The Impact of Energy Prices on Technology Choice in the United States Steel Industry *

Abstract

In the last 30 years, U. S. steel producers have replaced their aging open hearth steel furnaces with basic oxygen (BOF) or large electric arc furnaces (LEF). This choice of technology creates the opportunity to substitute electricity for fossil fuels. We extend earlier research to investigate whether energy prices affect this type of technology adoption. The econometric model uses the “seemingly unrelated Tobit” method to capture the effects of the industry’s experience with both technologies, technical change, and potential cost reductions, as well as energy prices, on adoption. When we include the prices of electricity and coking coal as explanatory variables, the four energy price coefficients have the signs predicted by the law of demand, but the magnitude of the coefficients is such that the non-price terms are more important, e.g. a 50% increase in electricity prices would delay LEF adoption by only 12 days. Our results suggest that the adoption of LEF represents a form of major process technical change (factor biased - electricity using), rather than a price-induced technological innovation.