Global Economic Review

Jones D.W., O'Neill R.V.

This paper endogenizes environmental degradation imposed by agriculture in a land-use model by introducing feedbacks between productivity and the application of inputs. Farmers maximize the value of their output by allocating inputs between production and conservation. We study this division of agricultural production resources between cultivation and maintenance with a model of individual agricultural decisions in a small region, possibly the size of a single state or a few states in the United States. We study the model for insights into how degradationconservation processes modify agricultural production decisions. We give particular attention to how degradation-conservation processes would alter the extensive deforestation occurring in developing countries such as Brazil. The analysis of the model shows a mitigating influence of labor-intensive conservation measures to counteract local environmental degradation. The economic situation of the individual farmer is improved when output prices increase, roads are improved, or there is a decrease in the price of purchased inputs. Under these improved conditions, cultivation intensity increases and there is a resultant degradation in the soil, but the degradation is less than would occur without the conservation feedback. In the case of decreased wages, degradation may actually decrease if conservation effects are sensitive to an increase in labor. In all cases, the conservation feedback reduces the environmental impact of increased cultivation. Improving the economic picture for the individual farmer also makes remote sites more profitable and tends to increase the area of deforestation, but this tendency to expand is modified by the increased profitability of cultivation within the existing region. In a number of cases, very effective conservation can actually decrease areal extent of cultivation, leading to more intense cultivation over a smaller region. The analysis also indicates that cultivation should be discouraged on more fragile soils. On the better sites, soil degradation is increased but the soils can withstand more degradation. The total area under cultivation tends to decrease, resulting in less deforestation.

Moroney J.R.

During the years 1950–1973, energy and capital were jointly substituted for labor, and real GNP per hour increased at 2.5% annually. Following the energy price shocks of 1973–1974 and 1979–1981, both capital utilization and energy per worker hour fell abruptly. Likewise, the growth in real GNP per hour declined to 1.2%. This paper specifies and estimates aggregate production functions designed to identify the roles of capital-labor substitution, energy-labor substitution, and technological change as sources of labor productivity growth. Declining energy intensity was an important partial cause of the slowdown in productivity growth.

Berger K., Fimreite Ø., Golombek R., Hoel M.

According to most scientists, greenhouse gas emissions must be reduced significantly relative to current trends to avoid dramatic adverse climatic changes during the next century. CO 2 is the most important greenhouse gas, so any international agreement will certainly cover CO 2 emissions. Any international agreement to reduce emissions of CO 2 is going to have a significant impact on the markets for fossil fuels. The analysis shows that it is not only the amount of CO 2 emissions permitted in an agreement which matters for fossil fuel prices, but also the type of agreement. Two obvious forms of agreements, which under certain assumptions both are cost efficient, are (a) tradeable emission permits, and (b) an international CO 2 tax. If the fossil fuel markets were perfectly competitive, these two types of agreements would have the same effect on the producer price of fossil fuels. However, fossil fuel markets are not completely competitive. It is shown that, under imperfect competition, direct regulation of the ‘tradeable quotas’ type tends to imply higher producer prices and a larger efficiency loss than an international CO 2 tax giving the same total CO 2 emissions. A numerical illustration of the oil market indicates that the difference in producer prices for the two types of CO 2 agreements is quite significant.

Goodwin T.H., Patrick R.H.

This paper examines the rate-of-return regulated firm's incentives in negotiations over cost recovery. It develops optimal recovery paths for the firm facing certainty versus uncertainty of discretionary regulatory policy. Front-loaded capital recovery is not generally optimal under certainty, which is contrary to Financial Accounting Standards Board (FASB) rules. However, with the consideration of regulatory uncertainty, the optimal recovery path is remarkably close to FASB-approved rules. The optimal recovery under certainty becomes time-consistent if the discretionary power of the regulators to alter a previously agreed upon plan is removed.

Walls M.A.

This paper surveys the literature in empirical oil and gas supply modeling. The models fall into two broad categories: geologic/engineering and econometric. Two types of geologic/engineering models are surveyed — play analysis, or simulation, models and discovery process models. A third category of supply models, ‘hybrids’, which contain features of both econometric and discovery process models are also discussed. Particular attention is paid to whether or not the models have linkages between a dynamic model of producer optimizing behavior and the factors governing supply of the resource; whether or not expectations of future prices, costs, and other stochastic variables are incorporated; whether the physical characteristics of non-renewable resources are captured; and how well the models perform. The paper concludes that the best path for future research efforts is a hybrid approach where the econometric component is derived from a stochastic dynamic optimization model of exploration behavior.

Sadorsky P.A.

In this paper, we show that requiring all firms to conduct non-negative levels of exploration restricts the number of firms in exhaustible resource industries. Thus exploration creates a natural barrier to the degree of competition in exhaustible resource industries. Relative to the competitive case, the oligopolist explores more and extracts more in the first period. Increasing the number of firms in the industry lowers the oligopolist's levels of exploration and extraction but increases the industry levels of exploration and extraction.

Yu E.S., Jin J.C.

A recently developed methodology of the cointegration test is employed to determine whether energy consumption has a long-run equilibrium relationship with the level of income or employment. It is found that the long-run equilibrium relationship fails to exist in either case. The finding implies a long-run neutrality of energy consumption, which is consistent with the short-run neutrality found in the literature. The results are further confirmed by splitting the sample into two sub-periods.

Helmi-Oskoui B., Narayanan R., Glover T., Lyon K.S., Sinha M.

Petroleum reservoir behavior at different levels of reservoir pressure is estimated with the actual well data and reservoir characteristics. Using the pressure at the bottom of producing wells as control variables, the time paths of profit maximizing joint production of oil and natural gas under various tax policies are obtained using a dynamic optimization approach. The results emerge from numerical solution of the maximization of estimated future expected revenues net of variable costs in the presence of taxation. Higher discount rate shifts the production forward in time and prolongs the production plan. The analysis of the state, corporate income taxes and depletion allowance reveals the changes in the revenues to the firm, the state and the federal governments.

Rothkopf M.H., Engelbrecht-Wiggans R.

This paper applies qualitative microeconomic analysis to issues facing the designers of auction programs for the leasing for development of governmentally owned resources. This kind of analysis suggests that there are several potentially valuable novel ways of setting lease terms and/or holding the leasing competition.

Naghshpour S., Willett K.

Use of annual data instead of monthly data distorts the regression results. The problem arises from the existence of seasonal variation in electricity consumption, rate schedules, and fuel adjustment rates.

Khadr A.M.

This paper examines optimal pricing strategies by a resource seller when endogenously-determined investment by users in resource-specific technologies creates a ‘lagged’ resource demand structure. The analysis reveals that: (i) if the seller can credibly pre-commit to a resource price path at the initial date, the optimal path features ‘high’ prices at the outset, followed by ‘low’ prices over a subsequent interval and an ‘intermediate’ long-run price; (ii) a subgame-perfect equilibrium in feedback strategies features consistently ‘high’ prices and makes both seller and users worse off in the long run; but (iii) a subgame perfect equilibrium in trigger strategies can sustain the same outcome as the precommitment equilibrium.

Stalon C.G.

This paper identifies two trends in the structure of the electric utility industry: an increasingly competitive wholesale market and horizontal mergers in the industry. The paper summarizes current institutions and spells out present legal oversight as divided between federal and state officials. Technological progress has pushed the efficient operational area beyond the geographic bounds that regulation has traditionally operated within; thus, transmission facilities often benefit a wider area than the regulatory jurisdiction where they are located. Regulation has not allocated risk well in the past. The paper catalogs regulatory or policy actions that indicate these two trends. Current restructuring objectives include expanded transmission access, improved transmission pricing, and expeditiously constructed transmission. Finally, pro-market, pro-merger and go-slow proponents of change are described. FERC's Transmission Task Force Report offers two strategies: prepare sweeping changes or reform in increments with obstacles removed as they arise.

Corey G.R.

This paper examines recent trends and future prospects for continued change in the regulation of the electric power industry. Future procurement of supplies will rely more on competitive bidding, and this will require opening up access to the transmission grid. The paper outlines problems for both developments. Competitive bidding could be a useful tool if utilities can bargain hard with suppliers and if a large number of independent producers remain so as to discourage implicit price collusion. Allowing wholesale traders greater access to transmission could be accomplished if problems are addressed. Access guidelines and legal responsibilities must maintain the integrity of the grid. New transactions must increase efficiency and not just redistribute surplus from existing trades. Transmission services must be priced to provide an equitable division of gains between the wholesale traders and the wheeling utility's equity holders and native customers. Recommendations for regulatory guidelines are spelled out.