II. Oil Markets & LCOE Flashcards
Can we anticipate what the trend in the prices of fossil fuels will be as we deplete them?
Fossil Fuels are an exhaustible resources.
Therefore, as we deplete, the price should rise at a fixed rate.
Oil Producers and Reserve Supply Management
Producers choose price considering its impact on demand.
Modern day quantities and reserves are simply producer optimization and profit maximization.
If discovering reserves increases in cost, prices rises by this average increase in discovery cost and keep quantities constant.
Is There Peak Oil?
There is no peak oil, not running out, 100-300 years more to go.
The ratio of reserves to production is also constant so doesn’t seem as though reserves are decreasing.
Since producers set prices to manage quantities, it’s up to them if it will peak before exhaustion.
We will produce same amount until there is zero which is different to going up and cliff edge.
Implications of No Peak Oil On Climate Change?
We cannot count on a natural exhaustion of quantities drive by the supply of oil to attain climate objectives.
Over next 100-300 years, we will just keep digging and also still have Shale Oil.
Implications of Inability for Supply Side To Help Attain Climate Objectives
Need to curb demand for oil and fossil fuels.
Must encourage alternative energy sources
Growing with supplementary energy has never been seen before.
Two Key Methods for Curbing Demand
Non-Market Based: Forcing consumers. Forbid fossil fuels for certain use cases.
Market Based: Bring cost of alternatives down, cost of fossil fuels up, subsidize clean sources, incentivize research/innovation
Importance of Levelized Cost of Energy (LTOE) for Market Based Approaches
LTOE allows us to compare the cost of different energy sources because they have different life time, energy production profiles, and cost structured (fixed vs marginal // upfront vs variable)
Easier for wind to setup since low fixed costs and stream of revenues as you face replacement costs, but lower lifetime. Nuclear as high fixed costs but long lifetime.
Evolution of LCOE of Alternative Energy Source (Wind and Solar)
The decrease in costs is plateauing.
It is not certain that alternatives will ever become cheap enough to replace fossil fuels without government intervention. Need government intervention.
Why May LCOE of Wind and Solar Increase Going Forward?
Cost of storage is still too high, and this may influence LCOE depending on the indices that discount.
We need lithium. However, will start running out of this exhaustible resource which increases prices.
Gradually running out of the best places for panels/wind, such that the costs may increase. –> Faster adoption would require costlier projects.
Looking at the LCOE curves, what tax would you propose and explain why it could be bad in terms of innovation?
Want to bring fossil fuels above LCOE curve. Thus, could put tax on coal exactly at the cost of renewables (LCOE curve). However, this tells markets/producers that you don’t need to innovate further and push costs down. That is where you see only bad solutions emerge.
Tax schedule should not depend on current prices per LCOE curves.
Better is to abstract away and tax SCC on fossil fuels.
Advantages and Disadvantages of Carbon Tax / Taxing at SCC
Your first best solution right now with technological uncertainty is just to do a carbon tax.
Advantages: Not picking a technology and you’re making any technology that is cheaper than (oil/gas cost +emission tax) more competitive. It’s not distortionary to incentives.
Disadvantages: Will never completely rule out oil or gas. For some use cases, the substitution will be more costly than a $100-$200 tax. Social choice.
Unsustainable Future of Alternatives
Precious metals shortage. By 2040, we 4x global metals demand.
As a result, zones where we get metals from are primary forests. When factoring in what’s destroyed in terms of carbon capture → renewals may be worse than gas.
This renewables trajectory is as unsustainable as current carbon trajectory.
Therefore, need decoupling and growth with less energy not just substitution.
EV Footprint and Grid’s Marginal Demand Source
Carbon footprint of EVs depends on carbon footprint of electric grid.
Currently, increase in electricity emissions would offset more than 50% of the emission gains from having fewer gasoline-powered vehicles.
Need to overhaul grid so that marginal demand is satisfied by wind/solar.
