Economics Paper on Oil Energy versus Renewable Energy Sources

Introduction

Historically, nations that do not produce oil have suffered significantly from unpredictable high oil prices. Although oil energy is a key source of energy, its price is not usually determined the balance of supply and demand in the market but by geopolitics (Brunn 484). The time has come for nations to stop relying heavily on oil energy, and turn their attention to renewable energy sources (RES). Geopolitics does not influence RES, including solar energy, hydroelectric energy, biomass, and wind power (Nelson 20). Furthermore, the energy from these sources is clean, reliable and efficient. Even if the cost of producing RES is relatively high, it is not as high as the cost of producing and transporting oil. Moreover, most RES do not pollute the environment or even damage it as oil energy does.

This essay compares and contrasts oil energy with RES. The essay argues that RES are far much better than oil energy. Accordingly, nations should shift their focus from oil energy to RES. This would go a long way in saving the environment and reducing the effects of high oil prices on our economies. To promote the production of RES, national governments should either lower tax levied on RES or offer subsidies to the production companies. This would encourage local companies to produce more and lower the prices of RES.

Advantages. To start it would be important to point out that even if geopolitics affects oil price significantly, oil is an abundant resource in the Middle East, North Africa and in other regions of the world. The ongoing oil exploration exercises indicate that it may be discovered in other parts of the world as well (Schobert 74). The widespread availability of oil makes it a good source of energy worldwide. It holds true for the RES as well. The materials required to produce RES can also be readily available because of several reasons. First, it can be easy to produce solar energy in the hot areas of the world. Secondly, it is easy to produce wind energy in the windy areas whereas areas which contained rivers, dams, rapids, and waterfalls can easily produce hydroelectric energy. Third, it can be easy to produce biomass energy in areas that have land for growing biomass crops (Nelson 20). Based on these facts, RES can also be considered readily available as oil energy.

But given that the market for oil is a global one, it is easily transportable (Heinberg and Fridley 32). The mass and volume density of the energy resources largely determine its transportability. But the state of the material—whether in a solid, liquid, or gaseous—also affects transportability (Heinberg and Fridley 32). In general, it is most convenient to transport oil because it moves through hoses and pipes, takes up less space than gasses, and does not dissipate into the air if not stored and distributed in perfectly airtight systems. Unlike oil, we cannot directly transport RES, like the energy from sunlight or the wind (Husher 22). They must be in a form that can be transportable (or converted to it) such as electricity, which moves through wires, enabling it to be delivered not only to nearly all buildings in industrialized nations but also to many locations within each building.

Obviously, the evaluation of energy resources is a complex process that entails the possibility of estimation errors (Husher 22). But in terms of risk evaluation, RES outweigh oil energy. For example, RES do not pose risks to the people that transport them. However, oil is highly risky to transport because it is flammable.

Like transportability, storage of energy is particularly important (Heinberg and Fridley 53). In fact, the two form a natural pair: energy transportability involves transporting energy spatially, while energy storage involves its temporal movement—whereby energy produced one time can be stored and delivered later. Unlike renewable sources of energy such as wind power and hydroelectric power, it is easy to store oil. The ease of storage makes oil a good source of energy because it can be used whenever needed (Ehrlich 371).

RES overcome some of the challenges that oil energy does not when it comes to polluting the environment. The impacts of RES are extremely low on air and water pollution. As the world finds it hard to tackle the issues of global warming, RES present a crucial zero carbon option to carbon-intensive oil production.

Furthermore, all RES are more sustainable and unlimited and are not subject to depletion anytime (Ehrlich 372). Accordingly, RES remain viable sources for the future as they neither pollute the environment nor deplete. In addition, most RES, such as geothermal, hydro, solar, tidal power, the wind, and wave power, have zero fuel costs, helping to reduce and hedge against energy price volatility.

Disadvantages

In terms of disadvantages, oil emits carbon gas when burnt. By so doing, it pollutes the air and damages the environment. RES do not pollute the air and rarely damage the environment. Oil drilling is also dangerous to the environment, as it not only damages the environment through excavation, but it also endangers the lives of the people that drill oil (Miller and Spoolman 192). Besides doing this, there is still a need to develop an advanced technology to drill the oil and recover it during recovery processes. Almost all RES are already in place and they do not need to be drilled or even harnessed through advanced technology.

With regard to its depletion, it is expected that oil will deplete one day (Miller and Spoolman 192). This is a warning for the nations who continue to rely heavily on oil as a source of energy. They might not meet their demand for energy at one time in the future. Based on this fact, it would be advisable for the nations to turn their attentions to the RES as opposed to over relying on oil energy. RES do not deplete anytime (Nelson 20). Accordingly, the supply of these resources does not change as it does for oil energy.

Although RES are far much better sources of energy than oil, they are expensive to produce. For example, it is extremely expensive to build a self-sufficient solar power station. It is also extremely expensive to build a wind power station as well. Such a power station requires many turbines to produce electricity. Besides the higher costs, as stated above, some types of energy resources can only be produced in certain areas (Nelson 20). For example, wind power can only be produced in windy areas whereas solar energy can only be produced in hot areas.

Like oil energy, most RES also requires advanced technology to produce it (World Trade Organization 56). Solar power on its part requires advanced technology for manufacturing solar panels whereas wind power and hydroelectric power similarly require such technology for manufacturing turbines. Although these disadvantages challenge the production of RES, they should not hinder their production because nations can counter them through subsidies and lower taxes. Both subsidies and lower taxes would reduce the cost of producing RES (World Trade Organization 56). By so doing, consumers would be encouraged to use RES as opposed to using oil energy.

Price Differentials

The prices of oil and RES are significantly different from each other. All RES tend to cost more than oil energy. This price difference can be attributed to two factors. First, in order for a person to have the solar energy, the person should invest an initial capital. The initial capital helps in purchasing the solar panel, battery and other types of equipment needed to install solar energy. In comparison to oil, the initial capital may be huge given that one does not require such capital in oil energy. It holds true for other RES as well. However, once the person invests the initial capital, the person may not need to invest in the project again except maintaining it. For the oil energy, the person keeps on purchasing it though at a manageable cost. Second, geopolitics does affect the oil price significantly whereas it does not affect the price of RES (Brunn 484). As a result, the energy price from renewable sources does not change from time to time as it does for oil energy.

Competition

The main competitors for RES are the other non-renewable sources of energy not covered in this essay. These competitors include natural gas, coal, and nuclear power. Largely, natural gas is a clean fossil fuel that does not pollute the environment as other fossil fuels do (Miller and Spoolman 192). However, like oil energy, this source of energy is highly flammable thereby the cost of transporting it is high like the cost of producing RES. Furthermore, natural gas is also at the risk of depletion, and once it depletes it depletes forever (Schobert 74). Therefore, natural gas does not pose stiff competition to RES. Nuclear energy on its part does not create greenhouse gasses, but its wastes are radioactive and dangerous to humans and the environment. Accordingly, although it would be a good source of energy, it is not a viable source. Lastly, although coal is a relatively cheap source of energy and some of its sources are yet to be exploited, it releases greenhouse gasses when burnt. Furthermore, non-renewable source of energy means that it will deplete at one point. Based on these facts, coal is not a good source of energy than renewable sources of energy.

 

Why Not Use Oil Energy?   

Given that geopolitics significantly affect oil energy, it would not be advisable for the nations to continue relying on oil energy. Overreliance on oil will continue to burden the nations and even make them poorer due to high prices that result from changes in geopolitics. At the same time, overreliance will continue to damage the environment as oil energy companies drill more oil (Miller and Spoolman 192). This will not only result in more air pollution, but it will also result in more excavations that endanger the environment.

Why use Renewable Energy Sources?

To deal with the challenges that oil energy poses to our economies and environment, it would be advisable for the nations to turn their attentions to renewable sources of energy. These sources of energy are not only clean, but they are also reliable and efficient.  The flows of RES are large in comparison with the humankind’s use of energy (Brunn 484). Therefore, in principle, energy from renewable sources can meet all human energy needs, both now and into the future. Further technological advancement and industrial learning will continue to bring costs down.

Effects of Subsidy on Renewable Energy Sources

Assuming that nations would close their local markets from the international market and that their markets would be perfect, governments’ subsidies would help local companies specializing in renewable sources of energy to expand their production. The expanded production would in return reduce the prices for their commodities, and in so doing, consumers would be able to invest in RES (World Trade Organization 56). In real life situation, it might not be possible for nations to close their local markets from the international market. Consequently, it may not be possible to reduce the prices of RES by locking out international players out of local markets. The following diagram illustrates what would happen in reality.

(World Trade Organization 56)

Assume that S0 provide the domestic supply, D0 satisfies the domestic demand, and P0 sets the world price for any of RES. Since the world price P0 lies below the equilibrium price, then the number of products that would satisfy domestic demand would be 0Qd. Whereas 0Q0 represents the number of products produced locally, Q0Qd represent the products from the international market.

If for any reason, the government would decide to increase the number of products produced locally from Q0 to Q1, then it may use subsidies to expand local production. Assuming that the world price would not change, then domestic supply would shift from S0 to S1. This would reduce imports by QoQ1 and increase local production from 0Q0 to 0Q1 (World Trade Organization 56).

The above diagram shows that if national governments would provide a subsidy to companies that specialize in RES, they would then promote local production. Promoting local production boosts economic growth by creating employment and increasing production. It also promotes the production of RES. Consequently, inasmuch as subsidies would reduce governments’ income, they would be good for promoting the production of RES. National governments should use this method to reduce their overreliance on oil energy.

The Effects of Tax on Renewable Energy Sources

(Lipsey and Harbury 98)

As in the above case, assume that the S0 provides the domestic supply, D0 satisfies the domestic demand, and P0 sets the world price for any of RES. Since the world price lies below the equilibrium price, then the number of products that would satisfy domestic demand would be 0Qd. Before the government increases or decreases tax levied on any source of RES, 0Qd comprises of products produced locally. Whereas 0Q0 represents the local products Q0Qd  represents the products from the international market.

In the first instance, assume that the government would increase tax levied on RES without affecting the world price. If this would happen, domestic supply would shift from S0 to S1. This would decrease the number of RES produced locally by Q1Q0. The implication would be that imports would increase. On the other hand, assume that the government would reduce tax levied on RES. Under this scenario, domestic supply would shift from S0 to S2. This would increase domestic production and reduce imports (Lipsey and Harbury 98). Given that majority of the governments would want to boost domestic production as opposed to the imports, then the best option for boosting RES would be to reduce tax. National governments would utilize this method as well to promote RES and discourage overreliance on oil energy.

Conclusion

In relation to the above analysis, it would be advisable for the national governments to consider promoting RES through the following two methods. First, it would consider reducing the taxes they levy on RES or even exempt them from taxation. At a local level, reducing taxes increases production of RES by encouraging local firms to produce more. Tax exemption boosts production of RES by reducing the cost of production. It, in return, promotes the production. Second, national governments should consider offering subsidies. Subsidies boost RES in the similar way that tax reduction does. If national governments would promote the production of RES by either offering subsidies or reducing tax levied on RES, then it would be possible for them to counter the negative effects of oil energy on their economies. They would be able to protect their environments from the damages that oil extraction causes to the environment as well as carbon emissions that pollute the air. This would go a long way in reducing global warming. And, they would also protect their economies from the negative effects of high oil prices caused by geopolitics.

 

 

Work Cited

Brunn, Stanley. Engineering Earth: The Impacts of Mega-Engineering Projects. Springer, 2011.

Ehrlich, Robert. Renewable Energy: A First Course. CRC Press, 2013.

Heinberg, Richard and David Fridley. Our Renewable Future: Laying the Path for One Hundred Percent Clean Energy. Island Press, 2016.

Husher, John Durbin. Crisis of the 21st Century: Start Drilling – the Year 2020 is Coming Fast. iUniverse, 2009.

Lipsey, Richard and Harbury C. First Principles of Economics. Oxford University Press, 1994.

Miller, Tyler and Spoolman Scott. Sustaining the Earth. Cengage Learning, 2012.

Nelson, Vaughn. Wind Power: Renewable Energy and the Environment. CRC Press, 2013.

Schobert, Harold. Energy and Society: An Introduction. CRC Press, 2002.

World Trade Organization. World Trade Report. World Trade Organization, 2006.

 

 

“To be” is unnecessary in the phrase “consider to be” and should be deleted.

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