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The Energy Journal
Volume 36, Adelman Special Issue



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Petro-Nationalism: The Futile Search for Oil Security

James M. Griffin

DOI: 10.5547/01956574.36.SI1.jgri

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Abstract:
This paper takes the contrarian viewpoint that petro-nationalist oil security policies by oil consuming nations are likely to be ineffectual, very costly, and politically destabilizing internationally. Because the world oil market is one big bathtub, oil security is a public goods problem with a worldwide scope. Thus cooperative solutions are essential. Particularly troublesome are bilateral supply agreements and efforts to achieve oil autarky, which aim specifically at achieving a political or economic advantage vis-a-vis other oil consuming nations. These misguided actions are likely to trigger politically destabilizing oil resource competition among major oil consuming nations.




Impact of low prices on shale gas production strategies

Svetlana Ikonnikova and Gürcan Gülen

DOI: 10.5547/01956574.36.SI1.siko

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Abstract:
We investigate shale gas drilling strategies during times of low oil and gas prices. Producers exhaust their high-productivity locations quickly in times of low prices, and then adapt their drilling practices to increase the inventory of commercially viable projects. Investment in a new well may be reduced relative to the cost of previously drilled wells in the same location (from now on, original wells) through closer well spacing, use of existing infrastructure, and, perhaps most importantly, use of fewer inputs (e.g., less water and proppant). Inventory of drilling locations is expanded through such infill drilling, which may or may not be economically viable on an individual well basis but which has the potential to increase area recovery and portfolio returns.




Liberalizing Russian Gas Markets – An Economic Analysis

Finn Roar Aune, Rolf Golombek , Arild Moe, Knut Einar Rosendahl and Hilde Hallre Le Tissier

DOI: 10.5547/01956574.36.SI1.faun

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Abstract:
The Russian gas market is highly regulated with low user prices of natural gas. In this paper we examine possible impacts of regulatory changes on the demand side of this market. In particular, we consider the effects on Russian energy consumers of increasing the regulated prices of natural gas, and how changes in Russian gas consumption may affect its gas export to Europe. We also examine the importance of Russian pipeline capacity to Europe, as well as impacts of hypothetical changes in Russian gas export behavior. For this purpose we use a detailed numerical model for the energy markets in Europe and Russia - LIBEMOD. Our results suggest that increasing the regulated natural gas prices will have substantial impacts on total consumption of gas in Russia, especially in the electricity sector. The magnitude of gas export to Europe will be significantly affected because more gas becomes available for export. Removal of other market imperfections in the Russian energy markets has smaller impacts on prices and quantities than imposing competitive natural gas prices. More competitive Russian gas export behavior would lead to much higher gas export to Europe, but our results suggest that Russian welfare would drop due to lower gas export prices.




Fuel Subsidies, the Oil Market and the World Economy

Nathan S. Balke, Michael Plante, and Mine Yücel

DOI: 10.5547/01956574.36.SI1.nbal

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Abstract:
This paper studies the effects of oil producing countries' fuel subsidies on the oil market and the world economy. We identify 24 oil-producing countries with fuel subsidies with retail fuel prices that are about 34 percent of the world price. We construct a two-country model where one country represents the oil-exporting subsidizers and the second the oil-importing bloc, and calibrate the model to match recent data. We find that the removal of subsidies would reduce the world price of oil by six percent. The removal of subsidies is unambiguously welfare enhancing for the oil-importing countries. Removal of subsidies is welfare improving for the oil-exporting countries as well, in the baseline calibration. However, the optimal subsidy from the point of view of oil exporters is not zero, in general.




Structure Matters: Oil Markets Enter the Adelman Era

Philip K. Verleger Jr.

DOI: 10.5547/01956574.36.SI1.pver

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Abstract:
The 2014/2015 oil price collapse surprised the many economists who have published brilliant econometric explanations of oil price behavior. The sharp decline would not have caught Morris Adelman unawares. Professor Adelman's lifelong research focused on the link between market structure and price behavior. His seminal work on industry structure, beginning with grocery retailer A&P, has provided a framework that can be used to explain oil price fluctuations that have occurred over the past four decades. His approach may not be as accurate as the elegant econometric models that dominate today's literature but it does have one clear advantage: it provides far greater clarity on the way forward.




Mineral Depletion and the Rules of Resource Dynamics

Robert D. Cairns and Graham A. Davis

DOI: 10.5547/01956574.36.SI1.rcai

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Abstract:
Conditions of exploitation of natural resources under certainty and uncertainty in some canonical natural resource problems are unified as r-percent rules by which the sum of all sources of gain from refraining from an irreversible action is compared to the interest rate. Action is initiated once the gain from action equals the gain from inaction. Morris Adelman's insights, succinctly presented his 1990 paper on mineral depletion, are highlighted as implicitly recognizing, and even being grounded by, these timing rules.




Valuing Barrels of Oil Equivalent

James L. Smith

DOI: 10.5547/01956574.36.SI1.jsmi

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Abstract:
By convention, the petroleum industry relies on thermal equivalence to summarize the results of upstream oil and gas operations - measuring outputs in terms of barrels of "oil equivalent." This despite the fact that the two commodities trade at nothing like thermal parity. Drawing on a well-known exponential production model of petroleum reserves, we demonstrate the potential for thermal equivalence to substantially distort common measures of exploration and development success. Drawing on a recent survey of actual upstream results, and relative to a proposed measure based on economic equivalence, we show that the extent of bias in estimates of value, cost, and profitability is indeed large.




Petroleum Taxation Contingent on Counter-Factual Investment Behaviour

Petter Osmundsen, Magne Emhjellen, Thore Johnsen, Alexander Kemp and Christian Riis

DOI: 10.5547/01956574.36.SI1.posm

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Abstract:
Petroleum administration can be regarded as a principal-agent problem. The government allocates exploration and production rights to petroleum companies on behalf of the population. The government is the principal and the companies are agents. With the aim of capturing revenue for the state, the government devises a petroleum tax system which takes account of the investment decisions made by the companies, while acknowledging for the fact that the companies may report strategically to the government. An important issue is how tax deductions are to be treated in investment analysis. A discrepancy arises here between assumptions made in some areas of tax theory and the actual investment analyses conducted by the companies. Tax theory has given rise to discussion and controversial tax proposals for the petroleum sector in Norway, Denmark and Australia. It led, for example, to reductions in tax-related depreciation for the Norwegian petroleum industry in May 2013. The article reviews this tax debate and analyses the implications of basing tax design on counter-factual investment behaviour.




Concentration Trends in the Gulf of Mexico Oil and Gas Industry

Charles F. Mason

DOI: 10.5547/01956574.36.SI1.cmas

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Abstract:
In this paper, I evaluate patterns of concentration in the Gulf of Mexico oil and gas industry, one of the most important sectors for US production over the past few decades. In the 1990s, production in the Gulf was quite concentrated, and was dominated by large oil companies. But over the past decade or so this concentration has eroded, with recent levels consistent with an unconcentrated industry. These patterns apply for drilling and leasing as well, and are relevant to both shallow and deep water. The overall picture is an industry with strong competition for leases, drilling and production.




The Relationship Between Oil Price and Costs in the Oil Industry

Gerhard Toews and Alexander Naumov

DOI: 10.5547/01956574.36.SI1.gtoe

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Abstract:
We propose a simple structural model of the upstream sector in the oil industry to study the determinants of costs with a focus on its relationship with the price of oil. We use the real oil price, data on global drilling activity and real cost of drilling to estimate a three-dimensional VAR model. We use short run restrictions to decompose the variation in the data into three structural shocks. We estimate the dynamic effects of these shocks on drilling activity, costs of drilling and the real price of oil. Our main results suggest that (i) a 10% increase (decrease) in the oil price increases (decreases) global drilling activity by 4% and costs of drilling by 3% with a lag of 4 and 6 quarters respectively; (ii) positive shocks to drilling activity affect the oil price negatively within a year; (iii) shocks to cost of drilling have a relatively small and statistically insignificant effect on the price of oil.