Frontiers of Earth Science

, Volume 8, Issue 1, pp 3–17 | Cite as

Pricing strategies in inelastic energy markets: can we use less if we can’t extract more?

Research Article


Limited supply of nonrenewable energy resources under growing energy demand creates a situation when a marginal change in the quantity supplied or demanded causes non-marginal swings in price levels. The situation is worsened by the fact that we are currently running out of cheap energy resources at the global scale while adaptation to climate change requires extra energy costs. It is often argued that technology and alternative energy will be a solution. However, alternative energy infrastructure also requires additional energy investments, which can further increase the gap between energy demand and supply. This paper presents an explorative model that demonstrates that a smooth transition from an oil-based economy to alternative energy sources is possible only if it is started well in advance while fossil resources are still abundant. Later the transition looks much more dramatic and it becomes risky to rely entirely on technological solutions. It becomes increasingly likely that in addition to technological solutions that can increase supply we will need to find ways to decrease demand and consumption. We further argue that market mechanisms can be just as powerful tools to curb demand as they have traditionally been for stimulating consumption. We observe that individuals who consume more energy resources benefit at the expense of those who consume less, effectively imposing price externalities on the latters. We suggest two transparent and flexible methods of pricing that attempt to eliminate price externalities on energy resources. Such pricing schemes stimulate less consumption and can smooth the transition to renewable energy.


peak oil price externality alternative energy resources EROEI 


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Copyright information

© Higher Education Press and Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.International Institute for Geo-Information Science and Earth ObservationUniversity of TwenteEnschedeThe Netherlands
  2. 2.Centre for Studies in Technology and Sustainable DevelopmentUniversity of TwenteEnschedeThe Netherlands

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