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Energy Journal Issue

The Energy Journal
Volume18, Number 4

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Computable Equilibrium Models and the Restructuring of the European Electricity and Gas Markets

Yves Smeers

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-1
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More regulation, not less, is temporarily necessary, if effective, competition is to be established in network industries. This paradox places new requirements on computable models: they should provide realistic descriptions of technologies but also of markets and institutions. Industrial economics and computation of economic equilibrium can help achieve this dual requirement. This paper discusses their potential in the context of the deregulation of the European gas and electricity sectors. Some key elements of the European legislative process are first presented in order to point out the diversity of institutions that can emerge and to highlight the need to model institutions. Perfect competition equilibrium models although institutionally poor are argued to be useful for ex post analysis. Applications of the standard Cournot and' Bertrand paradigms in ex ante analysis of gas and electricity markets are reviewed next. Models combining market power and externalities are then discussed with reference to electricity restructuring. Finally multistage equilibrium models are introduced in the context of investment in gas and electricity. Computation remarks conclude the paper.

Market Power, International CO2 Taxation and Oil Wealth

Elin Berg, Snorre Kverndokk and Knut Einar Rosendahl

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-2
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We present an intertemporal equilibrium model for fossil fuels, and study the effects on oil prices, extraction paths and oil wealth of an international carbon tax on fossil fuel consumption Our conclusion is that a carbon tax will hurt OPEC more than other producers, as the cartel is induced by its market power to restrain production in order to maintain the oil price. Thus, the effects on the oil wealth of the competitive fringe are minor, while OPECs wealth is considerably reduced. We also show by applying a competitive model that this result is due to market structure, and not to differences in the resource base.

Oil Spills, Workplace Safety and Firm Size: Evidence from the U.S. Gulf of Mexico OCS

Omowumi O. Iledare, Allan G. Pulsipher, David E. Dismukes, and Dmitry Mesyanzhinov

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-3
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Accidents on offshore oil and gas platforms have declined dramatically during the past decade, yet concern about safety and environmental damages from offshore operations seems to have intensified. In the U.S. Gulf of Mexico, some of this concern is premised on an offshore restructuring caused by major oil and gas companies investing more heavily in exploration and production (E&P) in foreign countries, leaving more domestic E&P to smaller 'independents' assumed to be less careful and capable than majors. Both industry, and regulatory specialists believe this trend will increase the risk of accidents and oil spills. However, our analysis found no evidence that more independents would threaten workers' safety or the marine environment. In fact, on average independents had a slightly better record than the majors. We also found that the, Minerals Management Service's platform inspection program had a beneficial and statistically significant effect, decreasing both offshore accidents and oil' spills.

Resource Depletion and Technical Change: Effects on U.S. Crude Oil Finding Costs from 1977 to 1994

Marie N. Fagan

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-4
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A dramatic decline in U.S. crude oil finding costs has provoked intense interest in the extent to which technical progress has mitigated the effects of resource depletion. Analysis of depletion and technical change using data for 27 large U.S. oil producers from 1977-1994 is conducted using a translog cost function. The translog provides a flexible representation of the underlying production function, and controls for changing factor prices. The model also controls for the effect of prospect highgrading. Results show that an accelerating rate of technical change reduced average finding cost 15 percent (onshore) and 18 percent (offshore) per year by 1994. Resource depletion increased cost at an average annual rate of 7 percent onshore and 12 percent offshore. Technical change was relatively labor-using bothonshore and offshore.

A Market Power Model with Strategic Interaction in Electricity Networks

William W. Hogan

DOI: 10.5547/ISSN0195-6574-EJ-Vol18-No4-5
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When transmission constraints limit the flow of power in an electric network, there are likely to be strong interaction effects across different parts of the system. A model of imperfect competition with strategic interactions in an electricity transmission network illustrates a possible exercise of market power that differs from the usual analysis of imperfect competition in more familiar product markets. Large firms could exercise horizontal market power by increasing their own production, lowering some prices, and exploiting the necessary feasibility constraints in the network to foreclose competition from others. This behavior depends on the special properties of electric networks, and reinforces the need for market analysis with more realistic network models.