Junk vs. quality energy.(Senate and the House passed energy bills, energy economics)

Both the Senate and the House passed energy bills this summer, which they hope to reconcile early this fall. All energy bills are basically shopping lists, and notwithstanding the dismal talk of disappearing supplies, the list of possible energy sources grows ever longer. The debate comes down to which hydrocarbon, carbohydrate, fissile element, photovoltaic semiconductor, or 100-foot windmill blade belongs higher on the list.

But while energy sources readily substitute for each other, they are not the same. Even the wise Nan Greenspan misframed this in a major energy speech last April. Energy, he stated, ought to have one price. While different fuels supply heat at different prices today, things will eventually flatten out. In the long run, he suggested, "the prices per unit of energy" from natural gas, oil, coal, nuclear power, and renewable sources will "tend to converge."

Sorry, Mr. Greenspan, but they won't--ever. Investors who bet against inherent differences will lose their shirts. Policy makers who deny price spreads will end up promoting schemes that burn mostly mountains of cash.

It's a quaint anachronism that we still measure energy sources in heat--the lowest-grade form of energy. Burn a ton of coal, a barrel of oil, or a cubic foot of gas and you release a certain amount of heat (which we measure in British Thermal Units, or BTUs). Our energy analysts routinely use BTUs to track energy production and consumption. The Hoover Dam, a power plant that burns nothing, is rated as an energy source by taking the electricity it delivers and translating that into the amount of heat that would be needed to generate the same power in a boiler. Diligent bookkeepers in the U.S. Department of Energy thus count annual U.S. energy consumption as 100 quadrillion BTUs.

This all sounds reasonable until you check prices. Mr. Greenspan did, and was surprised. "Prices for natural gas," he noted, are "notably less expensive than those for crude oil," measured on a BTU-equivalent basis. If all BTUs were equal and freely traded, this shouldn't last. As "the manner in which energy is produced and consumed evolves" Mr. Greenspan concludes, BTU-equivalent price spreads should narrow.

They won't. Because there's a world of difference between AAA and junk BTUs--a difference ordained by the second law of thermodynamics, which no speculator or ...