While I agree with the poster above who expressed some doubt about the monopolistic model being appropriate, I must ask just how a price cap should work. A simple model of the California debacle is a market with a cap on one end and an unregulated other end that went to hell when market movements made the equation unworkable for the utility suppliers on the unregulated other end(I’ve heard much noise about pricing collusion that both makes little sense and has yet to be established anywhere that I’ve seen).
So, aha! The fix is to cap both ends of that market. Put a cap on wholesale prices as well. So now we’ve capped what the generators can charge the suppliers. So the suppliers are sittin’ pretty - gauranteed but limited profit (bonds, anyone?). But there’s still an open end on that system, because the generators must buy their feedstock on the open market. So do we then cap what a pipeline company can charge a cogen plant for natural gas supply so the plant doesn’t wind up in a fix as well? Obviously the pipeline companies are at a risk in that case, unless we cap what the gas producers can charge the pipelines for product; or else they may just shut all their lines to the west and sell in friendlier markets.
This train of thought can bifurcate at this junction.
The simple trendline extrapolation of this thought is that you’d then have to cap what gas producers can charge at the tap, or the wellhead, and to protect them, you need to cap rig rates, bulldozer rates, the price of seismic data, the price of the explosives used to record seismic data, the contractors’ exposure to the price of safety boots, the safety boot manufacturers exposure to the price of leather and steel (and advertising!), ad nauseum…
But the other course this can take pursues contemplation of risk, which is encountered most remarkably at the level of the gas producer. While you can tell a pipeline that they’ll get cost + “reasonable” profit out of a managed market deal, and setup a scenario where that appears to work, because they just buy and sell, how do you work an exploring company’s dry holes into the equation?
This thought causes us to explore the partner of “caps” often called the “floor” which, when combined, squeeze market influences right out of the door. If you want venture capital to risk drilling for new reserves with a cap on what can be made, you’ll at best have to give them a floor or see them walk on over to other endeavors. And even with a floor and a ceiling, why would they spend major capital on a market that’s essentially the bond market when they can dabble in things as mundane, yet profitable, as real estate or the more exciting market in rappers?
And, of course, should the world market drop below the floor the citizens won’t benefit because tax dollars must be paid out to guarantee the floor.
It would be truly naive to call domestic exploration and production monopolistic as that market is dominated by relatively small independents, who can’t in their wildest dreams drive the price. It is certainly difficult for me to envision a government-run exploration regime that would be more efficient than that driven by those of us who compete for reserves. And we can hardly imagine that we can isolate ourselves from the world market, which nobody controls.
So, where do the price caps stop? And why will that work?
[aside] From the New York Times (via poster december):
Subsidize?
“…opening public lands to the oil drillers…”
If anybody gets to drill on federal lands they’ve paid for a lease and will pay a royalty on production just like they would in a dealing with a private mineral owner.
“…easing environmental rules to accelerate coal production…”
This is a subsidy?
This apparently willful misinformation drive on the part of the New York Times is hardly surprising, but not at all helpful. It seems to harken back to a thought from the '80s that I’d hoped was dead - that any money the government didn’t take away from you was a subsidy.
[/aside]
