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Prepress Content: The following article is a preprint of a scientific paper that has completed the peer-review process and been accepted for publication within Economics of Energy & Environmental Policy.
While the International Association for Energy Economics (IAEE) makes every effort to ensure the veracity of the material and the accuracy of the data therein, IAEE is not responsible for the citing of this content until the article is actually printed in a final version of Economics of Energy & Environmental Policy. For example, preprinted articles are often moved from issue to issue affecting page numbers, and actual volume and issue numbers. Care should be given when citing Economics of Energy & Environmental Policy preprint articles.

Economics of Energy & Environmental Policy
Volume 8, Number 2

Natural Gas markets in the European Union: Testing Resilience

Henry Bartelet and Machiel Mulder

View Abstract

The liberalization and integration of natural gas markets in Europe have resulted in gas-to-gas competition on a European scale with closely related natural gas prices in the various markets. More recently, the European Union aims to become a resilient energy union which may call for additional policy measures. In this paper we discuss the need for such additional measures on top of the existing measures to liberalize and integrate markets. We test the hypothesis that the European natural gas market is resilient to adequately deal with external shocks by analyzing the five most dramatic supply disturbances in the European natural gas markets over the past decade. We find that the natural gas markets were able to trigger responses by market parties which prevented forced supply of gas to consumers in almost all cases. In one case, infrastructure bottlenecks prevented market players to adequately respond to a shock. Hence, we conclude that the best policy to create a resilient energy union is to further integrate European markets and to further remove barriers for market participants.

Competitiveness of Energy-Intensive Industries in Europe: The Crisis of the Oil Refining Sector between 2008 and 2013

Robert Marschinski, Jesus Barreiro-Hurle, and Ruslan Lukach

DOI: 10.5547/2160-5890.8.2.rmar
View Abstract

After the so-called 'golden age' of refining between the years 2005 and 2008, total or partial closures of 13 EU oil refineries from 2009 to 2013 reduced the EU's total refining capacity by about 10%. This paper analyses the drivers behind this crisis, using industry data on performance and cost structure collected at the refinery level and covering the years 2000 to 2012. During this period EU refiners lost ground in terms of net margins, which fell from above to below the average of their non-EU competitors. Our results show that up to 90% of this loss was driven by refineries' energy costs, which grew almost twice as much in Europe than in other global refining regions. Further analysis indicates that this was not the result of increased energy intensity but of increasing unit energy costs. The remaining 10% of the total competitiveness loss can be explained by the relative worsening of EU refineries' utilization rates, reflecting the decline in demand for oil products-in particular gasoline-that occurred in the EU. Environmental and energy policies have likely contributed to this demand side effect, but its competitiveness impact remains of minor importance compared to the energy cost surge.

The Green Paradox, A Hotelling Cul de Sac

Robert D. Cairns and James L. Smith

DOI: 10.5547/2160-5890.8.2.rcai
View Abstract

The green paradox is an effect by which an increasing tax per unit on oil production, aimed at tracking damages from CO2 emissions, induces an increase in world production and a decrease in price in the near term. The increase is a rational response in a Hotelling exhaustible-resource model. We simulate the decisions of a price-taking producer in response to a tax of various shapes. In contrast to a Hotelling model, our extraction technology involves irreversible, lumpy investments in exploration and development. In addition, we assume output from a developed reserve is subject to natural decline at a rate that is determined by the sunk development investment and the geology of the reserve. Decisions are far more complicated, and results far subtler, than in the Hotelling framework. Given a price path, we show that almost any form of tax causes a reduction in the level of development and initial production, thereby contradicting the hypothesis of the green paradox.

An Economic Perspective on Mexico's Nascent Deregulation of Retail Petroleum Markets

Lucas W. Davis, Shaun Mcrae, and Enrique Seira Bejarano

DOI: 10.5547/2160-5890.8.2.ldav
View Abstract

Retail petroleum markets in Mexico are on the cusp of a historic deregulation. For decades, all 11,000 gasoline stations nationwide have carried the brand of the state-owned petroleum company Pemex and sold Pemex gasoline at federally regulated retail prices. This industry structure is changing, however, as part of Mexico's broader energy reforms aimed at increasing private investment. Since April 2016, independent companies can import, transport, store, distribute, and sell gasoline and diesel. In this paper, we provide an economic perspective on Mexico's nascent deregulation. Although in many ways the reforms are unprecedented, we argue that past experiences in other markets give important clues about what to expect, as well as about potential pitfalls. Turning Mexico's retail petroleum sector into a competitive market will not be easy, but the deregulation has the potential to increase efficiency and, eventually, to reduce prices.

The Value of Saving Oil in Saudi Arabia

Jorge Blazquez, Lester C. Hunt, Baltasar Manzano, and Axel Pierru

DOI: 10.5547/2160-5890.8.2.jbla
View Abstract

Saudi Arabia has one of the highest levels of per capita oil consumption in the world, but attempts are now being made by Saudi policymakers to significantly reduce this. Thus, a relevant policy question is what is the value of saving a barrel of oil in Saudi Arabia? The instinctive answer is that the value saved is the difference between the international market price and the domestic price. However, for Saudi Arabia, this answer is insufficient for several reasons. First, the current administered domestic price of oil is set below international market levels, which leaves room for improved economic efficiency. Second, Saudi Arabia is not a marginal producer of oil but a critical player in the international oil market; a shift in Saudi exports affects international oil prices and consequently the country's revenue from oil exports. Third, there are different ways to reduce the domestic consumption of oil. This paper explores policies that reduce the domestic consumption of oil in Saudi Arabia, increasing the amount of oil that would ultimately be exported and assesses the impact on welfare and carbon emissions (however, given the long-run perspective adopted here, it does not address the optimal timing to export the oil that is saved). Among the various methodologies to do this, we opt for a general equilibrium model. Our results suggest that oil-saving policies would lead to positive welfare gains and a reduction in domestic carbon emissions. The most relevant insight for policymakers is that a barrel of oil saved in the Saudi economy leads to an increase in welfare ranging between $6 to $56 for an international oil price of $52.9 per barrel, depending on the policy, and a decrease in domestic CO2 emissions from 150 kg to 368 kg.

The Environmental Footprint of Natural Gas Transportation: LNG vs. Pipeline

Katerina Shaton, Arild Hervik, and Harald M. Hjelle

DOI: 10.5547/2160-5890.8.2.ksha
View Abstract

Emissions to air from the production and transportation of natural gas is an important aspect of the decision making regarding the new infrastructure development in the offshore natural gas sector. In this study, we estimate the emissions of CO2, NOx, nmVOC and CH4 from extraction, processing and transportation of a unit of dry natural gas from the continental shelf of Norway to consumer markets; and compare the resulting emission intensities of the pipeline value chains, where natural gas is transported in gaseous form, with the LNG (liquefied natural gas) chains, where natural gas is liquefied and shipped by LNG carriers. The analysis substantiates the environmental superiority of pipeline chains over LNG-based chains. However, the comparative analysis of ten pipeline chains highlights the variability of the environmental performance of different chain configurations. The isolated analysis of the transportation segment of the value chains also confirms the superiority of the pipeline transportation over LNG.

Polar Vortexes in New England: Missing Money, Missing Markets, or Missing Regulation?

Jeff D. Makholm and Laura T.W. Olive

DOI: 10.5547/2160-5890.8.2.jmak
View Abstract

The 2014 and 2017-18 "polar vortex" events in New England served as virtual controlled experiments on how competitive natural gas and electricity markets coexist uneasily almost two decades after different kinds of regulatory restructuring initiatives freed different kinds of competitive forces to support the supply infrastructure in each energy market. As a region with no indigenous fossil fuels that relies on interstate pipelines to feed its fast-growing fleet of competitive combined-cycle natural gas turbine (CCGT) generation plants, New England shows where the interface of regulation and competition in those two different energy markets fails to serve the region's energy consumers in the face of a predictably recurring weather patterns. We chart the polar vortex problems in New England, describe the energy markets that supply the region, describe how each market deals with the risk of committing capital to serve a region with such extreme weather patterns and explain the institutional problem that makes useful solutions difficult.