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

Abstract

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.

Keywords

peak oil price externality alternative energy resources EROEI 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Arthur W B (2006). Out-of-equilibrium economics and agent-based modeling. In: Tesfatsion L, Judd K L eds. Handbook of Computational Economics Volume 2: Agent-Based Computational Economics. Amsterdam: Elsevier B.V., 1551–1564CrossRefGoogle Scholar
  2. Ayres R U, Ayres LW, Warr B (2003). Exergy, power and work in the US economy, 1900–1998. Energy, 28(3): 219–273CrossRefGoogle Scholar
  3. Bartusch C, Wallin F, Odlare M, Vassileva I, Wester L (2011). Introducing a demand-based electricity distribution tariff in the residential sector: demand response and customer perception. Energy Policy, 39(9): 5008–5025CrossRefGoogle Scholar
  4. Bhattacharyya S C (1996). Domestic energy pricing policies in developing countries: why are economic prescriptions shelved? Energy Sources, 18(8): 855–874CrossRefGoogle Scholar
  5. Brock WA, Xepapadeas A (2004). Management of interacting species: regulation under nonlinearities and hysteresis. Resour Energy Econ, 26(2): 137–156CrossRefGoogle Scholar
  6. Brookshire D S, Burness H S, Chermak J M, Krause K (2002). Western urban water demand. Nat Resour J, 2(4): 873–898Google Scholar
  7. Cheshire P, Sheppard S (2005). The introduction of price signals into land use planning decision-making: a proposal. Urban Stud, 42(4): 647–663CrossRefGoogle Scholar
  8. Chow J, Kopp R J, Portney P R (2003). Energy resources and global development. Science, 302(5650): 1528–1531CrossRefGoogle Scholar
  9. Cleveland C J, Costanza R, Hall C A S, Kaufmann R (1984). Energy and the U.S. economy: a biophysical perspective. Science, 225(4665): 890–897Google Scholar
  10. Costanza R, Hart M, Posner S, Talberth J (2009). Beyond GDP: the need for new measures of progress. The Pardee Papers 4: 46Google Scholar
  11. Daly H, Farley J (2004). Ecological Economics.Washington D C: Island PressGoogle Scholar
  12. Day J W Jr, Hall C A, Yanez-Arancibia A, Pimentel D, Marti C I, Mitsch W J (2009). Ecology in times of scarcity. Bioscience, 59(4): 321–331CrossRefGoogle Scholar
  13. Diamond J (2005). Collapse: How Societies Choose to Fail or Succeed. New York: Penguin, 1–576Google Scholar
  14. Ehrlich P R, Ehrlich A H (2009). The Dominant Animal: Human Evolution and the Environment. Washington D C: Island press, 480 pGoogle Scholar
  15. Ehrlich P R, Ehrlich A H (2013). Can a collapse of global civilization be avoided? Proceedings of the Royal Society B: Biological Sciences, 280(1754). http://rspb.royalsocietypublishing.org/cgi/doi/10.1098/rspb.2012.2845
  16. EIA (2002). Annual Energy Review 2001. Energy Information Administration: DOE/EIA-0384, 432pGoogle Scholar
  17. EIA (2013). Annual Energy Outlook 2013. US DOE, 244pGoogle Scholar
  18. EIA (2013a). Short-term Energy Outlook. Release Date: August 6, 2013Google Scholar
  19. Energy Information Administration. http://www.eia.gov/forecasts/steo/index.cfm
  20. Ekins O, Folke C, De Groot R (2003). Identifying critical natural capital. Ecol Econ, 44(2–3): 159–163CrossRefGoogle Scholar
  21. El-Ashry M (2010). Renewables 2010 Global Status Report. Paris: REN21 Secretariat. Copyright Deutsche (GTZ) GmbHGoogle Scholar
  22. Fader M, Gerten D, Krause M, Lucht W, Cramer W (2013). Spatial decoupling of agricultural production and consumption: quantifying dependences of countries on food imports due to domestic land and water constraints. Environmental Research Letters, 8(1): 014046. http://stacks.iop.org/1748-9326/8/i=1/a=014046?key=crossref.7dd1e79e39bbfb5d7423efaecb00e003 CrossRefGoogle Scholar
  23. Farley J, Gaddis E (2007). An ecological economic assessment of restoration. In: Aronson J, Milton S, Blignaut J eds. Restoring Natural Capital: Science, Business and Practice. Washington DC: Island PressGoogle Scholar
  24. Firrisa M T, van Duren I, Voinov A (2013). Energy Efficiency for Rapeseed Biodiesel Production in Different Farming Systems. Energy Efficiency, 1–17. http://link.springer.com/10.1007/s12053-013-9201-2 Google Scholar
  25. Gagnon L, Belanger C, Uchiyama Y (2002). Life-cycle assessment of electricity generation options: the status of research in year 2001. Energy Policy, 30(14): 1267–1278CrossRefGoogle Scholar
  26. Gever J (1986). Beyond Oil (3rd edition). New York: Harper BusinessGoogle Scholar
  27. Goldin K D (1975). Price externalities influence public-policy. Public Choice, 23(1): 1–10CrossRefGoogle Scholar
  28. Gowdy J, Roxana J (2005). Technology and Petroleum Exhaustion: Evidence from Two Mega-Oilfields. Rensselaer Working Papers in EconomicsGoogle Scholar
  29. Greene D L (1997). Oil dependence: the value of R&D. Proceedings of the Intersociety Energy Conversion Engineering Conference. Volume 3, 2148–2153Google Scholar
  30. Greene D L, Hopson J L, Li J (2004). Running out of and into oil: analyzing global oil depletion and transition through 2050. Energy and Environmental Concerns, 2004(1880): 1–9Google Scholar
  31. Gumilev L N (1990). Ethnogenesis and the Biosphere. Moscow: Progress PublishersGoogle Scholar
  32. Hall C A S, Cleveland C J, Kaufmann R (1986). Energy and Resource Quality: The Ecology of the Economic Process. New York: John Wiley and SonsGoogle Scholar
  33. Hall C A S, Day JW (2009). Revisiting the limits to growth after peak oil In the 1970s a rising world population and the finite resources available to support it were hot topics. Interest faded-but it’s time to take another look. Am Sci, 97(3): 230–237Google Scholar
  34. Höök M, Hirsch R, Aleklett K (2009). Giant oil field decline rates and their influence on world oil production. Energy Policy, 37(6): 2262–2272. Available at: http://linkinghub.elsevier.com/retrieve/pii/S0301421509001281 CrossRefGoogle Scholar
  35. Hubbert M K (1950). Energy from fossil fuels. Washington D C, American Association for the Advancement of Science Centennial: 171–177Google Scholar
  36. Hughes J D (2013). Energy: a reality check on the shale revolution. Nature, 494(7437): 307–8. http://www.ncbi.nlm.nih.gov/pubmed/23426309 CrossRefGoogle Scholar
  37. IEA (2007). Medium-Term Oil Market Report. Eagles L ed, International Energy Agency: http://omrpublic.iea.org/currentissues/mtomr2007.pdf
  38. IEA (2011). World Enegy Outlook. In IEA, 666Google Scholar
  39. Irastorza V (2005). New metering enables simplified and more efficient rate structures. Electr J, 18(10): 53–61CrossRefGoogle Scholar
  40. Kahl C H (2006). States, Scarcity, Civil Strife in the Developing World. Princeton, NJ and Oxford: Princeton University PressGoogle Scholar
  41. Kenney D S, Goemans C, Klein R, Lowrey J, Reidy K (2008). Residential water demand management: lessons from Aurora, Colorado. J Am Water Resour Assoc, 44(1): 192–207CrossRefGoogle Scholar
  42. Kerr R A (2008). Energy. World oil crunch looming? Science, 322(5905): 1178–1179CrossRefGoogle Scholar
  43. Krugman P R (1979). Increasing returns, monopolistic competition, and international-trade. J Int Econ, 9(4): 469–479CrossRefGoogle Scholar
  44. Kubiszewski I, Cleveland C J, Endres P K (2008). Energy return on investment (EROI) for wind energy. In: Cleveland C J ed. Encyclopedia of Earth. last updated June 18, 2008Google Scholar
  45. Levermann A, Clark P U, Marzeion B, Milne G A, Pollard D, Radic V, Robinson A (2013). The multimillennial sea-level commitment of global warming. Proceedings of the National Academy of Sciences (July 15): 1–6. http://www.pnas.org/cgi/doi/10.1073/pnas.1219414110 Google Scholar
  46. Lipsey R G, Courant P N, Purvis D D, Steiner P O (1993). Microeconomics (10th Edition). New York: Harper Collins College Publishers IncGoogle Scholar
  47. Loaiciga H A, Renehan S (1997). Municipal water use and water rates driven by severe drought: a case study. J AmWater Resour Assoc, 33(6): 1313–1326CrossRefGoogle Scholar
  48. Malthus T R (1826). An Essay on the Principle of Population. London: John Murray. Library of Economics and Liberty [Online] available from http://www.econlib.org/library/Malthus/malPlong1.html; accessed 18 May 2009Google Scholar
  49. Meinshausen M, Meinshausen N, Hare W, Raper S C B, Frieler K, Knutti R, Frame D J, Allen M R (2009). Greenhouse-gas Emission Targets for Limiting Global Warming to 2 °C. Nature, 458(7242): 1158–1162CrossRefGoogle Scholar
  50. Mulder K, Hagens N J (2008). Energy return on investment: toward a consistent framework. AMBIO: A Journal of the Human Environment, 37(2): 74–79CrossRefGoogle Scholar
  51. Munasinghe M, Meier P (1993). Energy Policy Analysis and Modeling. Cambridge: Cambridge University PressCrossRefGoogle Scholar
  52. Murphy D J, Hall C, Powers B (2010). New perspectives on the energy return on (energy) investment (EROI) of corn ethanol. Environment, Development and Sustainability, 13(1): 179–202. http://link.springer.com/10.1007/s10668-010-9255-7 CrossRefGoogle Scholar
  53. Murray J, King D (2012). Climate policy: oil’s tipping point has passed. Nature, 481(7382): 433–435CrossRefGoogle Scholar
  54. Pachauri R K, Reisinger A (2007). Climate Change 2007: Synthesis Report. Geneva, Switzerland, IPCCGoogle Scholar
  55. Rees W E, Wackernagel M, Testemale P (1998). Our Ecological Footprint: Reducing Human Impact on the Earth. Gabriola Island: New Society PublishersGoogle Scholar
  56. Simon J L (1998). The Ultimate Resource II. Princeton: Princeton University PressGoogle Scholar
  57. Solomon S, Plattner G K, Knutti R, Friedlingstein P (2009). Irreversible climate change due to carbon dioxide emissions. Proc Natl Acad Sci USA, 106(6): 1704–1709CrossRefGoogle Scholar
  58. Stern N (2008). The Economics of Climate Change: The Stern Review. Cambridge: Cambridge University PressGoogle Scholar
  59. Trewavas A (2002). Malthus foiled again and again. Nature, 418(6898): 668–670CrossRefGoogle Scholar
  60. Voinov A (2008). Systems Science and Modeling for Ecological Economics. Elsevier, Academic PressGoogle Scholar
  61. Whitcomb J B. (2005). Florida water rates evaluation of single-family homes. Report to South Florida Water Management District: 113Google Scholar

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

Personalised recommendations