Alternative futures

There has been a great deal of thought, discussion and debate in recent years about finding some way of removing our dependency on oil imports and all the benefits which might ensue (less pollution, less money going to despotic governments, which might force them to enact some real, meaningful reforms, etc.).

One approach would be to enforce increased mileage standards, although a proposal along these lines was stripped from the energy bill recently passed by Congress. Another approach would be increased interest in alternative fuel research, which includes anything from "clean" coal to sugar or corn ethanol and biodiesel.

The problem with the alternative fuels approach is the cost - no one wants to invest a lot of money in the necessary research and production infrastructure unless there is a reasonable expectation of making a return on it. I don't know what the exact figures need to be for alternative fuels to be competitive with petroleum, but estimates seem to place it in the $70-75 per barrel. I.e., if the price of a barrel of oil gets to about $75, alternative fuels can be competitive at that price point.

Soooo ... Devin Nunes, a Republican Congressman from California, has introduced an interesting idea - a bill which would have the government create a futures market for alternative fuels.

The idea is fairly simple. If someone is interested in building a biodiesel plant, for example, and can make a small profit at, say, $72 a barrel, they can purchase some futures that might guarantee them a rate of $72 five years from now. If, when the time comes, the cost of fuel is higher than that figure, then they can sell at the higher rate. If the cost is lower, then they sell at the lower rate, with the government essentially paying the difference.

I find this notion appealing on a variety of levels. First, I like the "predictive" power of future's markets. Sites like Intrade or various sports-based futures sites are a lot of fun to peruse. It would be interesting to see how a similar market did predicting the future cost of a barrel of oil, and how that affected auctions for various types of alternative fuels.

Second, I like the idea of a possible "free subsidy". What I mean by this is yes, if the price of all drops below the value of the future price, then the government pays the difference. I don't necessarily see this as bad, but rather think of it as a subsidy to help create the necessary national infrastructure for refining alternative fuels. On the other hand, if the price of oil actually rises above the futures rate, then the oil can be sold at the higher rate, the government is out nothing, but the needed infrastructure has still been built.

It's an interesting idea, and one I think merits investigation. I wonder if Buffel Grass can be converted to biodiesel? For a guaranteed $75 a barrel, maybe x4mr would be motivated to find out.