Energy: Does renewability matter?

Benjamin Zycher Contributor
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Efforts in Congress and by the White House to limit carbon dioxide emissions appear to be dead for this year, and the likely election outcomes this November suggest that dead they will remain for many years to come.  Instead, the current Congressional majorities may attempt to enact a far more modest package of subsidies, regulations, and other meddling designed to increase the production of “renewable” energy.

And unlike the case for energy taxation imposed to prevent purported global warming, dissent on the virtues of renewable energy subsidies seems small or nonexistent.  Conventional energy—oil, natural gas, coal, etc.—is finite and thus is termed “nonrenewable.”  Use a barrel of oil today, and by definition there is one less left; sooner or later it all will be gone.  Ethanol, wind, and solar power, on the other hand, are “renewable” because corn can be grown every year, because the wind is eternal, and because the sun never stops shining.

Ignore the fact that the complementary resources—land, rare minerals, silicon, etc.—needed to utilize renewables themselves are finite.  Just as is the case for those resources, the last barrel of oil will remain in the ground because it will be far more expensive to produce than justified by the market prices of petroleum products; finite energy resources will never be used up.  More fundamentally, the market will never use up all the oil in the ground even if it were costless to produce, because as it is depleted its price will tend to rise (other things constant), and so market forces will move (delay) the use of large quantities of oil into the future.

Consider a world in which oil is costless to produce, but the (known) finite supplies of which are declining.  Because of that, the price of oil in the future is expected to be significantly higher than that today.  Everyone knows that, including those greedy oil companies interested in making money for their shareholders.  They have a choice: They can produce an additional barrel today, put the money in the bank, and earn the market rate of interest.  Or they can leave that barrel in the ground, waiting for the significantly higher price tomorrow, and in effect earn a rate of return higher than the current market rate of interest.

Obviously, some substantial amount of production will be delayed.  This means that the current production of oil declines, raising prices today, while the expected future production of oil rises, reducing prices tomorrow.  In other words, the price path will become flatter; the market will shift the production of oil over time so that expected prices rise at the market rate of interest, again other things held constant.

Because the market rate of interest is the amount of extra future consumption that we forgo in order to consume today, the expected price of a nonrenewable resource should rise at that interest rate as supplies are depleted.  This is for a world in which production costs are zero and in which such complications as the need to maintain refinery runs are absent.  But even in the real world of complexities, costly production, regulations and distortions, technological advances, ad infinitum, the central principle holds: Market forces in the presence of enforceable property rights will not allow the depletion of a finite resource.  There may or may not always be an England, but there always will be oil, natural gas, coal, and all other “nonrenewables” available at some price, just as “renewable” energy always will be available at some price.  The distinction between the two is empty.

This is not rocket science.  Nor is it a secret that “renewable” energy requires massive subsidies and regulatory preferences in order to achieve even small shares of the markets for electricity generation and transportation fuels.  Why do so many worship at the shrine of “renewable” energy given its massive costs, its own all-too-real environmental problems, and its decades-long record of competitive failure?  Part of the answer is to be found in the political virtues of that failure: Renewable energy requires government support and coercion, a reality that yields power for the political class.  The greed and self-interest of those decrying profits know few bounds.

Benjamin Zycher is a visiting scholar at the American Enterprise Institute and a senior fellow at the Pacific Research Institute.  He may be reached at