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Among the many reasons folks wish to see more renewables development in the energy sector is that it is believed that generating, say, 25% of our electricity from wind and solar, rather than from gas, or generating half of our vehicular energy from electric (and hence wind and solar) rather than oil, would reduce our exposure to oil price shocks. Jim Hamilton has written extensively and smartly on the relationship between oil price shocks and recessions: oil price increases can be blamed in a large degree for many previous recessions (not the sole reason).

Given that finding, you might think the claim made by folks like Kevin Drum is reasonable:

I’m all for rebuilding our infrastructure, and a strong focus on renewable energy would certainly help reduce our vulnerability to oil shocks.

Without a caveat this is not clear at all. But Drum is usually a careful writer and to his credit he follows that sentence with:

 But it will happen only slowly, and only if the entire rest of the world does the same thing. At the same time, improvements in technology will be good for productivity, but are going to put increasing numbers of people out of work for good. Better infrastructure won’t really help that.

My emphasis added. Since oil is traded on a world market and much energy can be traded on world markets, then even if the US moved aggressively to solar and wind, the price is such energies would still depend on the price of alternatives around the world, and hence we would still be subject to the “vagaries” of oil price disruptions. This, of course, would be true unless oil ceased to be used as a fuel at all. Now, what is unspoken in this sentiment is that I don’t see any reason to believe that energy price volatility would be higher or lower when we move away from oil and into other fuel sources. Remember, not only do world demand conditions contribute to the volatility of oil prices, but so do the costs of production and storage. And while demand may be volatile and while some oil rigs do explode, sink, come offline for other reasons, it is very obvious that on the production side that oil production is far more steady and predictable than the production of “renewables.”

Given that we know renewables are subject to intermittency problems, and that they are far worse than the intermittency problems associated with the production in fossil fuels, it is not at all clear that energy prices will be more stable under that regime than the current one. I don’t mind the push for renewables, particularly if private actors wish to risk their own capital in doing so (even as that capital will be taxed as ordinary income), but just tossing out a debating point because it sounds good does not substitute for sound analysis. I could just as well make the argument that we should burn as much fossil fuel as possible today so that we can deplete them faster, this will give much more certainty to energy prices today, and give us more time to plan for the energy transition that is to come. That sounds great, right?

One Response to “Would Expanding Renewables Limit Our Exposure to Oil Price Shocks”

  1. Michael says:

    I focused on the part just after your emphasis: “improvements in technology will be good for productivity, but are going to put increasing numbers of people out of work for good.” I see that the Luddites are alive and well. I’m tempted to go into the faulty economic analysis, but I think that most people reading this blog are aware of the issues.

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