Energy Journal Energy Perspectives

The 'Energy Perspectives' section of The Energy Journal contains papers which review or analyse important current issues from a broader vantage point. Survey papers are also considered.

The Energy Journal

ISSN 0195-6574 (Print)
ISSN 1944-9089 (Online)


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UK Electricity Market Reform and the Energy Transition: Emerging Lessons

Michael Grubb and David Newbery

DOI: 10.5547/01956574.39.6.mgru
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The 2013 Electricity Market Reform (EMR) was a response to the twin problems of securing efficient finance for a new generation of low carbon investments, and delivering reliability along with a growing share of renewables in its energy-only market. Four EMR instruments combined to revolutionize the sector; stimulating unprecedented technological and structural change. Competitive auctions for both firm capacity and renewable energy have seen prices far lower than predicted and the entry of unexpected new technologies. A carbon price floor displaced coal, whose share fell from 46% in 1995 to 7% in 2017, halving CO2. Renewables grew from under 4% in 2008 to 22% by 2017, projected at 30+% by 2020 despite a political ban on onshore wind. Neither the technological nor regulatory transitions are complete, and the results to date highlight other challenges, notably to transmission pricing and locational signals. EMR is a step forwards, not backwards; but it is not the end of the story.


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The Historical “Roots” of U.S. Energy Price Shocks

Hillard G. Huntington

DOI: https://doi.org/10.5547/01956574.38.5.hhun

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Sustained energy price increases in the United States have preceded declines in economic activity as far back as 1890. This finding applies to two different historical GDP data sets. It suggests a much longer national experience with rising energy prices that began well before the period after World War Two. This problem emerged well before the U.S. transition towards petroleum products when coal was an important energy source. This relationship varies with the state of the economy and appears less evident during some periods, as in the years following the 1929 stock market crash.


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Stability versus Sustainability: Energy Policy in the Gulf Monarchies

Jim Krane

DOI: 10.5547/01956574.36.4.jkra

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Over the past half-century, production from vast reserves of hydrocarbons has transformed the once destitute Persian Gulf monarchies into developed states with comfortable lifestyles. However, longstanding policies that stimulate energy demand in these states are diverting an ever-larger share of resource production into domestic markets, threatening the region's chief export and biggest contributor to GDP. Five of these six sheikhdoms must soon choose between maintaining energy subsidies and sustaining exports. Rising domestic demand for natural gas, once considered nearly free, has already forced some states to shift to higher-cost resources, including imports. For now, governments have absorbed these costs and insulated consumers from higher prices. This practice only intensifies the pressure on exportable resources. As hydrocarbon production reaches a plateau, domestic consumption will gradually displace exports. Politically difficult reforms that moderate consumption can therefore extend the longevity of exports, and perhaps, the regimes themselves.


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Energy Efficiency Policy Puzzles

Timothy J. Brennan

DOI: 10.5547/01956574.34.2.1
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Promoting energy efficiency (EE) has become a leading policy response to greenhouse gas emissions, energy dependence, and the cost of new generators and transmission lines. Such policies present numerous puzzles. Electricity prices below marginal production costs could warrant EE policies if EE and energy are substitutes, but they will not be substitutes if the energy price is sufficiently high. Using EE savings to meet renewable energy requirements can dramatically increase the marginal cost of electricity. Rejecting "rationality" of consumer energy choices raises doubts regarding cost-benefit analysis when demand curves may not reveal willingness to pay. Decoupling to guarantee constant profit regardless of use contradicts findings that incentive-based mechanisms outperform cost-ofservice regulation. Regulators may implement EE policies to exercise buyer-side market power against generators, increasing consumer welfare but reducing overall economic performance. Encouraging utilities to take over potentially competitive EE contradicts policies to separate competitive from monopoly enterprises.


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U.S. Ethanol Policy: Time to Reconsider?

James M. Griffin

DOI: 10.5547/01956574.34.4.1
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This paper examines both the intended and unintended consequences of current U.S. ethanol policy. Originally, the 2007 legislation was intended to benefit consumers with lower gasoline prices, to reduce carbon emissions, and to promote oil security by displacing imported oil with domestically produced ethanol. While well-intentioned, the realized benefits have been minimal to consumers, the environment, and oil security. Alternatively, the unintended consequences on corn and other food commodity prices are having severe repercussions particularly in developing countries where consumers have more limited substitution possibilities. The extreme drought of 2012 illustrated the folly of mandating fixed quantities of ethanol use in gasoline, while allowing the residual to be left for food uses. It is time to reconsider and rescind the ethanol mandates.


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"Rebound" Effects from Increased Energy Efficiency: A Time to Pause and Reflect

Karen Turner

DOI: 10.5547/01956574.34.4.2
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The phenomenon of rebound effects has sparked considerable academic, policy and press debate in recent years over the effectiveness of energy efficiency policy. There has been a huge surge in empirical studies claiming rebound effects of hugely varying magnitudes. The contention of this paper is that the lack of consensus in the literature is grounded in a rush to empirical estimation in the absence of solid analytical foundations. Focus on measuring a single "rebound" measure has led to a neglect of detail on precisely what type of change in energy use is considered in any one study and on the range of mechanisms governing the economy-wide response. This paper attempts to bring a reflective pause to the development of the rebound literature, with a view to identifying the key issues that policymakers need to understand and analysts need to focus their attention on.


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Understanding Middle East Gas Exporting Behavior

Axel M. Wietfeld

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No2-8
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The Middle East is a fascinating region with an immense GDP growth and an excellent business environment. Thanks to its huge hydrocarbon reserves, the region already exports a lot of oil and gas and has realistic plans to increase this further. Although the global gas market is currently saturated and will be so for the next years, the hunger for additional supplies is likely to reappear in the second half of the new decade. Consequently, the gas exporting nations in the Middle East, such as Qatar, the UAE, Oman and Iran have to prepare themselves for developing additional projects. The question discussed in this article is whether they are able to do so, given challenges such as high indigenous demand, energy inefficiency, reserve structures and the sometimes unstable political environment, which is making it difficult to attract the required capital. This review begins with a brief overview of each country's reserve structure and natural gas history. It then proceeds to analyze the current and future supply/demand balance, taking into account the relevant pipeline and LNG export projects, and draws conclusions for future export projects. The results suggest that Qatar, the UAE, Iran and Oman could contribute to global LNG and pipeline gas supplies with additional volumes of 55 to 90 bcm/a in the period 2015 to 2020.


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Understanding Crude Oil Prices

James D. Hamilton

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No2-9
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This paper examines the factors responsible for changes in crude oil prices. The paper reviews the statistical behavior of oil prices, relates this to the predictions of theory, and looks in detail at key features of petroleum demand and supply. Topics discussed include the role of commodity speculation, OPEC, and resource depletion. The paper concludes that although scarcity rent made a negligible contribution to the price of oil in 1997, it could now begin to play a role.


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Issues in Designing U.S. Climate Change Policy

Joseph E. Aldy and William A. Pizer

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No3-9
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Over the coming decades, the cost of U.S. climate change policy likely will be comparable to the total cost of all existing environmental regulation�perhaps 1-2 percent of national income. In order to avoid higher costs, policy efforts should create incentives for firms and individuals to pursue the cheapest climate change mitigation options over time, among all sectors, across national borders, and in the face of significant uncertainty. Well-designed national greenhouse gas mitigation policies can serve as the foundation for global efforts and as an example for emerging and developing countries. We present six key policy design issues that will determine the costs, cost-effectiveness, and distributional impacts of domestic climate policy: program scope, cost containment, offsets, revenues and allowance allocation, competitiveness, and R&D policy. We synthesize the literature on these design features, review the implications for the ongoing policy debate, and identify outstanding research questions that can inform policy development.


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After the Natural Gas Bubble: An Economic Evaluation of the Recent U.S. National Petroleum Council Study

Ken Costello, Hillard G. Huntington, and James F. Wilson

DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No2-5
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This perspective paper reviews and critiques the policy analysis and modeling of future natural gas markets in the National Petroleum Council�s 2003 natural gas study (NPC Study). The NPC Study provided an important and timely review of long-term natural gas supply, demand and potential policies to increase supply or suppress demand. However, its long-term scenarios used assumptions and simplifications that led to understating likely longer-term market reactions to higher natural gas prices, which results in exaggeration of the potential benefits of the policies recommended by the NPC. In addition, the narrow scope of the NPC Study did not address many important considerations in natural gas policy, such as the costs of recommended policies, or their impacts on taxpayers, resource owners, or the environment. Overall, the study does not provide the evidence needed to justify major natural gas policies, especially in view of the current uncertain market environment.


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The Economics of a Lost Deal: Kyoto - The Hague - Marrakesh

Jean-Charles Hourcade and Frederic Ghersi

DOI: 10.5547/ISSN0195-6574-EJ-Vol23-No3-1
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This paper examines prospects for compromise between competing perspectives on four key climate change issues: costs, level of domestic action, environmental integrity, and developing world involvement. It focuses on the policy issues stemming from uncertainty about abatement costs. Based on extensive simulations of a model integration tool, SAP12 (Stochastic Assessment of Climate Policies, 12 models), the analysis considers options for fine-tuning the Kyoto Protocol, such as concrete ceilings or levies on carbon imports; "environmental restoration payments" to be made on excess emissions; and credits for sequestration activities in Annex B countries. It demonstrates that a restoration payment (implemented through a safety valve) emerges as a superior means of addressing the cost uncertainty issue. The paper concludes that had this approach been taken at the COP6 climate negotiations in The Hague, there would have been substantial room for compromise on payments of $35 to $100 per ton of carbon. Examining the Marrakesh (COP7) climate accord, it derives some lessons for attempts at completing Kyoto's unfinished business or at moving on to a new framework.


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The Dynamics of Commodity Spot and Futures Markets: A Primer

Robert S. Pindyck

DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-1

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How Plausible is the Consensus Projection of Oil Below $25 and Persian Gulf Oil Capacity and Output Doubling by 2020?

Dermot Gately

DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No4-1

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Analyzing California's Power Crisis

Ahmad Faruqui, Hung-po Chao, Vic Niemeyer, Jeremy Platt and Karl Stahlkopf

DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No4-2

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Explaining Cointegration Analysis: Part 1

David F. Hendry and Katarina Juselius

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No1-1
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'Classical' econometric theory assumes that observed data come from a stationary process, where means and variances are constant over time. Graphs of economic time series, and the historical record of economic forecasting, reveal the invalidity of such an assumption. Consequently, we discuss the importance of stationarity for empirical modeling and inference; describe the effects of incorrectly assuming stationarity; explain the basic concepts of non-stationarity; note some sources of non-stationarity; formulate a class of non-stationary processes (autoregressions with unit roots) that seem empirically relevant for analyzing economic time series; and show when an analysis can be transformed by means of differencing and cointegrating combinations so stationarity becomes a reasonable assumption. We then describe how to test for unit roots and cointegration. Monte Carlo simulations and empirical examples illustrate the analysis.


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"No Cost" Efforts to Reduce Carbon Emissions in the U.S.: An Economic Perspective

Ronald J. Sutherland

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No3-4
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The 1999 Special Issue of The Energy Journal presents several articles that conclude the costs of the Kyoto Protocol would be very high for the U.S. if all the adjustments were domestic. However, a few studies conclude that the Kyoto target is achievable at a negligible cost and perhaps with a net benefit. This paper explains why a majority of studies conclude that the cost of reducing emissions is high while some studies conclude that the Kyoto target could be achieved at a low cost, if not for free. Most studies employ mainstream economic analysis to estimate the costs of achieving the Kyoto Protocol. In contrast, the "no cost" analyses use a unique methodology applied only to energy conservation and referred to here as the energy conservation paradigm. One conclusion is that the energy conservation paradigm is inconsistent with mainstream economics. The "no cost" conclusion used to support approval of the Kyoto Protocol is not supported by the basic principles of economics. The Climate Change Technology Initiative recommends tax credits to reduce carbon emissions. With the proposed tax credit of $1,100 per residential head pump, each tonne of carbon reduced from the more efficient heat pump would cost $510. With different input assumptions, higher and lower estimates are produced.


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Developing Countries' Greenhouse Emmissions: Uncertainty and Implications for Participation in the Kyoto Protocol

Randall Lutter

DOI: 10.5547/ISSN0195-6574-EJ-Vol21-No4-4
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Developing countries can participate in the Kyoto Protocol to limit greenhouse gas emissions by adopting national emissions limits. Such limits could offer economic gains to developing countries, cost savings to industrialized countries, and environmental benefits. They could also address concerns of the U. S. Senate. On the other hand, uncertainty about greenhouse gas emissions in developing countries is so great that emissions limits may impose substantial costs if they turn out to be unexpectedly stringent. To manage risks arising from emissions limits, developing countries should index any emissions limits to variables that predict emissions in the absence of limits. This paper presents such an index-similar to one recently adopted by Argentina-and develops estimates showing that it could lower the risk of economic losses to developing countries from about 40 percent to about 35 percent.


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The Spanish Gasoline Market: From Ceiling Regulation to Open Market Pricing

Ignacio Contin, Aad Correlje and Emilio Huerta

DOI: 10.5547/ISSN0195-6574-EJ-Vol20-No4-1
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This paper examines the evolution of the Spanish gasoline market from the abolition of the state oil monopoly (January 1993) to "complete" liberalisation (October 1998). With the restructuring of the Spanish oil sector during the 1980s and early 1990s, a highly concentrated oligopoly emerged in the automotive fuels market. A system of price ceilings replaced the state administered prices in July 1990. Since then, new domestic and foreign operators have entered the market, particularly along the coast, near import terminals. Prices went up and then declined. These developments can be explained by an interplay of factors such as: the gradual decline in co-operation among the Spanish firms; the loss of market share of the largest of these, Repsol; the entry of independent operators and supermarkets; and the impact of the ceiling price system. By mid-1998 this system was abolished as the government considered it an "impediment" to further market liberalisation. However, some crucial barriers to the entry of new suppliers remain.


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The Development of a UK Natural Gas Spot Market

Joe Roeber

DOI: 10.5547/ISSN0195-6574-EJ-Vol17-No2-1
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This paper examines parallels between the evolution of spot markets jor oil during the 1980s, particularly Brent, and what is now happening in the UK gas industry. The structure of supply, formerly within the control of British Gas, is breaking up under antitrust and regulatory pressures, and the short-term balancing needs of the system are being externalised. This is giving rise to a spot market. This paper identifies four stages in the development of a spot market, of which the UK market is presently in the first and second stages (physical balancing and the development of price transparency). Feedback effects on prices are already apparent, and the fourth stage, the development of risk management tools, is being discussed. This scenario was drawn up three years ago, based upon the experience of oil before the existence of a gas spot market was acknowledged. It has so far not missed a step. According to this analysis, the question over the extension of this logic to the gas markets in Continental Europe is not whether, but when?


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On the Renewal of Concern for the Security of Oil Supply

Chantale LaCasse and Andre Plourde

DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No2-1
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It seems curious that the security of oil supply would again emerge as a source of concern precisely when oil market conditions seem to be most favourable to oil-importing nations. We trace this development to the increased import volumes that have followed the 1986 collapse in the world oil price, and argue that concerns over the source of oil are of primary importance only in situations where physical availability is likely problematic. As the conception of security of supply is broadened, a distinction between random and strategic shocks is useful. Supply-side considerations, such as stockpiles, seem apt only to address the consequences of random shocks. As time horizons lengthen, supply-side measures lose their effectiveness, and demand-side considerations emerge as possible means of dampening the macroeconomic effects of future strategic shocks. Implementation remains an unresolved issue: the expected costs and benefits of specific interventions must still be compared.


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The Greenhouse Debate: Econonmic Efficiency, Burden Sharing and Hedging Strategies

Alan Manne and Richard Richels

DOI: 10.5547/ISSN0195-6574-EJ-Vol16-No4-1
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We address the issue of economic efficiency as it relates to climate change. We begin with a classical cost-benefit perspective. Mat is, we focus on emission trajectories which maximize net benefits. We then examine the consequences of adopting alternative decision making paradigms-for example, those based on limiting atmospheric concentrations so as to achieve an "ample margin of safety." We also consider the regional distribution of costs and benefits under alternative burden sharing schemes. Although the climate issue is often viewed from a global perspective, international negotiators will be acutely interested in how damages and mitigation costs might be distributed among individual regions. Finally, we address the issue of decision making under uncertainty. The challenge confronting today's policy makers is to identify it sensible hedging strategy-one that balances the risks of waiting against those of premature action.


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IAEE Convention Speech: Energy, Exhaustion, Environmentalism, and Etatism

Richard L. Gordon

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No1-1
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Editor's Note: The author, Dr. Richard L. Gordon, won the IAEE's Outstanding Contributions Award for 1992. The following article is based on his acceptance speech given at the 16th international conference of the IAEE held in Bali, Indonesia, from July 27-29, 1993. The Association awards a prize annually for outstanding contributions to the profession of energy economics and to its literature.


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OPEC and the Price of Oil in 1993

Francisco R. Parra

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No1-2
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Editor's note: This article is based on a talk given by Mr. Francisco R Parra--a former Secretary General of OPEC and senior executive of Petroleos de Venezuela-at the Advanced International Petroleum Executive Seminar held byPetroleum Economics Limited in Divonne, from 9 to 11 March 1993. The article first appeared in Middle East Economic Survey 36:26, 29 March 1993. It is reprinted here with permission from the author and MEES.


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Oil Price Forecasting in the 1980s: What Went Wrong?

Hillard G. Huntington

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No2-1
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This paper reviews forecasts of oil prices over the 1980s that were made in 1980. It identifies the sources of errors due to such factors as exogenous GNP assumptions, resource supply conditions outside the cartel, and demand adjustments to price changes. Through 1986, the first two factors account for most of the difference between projected and actual prices. After 1986, misspecification of the demand adjustments becomes a particularly troublesome problem.


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Environmentally Responsible Energy Pricing

W. Kip Viscusi, Wesley A. Magat, Alan Carlin, and Mark K. Dreyfus

DOI: 10.5547/ISSN0195-6574-EJ-Vol15-No2-2
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This paper assesses the value of the non-global warming externalities associated with energy use. The estimates of the full social cost energy prices based on this "no regrets" approach imply environmental costs that often greatly exceed current tax amounts. The midpoint estimates suggest that the price of coaI is most out of line with its efficient level. Natural gas is currently overtaxed, and gasoline is appropriately taxed. There is also a substantial range of uncertainty embodied in the no regrets estimates.


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Petroleum Property Valuation: A Binomial Lattice Implementation of Option Pricing Theory

Eric Pickles and James L. Smith

DOI: 10.5547/ISSN0195-6574-EJ-Vol14-No2-1
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We take a simple tutorial approach to explain how option valuation can be applied in practice to the petroleum industry. We discuss a simple spreadsheet formulation, demonstrate how required input data can be extracted from market information, and give several exploration and development examples. Under the market and fiscal conditions described we derive the value of discovered, undeveloped reserves projected to result from offshore licensing in the United Kingdom, and we show how to determine the maximum amount that should be committed to an exploration work program to find those reserves. Lease-bidding and farm-out applications are briefly described. We recommend option valuation as an alternative to discounted cash flow analysis in situations where cash flows are uncertain and management has operating flexibility to adjust investment during the life of the project, and point to further work needed to fully value nested or embedded options.


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The Structure and Intensity of Energy Use: Trends in Five OECD Nations

Richard B. Howarth, Lee Schipper, and Bo Andersson

DOI: 10.5547/ISSN0195-6574-EJ-Vol14-No2-2
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Ths paper examines trends in the structure and intensity of final energy demand in five OECD nations between 1973 and 1988. Our focus is on primary energy use, which weights fuels by their thermal content and multiplies district heat and electricity by factors of 1.15 and 3.24 to approximate the losses that occur in the conversion and distribution of these energy carriers. Growth in the level of energy-using activities, given 1973 energy intensities (energy use per unit of activity), would have raised primary energy use by 46% in the U. S., 42%, in Norway, 33% in Denmark, 37% in West Germany, and 53% in Japan. Reductions in end-use energy intensities, given 1973 activity levels, would have reduced primary energy use by 19% in the U.S., 3% in Norway, 20% in Denmark, 15% in West Germany, and 14% in Japan. Growth in national income paralelled increases in a weighted index of energy-using activities in the U. S., West Germany, and Denmark but substantially outstripped activity growth in Norway and Japan. We conclude that changes in the structure of a nations economy may lead to substantial changes in its energy/GDP ratio that art? unrelated to changes in the technical efficiency of energy utilization. Similarly, changes in energy intensities may be greater or less than the aggregate change in the energy/GDP ratio of a given country, a further warning that this ratio may be an unreliable indicator of technical efficiency.


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OPEC and the Price of Oil

Robert Mabro

DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No2-1

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Energy Intervention After Desert Storm: Some Unfinished Tasks

Richard L. Gordon

DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No4-1
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Without fanfare, the U.S. government removed many intrusive regulations affecting oil and gas. Much further remains to be done. Regulation of environmental problems and public utilities remains deficient. Special attention is needed to the enthusiasm over the actual U.S. oil stockpiling program and proposed oil-import taxes. The arguments that oil is particularly insecure, that the insecurity produces severe macroeconomic damages, and that oil market policies are the best response are all dubious. In particular, design of such intervention is even more difficult than implementing traditional monetary and fiscal policy. International trade economics warns of the perils of taxing to create or offset monopoly. Stockpiling also is designed to offset the disincentives to private stockpiling -created by the tendency to impose price controls during crises. The fear of windfall profits that inspires price controls also discourages stockpile release. Stockpiling thus may not prove helpful. The U.S. establishes goals for its public lands more ambitious than can be attained with the budgets allocated for administration. Reversing the retreat from encouraging sales to the private sector could improve land use.


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