“In this world nothing can be said to be certain, except death and taxes.” ~Benjamin Franklin
All of us who have studied economics in the most rudimentary way know that as prices pass the peak of demand volume of sales begin to show a diminution of return. As prices go up, sales fall. We also know that price affects opportunity. That is that consumers have limited amount of funds to spend on a purchase, they can either spend all of their money on one thing or they can spend the limited funds they have on more than one other thing. There are also economic factors in dealing with choices over the same product or commodity and the choices between substitutable products.
The first, choices over the same product, is a simple concept to understand since most shoppers do this quite naturally. If there were two cabs in front of you (and we assume you need a cab), one with the advertisement on the door of $1.50 and another for $3.00, and
from all the information you could gather they offered the same exact service, which service would you choose? Almost everyone faced with this scenario would choose the cab with the $1.50 price.
The second, choices between substitutable or alternative products, is easily understandable. If you like getting pizza for dinner on Wednesday nights at a pizza parlor on your way home and the pizza costs $4.00 a slice, even though at the money you make $4.00 a slice is hard to afford. You eat pizza, but don’t eat dinner the following day since you can’t afford it. Then one day a hotdog place opens up next to the pizza place selling foot long super hotdogs with all the fixings for a $1.00. You would probably persuade yourself to purchase the hotdogs since they are an effective substitute for the pizza and it would still allow you to eat pizza every once in a while without starving the next night. All these types of factors work the same with oil and vehicles.
The problem with oil can be divided into only two main problems. The biggest problem we have with oil is that there are few suppliers. Remember the taxi cap scenario where the consumer is given a choice between two of the same taxi services the only difference being that one was $1.50 and the other $3.00. If there were a multitude of suppliers for oil, the participants in the market would quickly understand that in order to make sales they would have to present the lowest possible price. No participant, (in this case oil company) would dare to raise prices because they would be immediately shut out of the market or loose vast amounts of market share. Consumers given a choice between two of the same items would choose the lowest costing one. This means that the United States should be looking to breakup oil companies in order to create greater amounts of competition instead of allowing the behemoth companies to merge and form gargantuan sized companies with virtually no incentive to reduce prices. An example of this was when our US Congress allowed for the merger of Exxon and Mobil, and Chevron and Texaco.
Problem two is that there are too few substitutes. Remember the pizza and hotdog story? In the story the consumer was able to substitute pizza with hotdogs in order to feed himself more often. The roll of substitutes, or in our industry language the roll of alternatives, is to provide consumers with choices. I put in the first sentence of this paragraph that problem two was too few choices, but in actuality there are no choices for consumers when it comes to powering their automobiles. The choices to consumers are all oil based. Consumers use gasoline or diesel.
E85 fuel and flexible fuel vehicles (FFVs) are talked about, (these are vehicles that can run on a mixture of up to 85% Ethanol and 15% gasoline), and should be the easiest of the substitutes/alternatives to implement. Oddly enough there are many FFVs out on the road and in the used car market, having been released from government fleet leases. What there isn’t is retailers of the E85 fuel. According to Tom Dashel, in the state of California there are only 4 E85 stations and 3 are owned by government agencies used to power their alternative fueled fleets. The same scenario is repeated in most states if E85 is offered at all. The technology that allows vehicles to use E85 costs approximately $150 dollars per vehicle, easily accessible by consumers and easily implemented by automobile manufacturers. …TAXES… A law could be put in place requiring manufacturers to make all new gasoline vehicles FFVs capable of accepting up to 85% Ethanol. This would put into the publics hands a possible alternative to oil based fuels. Automobile manufacturers would be allowed to charge an FFV fee of 2% to cover the cost of installation at the factory plus provide a profit incentive to do so. A $10,000 car would collect $200 dollars paying for the FFV components plus a $50 dollar profit and a $20,000 car would bring in $400 giving the automakers a $250 incentive to install these devices.
In this Chicken or the Egg scenario, the Chicken clearly comes first. (I will leave you to guess what is the chicken and what is the egg.) The prospect of having millions of cars to sell fuel to, and new economies of scale and technologies that reduce the cost of producing E85, may bring strong competitors to the oil dominated market for motive power fuels. It may even give oil companies themselves incentive to go into the business of producing E85 as a survival strategy if the predictions of Peak Oil are in fact actually true.
In this scenario …TAXES… would have a welcome affect in moving our country off of oil. Once the vehicles are ready for an alternative fuel, taxing oil based fuels would make Ethanol more attractive. Once gasoline becomes more expensive than Ethanol, remember the taxi cab scenario and the pizza vs. hotdogs story, consumers will switch.
Fare warning though, Ethanol will have to become competitive with oil without the tax handicap, in the long run. If taxes are the sole reason the fuel is competitive with oil and fuel costs remain a burden on the general populous, political chance will happen and the oil taxes will be repealed. If Ethanol becomes competitive then the two industries will have a moderating affect on price increases. If Ethanol should become much more expensive than gasoline, people will switch, and if gasoline should become much more expensive then Ethanol, people will switch again.
There are other substitutes for oil other than just E85. Natural gas, hydrogen and electricity all can be worked into the scenario. Electricity having the lowest fuel cost per mile of all the fuels. I personally prefer a plug-in series hybrid that has an FFV engine that can run on any mixture of gasoline and Ethanol up to E85 that can also run on natural gas and LPG (liquid petroleum gases like propane or butane). This concept is referred to as an MFFFPSHV or Mufpishvee. This would commoditize a variety of motive fuels and all would have to be competitive with each other. If one should become more expensive than the others, people would simply switch to the fuel that gives them the greatest opportunity to purchase other things with their money. For me I prefer the choice that allows me to get pizza everyday with everything on it. I drive an electric car.
This was first published on EVWORLD