I was thinking about this question earlier today. I think it’s always useful to take a “societal” problem and try to backtrack to the government regulations that may or may not be responsible for it. My thinking on this started from the following site http://running_on_alcohol.tripod.com/ where the authors claim that they make their own ethanol in their backyard for about 60 cents (1 dollar cost to make the ethanol and 40c profit from selling the remains for feedstock). Why is ethanol not then cheaper than gasoline? Surely an industrial application could support even further cost advantages. I’m planning on making my own ethanol in order to confirm that the economics are in fact true. Luckily I own a small farm and by pure coincidence a flex-fuel Ford Ranger…
This got me thinking about what regulations might be at work. The first is clearly taxes. Once taxes are added then the cost goes up. One such tax is the alcohol tax. Even though pure ethanol is fine in your car it is illegal to produce it because you can also drink it. You must by law denature the alcohol (render it poisonous). That adds cost.
Consider also the difference between corn for food and corn for fuel. Corn for food is high quality. It requires good water, good soil, good seed. Corn for fuel can be lower quality. Here’s where subsidies muck things up. Subsidies incent farmers to grow fuel corn on land that is better suited for food corn. The result is that lower quality arable land that might support fuel grade corn is left unproductive.
I don’t think this sufficiently explains the economics but I’m sure there is more involved.
On to oil. One for the oil monopoly is that oil is subsidized by our foreign service and defense department. Consider how much oil would cost if the terrorists were not kept at bay by US forces. A significant amount of your tax money ends up keeping the price of oil down. This is not to say that oil is the “reason” for our foreign policy but it is no doubt a result.
Another free market impediment is regulation of automobiles, fuel transport and fuel stations. One can’t simply roll out a new automobile or new infrastructure. There are serious regulations that need to be met. All of these work to enforce the status quo.
One wonders why GM killed the EV1. It is simple to say that it wasn’t economic to produce but hard to refute the fact that demand existed. Possibly the economics of the labor unions prevented GM from innovating. Possibly they were just short sighted. Hard to say. Capitalism makes no claims on the varying abilities of people who run companies.
An interesting article to read is: http://www.setamericafree.org/Rnichols.pdf. This is written by an ex Ford engineer and details the history and viability of methanol which appears to be a very viable fuel which can be derived from (now cheap) natural gas. The most interesting part is where methanol was about to displace gasoline. The gasoline industry in the nick of time derived a reformulation that allowed it to meet emmissions standards. I think most people are unaware that we really came that close to a multi-fuel economy.
Anyway, I guess the advice to the questioner would be to examine the government interference that created the conditions in the first place. Austrian theory suggests that in many circumstances where the solution looks to be a new regulation that in fact you will find a preexisting regulation that would accomplish the same end and in better fashion.
It may simply be true that oil is just cheaper. In which case the gasoline car “problem” is solved by growing aggregate aesthetic demand. We sell more blue shirts than red shirts because the color blue has a greater marginal utility than red to more people. In the same way, “green” cars will sell more when they have a greater marginal utility than regular cars. There is nothing inherently wrong with environmentalists advocating to build this demand among constituents so long as it does not happen through forceful means, and certainly nothing wrong with environmentalists pooling their money to build a new car company from scratch…