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Energy Journal Issue

The Energy Journal
Volume 5, Number 2

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Energy Prices, Capital Formation, and Potential GNP

David F. Burgess

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-1View Abstract

A common theme of the rapidly developing literature on energy-economy interaction is that higher energy prices-initiated by external events such as OPEC-will permanently reduce the growth potential of net energy-importing economies even if full-employment conditions are maintained. According to this literature, in the absence of government measures to encourage saving and investment any initial adverse effect on the economy's real income at full employment (hereafter referred to as potential GNP) resulting from the need to pay a higher real price for imported energy will be compounded by secondary effects that reduce the rate of capital formation. This secondary or reverse feedback effect through capital may be the largest component of the overall impact on potential GNP.

The Price of Oil and Conflict in OPEC

Ali M. Reza

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-2View Abstract

The price-setting behavior of the oil-exporting nations is influenced by the various elasticities of demand for and supply of oil, and the long-run optimal price trajectory is also influenced by the rate of interest and reserves (see, for example, Pindyck, 1978, and Reza, 1981). Since it is generally agreed that the long-term price elasticity exceeds the short-term elasticity (in absolute value), measuring the latter can give a clearer picture of the former. The short-term price elasticity of demand for OPEC oil is also of interest because short-term financial constraints have apparently led at least some members of OPEC to weigh the short-run outcome of their pricing decisions more heavily. The issue addressed here is the magnitude of the short-run price elasticity of the demand for oil supplied by the OPEC core (Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar) and of OPEC as a group.

An Energy Demand and Generalized Fuel Choice Model for the Primary Metals Industry

LuAnn McClernan Buffos and Wen S. Chern

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-3View Abstract

The primary metals industry is defined by the Bureau of the Census as the Standard Industrial Classification (SIC) 33. In terms of both absolute amount of energy use and energy intensiveness, SIC-33 is large relative to other industries.' This paper estimates essential energy demand relationships for this important sector. Although there are basically four energy sources used in the primary metals industry (fuel oil, natural gas, coal, and electricity), the response to changes in own price and cross price is dampened as a consequence of technology, plant vintage, and historical growth in the industry. Forecasts of future energy demand hinge on these price elasticities and on assumptions about future energy prices.

Summer Time and Electricity Conservation: The Israeli Case

Haim Shore

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-4View Abstract

Summer Time (ST) refers to the practice of advancing the clock during the summer (commonly by one hour) in order to adjust it to changes of sunrise and sunset times at that period. Conventionally, ST is expected to accomplish three objectives: To reduce electricity consumption during dark evening hours.To reduce use of air conditioning systems during the morning. This effect,the result of an additional cool hour, is partially offset by an increasedconsumption of electricity for lighting during very early morning hours. To increase productivity (particularly in the industrial sectors that are notair-conditioned) following an additional cool hour in the morning.

Deregulating the Generation of Electricity Through the Creation of Spot Markets for Bulk Power

Roger E. Bohn, Bennett W. Golub, Richard D. Tabors, and Fred C. Schweppet

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-5View Abstract

Many observers are dissatisfied with the current condition of privately owned electric utilities in the United States. Numerous pro-posals have been made for change, including suggestions to deregulate all or part of the industry.' Those who favor deregulation argue that electric power systems, and especially electric generation, may no longer be natural monopolies. Furthermore, under the present regulatory regime, many utilities are refraining from investing, which is not in the best interests of their customers.2 Others, however, worry that quality and reliability of1. See Golub (1982, Chapter 2) for a review of the literature on deregulating electricutilities.2. A major electric utility's internal planning documents discussed the problem as follows. The ability to raise new capital is finite, and is especially limited given the current financial condition, the economy, and the regulatory climate. Thus, although the recommended investments ... will lead to a correct economic decision ... they may not be desirable due to other constraints [on the company] ... The document goes on to report that the company is not investing in coal projects, although such projects' long-term cost is one-third less than current anticipated generating costs.

Fair Value Versus Original Cost Rate Base Valuation During Inflation

Walter J. Primeaux, Jr., Edward L. Bubnys, and Robert H. Rasche

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-6View Abstract

Valuation of public utility property for rate-making purposes has been controversial since the beginning of public regulation. Despite much academic research and practical experience, there is no consensus of academicians or practitioners concerning the appropriate value of physical property used for providing service to customers. In public utility rate making, the value of this physical property, net of depreciation, is called the rate base. An important question is how well regulatory processes adjust the rate base for price level changes during periods of inflation.Statutes of the individual states determine how public utility property will be valued for rate-making purposes. Three basic methods are employed. Original cost jurisdictions set the rate base at the value of the property when it was first installed in a public utility application; the fair value method attempts to adjust the base to a level that more correctly reflects its current value; and the reproduction cost approach tries to establish a value that would permit reproduction of the property. Because the reproduction cost approach is not now being used by any state, this study focuses on the original cost and fair value methods.

Capital-Energy Substitutionin the Long Run

Joel Gibbons

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-7View Abstract

Econometric modeling of production relationships, especially those of manufacturing industries, entered a period of intense activity with the dramatic energy price shocks of the past ten years. This work has called attention to possibilities for substitution between energy and other factors, but it has not yet led to consensus on all the important issues.' One open issue has to do with the relative substitutability of fixed capital for energy, compared with the substitutability of other factors for energy. One set of studies, generally those based on international cross-section data, finds capital and energy to be Hicksian substitutes. Other studies, based on time series data, find them to be Hicksian complements.

Residential Electricity Demand Modeling in the Australian Capital Territory: Preliminary Results

W. A. Donnelly

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-8View Abstract

The demand for electricity has recently become a topic of major interest in Australia, where very little empirical analysis has been done (see Hawkins, 1975; Saddler et al., 1980; Department of National Development and Energy, 1981; Brian and Schuyers, 1981; and Donnelly and Saddler, 1982). Two of the policy issues being raised concern the appropriate pricing strategies that should be adopted by supplying authorities and the need for additional generating capacity. An understanding of the relative importance of the factors influencing electricity demand is required to aid public policy making, particularly since substantial investment is now being considered.

Cogeneration in the People's Republic of China

Qu Yu

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-9View Abstract

Cogeneration refers to the combined generation of heat and electric power. A common application is district heating. Cogeneration's ad-vantage stems from savings in investment and operating expenditures, and frequently also from greater reliability. It is geographically more restricted than large electricity networks since heat losses limit its distance from the generating station. Its optimal applications are therefore in load-intensive regions.

Are Federal Energy Tax Credits Effective? A Western United States Survey

Edwin H. Carpenter and S. Theodore Chester, Jr.

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-10View Abstract

The residential energy credit provided by the federal Energy Tax Act (1977) cannot be carried beyond December 31, 1987, and the Reagan administration has indicated a disinclination to support an extension of its provisions, in either its current or an altered form. Its likely demise indicates nothing about the Act's effectiveness in getting homeowners to invest in energy conservation or solar devices. Rather, it is a reflection of the Reagan philosophy of letting market conditions determine energy conservation decisions. Since the administration is not explicitly passing judgment on the success or failure of residential tax credits, important questions regarding their efficacy remain to be answered. This paper will attempt to shed light on this question. It will examine data derived from a random sample of Western United States homeowners to determine awareness and use of the federal energy tax credit; the role of climate and dwelling type; and the influence of selected socioeconomic factors on the use of energy tax credits. Most important, it will seek to determine the extent to which conservation decisions were contingent on the availability of the tax credits, i, e., what proportion of investments were made wholly or predominantly because of their special tax inducements and what proportion would have been made in any case.

Residential Electricity Demand: A Suggested Appliance Stock Equation

Christopher Garbacz

DOI: 10.5547/ISSN0195-6574-EJ-Vol5-No2-11View Abstract

A large amount of work in residential electricity demand has relied on logit estimation of a disaggregated appliance stock. (See the seminal work by McFadden et al., 1977.) While this approach may be suitable for certain types of models with certain goals in mind, a simple formulation of an appliance stock equation may sometimes be appropriate. For example, if the goal is to estimate seasonal patterns in elasticities employing a national micro-data set (as in the National Interim Energy Consumption Survey 1978-1979; see U.S. Department of Energy, 1980), then it may be appropriate to develop an appliance stock equation to predict the size of an appliance stock index (approximating a continuous variable). The present appliance stock equation is part of a three-equation model that is estimated in log-linear form via 2SLS.