nep-ene New Economics Papers
on Energy Economics
Issue of 2006‒08‒05
seventeen papers chosen by
Roger Fouquet
Imperial College, UK

  1. World Crude Oil Markets: Monetary Policy and the Recent Oil Shock By Noureddine Krichene
  2. Dynamic Effects of Raw Materials Price Shocks for Large Oil-Dependent Economies By Wohltmann, Hans-Werner; Winkler, Roland
  3. Oil Price Shocks and Currency Denomination (A revised version of EWP 2005-01) By Wohltmann, Hans-Werner; Winkler, Roland
  4. Determinants of Venezuela's Equilibrium Real Exchange Rate By Juan Zalduendo
  5. Energy, the Exchange Rate, and the Economy: Macroeconomic Benefits of Canada's Oil Sands Production By Tamim Bayoumi; Martin Mühleisen
  6. Monetary Policy Dynamics in Large Oil-Dependent Economies By Wohltmann, Hans-Werner; Winkler, Roland
  7. How Much is Enough? Monte Carlo Simulations of an Oil Stabilization Fund for Nigeria By Ulrich Bartsch
  8. Forecasting the price of crude oil via convenience yield predictions By Knetsch, Thomas A.
  9. Distributional Effects of Oil Price Changes on Household Expenditures: Evidence from Mali By Kangni Kpodar
  10. A Scheme for Efficient Subsidisation of Kerosene in India By Morris Sebastian; Pandey Ajay; Barua Samir K.
  11. Indirect Taxes on International Aviation By Jon Strand; Michael Keen
  12. Dynamic Testing of Wholesale Power Market Designs: An Open-Source Agent-Based Framework By Sun, Junjie; Tesfatsion, Leigh S.
  13. Mergers in the GB electricity market: effects on retail charges By Evens Salies
  14. Nuclear high-radioactive residues: a new economic solution based on the emergence of a global competitive market By Pedro Cosme da Costa Vieira
  15. The Polluter Pays Principle and Cost-Benefit Analysis of Climate Change: An Application of Fund By Richard S.J. Tol
  16. Optimal Abatement in Dynamic Multipollutant Problems when Pollutants can be Complements or Substitutes By Moslener, Ulf; Requate, Till
  17. Economy-Wide Estimates of the Implications of Climate Change: Human Health By Francesco Bosello; Roberto Roson; Richard S.J. Tol

  1. By: Noureddine Krichene
    Abstract: This paper examines the relationship between monetary policy and oil prices within a world oil demand and supply model. Low price and high income elasticities of demand and rigid supply explain high price volatilities and producers' market power. Exchange and interest rates do influence oil market equilibrium. The relationship between oil prices and interest rates is a two-way relationship that depends on the type of oil shock. During a supply shock, rising oil prices caused interest rates to increase; whereas during a demand shock, falling interest rates caused oil prices to rise. Record low interest rates led to high oil price volatility in 2005. Data shows that world economic growth and price stability require stable oil markets and therefore more prudent monetary policies.
    Keywords: Oil prices , Interest rates , Exchange rates , Monetary policy , Oil crisis ,
    Date: 2006–03–21
  2. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the dynamic effects of anticipated price increases of imported raw materials upon two large open economies. It is assumed that the economies have an asymmetric macroeconomic structure on the supply side and are dependent upon a small third country for oil or raw materials imports. The dynamic behavior of several macroeconomic variables is discussed under alternative scenarios. We first assume that oil is priced in dollars. Thereafter, we investigate the impacts of oil price shocks on the domestic and the foreign economy if oil imports are denominated in terms of domestic currency (Euro) rather than US dollars. It is shown that with domestic- currency denominated oil the stagflationary effects of oil price increases upon both the domestic and foreign economy are reduced. The paper also discusses several monetary policy responses to oil price shocks.
    Keywords: oil price shocks, international policy coordination, time inconsistency, currency denomination
    JEL: E63 F41 Q43
    Date: 2005
  3. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the dynamic effects of anticipated price increases of imported raw materials upon two large open economies. It is assumed that the economies have an asymmetric macroeconomic structure on the supply side and are dependent upon a small third country for oil or raw materials imports. The dynamic behavior of several macroeconomic variables is discussed both under US dollar and Euro-currency denomination. It is shown that with Euro-currency denominated oil the stagnationary effects of oil price increases upon both the domestic and foreign economy are reduced. The paper also discusses several monetary policy responses to oil price shocks.
    Keywords: oil price shocks, international policy coordination, currency denomination
    JEL: E63 F42 Q43
    Date: 2005
  4. By: Juan Zalduendo
    Abstract: The Venezuelan Bolivar is pegged to the U.S. dollar and supported by foreign exchange restrictions. To assess the appropriateness of the peg during the current period of high oil export earnings and the likely consequences of a liberalization, this paper attempts to disentangle the effects of oil prices from other factors underlying the equilibrium real exchange rate, and examines the role of foreign exchange controls by extending the application of a vector error correction (VEC) model to parallel market exchange rates. Several findings are worth noting. First, oil prices have indeed played a significant role in determining a time-varying equilibrium real exchange rate path. Second, oil prices are not the only important determinant of the real effective exchange rate: declining productivity is also a key factor. Third, appreciation pressures are rising. Finally, the speed of convergence of a VEC model using parallel rather than official rates is higher, suggesting that the government has been able to maintain sharp deviations between the official and equilibrium rates because of Venezuela's oil dependency and the concentration of oil income in government hands.
    Keywords: Real effective exchange rates , Venezuela, Republica Bolivariana de , Oil prices , Foreign exchange , Exchange control measures , Exchange markets ,
    Date: 2006–03–31
  5. By: Tamim Bayoumi; Martin Mühleisen
    Abstract: This paper describes potential benefits from Canada's expanding oil sands production, higher energy exports, and further improvements in the terms of trade. Contrary to the previous Canadian exchange rate literature, this paper finds that both energy and nonenergy commodity prices have an influence on the Canadian dollar, and some upward pressure on the exchange rate would therefore be expected. Model results suggest, however, that the impact on other tradable goods exports is limited.
    Keywords: Balance of payments , Canada , Trade , Exports , Commodity prices , Exchange rates , Oil production ,
    Date: 2006–03–29
  6. By: Wohltmann, Hans-Werner; Winkler, Roland
    Abstract: The paper analyzes the impacts of anticipated and unanticipated monetary policies on two large open economies that are dependent upon raw materials imports from a small third country. The analysis is based on asymmetric behavior on the supply side of both economies and an endogenous commod- ity pricing equation of Phillips' curve type. It is shown that an increase in the growth rate of domestic money supply is not neutral in the long run but induces contractionary output effects in both economies. The paper also dis- cusses the impacts of monetary policy rules that either reduce the in°ationary or contractionary output effects of commodity price shocks.
    Keywords: Monetary Policy, Oil Price Shocks, International Policy Coordination
    JEL: E63 F42 Q43
    Date: 2005
  7. By: Ulrich Bartsch
    Abstract: In oil-dependent countries, a major issue is how to stabilize fiscal spending when government revenue fluctuates along with the international price of oil. A stabilization fund would allow the government to pull through an oil price trough and absorb windfall revenue when prices are high. This paper focuses on two key issues. First, the paper proposes to base government spending on moving averages of past oil prices that are shown to behave nearly as a random walk. Second, it uses Monte Carlo simulations of a fiscal policy model to look at the probability that a given level of assets in the stabilization fund is exhausted over a certain number of years. The simulations show that with a fiscal policy based on moving averages over three to five years, a stabilization fund of about 75 percent of 2004 oil revenue would be adequate, which, in Nigeria, would equate to US$16-18 billion.
    Keywords: Revenues , Nigeria , Oil prices , Government expenditures ,
    Date: 2006–06–14
  8. By: Knetsch, Thomas A.
    Abstract: The paper develops an oil price forecasting technique which is based on the present value model of rational commodity pricing. The approach suggests shifting the forecasting problem to the marginal convenience yield which can be derived from the cost-of-carry relationship. In a recursive out-of-sample analysis, forecast accuracy at horizons within one year is checked by the root mean squared error as well as the mean error and the frequency of a correct direction-of-change prediction. For all criteria employed, the proposed forecasting tool outperforms the approach of using futures prices as direct predictors of future spot prices. Vis-à-vis the random-walk model, it does not significantly improve forecast accuracy but provides valuable statements on the direction of change.
    Keywords: oil price forecasts, rational commodity pricing, convenience yield, single-equation model
    JEL: C22 E37 G12 G13 Q40
    Date: 2006
  9. By: Kangni Kpodar
    Abstract: Using an input-output approach, this paper assesses the distributional effects of a rise in various petroleum product prices in Mali. The results show that, although rising gasoline and diesel prices affect mainly nonpoor households, rising kerosene prices are most harmful to the poor. Overall, the impact of fuel prices on household budgets displays a U-shaped relationship with expenditure per capita. Regardless of the oil product considered, highincome households would benefit disproportionately from oil price subsidies. This suggests that a petroleum price subsidy is an ineffective mechanism for protecting the income of poor households compared with a targeted subsidy.
    Keywords: Oil prices , Mali , Income distribution , Oil subsidies ,
    Date: 2006–04–17
  10. By: Morris Sebastian; Pandey Ajay; Barua Samir K.
    Abstract: The distortions in price based subsidisation are very severe. The direct fiscal cost of ensuring that a rupee of value is delivered to all household users of kerosene is as high as Rs.3 and when the consideration is the benefit that finally reaches the poor “below the poverty line” consumers it is much more. This is well known. This excludes the indirect costs in the form of negative externalities imposed by adulteration, and environmental costs. Worse still are the “third order” effects of entrenched rent seeking and corruption of distribution networks and the conversion of retailing to patronage. In such situation reform and deregulation become problematic. At the core of all these failures in the “price arbitrage” that arises when price based subsidies are resorted to. The total fiscal losses on account of kerosene subsidisation are in excess of Rs. 24,000 crore far above the conventional estimates (around Rs. 8000 – 10,000 crore) which do not recognise the fiscal cost of diversion and adulteration. This paper studies the current design of the public distribution system and price based subsidisation to bring out the perversities, and argues that a complete replacement is called for. The Public Distribution System (PDS) which had value in an era of shortage and rationing has no role today. Market based distribution can bring down the direct costs since now kerosene distribution could then enjoy the synergies of oil and provisions distribution channels. There is clear evidence that a significant percentage (about 40) of kerosene is diverted out of the PDS and sold at higher prices. The commission paid to the distribution channel, in particular to the retailers of kerosene does not make the business financially viable. The rents being earned by those associated with the distribution channel for kerosene are very large. The rent extractors have become so well entrenched over time that it is plausible that other agencies in the system and even the regulatory process itself may be hostage today to their influences. The indirect losses from use of sub-optimal fuel mix, product mix and investment decisions are very large and may harm the economy significantly in the long term. The subsidy through uniform low pricing of kerosene, though intended for the poor, is in fact not reaching them as they are in no position to buy much of the kerosene allotted to them even at the low issue prices being charged by the fair price shops. It is imperative to bring into play information and communication technologies so as to break the stranglehold of the distribution channel by capturing information at the point of sale and thereby creating a permanent audit trail of all relevant transactions. Only by empowering the target segment, the BPL families, by providing them with the freedom to choose the manner in which they would like to consume the subsidy intended for them can the problem be overcome. The well-documented failure of TPDS (Targeted Public Distribution System), implemented on an experimental basis, clearly demonstrates that tinkering with the existing system would not achieve the twin goal of benefiting the really poor and not-benefiting the non-poor. The direct subsidy scheme, which is based on free market pricing of kerosene, and therefore a radical departure from the current method of uniform low pricing is the answer for achieving effectiveness of subsidization. The subsidy is to be disbursed to the poor through smart cards and the accounting of disbursal is to be done using systems similar to those used by credit card companies. The purchasing power put in the hands of the beneficiaries would allow them to use it for spending on their choice of commodities and services and thereby not only enhance the use of subsidy to the full but would also add greatly to their welfare. The proposed system would almost completely eliminate the indirect losses arising from distorted choices since the price of kerosene would be market determined and therefore not relatively cheap compared to alternate fuels. A task force (TF) must be set-up for implementation, with wide-ranging powers and full financial backing of the government of India so as to be able to function autonomously. The task force should consist of eminently qualified individuals with diverse skills and known for their integrity and appreciation for the significance of the task to be performed. The critical task of identifying the beneficiaries at micro-level should be done using all possible sources of data and information (outlined in the report) so as to minimize both, Type I and Type II errors, that is, chance of exclusion of genuine beneficiary and chance of inclusion of spurious beneficiary in the list of target beneficiaries. There are interesting ways by which private information can be brought to bear, and incentive compatibility ensured in correct identification. The disbursement of subsidy should be such that the disbursement is recorded at the point of transaction and get immediately captured in a large centralized database, thereby creating a permanent audit trail, akin to operation of credit cards (details outlined in the report). The activities associated with initial identification of beneficiaries, disbursement of subsidies and updating the list of beneficiaries is to be done by well-qualified private agencies. The operations of the system should be monitored by an SPV to be specially created for the purpose and working under the broad supervision and direction of the task force. The SPV and the TF should ensure full transparency of operation of the private vendor and the scheme by making public all relevant information on the operation of the system and opting for periodic audit of operations. The appropriate organisation design and policy framework for the same is elaborated. The immediate gain to the exchequer from the proposed system, due to market based pricing of kerosene would be an estimated inflow of Rs. 14000 crore per year by way of additional taxes. This gain from additional taxes, based on certain assumptions, is expected to rise to over Rs. 37000 crore in 2010-11, at Jan. 2006 petroleum prices. The gain to the economy and society at large from elimination of indirect losses due to sub-optimal choices of fuel-mix, product-mix, and asset mix would be immense as they would be completely eliminated in the new system. The most important gain however is that the beneficiaries would be in a position to fully utilize their entitlements and spend the same on products and services of their choice, significantly enhancing thereby the utility of their consumption. This should also make direct subsidies politically rewarding.
    Keywords: Petroleum; Subsidies, India, Reform, Direct-Subsidies, Economic-Distortion, Microeconomics, Economic-Efficiency, Distribution, Targeting, Fiscal-Deficit, Government-expenditure, Public-distribution
    JEL: H2
    Date: 2006–07–24
  11. By: Jon Strand; Michael Keen
    Abstract: This paper examines the case for internationally coordinated indirect taxes on aviation (as a source of general revenue-not (necessarily) as a source of development finance). The case for such taxes is strong: the tax burden on international aviation is currently limited, yet it contributes significantly to border-crossing environmental damage. A tax on aviation fuel would address the key border-crossing externalities most directly; a ticket tax could raise more revenue; departure taxes face the least legal obstacles. Optimal policy requires deploying both fuel and ticket taxes. A fuel tax of 20 U.S. cents per gallon (10 percent, at today's fuel prices, corresponding to assessed environmental damage), or alternatively ticket taxes of 2.5 percent, would raise about US$10 billion if imposed worldwide, and US$3 billion if applied only in Europe.
    Keywords: Indirect taxation , Energy taxes , Transport , Environment ,
    Date: 2006–05–23
  12. By: Sun, Junjie; Tesfatsion, Leigh S.
    Abstract: In April 2003 the U.S. Federal Energy Regulatory Commission proposed a complicated mar- ket design - the Wholesale Power Market Platform (WPMP) – for common adoption by all U.S. wholesale power markets. Versions of the WPMP have been implemented in New Eng- land, New York, the mid-Atlantic states, the Midwest, and the Southwest, and adopted for implementation in California. Strong opposition to the WPMP persists among some indus- try stakeholders, however, due largely to a perceived lack of adequate performance testing. This study reports on the development and open-source implementation (in Java) of a com- putational wholesale power market organized in accordance with core WPMP features and operating over a realistically rendered transmission grid. The traders within this market model are strategic profit-seeking agents whose learning behaviors are based on data from human-subject experiments. Our key experimental focus is the complex interplay among structural conditions, market protocols, and learning behaviors in relation to short-term and longer-term market performance. Findings for a dynamic 5-node transmission grid test case are presented for concrete illustration.
    Keywords: Wholesale power market restructuring; Empirical input validation; Market design; Behavioral economics; Learning; Market power; Agent-based modeling; AMES wholesale power market framework; Java; RepastJ.
    JEL: C6 D8 L1 L9
    Date: 2006–07–27
  13. By: Evens Salies (Observatoire Français des Conjonctures Économiques)
    Date: 2006
  14. By: Pedro Cosme da Costa Vieira (Faculdade de Economia, Universidade do Porto)
    Abstract: Nuclear energy is economic and does not emit CO2 but has two central setbacks. First, it has not been yet implemented an efficient method of disposing the spent fuel. Second, the reactors’ complexity is expensive and turns possible the occurrence of accidents. In this paper, first I propose a very simple, economic and safe boiling heavy-water reactor that may constitute a way of mitigating these setbacks. The reactor is a container filled with a hydraulic suspension of fuel that is crossed-over by two fluxes: by one side, the fuel suspension that remains 250 days in the reactor and, by another side, the cooler that remains 50 seconds in the reactor. Second, I discuss that the solution of nuclear high-radioactive residues problem passes by the emergence of a global competitive market.
    Keywords: Nuclear reactor; Heavy water; Boiling water; Continuous fuel feeding; IV generation; Nuclear residues pricing and trading
    JEL: D41 D45 L72 Q48
    Date: 2006–07
  15. By: Richard S.J. Tol (Hamburg University, Vrije Universiteit and Carnegie Mellon University)
    Abstract: I compare and contrast five climate scenarios: (1) no climate policy; (2) non-cooperative cost-benefit analysis (NC CBA); (3) NC CBA with international permit trade; (4) NC CBA with joint and several liability for climate change damages; and (5) NC CBA with liability proportional to a country’s share in cumulative emissions. As estimates of the marginal damage costs are low, standard NC CBA implies only limited emission abatement. With international permit trade, emission abatement is even less, as the carbon tax is reduced in countries with fast-growing emissions, and because a permit market ignores the positive, dynamic externalities of abatement. Proportional liability shifts abatement effort towards the richer countries, but away from the fast-growing economies; again, long-term, global emission abatement is reduced. Joint and several liability would lead to more stringent climate policy. These findings are qualitatively robust to the size and accounting of climate change impacts, to the definition of liability, and to the baseline scenario
    Keywords: Climate Change, Cost-benefit Analysis, Liability, Permit Trade
    JEL: Q54
    Date: 2006–06
  16. By: Moslener, Ulf; Requate, Till
    Abstract: We analyze a dynamic multi-pollutant problem where abatement costs of several pollutants are not separable. The pollutants can be either technological substitutes or complements. Environmental damage is induced by the stock of accumulated pollution. We find that optimal emission paths are qualitatively different for substitutes and complements. We derive general properties governing optimal emission paths and present numerical examples to illustrate our main results. In particular we find that optimal emission paths need not be monotonic, even for highly symmetric pollutants. Finally, we describe a comparatively simple method to implement the optimal path without explicitly knowing its shape.
    Keywords: Multi-pollution, abatement technology, accumulating pollutants
    JEL: L5 Q2
    Date: 2005
  17. By: Francesco Bosello (Fondazione Eni Enrico Mattei); Roberto Roson (Ca’Foscari University of Venice and International Centre for Theoretical Physics); Richard S.J. Tol (Hamburg University, Vrije Universiteit and Center for Integrated Study of the Human Dimensions of Global Change)
    Abstract: We study the economic impacts of climate-change-induced change in human health, viz. cardiovascular and respiratory disorders, diarrhoea, malaria, dengue fever and schistosomiasis. Changes in morbidity and mortality are interpreted as changes in labour productivity and demand for health care, and used to shock the GTAP-E computable general equilibrium model, calibrated for the year 2050. GDP, welfare and investment fall (rise) in regions with net negative (positive) health impacts. Prices, production, and terms of trade show a mixed pattern. Direct cost estimates, common in climate change impact studies, underestimate the true welfare losses.
    Keywords: Impacts of climate change, Human health, Computable general equilibrium
    JEL: C68 D58 Q25
    Date: 2005–07

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