Arnold Kling  

Another Energy Futures Market?

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Climate Models... A Specter of Common Sense...

Kevin Hassett writes


If you want some action in the next few years, you can operate in existing markets. If you want to buy the right to sell your alternative fuel for the equivalent of $70 at any time in the next couple of decades, you are out of luck.

The Nunes solution is to have the government create a market for long-run put options for alternative fuels. This would give those who have constructed qualifying facilities the right to sell (or ``put'') their product at a minimum price to the government should the actual price drop below that.


Thanks to a commenter for the pointer.

I don't think that you need an alternative energy market. Oil prices and the price of alternative energy will be highly correlated enough. All you need to do is extend the oil market to include a contract dated, say, January 3, 2015 another one dated January 3, 2020, and another one dated January 3, 2025. Then abolish the Department of Energy and have the government spend some of that money going "long" on those contracts.


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/742
The author at Knowledge Problem in a related article titled Nunes Proposes Market Subsidy to Displace Energy Policy writes:
    Michael Giberson Kevin Hassett thinks Congressman Devin Nunes has a good idea (also here): It's hardly a surprise when politicians fail us. Last week, with energy policy in play, we saw disappointments galore. But the biggest surprise of the week... [Tracked on August 7, 2007 7:50 AM]
COMMENTS (1 to date)
Joe Teicher writes:

The idea in the article is really depressing. It is depressing that it is just another way to throw money at alternative energy companies. It is extra depressing that many people who think they are financially informed, like the guy who wrote the article, will be duped by it.

Why is it obviously pork?
Because no alternative energy company could possibly afford to pay market value for 20 year out $70 puts on oil. If you look on the nymex website you can see that dec. 2010 $70 puts are trading at over $8/barrel. These are only a little over 3 years from expiration. 20 year out 70 puts would easily be in the $15-20/barrel range. Can anyone imagine a barely-profitable alternative energy company paying an extra $20 for every barrel of oil they produce just to protect their downside risk? I sure can't. I'm sure congressman Nune can't either and I'm sure his plan is to practically give these puts away which will amount to a massive subsidy for the receiving companies.

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