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Energy Journal Issue

The Energy Journal
Volume 12, Number 2



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The Gulf Crisis: Oil Fundamentals, Market Perceptions and Political Realities

Ahmad Zaki Yamani

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-1View Abstract

Abstract:
The oil market has certainly not disappointed those who might have feared that it had lost its ability to shock. The dramatic events in the Gulf in August 1990 resulted in the oil price more than doubling within two months, reaching -- at over $40 a barrel -- levels not seen since November 1980. This is a faster rise than that observed during the height of the Iranian crisis, when the price of oil took seven months to double. Once again political events in the turbulent Middle East managed to generate huge shock waves in the oil industry and to toss much else besides into dizzy confusion. Of course, the governments of many oil-producing states and a number of oil companies may feel euphoric about the price-driven surge in their incomes. However, price rises of this rapidity and magnitude are bound to make any jubilation turn sour, if past experience is anything to go by -- and these days the turn-around will happen sooner rather than later.




Inherent Difficulties in Producer-Consumer Cooperation

James R. Schlesinger

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-2View Abstract

Abstract:
In August/September 1990 we experienced the first oil crisis brought on by the actions of consumers. That oil price run-up reflected the novelty of importing nations banding together to refuse to purchase oil -- rather than the unwillingness or inability of producer nations to supply oil.A writer from the United States, which until September 1990 was the world's second largest oil producer, might in the past have been expected also to "speak for" the producer countries. Now, however, America's appetite for energy has reached the point that it already imports one-third or more of the oil moving in international trade. At one time America's crude oil-production capacity could cushion the impact of supply interruptions on its partners. That was the case in the Suez crisis. But those days are long since gone. One must also recall that, in the days when the United States was the major supplier nation, its role was not always the benign one of cushioning the effects of supply interruptions. President Roosevelt's decision to cut off oil supplies to Japan in August 1941 may have precipitated Japan's decision to go to war.




Forecasting Ultimate Oil Recovery and Its Rate of Production: Incorporating Economic Forces into the Models of M. King Hubbert

Cutter J. Cleveland and Robert K. Kaufmann

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-3View Abstract

Abstract:
Dwindling production of oil from domestic fields and rising consumption have increased U.S. dependence on imported oil to an all-time high. Concern about the effect of this dependence on economic and national security has focused attention on the domestic resource base: how much oil awaits discovery and at what rate can it be produced? We analyze the adequacy of domestic resources by updating and modifying in important new ways the models of discovery and production developed by M. King Hubbert. Hubbert's models have been a lightning rod for debate about the future of oil resources because they have been the most accurate on record. When we include real oil prices and the annual rate of drilling effort in Hubbert's model of oil discovery, there is no evidence for claims that the secular decline in discoveries per foot of well drilled has been arrested or reversed in the lower forty-eight states. Our results indicate that there is little oil waiting to be found in unexplored sedimentary formations in the lower forty-eight states using conventional exploration techniques. Furthermore, we show that the declining quality of the resource base has offset the positive stimuli of price increases and changes in government policy towards a free market. Having passed through a period in which production in the lower forty-eight states fell 20 percent while real oil prices tripled there seems little that the U.S. government can do to alter the bottom line for domestic operators so that U.S. production can displace imports to a significant degree. We conclude that the conventional supply side offers little room to manoeuvre around increased dependence on imported oil.




Economics of Electricity Self-Generation by Industrial Firms

Kenneth Rose and John F. McDonald

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-4View Abstract

Abstract:
This study develops, and econometrically tests, a model explaining the relative importance of several key economic and engineering factors that industrial firms consider when deciding whether to self-generate or cogenerate electricity. The model and empirical results (based on data from the chemical and paper industries) suggest that industrial self-generation is determined by the derived demand for electricity, price of purchased electricity, and marginal cost of self-generation. The buyback rate was found to be important only when certain economic and engineering conditions are met -- such as a relatively low marginal cost and/or a sufficiently high buyback rate. The evidence presented suggests that for most (inns the buyback rate plays no role in determining the quantity of electricity demanded or produced. The results indicate that policy actions related to industrial cogeneration should focus on the price of electricity and factors that affect the plant's marginal cost of producing electricity.




The "Most Value" Test: Economic Evaluation of Electricity Demand-Side Management Considering Customer Value

Benjamin F. Hobbs

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-5View Abstract

Abstract:
What measure of economic efficiency is appropriate for evaluating demand-side management (DSM) programs sponsored by electric utilities? Most regulatory commissions in the United States require that utilities assess the efficiency of alternative programs as part of their planning process. A criterion based upon maximization of consumer surplus is proposed. This, the "most value" test not only counts the avoided supply cost and environmental benefits of such programs, but also the changes in customer value that result from rebound/takeback and changes in electric rates. The test can be viewed as an extension of the "least cost" test, which many commissions now require utilities to use. Among the "most value" test's practical implications is the fact that the net benefits of DSM will often be decreased if free riders are present or if electric rates must increase to fund the program. The "least cost" test wrongly assumesthese effects to be merely matters of income transfer. Consequently, some programs that are desirable from a "least cost" standpoint will not be beneficialfrom a most value"point of view. However, if rebound effects are large enough, the opposite can happen: some DSM programs which are apparently too costlywill actually have positive net benefits. These conclusions apply not only to programs for conserving electricity, but also to water and natural gas conservationefforts and programs that promote energy use.




Efficient International Agreements for Reducing Emissions of CO2

Michael Hoel

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-6View Abstract

Abstract:
International agreements are necessary to achieve significant reductions of emissions of CO2 and other greenhouse gases. Traditional agreements of the type "uniform percent reductions" have two disadvantages: in the first place, it would probably be difficult to get a sufficiently large participation in such an agreement, since it gives a distribution of costs of reducing emissions which may differ strongly from the advantages the countries have from avoiding climatic changes. In the second place, agreements of this type are generally not efficient.An international CO2 tar and tradeable CO2 quotas are two alternative schemes which have several common features, and which both are (almost) efficient under reasonable conditions. With appropriately chosen tax reimbursements in the case of a CO2 tax or initial distribution of quotas in the case of tradeable quotas, it is possible to make all, or at least almost al4 countries better off with the agreement than without.




The Cost of Switching Electricity Generation From Coal to Nuclear Fuel

Maria R. Virdis and Michael Rieber

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-7View Abstract

Abstract:
The Western European and Japanese nuclear power cost advantage over coal-fired electricity generation has been used, particularly since global warming became an issue, to counterpoint the U.S. experience - where the advantage is not apparent. Using OECD methodology, this paper examines the OECD assumptions and, as necessary, replaces them with European/lapanese practice. Additionally, for comparison with the U.S., market conditions replace statist controls. With the revised assumptions, the OECD data are resimulated yielding a severe reduction or reversal of the European/Japanese nuclear to coal advantage. Since the new generation is only developmental, existing technologies are used.




The Cost of Australian Carbon Dioxide Abatement

Robert E. Marks, Peter L. Swan, Peter McLennan, Richard Schodde, Peter B. Dixon and David T. Johnson

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-8View Abstract

Abstract:
This paper examines efficient means of abating the greenhouse effect in Australia by reducing the emissions of CO2. It examines the generation of CO2 emissions from fossil fuels in Australia, and analyses means to cut emissions from electricity generation and road transport. Finally, it calculates the cost, in terms of growth forgone, of measures to attain the Toronto targets for Australian electricity generation and road transport, using the ORANI multisectoral model.




Capacity Rationing and Fixed Cost Collection

Chi-Keung Woo

DOI: 10.5547/ISSN0195-6574-EJ-Vol12-No2-9View Abstract

Abstract:
This paper proposes a simple load management program with a two-part tariff to ration an electric utility's installed capacity and to collect its fixed costs under asymmetric information and demand uncertainty. Because of its simplicity, the program is a practical alternative to spot pricing and rationing schemes with highly nonlinear rate structures.