Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries

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1 THE ENERGY JOURNAL Volume 15, Issue 4 October, 1994 Pages 1-18 Toward an Optimal Oil and Gas Leasing System by Walter J. Mead (University of California at Santa Barbara) The four principal leasing systems work program, royalty, profit share (including rent resource tax), and bonus bidding are reviewed relative to their efficiency in maximizing and collecting the present value of economic rents. Empirical research is shown to support theoretical conclusions that the most efficient system appears to be bonus bidding, without a fixed royalty, with leases issued in perpetuity, with environmental and other regulations required to pass a benefit/cost test, and with elimination of any nationalistic or other barriers to entry. Pages Macroeconomic Responses to Oil Price Increases and Decreases in Seven OECD Countries by Knut Anton Mork (Norwegian School of Management), Øystein Olsen and Hans Terje Mysen (Statistics Norway) The correlations between oil-price movements and GDP fluctuations are investigated for the United States, Canada, Japan, Germany (West), France, the United Kingdom, and Norway. The responses to price increases and decreases are allowed to be asymmetric. Bivariate correlations as well as partial correlations within a reduced-form macroeconomic model are considered. The correlations with oilprice increases are negative and significant for most countries, but positive for Norway, whose oilproducing sector is large relative to the economy as a whole. The correlations with oil-price decreases are mostly positive, but significant only for the United States and Canada. Most countries show evidence of asymmetric effects, with Norway again as an exception.

2 Pages Price Convergence Across Natural Gas Fields and City Markets by W. David Walls (University of Hong Kong) This research reports the results of cointegration tests between natural gas spot prices at various production fields, pipeline hubs, and city markets. Cointegration between prices is evidence that spatial arbitrage is enforcing the law of one price across market locations. The results show that prices at certain city markets, Chicago and to a lesser extent California, are cointegrated with prices at field markets. However, the prices at most other locations do not move in step with gas prices in the field markets. Customer access to pipeline transportation, or competitive bypass, may explain why prices at some city markets are more responsive to production field prices than others. Pages Fuel Efficiency and Automobile Safety: Single-Vehicle Highway Fatalities for Passenger Cars by J. Daniel Khazzoom (San Jose State University) This paper reports the results of an effort to shed some light on the relationship that might exist between enhanced standards and single-vehicle passenger car highway fatalities. Quantification of this relationship is not an easy task. Not surprisingly, the literature on modeling the relationship between fuel economy and highway fatalities is very scant. Our analytic framework consists of two submodels: a corporate average fuel economy (CAFE) submodel and a single-vehicle highway fatalities submodel. Some of the variables that enter the CAFE relationship affect single-vehicle fatalities, as well. The results of this study are not unequivocal in every respect. However, they indicate that enhanced standards and automobile safety need not be at odds with each other. A main message that emerges from this study is the need not to confuse car downsizing with downweighting. Quantatative studies of highway fatalities have mostly treated weight and size interchangeably, and have used only the weight variable in the fatalities equation to avoid dealing with multicollinearity. Such references as "size/weight" which lump size and weight together as if they were the same variable are not uncommon in the safety literature. Our study indicates that weight and size are not a proxy to each other, and that in single vehicle crashes they are likely to have opposite effects on safety. When researchers choose to drop the size

3 variable and include only the weight variable in the fatalities equation, the weight estimate may end up with a negative sign, not necessarily because weight has a beneficial effect on safety, but because the omitted size variable has a dominant beneficial effect on safety, which is picked up by the weight variable that appears in the equation. Pages Income Distribution Effects of Electric Utility DSM Programs by Ronald J. Sutherland (Argonne National Laboratory) This paper uses the Residential Energy Consumption Survey undertaken by the Energy Information Administration in 1990 to estimate the statistical association between household income and participation in electric utility energy conservation programs and the association between participation and the electricity consumption. The results indicate that utility rebates, energy audits, load management programs and other conservation measures tend to be undertaken at greater frequency by high income households than by low income households. Participants in conservation programs tend to occupy relatively new and energy efficient residences and undertake conservation measures other than utility programs, which suggests that utility sponsored programs are substitutes for other conservation investments. Electricity consumption during 1990 is not significantly less for households participating in utility programs than for nonparticipants, which also implies that utility conservation programs are displacing other conservation investments. Apparently, utility programs are not avoiding the costs of new construction and instead are transferring wealth, particularly to high income participating households. Pages Cost-Effective Climate Policy in a Small Country by Cathrine Hagem (Centre for Climate and Energy Research, Oslo) Unilateral action to curb CO 2 emissions in a small country or a group of countries has only a limited effect on global CO 2 emissions. However, it could be a first step toward a broader climate treaty. So far, unilateral commitments have been aimed at reducing national consumption of fossil fuels. A country that produces and consumes fossil fuels can also influence the global CO 2 emissions by reducing its production. The estimated cost of reducing national CO 2 emissions in Norway, through a reduction in fossil fuel consumption, is presented in a report from the Environmental Tax Committee (1992). In this

4 paper, that cost is compared with an estimated cost of reducing fossil fuel production. The calculation reveals that it could be less costly to reduce the production than the consumption, given that the effect on global CO 2 emissions is identical. Pages Incomplete International Climate Agreements: Optimal Carbon Taxes, Market Failures and Welfare Effects* by Rolf Golombek and Jan Bråten (SNF, Olso) This paper provides an empirical study of optimal carbon taxes and welfare effects under incomplete international climate agreements when there are market failures in the cooperating countries. The objective of the group of countries taking part in the international climate agreement is to design carbon taxes that maximize their aggregate net income, subject to a constraint on global CO 2 emissions. We use a numerical energy model to study scenarios that differ with respect to types of CO 2 taxes and countries taking part in the climate agreement. We also discuss the impact on regional net income following from different international climate agreements. * received IAEE's best paper award for 1994 Pages Rethinking Contracts for Purchasing Power: The Economic Advantages of Dispatchability by Gary W. Dorris and Timothy Mount (Cornell University) The purpose of this article is to evaluate and compare the incremental cost of purchased power from non-utility generators (NUG) versus utility built generation considering a variety of contracts for energy purchases. Four types of contracts are evaluated: (1) Flat Rate Produce and Pay, (2) On- Peak/Off-Peak, (3) Basic Dispatchable, and (4) Actual Cycle Energy Dispatch. An analysis conducted for a representative utility calculates the effects of NUG power purchases on a utility's energy production costs and the cost of new debt issuances. Dispatchable energy contracts are shown to provide significant economic and operating advantages over Flat Rate and On-Peak/Off-Peak energy contracts. The analysis also shows that NUG purchases based on the actual costs of dispatch cost less

5 than utility-built generation financed at the utility's weighted average cost of capital. NUG contracts for a utility which already has significant risk exposure are shown to parallel a capital lease. Under these conditions, additional payment obligations to NUGs increase the cost of new debt issuances making an equity issuance for utility built capacity a more attractive option. Pages Reactive Power is a Cheap Constraint by Edward Kahn (Lawrence Berkeley Laboratory) and Ross Baldick (University of Texas) Hogan (1993) has proposed a version of marginal cost pricing for electricity transmission transactions that include a component for reactive power to support voltage at demand nodes. His examples support the notion that the cost of satisfying voltage constraints can be quite high. We show that in his simplest example the price on this constraint results from an uneconomic and artificial characterization of the problem, namely an inefficient and unnecessarily constrained dispatch. By eliminating this characterization, the price of reactive power falls to a very modest level. Our counterexample has implications for the institutional arrangements under which transmission pricing reform will take place. We believe that environment will be an open access competitive setting, where dispatch is still controlled by one group of participants. Manipulation of marginal transmission costs becomes quite feasible in complex networks through subtle changes to dispatch. Therefore an open access regime using marginal cost pricing must involve either some kind of monitoring and audit function to detect potential abuses, or alternatively, institutional restructuring to eliminate conflicts of interest. Pages A Dynamic Model of Industrial Energy Demand in Kenya by Semboja Haji Hatibu Haji (Gothenburg University) This paper analyses the effects of input price movements, technology changes, capacity utilization and dynamic mechanisms on energy demand structures in the Kenyan industry. This is done with the help of a variant of the second generation dynamic factor demand (econometric) model. This interrelated disequilibrium dynamic input demand econometric model is based on a long-term cost function representing production function possibilities and takes into account the asymmetry between variable inputs (electricity, other-fuels and labour) and quasi-fixed input (capital) by imposing restrictions on the

6 adjustment process. Variations in capacity utilization and slow substitution process invoked by the relative input price movement justifies the nature of input demand disequilibrium. The model is estimated on two ISIC digit Kenyan industry time series data ( ) using the Iterative Zellner generalized least square method. Book Reviews Pages Energy and Economic Reform in the Former Soviet Union by Leslie Dienes, Istvan Dobozi, and Marian Radetzki (book review by Michael Lynch) Pages Regulatory Power: The Economics of Electricity in the Information Age by Carl Pechman (book review by Kenneth Costello) Pages The European Carbon Tax: An Economic Assessment by C. Carraro and D. Siniscalco (eds), (book review by Jeffrey Lazo) Pages Environmental Economics and the Mining Industry by Wade E. Martin (ed.), (book review by Jeffrey Lazo) Pages Electric Utility Mergers: Principles of Antitrust Analysis by Mark W. Frankena and Bruce M. Owen (book review by Frank Felder)