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High and Low Energy Markets

Feb 6, 2012 • Businesses, Demand, Supply, and Markets, Economic Debates, Economic History, Environment, Government, Households, Innovation, International Trade and Finance, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 185 Views    No Comments

Let’s rewind to 2008 for a moment. At $13 per thousand cubic feet, the price of natural gas was soaring. Close to $91 a barrel, the price of oil was exceeding recent highs. Selling for more than $200 per kilogram, even the price of the silicon used to manufacture solar panels was very expensive.

At the U.S. Department of Energy, people were saying that we had better figure out some better alternatives. Soon, primarily for solar projects, billions dollars of loan guarantees and subsidies poured from federal coffers to support new clean tech energy production.

And then, everything changed. New technology emerged for natural gas production and its price declined from $13 to less than $3 per thousand cubic feet. The recession diminished the demand for oil and its price plummeted. Meanwhile, the solar panel world was radically changing. Attracting new producers, high silicon prices soon plunged when the supply side of the market was deluged.

Our bottom line: The power of the market.

This Wired article tells the whole story.

The Economic Lesson

During the 18th century and part of the 19th century, energy and illumination were all about whale oil. Comparable perhaps to Exxon Supreme or Gulf Premium, oil from the sperm whale was considered the best.  Originating in the large cavity of the sperm whale’s head, the spermaceti produced the highest quality whale oil to light the home and use in the factory.

Always, though, the march of creative destruction continued as new resources emerged. Oil wells in Pennsylvania, Thomas Edison and electricity, new uses for coal…wind, solar, coal, nuclear, petroleum, natural gas. And consistently, the market has selected the “winner.”

An Economic Question: Knowing “the power of the market,” how much through subsidies, taxes, and grants should government encourage the trajectory of our energy usage?

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