Monday, December 08, 2008

Smart Energy Future

© Stock Photo
The track to energy independence will be long tough haul.

Recent generations developed the idea that the path to solving the world's problems was simply to overpower the problem with energy. In recent years, the world hit capacity. We now need to develop an economy with a little more finesse. The high path to conservation is to improve the quality of our decision making process so that we make the best use of our available resources.

Apparently, Utah is considering changing the gas tax from a fixed rate per gallon to a percentage of the price.

Scott Hinrichs dislikes this idea as he feels that percentage tax would magnify price fluctuations. Let's say the base price of gas fluctuates from $2 to $4 a gallon each year; a 10% tax would cause the pump price to fluctuate from $2.20 to $4.40. A tax fixed at $.30 a gallon would even out the price fluctuations. The price would go from $2.30 to $4.30.

I countered by saying that, if there is something in our economy that causes massive fluctuations in prices each year, we don't want to have a tax policy that dampens the fluctuation, we want a tax policy that passes full information about the fluctuation so that people can make energy decisions based on the information conveyed by the price.

The thing that causes the annual jump in gas prices is, of course, the summer driving season when consumer demand pegs capacity. As there are constraints on supply, what happens is that prices raise to the point when consumer demand eases off and matches supply. The percentage tax gets us to the break point sooner than a fixed cent tax.

As we move into the world of alternative fuels, I suspect we will find ourselves enmeshed in an extremely complex fuel economy where different forms of fuel hit their maximum capacities at different times throughout the year, day or week.

Alternative energy is the art of storing and releasing energy so that it has maximum effects. Perhaps the best path to alternative energy is to create pricing variable pricing structures that communicate capacity information in the form of cost.

Imagine having an electrical grid that communicated costs throughout the day. Refrigerators, air conditioners and battery chargers could respond to this information by turning themselves off and on according to the price of the moment.

The wild fluctuations in price this summer seem to have left a good many people emotionally devastated. Personally, I see the wild fluctuations as a good thing in that the fluctuations have people more attuned to the nature of energy, which travels in waves.

Taxes distort prices. Perhaps the distortion of a percentage based gas tax would be better than the distortion of fixed penny tax because the percentage based tax does a better job of communicating information about current demand and capacity.

Just In Time Production

Interestingly, a system with fluctuating energy prices might cause us to alter some of our current ideas about business. For example, people are currently sold on Just in Time production. JiT techniques say "resource considerations be damned" we want material handled by production flow. Fluctuating energy prices might cause manufacturers to see their production line as a system that stores and releases energy and modify the JiT line with a little old fashioned material handling and processing wisdom.

A good portion of the alternative energy future is designing a system that accurately communicates capacity information so that consumers can meter their consumption of energy accordingly.


Scott Hinrichs said...

Better, more transparent, and more timely information is always good. It helps consumers make better decisions.

It seems as if you are treating the wild fluctuations in energy prices of this last year as normal seasonal swings. Seasonal adjustments were only a small portion of this year's price changes. Fed policy and overall economic issues made a much larger difference than any seasonal change.

y-intercept said...

My next posts were going to answer this very question.

Part of this summer's price spike resulted from a belief that American fuel demand was fixed because demand had failed to respond to the increasingly large fluctuations that occurred every summer.

I suspect that there was a great deal of manipulation of prices through a broken financial system.