Oil, Natural Gas, and Giant Hamsters

Before I start in on this post, I want you to answer a few questions:

1.       Do you know where the electricity that powers your home or apartment comes from?

2.       Do you know what kind of energy was used to produce that electricity?

Got your answers?

Good.  Here are my answers:

1.       National Grid.

2.       Not sure.  Giant hamsters running inside a Ferris Wheel?

I just finished reading “The Quest: Energy, Security, and the Remaking of the Modern World” by Daniel Yergin.  In this behemoth of a book, Yergin discusses everything energy from the history oil to the development of Tesla’s all-electric sports car.  After completing “The Quest”, I was left wishing that Yergin had focused more on his most profound point.  This argument, which is buried in the section on nuclear power in the middle of the book, is that the modern free market capitalist system is not suited to promoting competition in the energy sector.

The most powerful part of the free market system is that is essentially democratic.  Consumers vote for their favorite products by investing money in purchasing them.  Products with the most votes make money while products with the least votes go bankrupt.  The crux of this system is that it requires open competition to function properly.  Consumers must be informed of the existence of all the potential candidates in an industry and have the ability to vote for their favorite.

This is where the problem lies with the energy sector.  In the energy sector, you cannot vote for your preferred energy type.  Don’t believe me?  Try calling the electric company and asking them to switch your electricity to all renewable, non-carbon sources. 

The automobile industry is also a monopoly.  There are plenty of brands to choose from but the vast majority of the cars sold in the US are still petroleum powered.  Even the much hyped Tesla Roadster, which runs entirely on electricity, still needs to be charged by an electric grid.  This is just fossil fuel consumption by outlet rather than gas tank.

For better or worse, the US economy drives innovation through competition.  This competition has been conspicuously missing in energy and automotive markets for the past century.  The result has is an energy sector and automobiles that have become significantly more efficient, but woefully lacking in true disruptive innovations.  Until this lack of competition is rectified, we can expect more of same in our energy industry: rising gas prices, slow increases in fuel efficiency, and giant hamsters.