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Complex and not so Complex

May 18, 2012 - John Stack
It doesn’t get much simpler in Economics than supply and demand. If demand of a product exceeds the supply of a product, the price goes up. But if supply goes up, and demand stays the same, price goes down. We have seen this on a very macro stage with oil. OPEC has used this simple model for decades. Basically, the idea behind OPEC would be to limit the amount of oil in order to keep oil prices higher. Now lets look at some misbegotten beliefs about exporting coal.

One thing abouCt the increased price of oil, and the inelasticity of demand (for the most part) for oil is the greater amount spent on finding newer oil reserves to increase the supply of oil to meet demand. This is essentially the equation MR=MC (Marginal costs =Marginal returns) – This is the point of which producers try to hit – where the price to produce one more unit costs more than their return for that unit. Now, in 2010 the US exported 81 million tons of coal (from the US Energy Information Administration). Most of it (about 47%) is sold to Europe, and about 21% is sent to Asia (unlike the info from an unnamed blogger on ADE). In fact less than ½ of 1% of coal produced in the US goes to China and their lower emission standards. Regardless. If more coal was used in the US (US produced 1.085 billion tons of coal in 2010, and used 1.048 billion tons – we actually imported 19 million tons) would less coal be exported to foreign countries? Some posit that this coal that is exported is loaded onto big gas guzzling freighters, shipped across the ocean and then loaded onto big trains causing a whole lot more emissions. If we used more coal, we wouldn’t export this coal saving us precious emissions right? In what backward world would that be true? Why would US coal producers choose to not export coal to foreign countries? The EU and Asia still need the coal. They wouldn’t STOP using coal, they would need to get it somehow. Basic economics tells you that the supply of coal in the US would increase. There would be an increase in demand. This would cause an increase in price. The increase in price would move the point of the MR=MC line to a higher price point.

The idea that burning more coal in the US would somehow help in world emissions is a preposterous proposition. Burning more coal in the US- be it through more ‘clean ‘ plants would have this direct affect – more coal would be mined causing greater emissions. The easiest coal has all ready been taken. Therefore new coal supplies are in more and more remote places, and more environmentally sensitive areas. The net effect of exports on emissions surely wouldn’t be lower emissions.

Yet the coal/oil proponents try newer and more ideologically and ridiculous arguments. ‘Wind is far too unreliable’. Really? Just the opposite is actually true. When a coal power plant goes down, there is no energy coming from the coal plant. If there are 60 turbines in a grid, if one goes down, the loss is less than 1%, rather than 100 percent. ‘But the wind doesn’t always blow’. True. But, over the course of a year, and over the whole US, it DOES stay pretty even year to year. If New York is having a low wind speed period, often some other places such as Iowa has higher than average wind output. The more turbines that are built, the variability as a whole only decrease. If all the power was coming from JUST the Tug Hill Plateau, there would be incredible variability. With tens of thousands of turbines, the reliability of the wind, and of wind power is actually greater than that of coal. Plus, wind generation facilities also have huge storage capacities so that when the wind isn’t blowing , there is still power available to the grid.

How about ‘the sun does go down every day’. This one fails even a cursory laugh test. If in a one month cycle, a solar power facility can produce 100 MW of power for 10 cents per unit and it cost a coal plant 15 cents per unit for 100MW of power, why would the amount of time the sun being out make any difference in the economics of the plan? If one type of energy is 5 times as efficient as another, but is only operable 50% of the time, that is still 2.5 times as efficient overall. No one investing money would choose the least efficient method.

The only cogent arguments (which are ignored by the Fox News viewership) are probably ignored because it is too complex to understand. Saying ‘wind doesn’t always blow’ or ‘the sun goes down every night’ may be true statements, and you can fool some of the people, they are completely invalid arguments. The arguments we should be having are ‘ are the health cost/benefits worth it if the power is cheaper’. Can wind or solar power be economically feasible without government subsidies? ‘Is the future security of the US better served by weaning us off foreign oil and moving towards alternate energy?’ Specious and ideological arguments should have no standing here. Most of this is fact, not opinion (such as how much coal we export, where we export it, and the like).


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