Essays on Risk in Energy Economics
Energy markets are characterized by large uncertainties and risks. The annual volatility of the Brent oil price is 28%, meaning that there is a 1-in-3 chance that next year's oil price will be more than 28% higher or lower than this year's price. Similarly, the annual volatility of gas prices for domestic consumers in Belgium/Brussels is 14%. The uncertainty is much larger than in many other goods and services, such as cars, housing, or travel, to name but a few household spending categories. This phenomenon is all the more important since energy is an essential input to many production processes and consumption patterns.
The risk in energy markets has several underlying causes: technical, such as the recent application of new techniques that allow for the extraction of ‘shale gas’, which has depressed gas prices in the US; macroeconomic, such as the drop in oil demand following the 2008/2009 global economic crisis, which roughly halved oil prices; and political, such as the Russian-Ukrainian gas crisis in 2006 and 2009, or the first oil shock in the 1970s.
Part I of this thesis deals with political risk, and analyzes decisions of resource-rich countries that affect the allocation of energy-related rents. Chapter 2 studies the Russian-Ukrainian gas crisis and how it impacts European import strategies. Chapter 3 investigates the taxation of resource extraction in petroleum-producing countries. Chapter 4 also studies taxation, but focuses on a resource that is mostly exploited in Western countries, namely nuclear power. Chapter 5 also deals with Western countries and explores the possible outcome of potential international negotiations on the distribution of rents arising from a trans-European CO2 pipeline network for Carbon Capture and Storage (CCS).
Part II of this thesis investigates how firms can protect themselves against the risks in energy supply, by hedging their exposure. The main challenge in hedging is that energy markets are typically very incomplete, in that not enough different contracts (such as options) exist to enable firms to hedge their exposure completely. Chapter 6 analyzes the effect of market incompleteness on welfare and investment incentives in the specific case of an electricity market with demand uncertainty. Chapter 7 provides a generalization of the theory for a generic market structure with non-specified uncertainty.
MORBEE Joris;
2012-11-29
University of Leuven (KULeuven)
JRC70521
https://publications.jrc.ec.europa.eu/repository/handle/JRC70521,
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