If fossil fuels will be more valuable in the future, we would expect companies that own reserves to delay exploiting them so they can instead sell them in the future. We would also expect the forward curve for oil to be upwards-sloping. The latter is true, but only because the spot price has fallen so much over the past 4 months; 6 months ago the spot price of oil was well above the price of oil in 2020.
Now, you might object that private actors would only save the oil if they expected to make returns greater than current interest rates; otherwise they would be better off producing now and saving they money. As such, if oil is more valuable in the future, but only a little bit, private firms would inefficiently produce now. But this is not a special feature of oil—this is a fully general complaint against positive interest rates.
So essentially either:
You are better at predicting future demand than the highly liquid oil futures market
Interest rates are too high
The market is currently efficient; there are no gains from such a plan.
Thanks for the response. This is cool info, but I’m not convinced. I wonder if there is value that exists but can’t be captured by individuals alive today, causing them to not care.
That post on sustainability I disagree with. I don’t think we understand enough about technological advance to plan for specific future technologies, except in the short term.
I wonder if there is value that exists but can’t be captured by individuals alive today, causing them to not care.
Yes I think this is very plausible—indeed, I donate to MIRI! But as I noted above, this is an argument against positive interest rates in general, not anything specific to fossil fuels. If interest rates were negative, backwards induction in asset prices would lead to current prices accurately reflecting future values.
That is interesting. My knowledge here is pretty limited. If interest rates were lower, saving would be lower and so technological progress would be slower—unless, I guess, governments intervened to make folks save.
If fossil fuels will be more valuable in the future, we would expect companies that own reserves to delay exploiting them so they can instead sell them in the future. We would also expect the forward curve for oil to be upwards-sloping. The latter is true, but only because the spot price has fallen so much over the past 4 months; 6 months ago the spot price of oil was well above the price of oil in 2020.
Now, you might object that private actors would only save the oil if they expected to make returns greater than current interest rates; otherwise they would be better off producing now and saving they money. As such, if oil is more valuable in the future, but only a little bit, private firms would inefficiently produce now. But this is not a special feature of oil—this is a fully general complaint against positive interest rates.
So essentially either:
You are better at predicting future demand than the highly liquid oil futures market
Interest rates are too high
The market is currently efficient; there are no gains from such a plan.
Here is a related post by David Friedman on Sustainability
Thanks for the response. This is cool info, but I’m not convinced. I wonder if there is value that exists but can’t be captured by individuals alive today, causing them to not care.
That post on sustainability I disagree with. I don’t think we understand enough about technological advance to plan for specific future technologies, except in the short term.
Yes I think this is very plausible—indeed, I donate to MIRI! But as I noted above, this is an argument against positive interest rates in general, not anything specific to fossil fuels. If interest rates were negative, backwards induction in asset prices would lead to current prices accurately reflecting future values.
That is interesting. My knowledge here is pretty limited. If interest rates were lower, saving would be lower and so technological progress would be slower—unless, I guess, governments intervened to make folks save.
http://reflectivedisequilibrium.blogspot.com/2014/06/increasing-and-improving-saving-as.html
What might other concrete effects of artificially low interest rates be?