Chasing your Tail

In college, I made an important mistake and learned a valuable lesson. I was working on a solar thermal cooling system and made a cost/benefit analysis. I determined this technology would break even if the price of oil exceeded $50 per barrel. Adjusting for the CPI, this is $121/barrel today. Well, oil exceeded that recently, but this technology did not come to market. My error was that as oil becomes more expensive, so do solar technologies. There's a lot of energy embedded in the cost of things. When energy prices rise, so do the cost of these items. There is a multiplier in each product, such that a 1% increase in energy prices results in a fraction of 1% increase in cost. Some things are energy intensive (like food or aluminum) and some things are not. Although, at the moment, I have trouble naming anything that is not.

If something has an energy cost factor of 25%, it means that a 1% increase in energy prices causes a 0.25% increase in price. Imagine an alternative energy technology that can produce power for 20 cents/kWh at today's energy cost of 10 cents/kWh. Also assume the technology has an embedded energy cost factor of 25%. So when energy prices rise to 20 cents/kWh, the cost of the energy produced by the alternative supply also increases to 22.5 cents/kWh. So it's not quite at break even yet.

In general, the price of energy might need to rise more than one might think before alternative technologies break even, because these technologies have an energy content that increases in cost. If the energy content is too high, then you can chase your tail, so to speak, and not reach break even for a very long.

If you know any good papers about the impact of energy prices on food prices, please comment. Thanks.

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