inamerrata

When I reinvented this segment of my blog, I said it was meant to cover economics as well as politics, but I haven’t really been following through on that too well. Since someone thinks I may perhaps have a spec in my eye labelled “not blogging enough”, I figured I’d mix two metaphors with one stone.

One of the pre-requisites for being an economic right-winger is having faith in the market, and if you don’t have it, you probably don’t know what such a thing even means. Fortunately, an example showed up on the ABC news today. It went something like this:

Fuel price prompts power rethink in outback

The owner of a remote fuel station in the Gulf country of the Northern Territory says people in remote areas should consider installing alternative sources of power to combat a hike in oil prices.

[…]

[Paul Zlozkowski] says he has replaced a diesel generator with a solar powered system on his cattle station and has significantly reduced fuel consumption.

“Well here at Murranji it’s about a litre a day I’m using now, even with a small plant here I would have been using at least a litre an hour so that’s an incredible saving.”

The principle’s pretty simple: a decrease in supply, or an increase in demand cause the price of something to go up, and people start looking seriously at alternatives. Once it goes up enough to make the alternatives cheaper, they switch to them.

In this case, the price went from probably around $19 a day (24 litres per day at 80c a litre), to around $38 (at $1.60 per litre). Dropping down to one litre a day at those prices is a saving of almost $39 per day, or around $13,500 per year. At the old prices, it’d be a saving of only $6700. A $20,000 solar generator, with running costs of $10 a day, that achieved those results would pay for itself in two years and sixteen days at fuel prices of $1.60 a litre; it’d take six and a half years at 80c per litre. Those numbers can get worse too, if you factor in the risk that the solar generator might need to be replaced within a few years, or that the running costs might blow out, or that it won’t actually be as effective as you expect.

(For reference, solazone seems to have an $18,000 system that’ll provide 100% of the power in a 3-4 bedroom “energy-efficient” home. Add back the $4,000 solar power rebate for $22,000, and subtract GST for the $20,000 above. The $10/day of maintenance costs were pulled out of my butt. YMMV.)

All of which is to say that price fluctuations are an effective way of encouraging people to use alternative technologies. Everyone knows this — that’s why there are hefty tariffs on cigarettes: to encourage people to relax by other methods.

The real trick is in working out what people should prefer, whatever that means. When should you prefer solar over oil, or vice-versa? Do they both produce enough energy? How much space and other resources do they take up? Can the energy be stored easily and without too much waste? How sustainable is the resource? How about pollution? Does it clutter up the scenery like a windfarm?

But magically, most of those things are already factored into the price. If it takes more equipment to produce the energy you need, it’ll cost more in parts and labour. If the energy isn’t naturally storable, you’ll have to generate more of it (more expensive) and have expensive batteries to store it instead of a 20 gallon tank (also more expensive). If the resource isn’t sustainable, people will start buying it and storing it so that they can charge a premium and make themselves even richer when you can’t pump it from the ground anymore, thus increasing demand, and again increasing the cost. Even the scenery gets counted, as people are generally, and increasingly, willing to pay a premium for aesthetics. (Pollution is trickier to manage, though it can be pretty easily forced into the calculations by adding a rebate or a levy, as has been done with solar power in .au)

As a big believer in decentralisation and emergent order, I really like that sort of system — having lots of people acting independently to produce valuable information without even knowing how they’re doing it is impressively cool — certainly much more so than having a bunch of folks try to tell everyone how things “should” be. And even better, markets seem to be more effective in practice as well as being cooler in theory. Whether in working out what direction a business should take, or predicting the outcome of an election they seem remarkably effective, both in being far more willing to make confident predictions on what will happen, and in reacting quickly to changes.