Posts tagged oil

California’s Tradable Permit on Oil Refineries

Californian Government Implements Tradable Permit on Oil Production

The Reporter: News Article

According to The Reporter, California decided to implement the tradable permit policy for the production of oil, which is responsible for the global warming. The government has budget deficit of “$9 billion” and it hopes to gain “$14 billion” by 2015, profiting from auctioning tradable permits to the oil companies.

The main reason for implementing tradable permit policy is that there is a negative externality associated with the production of oil. The social cost exceeds the private cost and this makes the society to take care of the environmental cost. In order to internalize the cost of pollution of the oil production and move the quantity supplied from Q market to Q optimum, the Californian government introduced tradable permit.

The government or EPA sets the amount of pollution allowed and auctions the pollution rights (tradable permits) to the oil companies. If the amount of tradable permit is appropriately chosen, it effectively moves the quantity supplied to Q optimum both eliminating the negative externality and increasing the government profit. The government would profit P times Q optimum amount of money.

However, some critics argue that the increase in the price of oil will increase the overall price of consumer goods. The cost of production will increase for virtually all the consumer goods that are produced from oil-running factories. Also, the means of transporting goods from city to city will be more expensive. All this will contribute in increasing the price of consumer goods. The economic size (or social welfare) would decrease also.

The overall increase in the price of oil and the price of consumer goods will lead to the decrease in the consumer spending overall. United States, especially California, is a place where the public transportation is not as advanced and popularly used as Korea. People usually drive their cars to go to work and go shopping. The increase in the price of oil will act as a disincentive for the people to go out on shopping. This will shift the demand curve from Demand 1 to Demand 2 decreasing the price of consumer goods from P2 to P1 and decreasing the quantity demanded from Q1 to Q2. Again, the economic size (or social welfare) will decrease. Some argue that the tax revenue form the taxes such as VAT will decrease countering the benefits by profits from implementing tradable permits.

In conclusion, the tradable permit will increase the profit of Californian government and at the same time cut down the level of pollution contributing to the global warming. However, the government should be fully aware of the complicated consequence or unintended effects of implementing any sort of policy distorting the market will have.

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China’s Skyrocketing Oil Consupmtion

China’s Astonishing Rate of Oil Consumption

BBC News: Click Here

The Heat Zone: Click Here

According to BBC News, China’s demand for oil jumped by an ‘astonishing’ 28% in January compared with the same month a year earlier. As the headline tells us, China’s consumption of oil is skyrocketing as it tries to fulfill the energy hunger engendered by rapid economic growth. There are many concerned voices that this ‘astonishing’ (for some, ‘horrifying’) consumption of oil could stir up several ecological and economcial problems.

First off, many are concerned that this incredible rate of oil consumption will eventually result in depletion of oil. The concern for the depletion of oil was an old issue for industrial countries, however, this issue recently became an hot potato because of China’s increasing consumption of  oil. Some analystist say that as China’s consumption of oil increases tremendously the world supply of oil can be depleted earlier than expected. It would certaintly stir up sever problems if the supply of oil depletes. It might be difficult for both developing and developed countries to even sustain itself.

Secondly, China’s tremendous consumption of oil has several negative externalities. For example, it could emit tons and tons of CO2 in the atmoshpere which in turn will aggravate the global warming. In the graph above, the external cost to the society is not reflected in the current oil market price. It is at the curve of MPB, which should be at MSB. In my opinion, even though the market price for oil reflects the external cost and the curve on MSB, China’s consumption of oil is so high that it will do no good.

As you see in the graph above, the demand for oil is much higher than the supply. The demand is always higher than the supply and that is why market price of oil is high (about 80$ or above for a barrel). However, with higher demand by China, the price for the oil will increase significantly. Therefore, with extremely high market price for oil, many developing countries (other than China) will have a great difficulty in their economic growth and development. It will also affect the developed countries by some extent. In my opinion, the countries importing oil, like Japan, will be hurt the most.

In conclusion, China’s increase in consumption of oil could stir up many problems such as depletion of oil, global warming, and high market price for oil.

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