The Indian Economy Blog

September 30, 2005

The Future of Energy

Filed under: Energy — Atanu Dey @ 2:17 am

“Fossil fuel is dead,” declared CJ.

CJ likes to make those kinds of superficially profound statements. We were meeting after a long time. I was in Delhi for a conference and caught up with CJ at the Taj Mansingh Hotel coffee shop. We were discussing the spike in the gas prices.

“Dead or not, seventy dollars a barrel for crude was bad news for India considering that India imports about half of its energy needs. Will slow down the economy a bit, won’t it?” I said.

CJ is a contrarian. Never seen him see an issue the same way that prevailing wisdom indicates. You can count on him to prepare to make hay when the clouds come rolling in.

“I think it is a great deal of luck that oil is peaking,” he said. “That is one of the best things that has happened lately. It is good for the world, and it is going to be excellent for India. The only guys who stand to lose are the bad guys.”

“O yeah? The bad guys are making money hand over fist, aren’t they?” I said.

“That’s alright. It won’t last. In fact, it is a pity that the shock to the system came so late. Shocks are good. Makes things interesting. Every shock to a system makes it stronger. Neitzsche, you know. Everything that does not kill me, only makes me stronger.”

“You mean, that the oil industry will become stronger?” I said.

“No, the shock to the global economy will make the global economy more secure. More and better things will follow. The oil companies will morph into something else as they follow the dinosaurs. Fossil fuel is called so not without a reason.”

“Fossil fuels are not made up of dinosaur bones, you know. It was the carboniferous period that petroleum began its life-cycle,” I said.

“Doesn’t matter. It is the shock to the system that we need to focus on. Shocks make the world go round. The evolution and diversity of life is connected intimately with shocks. Shocks are what I call the Shiva Hypothesis,” said CJ.

“Shiva hypothesis? Isn’t that already taken? Shiva as the Creator and the Destroyer?”

“Let me explain this. At the end of the cretaceous period about 65 million years ago, a pretty big chunk of rock slammed into the earth. That shock killed off the dominant life-forms and cleared the stage for the little rodent-sized mammals to gain a foothold. Dinosaurs exit stage left, mammals enter stage right.”

“I know that. That is like a soft-reboot of a system. Lots of stupid processes running wild and hogging resources. So just kill off those and clean up the system,” I offered.

“Silly analogy,” CJ replied. “What you really need to consider is the economics of the situation. I suppose you have not forgotten Econ 101 now that you have been out of Berkeley for two years.”

“Shall we walk around the shops here?” I asked.

The Mont Blanc shop was right around the corner from the coffee shop. It was brightly lit and tastefully appointed and devoid of any shoppers. The sales lady brightly greeted us and came over to chat.

Here was a nice piece of luggage, a black carry-on. How much I asked. I suppose it was one of those shops where if you have to ask the price, you have no business being there. She said it was a new arrival and was modestly priced around $1000. Pretty good, pretty good, said I as if the idea of a carry-on costing about two years of the average Indian’s annual income was so ho-hum. I am as sophisticated as the next guy. The coin purse under the glass case with a magnifying glass mounted on rails was next on my list of price inquiries. It was an affordable $300. You would have to carry gold coins in it for the coins to match the cost of the coin purse, of course.

The case displaying pens and watches held a watch that I thought I fancied. Only $3,000. I had a thought. I realized that I could spend about $5000 in the shop and walk out without having to haul stuff away in a truck. Here was a place that was alien to me and to about 99 percent of the world’s population.

The economics, as CJ had said a little while ago, is what matters. But I wanted to get back to the oil shock discussion.

“So, CJ, how do you see the economics of the peak-oil business?”

“Simple really. Markets respond by increasing the supply of substitutes when the price of a good goes up. Suddenly the market for alternative energy forms will look pretty good and you will have a substitute for the polluting carbon-based fuels.”

“Yes of course. Solar energy will make a lot more sense if the price of oil is not the ridiculous $20 a barrel,” I said.

“OK, let’s get this thing straight. It is all solar energy. Carbon is just the working medium. Fossil fuel? Came from the sun through photosynthesis. Your own energy? Ultimately you are powered by photosynthesis. Wind energy? Powered by the sun. Tidal? Sun powered.”

“Ah but nuclear energy is not solar in origin. That is perhaps the energy source that originates outside the solar system.” I said.

“You are right, I think. The heavy elements which power nuclear fission reactors originated outside the solar system. But the rest are solar. In fact, fusion could be considered extra-solar as well. Anyway, perhaps now we will move beyond fossil energy. I think that the age of what I call the ‘Direct solar energy’ age is here.

“Instead of photosynthesis, a process which involves carbon dioxide and has its attendant problems of global warming and such, you have to go directly to solar energy. Photovoltaics is going to get a boost. I think the slogan I would promote will be ‘Photovoltaics, not photosynthesis.’ Get some t-shirts printed with that logo, will you?”

“I agree that cutting out the carbon from the middle and going directly to tapping solar energy is a good idea, CJ. But it will take too long. What happens in the meanwhile is what bothers me.”

“The meanwhile will not be a such a long time. The pace of technological change is accelerating at an accelerating pace. Second order acceleration, if you can get your mind around it. It boggles the mind. The smart money will be on developing direct solar energy solutions such as photovoltaics and a few somewhat indirect solar energy solutions such as wind energy. I would say that in the next few years, you will see a gradual shift to alternate technologies available commercially.”

“And that would be good for India?” I asked.

“Actually this is great for all economies that currently depend on imported fossil fuels. Indian movers and shakers don’t have the foresight to actually develop alternative energy solutions. India should have done so years ago. After all, India is a large economy with the energy bill annually running into several tens of billions of dollars. Imagine that India had invested massively in direct solar energy (DSE) research and development. Just a few billion dollars well spent on energy research would have paid enormous returns. A huge domestic market is a given, of course. And the conditions are such in India—280 sunny days a year on average—that direct solar energy makes a heck of a lot of sense.”

“I know what you mean. Investing in DSE research would make a lot more sense than ‘let’s send an Indian to the moon by 2010’. But I suppose Indians lack imagination, primarily. The US has cars and the US has highways and the US has sent people to the moon. So we in India have to have cars, and we have to have expressways, and we have to send a man to the moon. That we should have a good public transportation system instead of cars, a great rail system instead of expressways, a national goal of developing alternate energy source by 2010 instead of sending a man to the moon—that is not part of our thinking. Of course, if I say that I think Indians are collectively stupid, I get called names.”

“Well, if you call them names, they will naturally call you names. But I wouldn’t worry about being called names. Just words, not sticks and stones, etc. Anyway, here is what I think. Because Indians are too stupid to imagine a different scenario and are fated to ape the westerners, now there is some hope for India.

“Basically, given the pressures of high oil prices, the US and other developed countries will develop the direct solar energy solutions. That is why they are called developed economies, by the way. They develop solutions. The developing economies merely copy the solutions that the others develop. They should be called the ‘me too‘ economies instead of developing economies.

“Then the developed economies will license the DSE to economies like India. Basically, India will import the technology, instead of importing the oil. And that I believe will be cheaper than importing oil and thus supporting jihad around the world. The world wins and except in the short run, even the developing countries win.

“So as I was telling you, fossil fuel is dead. It is direct solar energy that will rule from now on.”

We walked out of the airconditioned comfort of Hotel Taj Mansingh into the steam bath conditions of the midday Delhi sun. I look forward to the day that the smart people in the western world develop the direct solar energy solutions. Until then, we just have to sweat it out in the sun.

Bye, CJ, and have a good trip back home.

Postscript: For another conversation with CJ, see Choosing between WCs and PCs.

13 Comments »

  1. Er, Atanu, while not exactly sharing CJ’s argument, I think high oil prices might actually be a good thing. To quote from an essay by Jay Hancock:

    Bloody shame about those high oil and gas prices.

    They’re causing billions of dollars to be invested in petroleum production, which will increase supply. They’re discouraging unnecessary driving, encouraging use of public transit and fuel-efficient cars and cueing industry to cut fuel costs, which will decrease demand.

    And they’re triggering billions more to be invested in new technologies such as solar power and hybrid engines, which will offer alternatives.

    I hate to say it, but if this keeps up we might avoid a 1970s-style energy crisis, with its shortages, gas lines, severe recession and petroleum prices a third higher than they are now, adjusted for inflation. We might even set the stage for a new era of low oil prices, like we had in the 1980s and 1990s, or at least new stability.

    Also read: Prices 101 on Cafe Hayek.

    Comment by Amit Varma — September 30, 2005 @ 4:14 am

  2. Amit, I think the message may have been lost but I am arguing that high oil prices are a good thing, for the world, as well as for India.

    Comment by Atanu Dey — September 30, 2005 @ 4:18 am

  3. Ah, sorry, that didn’t come through to me, maybe I should have read more closely. We are in agreement then.

    Comment by Amit Varma — September 30, 2005 @ 8:47 am

  4. Coal is also a fossil fuel, and it won’t be dead for a while.

    Comment by walker — September 30, 2005 @ 12:24 pm

  5. Hi Atanu
    I am wondering about two things: both you and Amit say that the increase in the price of oil could be a good thing. How so? It can only be bad for consumers.

    Oh sure, it may not be so bad in the long run because the higher price will spur conservation and alternatives, but the same thing could have happened if the government had merely taxed oil imports when the price was lower and it would have had some revenue. I see this as sort of like Bastiat’s broken window fallacy. Just because the economy efficiently produces a new window to replace the broken one doesn’t mean that it was good to break it. In the same way, just because the economy might efficiently produce a new form of energy to replace cheap oil doesn’t mean that it was good that cheap oil is no longer around.

    Second: I wonder what you see as the government’s role in producing new energy policy. You wrote, “That we should have a good public transportation system instead of cars, a great rail system instead of expressways, a national goal of developing alternate energy source by 2010 instead of sending a man to the moon—that is not part of our thinking.” Maybe sending an Indian to the moon is a waste, but is it really the government’s job to promote alternative energy sources.

    If solar energy is the great new thing, wouldn’t individuals willingly place solar panels on homes and on businesses? If it doesn’t pay for individuals to do this, why should government try to push these things? Maybe there is some kind of externality here that is important, but I do not really see it. Energy independence is not a public good.

    Comment by Michael H. — September 30, 2005 @ 5:40 pm

  6. Michael, high gas prices is a good thing because substitutes become more attractive, which in turn spurs the development of technologies that are likely to be more benign than gasoline. In a world of only two billion people and very few cars, the pollution due to burning of fossil fuels was not such a problem. In a world with six billion and ever increasing use of energy, even if gasoline were free, we would have the problem of finding a sink for all the pollution.

    With high gas prices, cleaner energy solutions stand a chance. We don’t have to conserve any non-depletable source of energy. Solar energy, in all its forms such as direct solar to wind to biofuel, is one of the options. (Note, biofuel is solar energy.) The other is nuclear.

    In India’s case, we are dependent on importing nuclear fuel. So India is better off going in for solar energy (which, I repeat, includes biofuel, direct solar, wind, etc). India is located in the tropics and sunshine is plentiful.

    Why don’t people use solar technologies now? Because the technology is primitive and therefore the products are too expensive. If the technology were developed, then the solution would be more efficient. Then there is the problem of scale. Scale economies are massive in any mature technology. Solar will not achieve scale economies unless it is supported by forces outside the market. That is where the role of the government comes in.

    To give a concocted example, suppose at 100,000 units, the average cost of a widget is $1; and at 10,000 units, the average cost is $10. Suppose at a price of $10 per widget the total demand is 5,000 units and at a $1 price, the total demand is 100,000 units. The market will exist only if 100,000 units are produced.

    In other words, the market for widgets deviates from the ideal conditions for competitive markets in the sense that these widgets have positive scale economies. Therefore, someone has to build a factory huge enough to make these widgets to get the whole business going.

    In the case of solar energy also, there are not only scale economies, but also very high fixed costs, often much of it sunk costs. (High fixed costs are a deviation from ideal market conditions which are assumed to have zero fixed costs.) So these fixed costs have to be funded by the government.

    This government funding of sunk and fixed costs is not unheard of. The research and development which led to the internet and the world wide web which has enabled countless businesses to flourish was funded publicly funded.

    So I argue that the government of India has the wherewithal to fund the research and development of solar energy (biodiesel, wind, direct solar, etc) technologies for use domestically and for export. Once the basic technology is developed, the private sector will jump on it and create neat gadgets which you and I will buy and put up on our roofs.

    Government’s role is to correct for “market failures” which I identified as high fixed costs and scale economies. The former is fixed by massive funding, and the second by encouraging private participation for the commercialization of the products.

    Regarding your point about taxing fuel to encourage conservation: it happens. Check out European prices: $6 per gallon as opposed to US $2 per gallon until recently. The Euro prices most of it taxes encourage conservation in Europe. What they do with that tax money I don’t know. But if they put it into funding R&D for solar energy (biofeul, biodiesel, wind, direct solar), then they are doing the right thing.

    Comment by Atanu Dey — October 1, 2005 @ 12:42 am

  7. Michael, high prices hardly correspond to the broken window of Bastiat’s fine analogy. What is the alternative to high oil prices? Price controls? You’ll then have shortages, and disincentives for future oil exploration. I’m sure you remember what happened when America tried that in the 1970s. Prices are a way of allocating resources efficiently, and messing with that process only makes things worse.

    Comment by amit varma — October 1, 2005 @ 1:36 pm

  8. Amit, Michael’s comment abt the Broken Window Fallacy analogy was quite insightful. Assuming that high prices are good just because of the downstream effects such as greater gas exploration and substitution is indeed analogous to the Broken Window Fallacy.

    But Atanu has a reasonable explanation in his comment, that there is more to it than the usual downstream economic effects replacing the broken window. Reduction in pollution is one aspect. Geopolitical reasons and energy independence (which were alluded to in the post) are other important downstream effects, which are positive enough to make breaking that window attractive.

    Comment by seven_times_six — October 1, 2005 @ 3:29 pm

  9. Hi Amit
    You’re telling me that prices allocate resources?
    But high prices are like a high fever: it may be nature’s way of care of problems but it makes you feel lousy.

    Hi Atanu:
    I see what you are saying now. You believe that fossil fuels pollute and solar doesn’t so solar is better. But it may not be cost effective to promote solar energy even if the pollution benefit were factored into the price of each fuel (to some extent, fuel taxes are there to prevent pollution). When I was a child, pollution was bad in the U.S. I remember being sickened by the smog. Today, I live in a major metropolitan area and I don’t notice the polution at all. The difference: better engines.

    Of course, fossil fuels cause global warming. I would not think that this would be so very high on the list of priorities for India, but it is there. Still, I am not convinced that there is any truly “clean” fuel that can take over. Can you run a car on solar energy – I don’t think so. I don’t think there is enough solar radiation landing on a home to keep it fully powered (perhaps I’m wrong).

    Economies of scale do not necessarily mean market failure. They can lead to natural monopolies but most situations in which you see economies of scale, there is still a limiting size that makes it efficient to have three or more private firms operate simulataneously. And, in any case, a natural monopoly could easily be a private company. The “scale economy” argument doesn’t explain why firms don’t produce solar power in abundance.

    Comment by Michael H. — October 3, 2005 @ 7:46 pm

  10. Found an article that might be of interest for the purpose of India-specific policies.


    India’s next big business?
    Possibly oil, says CNET News.com’s Michael Kanellos. The country’s deposits are twice the size of Iraq’s.

    Comment by Pranay Da Spyder — November 30, 2005 @ 8:23 pm

  11. Wind Power is a vital part of our planet’s future.

    Less to do with the environment. More do do with balancing our grids, and saving money as the technology rapidly continues to become more efficient ( particularly when one looks offshore ).

    I feel that if every country on the globe were to develop wind power such that it made up 10 – 20% of each countries energy portfolio we would all be doing ourselves a favor.

    Daily peak demands parallel supply for 35% of a year, typically in the colder months, when energy demands are higher, and solar activity is not so present ( save for some of the planet’s deserts of course ).

    Keep nuclear, keep coal, keep hydro ( clean the technologies up a bit by putting more R&D into them ), and diversify our supply with Wind,solar, Biomass, Tidal, Waste to Energy, Geothermal, Hydrogen, and all other technologies that quite simply make sense if the application is efficient.

    I am the President of two wind power companies, so of course I have a vested interest in seeing wind power do well. However, I also do volunteer work for NGO’s and worked as a geoligist for many years prior to moving into wind power.

    Canada is a primary resource nation. We are innovators in extracting resources from the earth. We have spent the last 20 years letting European nations lead in the wind power business, and are presently playing catch up. It would seem as if India has embraced wind power, this is fabulous!

    I am always looking for partners to do business with in Asia (India of course included in this vague geographical description ).

    If anyone reads this and would like to discuss developing wind farms, I invite them to contact me at: ckuntz@cogeco.ca or direct 1 705 497 3764.

    Cheers. Interesting Blog. Chris Kuntz

    Comment by Chris Kuntz — April 23, 2006 @ 6:12 am

  12. For ONE -
    As peak-oil is a reality, renewables has to take the driving seat as fast as just humanly possible. This is anybodys responsibility, in particular goverments.They shall know the situation.
    “All americans and their like, who drives SUVs should be hung by dawn”.These ignorant people who simply dont care, uses unresonable much energy per capita. These folks drive the oilprice up, on behalf of the rest of us. The main crooks are both the Republicans and the Democrats of US politics. Neigther of them dares to speak up on vehicular responsibilities, eg. raise the petrol duties and deny productions of SUVs….
    These political parties should join hands on this very issue, and be disagreeant on anything else…that would be called RESPONSIBILITY !

    On this subject Europe is much better, heavy duties on oil/car

    SECONDLY –
    STOP combusting the scarce OIL -for the ONLY purpouse of private transport !

    I feel UN should come deeply into the picture on the upcomming oilcrises. UN should demand – say from 2020 onwards, all private commuting by cars and motorbikes be done by “manmade renewable fuels”, biodiesel or others. This would speed up needed technologies and supply sceems, in an interesting speed. Thus generate millions of new and everlasting jobs all over the place – planet Earth.

    The rest oil would last for houndreds/thousands(?) of years, supplying all variety of petrochemical industries, producing an array of products which are for the better cause………
    Also renewable energies are oil based.Take the windturbine, their blades ar made fron fiberglass, which is an oil produce.

    Also it would ease the struggles of the airline industry, eg fuelcosts, actually it would SAVE the airlineindustry / tourism. There are (to my knowledge) no replacements for the jetengine, by now, nor fuel. OIL is high energetic, there is NOTHING LIKE IT !

    Think again, and fast…….

    Comment by paul norway — June 24, 2006 @ 8:37 am

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