Maurice, delayed discussion concerning volatility and average prices, you said:
"Ashley, at the time, I could see the argument, but didn't conclude whether you were right or not. Now, I think that
volatility is actually a negative for oil. That's because volatility introduces another cost for oil consumers; they have to
be prepared to swing to something else when oil goes through the expensive times and switch back when it gets
cheaper. "
We're looking at this from opposite ends. Oil is our primary power source. The major substitutes currently in use, hydro and nuclear, have high capital costs. Once those alternatives are built, they will tend to be used for base-line generation. No one will build hydro, nuclear or solar plant and willingly leave it off-line. Once built, they (hydro and solar anyway) will be cheaper to operate than oil. Anytime a power plant using one of those alternative fuels is built, the demand for oil will drop for the lifetime of that plant.
Before building a power station using an alternative fuel, someone has to decide that the marginal operating advantage of the alternative is sufficient to justify the difference in capital costs. If oil is cheap for a few years after the plant comes on line, that could destroy the economics of an otherwise promising proposal. Thus, I argue a higher average price can be sustained when there is more, rather than less, volatility.
Perhaps anyone thinking of building a hydro or solar plant should consider hedging by selling oil futures? I suppose it would be more straightforward to pre-sell the electricity, and that may be possible during a spike in the price such as experienced in California a short while ago.
Ashley
PS. I suppose you put text in brackets by using "i" encased in brackets, thus: but how do you revert back from italics? |
