannot be morally justified.”

. February 22, 2009 at 9:05 pm

Bust-town, Alta.

From Saturday’s Globe and Mail
February 20, 2009 at 9:56 PM EST

FORT SASKATCHEWAN, ALTA. — In a snow-swept field northeast of Edmonton, a slender green smokestack rises like an impudent finger gesturing rudely at the economic carnage around it.

The stack is surrounded by industrial debris, including big tube-like steel vessels that cost more than $5-million apiece. The clutter suggests the scene at a messy apartment where the occupant got an unexpected phone call to vacate in a hurry.

This is the would-be home of a massive bitumen upgrading project, which, after a $530-million investment in land, equipment and technology, now lies abandoned by all but security guards. Its corporate owner, BA Energy, is in bankruptcy protection.

The site and the surrounding fields are where Upgrader Alley, a hotly anticipated $80-billion complex of oil sands processing and related industry, has hit its physical and symbolic dead end.

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