January 20, 2004

Price Ceiling Analysis

I'm fascinated by the concept of market price ceilings. These are things that absolutely ruin a crisis monger's day. For instance, oil has a price ceiling. There are abundant sources of oil in Western countries, most notably Canada. The price to extract this oil is high which is why most of it stays in the ground. The price ceiling for oil is the extraction cost of this Canadian (tar sand) oil plus the initial cost to set up the extraction machinery. But Canadian deposits are not the only ceiling because they are not the only alternative source. A large variety of substitute sources could make up for politically dubious OPEC oil. The lowest abundant alternative energy source price ceiling is the maximum price that an OPEC oil embargo could damage us if the Middle East spun completely out of control.

There are people who don't often get many headlines who work on lowering these price ceilings. Some are in solar, others do wind turbines, others work on coal gasification, still others in the Canadian oil sands field. Every time some guy in a lab coat goes eureka and drops the price down a bit on extraction, transport, or a unified distribution system (commonly known as the hydrogen economy) the clock ticks down on OPEC's viability and the necessity of excusing all those nasty political and social practices in the middle east.

The horrible part about price ceilings is that they are the orphans of the news business. They don't sell, they're complex, and are hard to pick out when they show their influence. There's not a lot out there.

One of the big low grade threats to the world is a threatened lack of sufficient, cheap, potable water. A January 12th item from Austin Bay gives an intriguing account of an unusual water deal and an accidental illustration of how to spot the hints of a price ceiling at work.

January 12, 2004: Water is a big strategic issue in the Middle East. It is far more valuable than oil. Israel and Turkey recently reached a very telling armaments agreement. Turkey will ship Israel millions of liters of fresh water in exchange for Israeli arms and munitions. The water will be shipped in ocean tankers from Turkish to Israeli seaports. Here are some of the specifics as reported in the international press: The water for arms deal will last 20 years. Each year Turkey will send Israel 50 million cubic meters of water. Israel will build several large water tanker ships to carry the water. The water will come from Turkey’s Manavgat River. In return, Turkey will receive Israeli armored vehicles and air force technology. Both nations see this as a “win-win” deal. Here’s a thought, which may seem farfetched at the moment, but check it out in five years: One of the main reasons the Israelis are reluctant to reach a deal with Syria about the Golan Heights is because the Golan is a key regional water resource. If Syria moderates politically, the reliable supplies of water from Turkey may give the Israelis more “flexibility” on the Golan issue. (Austin Bay)

Do you see the price ceiling at work? Israel's water needs will grow over time. Everybody's water needs are growing. So why is this deal time limited for 20 years? A sudden cessation of water delivery would impact the entire country. Cities have been abandoned for lack of water. Furthermore, flexibility on the Golan due to alternate Turkish water supplies would make the bind even worse as the net effect would be to put Israel in a spot with more people and even less water than today. The only way this makes sense is if the guys in the lab coats are making enough progress that 20 years from now water will be cheap enough not to worry about river supplies or container ships from Turkey. The water will be worth less than the weapons by then, calculates Israel, so the deal terminates.

If water desalination plants grow inexpensive enough for general use, a great number of malthusian disaster scenarios go up in smoke. Water wars generate conflict not only all over the middle east but even in the US today. If piped, desalinated water sufficiently drops in price, agricultural usage will no longer cause nearly as much environmental conflict with green activists (and people have almost come to blows as recently as the Clinton administration on this issue).

Posted by TMLutas at January 20, 2004 10:40 AM