nep-ene New Economics Papers
on Energy Economics
Issue of 2007‒03‒03
thirteen papers chosen by
Roger Fouquet
Imperial College, UK

  1. Reliability and Competitive Electricity Markets By Joskow, Paul L; Tirole, Jean
  2. Modelling Spikes in Electricity Prices By Ralf Becker; Stan Hurn; Vlad Pavlov
  3. What drives natural gas prices? By Stephen P. A. Brown; Mine K. Yücel
  4. Russian and European gas interdependence. Can market forces balance out geopolitics? By Dominique Finon; Catherine Locatelli
  5. The Allocative Cost of Price Ceilings: Lessons to be Learned from the US Residential Market for Natural Gas By Davis, Lucas W; Kilian, Lutz
  6. Gas Natural y Desigualdad en Bolivia Después de la Nacionalización By Lykke E. Andersen; Johann Caro; Robert Faris; Mauricio Medinaceli
  7. Natural Gas and Inequality in Bolivia after Nationalization By Lykke E. Andersen; Johann Caro; Robert Faris; Mauricio Medinaceli
  8. How Best to Use the Extraordinary Hydrocarbon Revenues in Bolivia: Results from a Computable General Equilibrium Model By Lykke E. Andersen
  9. Gas Storage Valuation Using a Monte Carlo Method By Alexander Boogert; Cyriel de Jong
  10. Are All Resources Cursed? Coffee, Oil and Armed Confict in Colombia By Oeindrila Dube; Juan F. Vargas
  11. Searching for Equitable Energy Price Reform for Indonesia By Yusuf, Arief Anshory; Resosudarmo, Budy P.
  12. Cycling: An Increasingly Untouched Source of Physical and Mental Health By Inas Rashad
  13. Projections of Chinese Energy Demands in 2020 By F. Gerard Adams; Yochanan Shachmurove

  1. By: Joskow, Paul L; Tirole, Jean
    Abstract: This paper seeks to bridge the gap between economists focused on designing competitive market mechanisms and engineers focused on the physical attributes and engineering requirements they perceive as being needed for operating a reliable electric power system. The paper starts by deriving the (second-best) optimal prices and investment program when there are price-insensitive retail consumers, but when their load serving entities can choose any level of rationing they prefer contingent on real time prices. It then examines the assumptions required for a competitive wholesale and retail market to achieve this optimal price and investment program. The paper analyses the implications of relaxing several of these assumptions. First, it analyzes the interrelationships between regulator-imposed price caps and capacity obligations. It goes on to explore the implications of potential network collapses, the concomitant need for operating reserve requirements and whether market prices will provide incentives for investments consistent with these reserve requirements.
    Keywords: electricity; incentives; regulation
    JEL: L1 L5 L9
    Date: 2007–02
  2. By: Ralf Becker; Stan Hurn; Vlad Pavlov
    Abstract: During periods of market stress, electricity prices can rise dramatically. Electricity retailers cannot pass these extreme prices on to customers because of retail price regulation. Improved prediction of these price spikes, therefore, is important for risk management. This paper builds a time-varying-probability Markov-switching model of Queensland electricity prices, aimed particularly at forecasting price spikes. Variables capturing demand and weather patterns are used to drive the transition probabilities. Unlike traditional Markov-switching models, that assume normality of the prices in each state, the model presented here uses a generalized beta distribution to allow for the skewness in the distribution of electricity prices during high-price episodes.
    Keywords: electricity prices, regime switching, time-varying probabilities, beta
    JEL: C22 C53 Q49
    Date: 2007–02–27
  3. By: Stephen P. A. Brown; Mine K. Yücel
    Abstract: For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes.
    Date: 2007
  4. By: Dominique Finon (CIRED - Centre international de recherche sur l'environnement et le développement - [CIRAD : UMR56][CNRS : UMR8568] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale des Ponts et Chaussées][Ecole Nationale du Génie Rural des Eaux et des Forêts]); Catherine Locatelli (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - [CNRS : FRE2664] - [Université Pierre Mendès-France - Grenoble II])
    Abstract: This article analyses the economic risk associated with the dominant position of the Russian vendor in the European market, with a view to assessing the relevance of possible responses by European nations or the EU. It considers various aspects of the Russian vendor's dependence on the European market, before turning to the risks that Gazprom exerts market power on the European market. It concludes by considering the relevance of the possible responses open to the EU and member states to limit any risks by creating a gas single buyer or more simply by encouraging the development of a denser pan-European network, with additional sources of supply and increased market integration.
    Date: 2007–02–08
  5. By: Davis, Lucas W; Kilian, Lutz
    Abstract: Following a Supreme Court decision in 1954, natural gas markets in the U.S. were subject to 35 years of intensive federal regulation. Several studies have measured the deadweight loss from the price ceilings that were imposed during this period. This paper concentrates on an additional component of welfare loss that is rarely discussed. In particular, when there is excess demand for a good such as natural gas for which secondary markets do not exist, an additional welfare loss occurs when the good is not allocated to the buyers who value it the most. We quantify the overall size of this allocative cost, its evolution during the post-war period, and its geographical distribution, and we highlight implications of our analysis for the regulation of other markets. Using a household-level, discrete-continuous model of natural gas demand we estimate that the allocative cost averaged $8.1 billion annually in the U.S. residential market for natural gas during 1950-2000, effectively doubling previous estimates of the total welfare losses from natural gas regulation. We find that these allocative costs were borne disproportionately by households in the Northeast, Midwest, and South Atlantic states. Costs were largest in New York, Pennsylvania, and Massachusetts with 70% of all costs borne by the ten states affected most.
    Keywords: allocative cost; deadweight loss; natural gas; price ceiling; regulation
    JEL: D45 L51 L71
    Date: 2007–02
  6. By: Lykke E. Andersen (Institute for Advanced Development Studies); Johann Caro (Institute for Advanced Development Studies); Robert Faris (Kennedy School of Government, Harvard University); Mauricio Medinaceli
    Abstract: Los precios altos del petróleo y el significativo incremento de los ingresos públicos provenientes de su explotación han implicado que el gas natural se vuelva muy importante para la economía boliviana. Este trabajo utiliza un modelo de Equilibrio General Computarizado (EGC) para evaluar los impactos de este boom sobre las variables macroeconómicas claves así como respecto de la distribución de ingresos en la sociedad. Desde una perspectiva macroeconómica, el boom del gas natural parece ser una bendición, pues podría elevar en cerca de un punto porcentual las tasas de crecimiento del PIB durante por lo menos una década, incrementando vigorosamente los ingresos del gobierno para realizar gastos e inversiones públicas. Sin embargo, los segmentos más pobres de la población (pequeños agricultores e informales urbanos) podrían verse seriamente afectados, sufriendo reducciones en sus ingresos reales en comparación con el escenario opuesto, es decir, sin el boom del gas. Esto quiere decir que el boom del gas natural no sólo podría causar un aumento en la desigualdad sino también una expansión de la pobreza. Este trabajo termina con algunas recomendaciones en cuanto a políticas que sugieren cómo contrarestar los efectos secundarios negativos del boom de gas natural.
    Keywords: Gas Natural, Desigualdad, modelo EGC, Bolivia
    JEL: Q33 Q43
    Date: 2006–08
  7. By: Lykke E. Andersen (Institute for Advanced Development Studies); Johann Caro (Institute for Advanced Development Studies); Robert Faris (Kennedy School of Government, Harvard University); Mauricio Medinaceli
    Abstract: The high oil prices and the sharp increases in royalties mean that the natural gas boom in Bolivia has become very important for the economy. This paper uses a Computable General Equilibrium (CGE) model to assess the impacts of this boom on key macroeconomic variables as well as the distribution of incomes in the society. From a macroeconomic perspective, the natural gas boom is a blessing, adding around 1 percentage point to GDP growth rates for at least a decade, and sharply increasing government revenues available for public spending and investment. However, the poorest segments of the population (rural small-holders and urban informals) suffer actual reductions in their real incomes, compared to the counterfactual scenario without the gas boom. This means that the natural gas boom not only causes an increase in inequality but also an increase in poverty. The paper finishes with some policy recommendations on how to counteract the negative side effects of the natural gas boom.
    Keywords: Natural Gas, Inequality, CGE model, Bolivia
    JEL: Q33 Q43
    Date: 2006–07
  8. By: Lykke E. Andersen (Institute for Advanced Development Studies)
    Abstract: The high oil prices and the sharp increases in royalties mean that the natural gas boom in Bolivia has become very important for the economy, and particularly important as a source of government revenues. Using a CGE model, Andersen et al (2006) show that the natural gas boom is likely to boost GDP growth by about 1 percentage point per year. However, if the government continues with past spending and investment patterns, the boom is also likely to have a very adverse effect on the income distribution, so much so that the poorest half of the population is likely to experience absolute reductions in their real income levels compared to a scenario without gas boom. The present paper explores alternative uses of natural gas revenues in the CGE model to see if a better outcome can be engineered.
    Keywords: Natural Gas, Inequality, CGE model, Bolivia
    JEL: Q33 Q43
    Date: 2006–12
  9. By: Alexander Boogert (School of Economics, Mathematics & Statistics, Birkbeck); Cyriel de Jong
    Abstract: Developed countries increasingly rely on gas storage for security of supply. Widespread deregulation has created markets that help assign an objective value to existing and new to build storages. Storage valuation is nevertheless a challenging task if we consider both the financial and physical aspects of storage. In this paper we develop a Monte Carlo valuation method, which can incorporate realistic gas price dynamics and complex physical constraints. In specific we extend the Least Squares Monte Carlo method for American options to storage valuation. We include numerical results and show ways to improve computational speed.
    Date: 2007–02
  10. By: Oeindrila Dube; Juan F. Vargas
    Abstract: The “Resource Curse” posits a positive association between the value of natural commodities and civil conflict. In this paper, we suggest that the value-to-violence relationship differs across commodities, and that the factor intensity of production determines whether a rise in the price of a legally traded good will exacerbate conflict. We exploit exogenous price shocks for coffee and oil to test this hypothesis, using data on politically-motivated violence in Colombia over 1988 to 2004. We find that a drop in coffee prices during the 1990s led to a disproportionate rise in conflict in the coffee areas. Poverty dynamics follow a similar pattern, while substitution into drug crops do not, which suggests that it is the fall in income rather than the drug trade that fuelled this effect. In contrast, we find that oil prices are positively related to clashes with government forces, and that state revenue is used to strengthen military presence in oil areas. Our results suggest that the income channel is critical in determining how price shocks to labor-intensive commodities affect insurgency. However, for capital-intensive goods, the revenue effect predominates in mediating how the value of the commodity affects violence.
    Date: 2006–12–13
  11. By: Yusuf, Arief Anshory; Resosudarmo, Budy P.
    Abstract: Economic structure, households energy consumption pattern, and household's pattern of factor income in developing countries may typically be different with those of the developed countries, hence the distributional impact of energy price reforms could be. This may be portrayed using a Computable General Equilibrium (CGE) model with disaggregated households that allows for rich and accurate distributional story. Using this method, counter-factual scenarios analysis of recent energy price reform in Indonesia is carried out. The result suggests that vehicle fuels subsidy is regressive but increasing the price of domestic fuel (such as kerosene) tends to increase inequality, unless accompanied by a proper and effective compensation scheme. Distributional impact does depend on compensation scheme, its form and its effectiveness. Cash transfers to the poor with moderate ineffectiveness, for example, could not even prevent the increase in poverty nation-wide. Giving more cash to urban poor than to rural poor might have been better than a simple uniform cash transfers, due to urban poor's dependence on kerosene. The result also suggests that non-cash compensation, by subsidizing the poor's education and health spending may not be effective to mitigate the reform despite its desirability as longer-term poverty alleviation programs.
    Keywords: Energy price reform; Distribution; CGE; Indonesia
    JEL: D58 D30
    Date: 2007–01
  12. By: Inas Rashad
    Abstract: Cost savings associated with increased gasoline prices and lower levels of urban sprawl have been cited in terms of personal savings, environmental awareness, reduced costs through lower travel times and congestion, and reduced income inequality. Cost savings in terms of improved health, however, are often not cited yet represent another dimension of savings associated with reduced urban sprawl and gas prices. Cycling is a form of exercise that can also be used as a mode of transportation if the surrounding environment facilitates such use. According to the United States Department of Transportation, 73 percent of adults want new bicycle facilities such as bike lanes, trails, and traffic signals. Using data from the 1990, 1995, and 2001 waves of the Nationwide Personal Transportation Survey, in addition to data from the Behavioral Risk Factor Surveillance System (1996-2000), I propose to analyze the effects of variations in the built environment in the form of urban sprawl and in real gasoline prices on cycling as a form of physical activity. Using bivariate probit and propensity score methods, I show how cycling can lead to improved physical health outcomes. This is turn may carry policy implications in terms of improved public awareness and city planning.
    JEL: I10 I12
    Date: 2007–02
  13. By: F. Gerard Adams (College of Business Administration, Northeastern University); Yochanan Shachmurove (Department of Economics, City University of New York and Department of Economics, University of Pennsylvania)
    Abstract: As current trends of Chinese economic growth and motorization continue, its demand for higher efficiency fuels (oil, gas, and electric power) will increase. This, coupled with China’s limited domestic production, can translate into a massive demand for energy imports. To predict China’s energy demand into 2020, an econometric model of the Chinese energy economy is constructed based on its energy balance. This paper suggests that China’s increase demand for energy imports will be most sensitive to increases in motorization rather than economic growth. It can be partially offset by increasing domestic energy production or energy efficiency.
    Keywords: China; Energy; Energy Demand; Petroleum and Coal; World Energy Markets; Motorization; Energy Efficiency
    JEL: Q3 Q4 F1 F2 F4 L9 N7 O53 P28
    Date: 2007–02–01

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