Saturday, April 23, 2011

Major shifts in fuel are possible

In light of all the latent pessimism present in the previous posts about the Nisbet Report -- that the current strategy of climate change advocacy in the US is unlikely to succeed -- it is useful to revisit a case where significant change in fossil fuel usage did occur.

Most electricity is generated by boiling water in order to create steam that is used to power turbines. The major difference among power plants is the fuel used to boil the water -- whether it be coal, oil, nuclear power, natural gas or whatever. As shown in the graph below (taken from chapter 3 of the IMF's 2011 World Economic Outlook report), the use of oil as a fuel to generate electricity in the OECD countries grew rapidly during the 1960's, accounting for over 25% of electrical power generated in the early 1970's. The proportion of electricity generated from oil has progressively declined to the present level of 2.5%, a 90% decrease over 40 years.

Here is how the report explains the shift:
Most OECD countries saw a big switch away from oil in electric power generation in the early 1980s. After oil prices rose sharply compared with the prices of other fossil fuels in the 1970s, the power sector switched from oil to other inputs (Figure 3.6): some countries went back to coal (for example, the United States); others increased their nuclear capacity (for example, France) or turned to alternative energy sources. .... Today, however, the power sector is no longer an important oil consumer in OECD or emerging market economies. In fact, the transportation sector currently accounts for about 50 percent of total oil consumption. A substantial part of the remainder goes to the petrochemical industry and for other miscellaneous uses outside the power sector. Given current technologies, it is harder to substitute other factors for oil in these sectors, explaining the break in the estimated elasticities.

Back in the 1970's as oil prices rose there was a big debate: was oil a price elastic or an inelastic commodity. In other words, as the price rose, would shifts occur to other fuels or would the higher costs be absorbed and passed on because no suitable substitutes were available. The answer, it turns out, depends. Thus, in the power sector where there were cost effective alternatives, substitution occurred. In the transportation sector, where cost effective substitutes were not available, people adjusted by purchasing more fuel efficient cars rather than adopting a technology powered by another fuel.

In short,
1. Significant energy shifts do occur.
2. Under the right conditions, the shift can occur fairly quickly (the bulk of the decline came in a period of about 10 years), though the entirety of a transition can take decades.
3. Rapid shifts are driven by economics (in this case, substituting a cheaper fuel source) rather than regulatory policy.
4. Shifts are dependent on the availability of substitutes.

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