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The Power of Ideas
The Politics of Energy
Professor Severin Borenstein on the future of energy
markets
Severin Borenstein is the E.T. Grether Professor of
Public Policy and Business Administration at the Haas
School and director of UC Berkeley's Energy Institute.
He spoke to CalBusiness about the lessons of the California
energy crisis, and the governor's energy policy.
Q: What did you learn from the California Energy Crisis?
A: You have to design markets that are robust to players
doing everything they can to make money because if there
is a way to make money, and it's not explicitly
outside the rules, somebody is going to do it. When
we started getting a tighter electricity market, the
sellers figured out they could make more money by making
less electricity and driving the price up in the market.
That's why you need to stress test a design like
this before you put it into place. We also need to have
much of the power bought on long-term contracts so that
we aren't vulnerable to big fluctuations.
Q: You once said that all commodity markets require
some level of regulation. How much should we regulate
electricity markets?
A: There is still a strong argument for a regulated
retail sector where you have a utility providing power
to customers. But there is also a good argument for
a less regulated wholesale sector. The utility companies
would buy the power in a competitive market, instead
of with the old model where the utility builds all its
own power plants and self-provides the power.
Q: California pays 20 to 40 cents per gallon more for
gasoline than other states. Will this change soon?
A: Up until about a year ago California averaged about
12 cents more per gallon than other states, before taxes.
In the near future we are unlikely to see that 12-cent
differential again for any sustained period of time.
The reason is that from 1996 to last year California
could produce enough gasoline for itself and still export
to other states. That's over, by and large. We
are now importing gasoline on the margin. We are in
this position, if not permanently, for a long time to
come, mainly because I do not see anyone building a
refinery in California anytime soon.
Q: Will President Bush's second term influence
the energy markets?
A: The simple prediction is that it's not going
to make any substantial difference in the next five
years. There's very little that can be done over
the short run to change the energy situation. If we
start drilling in the ANWAR (in Alaska) no oil will
flow for another five years at least. If we did drill,
it would be such a small share of the world market that
it wouldn't make much difference to the price.
If we upgraded the fuel efficiency standards for US
cars, those upgrades wouldn't start to take effect
for five years and, once they did, it would be at least
another five years before they substantially affected
fleet fuel economy because cars don't wear out
that quickly.
Q: How do you view the steps Gov. Schwarzenegger is
taking to address California's energy woes?
A: On the electricity side I'm in agreement with
him on the need for wholesale competition. However,
he believes there are strong arguments for retail choice
or competition for large industrial consumers and I
am completely unconvinced of that. I see a very serious
downside if that is used to shift the costs to other
customers. On the gasoline side there's not much
a governor can do. We're stuck with some harsh
realities: oil is going to cost a lot, California doesn't
have the refining systems to support our gasoline needs,
and no one wants to live near a refinery.
Q: Would energy independence solve the US energy crisis?
A: Energy independence is the wrong goal. We live in
an integrated economy and we should continue to trade
with the rest of the world. Reducing reliance on products
that come from unstable or oppressive regimes should
be our goal. We don't need to stop using oil,
but reduction is critical. We can increase fuel economy
in autos and trucks. On the electricity side we can
continue to develop renewable alternatives, but with
a real willingness to face reality about what works,
what doesn't, and what costs a lot, and what doesn't.
Wind power is something that we should be using now;
solar power is something we should be putting money
into for research and development to make it better.
Q: Do you see a worldwide energy crisis in the future?
A: We are in the middle of a worldwide, I'm not
sure I'd call it crisis, but energy upheaval.
People are focused on the spot price of oil and how
it is above 50 dollars or below 50 dollars. That's
the wrong focus to understand what's really happening.
Since the early 1990s and before, if you looked at the
futures market and looked at the farthest contract six
years out, it was almost always between 18 and 23 dollars
a barrel. At the start of 2005, it was more than 36
dollars a barrel. This is a much more dramatic change
than what we've seen in the spot price. This is
important. We aren't just seeing a short-term
blip, we are seeing a long-term change in the supply
and demand balance in oil. This change will have far-reaching
implications for the world economy.
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