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Energy Journal Issue

The Energy Journal
Volume 27, Number 3

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A Note on Price Asymmetry as Induced Technical Change

Hillard G. Huntington

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-1
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This note evaluates whether fixed time effects (yearly dummy variables) are a better representation than separate price-decomposition terms for induced technical change in energy and oil demand. Fixed time effects are a proxy for all omitted variables that change similarly over time for all countries. Many of these omitted variables have little relevance to technical change. Empirically, statistical tests applied to previous studies reject an important premise of the fixed-time-effect model that energy or oil demand responds symmetrically to price increases and decreases. Moreover, when price-decomposition techniques allow for price-asymmetric responses, the estimated income elasticities are not dramaticalxly different from their fixed-time-effect counterparts, as it is sometimes alleged. There are also practical reasons for choosing models that allow for asymmetric responses to price, especially when evaluating the longrun implications of a number of important energy and environmental issues.

Examining Asymmetric Behavior in US Petroleum Futures and Spot Prices

Bradley T. Ewing, Shawkat M. Hammoudeh and Mark A. Thompson

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-2
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This paper uses the momentum-threshold autoregressive (M-TAR) model to examine the possible asymmetric relationship between petroleum futures and spot prices for three different markets: crude oil, heating oil, and gasoline in the United States. The results indicate that the futures and spot prices for each petroleum type are cointegrated when allowing for asymmetric adjustment for each of these energy markets. We further investigate the asymmetric behavior between the futures and spot prices by estimating the M-TAR error-correction model. The M-TAR model allows us to document the adjustments that these markets undergo in response to changes in the basis.

Options and Instruments for a Deep Cut in CO2 Emissions: Carbon Dioxide Capture or Renewables, Taxes or Subsidies?

Reyer Gerlagh and Bob van der Zwaan

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-3
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This paper compares both the main physical options and the principal policy instruments to realize a deep cut in carbon dioxide emissions necessary to control global climate change. A top-down energy-economy model is used that has three emission reduction options: energy savings, a transition towards less carbon-intensive or non-carbon energy resources, and the use of carbon dioxide capture and storage technology. Five policy instruments - carbon taxes, fossil fuel taxes, non-carbon (renewable) energy subsidies, a portfolio standard for the carbon intensity of energy production, and a portfolio standard for the use of non-carbon (renewable) energy resources - are compared in terms of costs, efficiency and their impact on the composition of the energy supply system. One of our main conclusions is that a carbon intensity portfolio standard, involving the recycling of carbon taxes to support renewables deployment, is the most cost-efficient way to address the problem of global climate change. A comprehensive introduction of the capture and storage of carbon dioxide would contribute to reducing the costs of climate change control, but would not obviate the large-scale need for renewables.

Valuation of International Oil Companies

Petter Osmundsen, Frank Asche, Bard Misund, and Klaus Mohn

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-4
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According to economic theory, exploration and development of new oil and gas fields should respond positively to increasing petroleum prices. But since the late 1990s, stock market analysts have focused strongly on short-term accounting return measures, like RoACE , for benchmarking and valuation of international oil and gas companies. Consequently, exaggerated capital discipline among oil and gas companies may have reduced their willingness to invest for future reserves and production growth. Based on panel data for 14 international oil and gas companies for the period 1990-2003, we seek to establish econometric relations between market valuation on one hand, and simple financial and operational indicators on the other. Our findings do not support the general perception of RoACE as an important valuation metric in the oil and gas industry. We find that the variation in company valuations is mainly explained by the oil price, oil and gas production, and to some extent reserve replacement.

From Investor-owned Utility to Independent Power Producer

Jun Ishii

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-5
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We examine the issue of why some parent companies of U.S. electric utilities have expanded into domestic independent power production (IPP) but not others. We evaluate the conjecture that the parent companies who have chosen to participate in recently restructured U.S. wholesale electricity markets are those with the most generation cost advantages. Specifically, we empirically investigate the link between apparent advantages in two types of generation costs operation & maintenance (O&M) and capital and the IPP participation decision. We use electric utility data from FERC Form 1 and combine it with IPP data collected from various industry sources. The data is analyzed using both a descriptive approach and a simple, empirical competitive entry model. We find that utilities with lower O&M costs are more likely to expand into IPP. Also, utility financial characteristics, reflecting possible capital cost advantages, seem to matter mainly for the largest utilities.

Is the Strategic Petroleum Reserve our Ace in the Hole?

Timothy J. Considine

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-6
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The Strategic Petroleum Reserve (SPR) is often touted as a vital asset in mitigating the adverse effects of oil supply disruptions on the economy. The importance of SPR, however, largely depends upon the effect of stock sales on market prices. To address this question, this study develops a monthly econometric model of the world crude oil market. Inventories, consumption, production, and prices for crude oil are determined within a dominant producer pricing framework in which Saudi Arabia adjusts output based upon market demand and competitive fringe supply. The estimation results provide additional support for the dominant producer pricing model for world oil markets and reasonable estimates of short-run supply and demand elasticities. Several model simulations are conducted to assess the impacts of SPR policies. For example, the gradual build-up of the SPR by the Bush Administration resulted in a very small, almost imperceptible increase in world prices. Similarly, the Clinton sale from SPR had minor impacts on market prices. Another simulation indicates that while SPR sales can lower world prices during a supply shock, the required drawdown would be so substantial the reserve would be significantly depleted after just a few months. These findings suggest that once played, the SPR card has modest impacts on world prices and could be easily trumped by actions of other players, including output adjustments by world oil producers.

The Timing of Biological Carbon Sequestration and Carbon Abatement in the Energy Sector Under Optimal Strategies Against Climate Risks

Vincent Gitz, Jean-Charles Hourcade and Philippe Ciais

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-7
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This paper addresses the timing of the use of biological carbon sequestration and its capacity to alleviate the carbon constraint on the energy sector. We constructed a stochastic optimal control model balancing the costs of fossil emission abatement, the opportunity costs of lands allocated to afforestation, and the costs of uncertain climate damages. We show that a minor part of the sequestration potential should start immediately as a "brake", slowing down both the rate of growth of concentrations and the rate of abatement in the energy sector, thus increasing the option value of the emission trajectories. But, most of the potential is put in reserve to be used as a "safety valve" after the resolution of uncertainty, if a higher and faster decarbonization is required: sequestration cuts off the peaks of costs of fossil abatement and postpones the pivoting of the energy system by up to two decades.

Modeling Economy-wide vs Sectoral Climate Policies Using Combined Aggregate-Sectoral Models

William Pizer, Dallas Burtraw, Winston Harrington, Richard Newell, and James Sanchirico

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-8
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Economic analyses of climate change policies frequently focus on reductions of energy-related carbon dioxide emissions via market-based, economy-wide policies. The current course of environment and energy policy debate in the United States, however, suggests an alternative outcome: sectorbased and/or inefficiently designed policies. This paper uses a collection of specialized, sector-based models in conjunction with a computable general equilibrium model of the economy to examine and compare these policies at an aggregate level. We examine the relative cost of different policies designed to achieve the same quantity of emission reductions. We find that excluding a limited number of sectors from an economy-wide policy does not significantly raise costs. Focusing policy solely on the electricity and transportation sectors doubles costs, however, and using non-market policies can raise cost by a factor of ten. These results are driven in part by, and are sensitive to, our modeling of pre-existing tax distortions.