A visit from a relative this week forced me to re-think a recent post on energy policy.
What I’d suggested was a floor price for energy. The scheme is based on agriculture policy, and (for history buffs) the old Texas Railroad Commission, which limited pumping through the 1960s in order to keep prices "up" at $3/barrel. (The chart shows the trend of OPEC "floor prices," otherwise known as "the problem.")
What I realized, after my Texas father-in-law and I chatted about this, was that the original plan I offered only solves half the problem — energy supply.
If the new supply is based on hydrocarbons, you have not really solved the problem.
We can fix that.
Set one floor (based on costs) for non-hydrocarbon energy, and a higher floor for hydrocarbons.
Sure, you’ll stimulate hydrocarbon supply. But as non-hydrocarbon supplies come on-stream, the price gap will slowly crowd-out the hydrocarbons.
Note that I’m talking about a floor price, not a ceiling. A floor price allows supplies to come in at prices above the floor.
And for those of you wondering why I would want to stimulate the supply of greenhouse-gas producing hydrocarbons, I have to. But by setting a high floor price, I automatically stimulate conservation. A high floor price limits demand.
In the case of non-hydrocarbon energy, the top floor will be most relevant at first. If you can get your costs under that top floor, you can be profitable. And we need to keep that floor high as far as we can see, in order to stimulate all kinds of domestic supply.
It’s only after our energy hunger is sated that the lower floor really kicks-in. It will serve as a natural market advantage for non-hydrocarbon projects. They will be able to undersell hydrocarbons forever, based on that lower floor price.
Yes, we will adjust the floors from time to time. We should set the floors based on the cost of bringing in non-hydrocarbon energy, not hydrocarbons. This policy is minimally intrusive on the market. It comes from Texas. It’s simple, easy to understand, and it works. (That’s why we’re awash in agriculture products.)