While oil goes above 65, agricultural commodities widely viewed as alternative energy sources fall, with corn near a 2-month low and sugar below the round at an 18-month low. What does this apparent schizophrenia portend?

From Gordon Haave:

As energy goes up, the price of that drill bit, and the price of moving that rig, etc. goes up. Drilling costs are up 100% in the last few years. This causes people to drill less, just as they would if they actually counted all of those inputs.

From Stefan Jovanovich:

The actual numbers for the rig counts over the past few years are rather different.

It is the spread that matters, not the absolute cost. The increased cost of drilling only cuts back on the rig count if drilling becomes unprofitable at the anticipated revenue from production. The difficulty with alternative fuels - like bike paths and free subways - is that their marginal costs are inflexibly high. None of them has the declining marginal cost curve that coal, oil & gas production still has. The costs (both in dollars and in gross energy consumption) of the fertilizer, water and mechanical energy to produce #X barrel-equivalent of corn or sugar-based energy are not significantly different from those for #X-1. (Neither are they for subway train or bicycle #x vs. #x-1).

For oil & gas and (to a lesser extent coal), the numbers are very, very different. I hate to quarrel yet again with James about transportation history; but he has it backwards. The evil oil companies and their customers built the roads in the United States. Three quarters of the paved roads in the United States were built after 1950, and they were funded almost completely by the taxes paid on gasoline and diesel fuel consumption. It was those same funds that have paid for and continue to pay the subsidies for mass transit as well as all Federal Highway improvements. It may be different in Hawaii, but the state contribution to road building here in California has been funded by state fuel taxes. As usual, the devil is in the counting details.





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