This is the first in a series of guest posts written by Paul Bennett, PhD Student in Economics at George Mason University in Fairfax County, Virginia. Each post will deal with a question pertaining to Andrea Rossi’s E-Cat technology
Will the E-Cat supplant oil/coal/fission as the predominant energy source in the advanced economies?
Various bloggers have expressed their views on this, ranging from “all energy production will rapidly be replaced by E-Cats” to “it will take a long time and have little impact”. As an economist, I have to point out that market forces will determine both the rate and the extent of this process.
The best parallel I can think of is the replacement of canals by the railways in England in the 1830s. Between 1750 and 1830, the British built something like 4,000 miles of canals in their country that measures about 500 miles by 200 miles. The economic impact of the canals had been dramatic: the price of coal in one town dropped by more than 50% when the canal was built; the price of coal at the canal wharf was 20% of what it was 5 miles away.
The canal companies were chartered by act of parliament and their tariffs were specified by law. They were both legal and natural monopolies – until the railways came along. In the following 20 years, the British people built a railway system that not only matched the canal system, but expanded it. To overcome the monopoly status of the canal companies, the railway companies frequently bought up the canal companies so that they could (a) build on their land and (b) assume their monopoly rights.
The interesting and relevant thing is what happened to the canals and their tariffs. Firstly, the canals did not go out of business immediately. Secondly, they did drop their tariffs by about 90%. Thirdly, the railway operators were able to compete with the established canal system even though they had to invest in new infrastructure. I conclude that if the cost effectiveness of the E-Cat is sufficiently large, the producers of energy (oil, coal, fission) will either reduce their prices to match the new energy source or go out of business.
My guess is that fission will disappear, coal will drop to a small fraction its current size and oil will continue to be a major source of power. The costs of producing power by fission are largely operating costs (fuel preparation costs are included under this heading). It will not be feasible to reduce these by 90% or even 50% (in fact many of the costs of fission are in the disposal of the waste and have not been adequately accounted for). It will not be possible for fission power plants to reduce their costs to match the new benchmark for E-Cats.
Coal is similar. The costs of coal derived power are now mainly the costs of extraction and conforming to environmental rules. These cannot be easily reduced.
Oil is a different story. The owners of the world’s most easily accessible oil reserves are currently taking about 80% of the price paid for each barrel of oil as pure profit (the cost of extraction of oil for these owners is a small fraction of the price they can fetch on world markets). In the face of competition, the price of oil will be driven down. The lowest this price can be driven to is the cost of extraction. (Note. This does not include any investment in further exploration for new oil reserves.)
If the cost of energy production from oil at this minimum price is still higher than the cost from the E-Cat, the world will very rapidly transition (could be as quick as 2 years) all energy production to E-Cats. If the cost of energy production from E-Cats is higher than this, the two technologies will exist side by side.