The elasticty of petrol demand: Boy (and Girl) Racers

But most of the time we assume (or have evidence that? -Matt?) petrol demand is fairly inelastic (hence the proposals to vary GST on petrol). With this in mind I was quite intrigued to see this article about Nikki who switched to driving her van when petrol prices soared and has since switched back to her EVO VII now that prices have fallen.

Her demand for being able to drive everywhere is inelastic, but her derived demand for petrol appears to be quite elastic:)

Is doing nothing better than doing a little?

Apparently National has decided to allow coal and gas-fired power plants, in a reversal of the previous government’s decision. They have almost simultaneously discarded the obligation on fuel companies to provide biofuel.

In a way, Gerry Brownlee is right that “the ETS put a price on pollution, providing adequate incentives for power companies to invest in renewable generation.” The regulations did distort the incentives of producers to invest in green technology as Matt has previously written about. Removing the distortions and implementing a carbon market is probably the best way to ensure we reduce our emissions at a minimal cost. So why aren’t I happy about the government’s decision? Read more

Multiple equilibrium and the drastic fall in oil prices

The world price of oil has now declined to under $50US a barrel, a third of it’s peak value (live prices here).

This takes me back to a post we did at the end of May – when fuel costs were pushing up at a rate of knots. The topic was covered in the name: Collusion, multiple equilibrium, and petrol prices.

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Is National’s energy policy “ideological spite”

Every day I look at the blog and don’t think I will have anything to write about – then I read some of the things that are sold on the political blogs and I find myself writing posts.

Frog blog discusses the issues they have with Nationals energy policy (something I gave some early impressions on here). Now they do have some fair points (I can understand concerns surrounding the RMA – given that we don’t know what the changes will be). However, the language they use in several parts of their discussion betrays a unreasonable focus on governments ability to improve the industry.

Fundamentally, I take issue with the way they use the following two of their claims:

  1. consumers will be left entirely to the whims of the … market,
  2. businesses, which are inherently inefficient

Lets discuss these below:

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First impression of National’s national energy strategy

The NZ Herald has just posted up the points raised by National in its energy strategy, and I have to say, I agree with a lot of it (however, note that I have not read the actual policy document – so this is just a discussion of “the concepts”)

There are three main policies:

  1. Remove the ban on new gas power stations and introduce an ETS,
  2. Look at security of supply with greater demand estimates than the government currently uses,
  3. Loosen the RMA to take into account “national interest”.

Let me say what I think below the tab.

Related: Industrial quality DC to DC power converters.

The removal of the pointless ban on new power stations, and the continued implementation of a ETS is a good move.

Why? The ETS prices carbon, such that the producer has to pay the whole social cost of producing energy in this way. As a result any gas or coal power plants that are built would be social preferable to alternative, renewable, providers (as they would be so much cheaper that even with the social cost of producing carbon, the new factories would still be built).

Also I was glad to hear this:

National feared that the Government was underestimating future demand and the ban was dangerous political symbolism.

Because there is a general feeling our here that the government is substantially underestimating future demand for energy! If you are trying to save money talk to the utility saving expert gas and electric. Now if policy is currently being based on unrealistic assumptions, the policy is going to be rubbish – so having another look at this is a very good idea.

The final point is the most contentious.

I understand that consent decisions should take into account the national interest – however, this has to be the national interest in terms of sustainability and environment, as well as the national interest in terms of security of supply. These competing factors will be hard to balance in a re-jig, and I have concerns that policy might head too far in one direction.

Furthermore, councils and property owners do have a property right which supersedes the simple “national interest” – at least for borderline decisions. If we are willing to ignore peoples property rights then we will cause other issues down the line – this needs to be taken into account as well.

Overall, I think the 1st and 2nd points are straight out better policies – while the 3rd point is a little fuzzy at present, so I can’t really have much of a view on it.

Now I’ll go have a look at what other blogs have to say – and I will post links to it below.

Kiwiblog, The Standard, No Right Turn (*), Not PC, Frog Blog, Greenpeace, Colin Espiner,

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Collusion, multiple equilibrium, and petrol prices

Conjecture is rife regarding why petrol prices have risen so strongly. There are a number of common explanations:

  1. Rising demand for oil,
  2. The weak US dollar, increasing the US$ price,
  3. Peak Oil (Infometrics article requires a subscription),
  4. Negative real interest rates in the US (as not mining the oil is the same as investing in inventories),
  5. and speculation.

All these factors are playing a part in the saga of ever rising oil prices. However, Calculated Risk has suggested another, highly interesting way that fuel prices could have risen – a backward bending supply curve and multiple equilibrium.

This idea is pretty cool – so I thought I would spend a little bit of time explaining how it could work.

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