Energy, ENVIRONMENTAL, AND MINERAL ECONOMICS (ENNEC) 484W
Energy Economics

Instructor:
Professor Timothy J. Considine
Department of Energy & Mineral Engineering
125 Hosler Building
Phone: (814) 863-0801, Email: cpw@psu.edu
Office Hours: Monday and Wednesday 9-11:30am

Teaching Assistant:
Rebecca Entler
Phone: (347) 996-0079, Email: rge113@psu.edu
Office Hours: by appointment

OBJECTIVE

The objective of this course is to provide students with the ability to apply and
communicate economic principles for policy and planning issues in energy industries.

OVERVIEW

The course is composed of five components. The first provides a brief overview of major energy and environmental policy issues facing the United States and the world. The second section of the course examines the determinants of energy demand, focusing on the socio-economic and technological factors that determine the consumption of energy in the household, commercial, industrial, and transportation sectors. The economics of energy conservation programs is also discussed in this section.

The course then examines the technologies and costs of producing and delivering energy products and services. The energy supply technologies include primary fossil fuels, nuclear, and renewable energy resources, including biomass, wind, and solar energy. This section will compare the relative technical, economic, environmental performance of these energy systems.

Part four will examine the determinants of energy prices. Energy prices frequently are quite volatile because demand and supply are very inelastic in the short-run. Market structure is another important determinant of energy prices. The oil industry in particular has a long history of imperfect competition with cartels controlling production and setting prices with varying degrees of success. Another dimension of energy pricing arises from the nonrenewable nature of fossil fuel supply. We will examine the theoretical basis for oil and other resources containing a so-called scarcity premium. Finally, most primary fuel prices are determined in open cry commodity markets. Accordingly we will examine the role of expectations and inventories in short-run price movements for oil, natural gas, and petroleum products.

The fifth and final section of the course examines energy and environmental policy. The concept of energy and mass balances will be developed, which will enable an holistic view of energy, environment, and economy interactions. After a discussion of so-called criteria pollutants, which has been a major factor affecting the electric power industry, the focus shifts to the most important environmental issue looming for all energy industries: carbon regulation. The analysis begins with the economics of climate change and then shifts to the debate of the relative merits of taxes versus permits in reducing carbon emissions. The economic impacts of various proposals to limit carbon emissions then will be examined. The course concludes with a broad overview of how emerging efforts to control greenhouse gas emissions will affect fuel prices given declining energy resource quality.

PRE-REQUISITES

This writing intensive course is open to all majors and is for upper-division undergraduates in Energy Business Finance. Introductory microeconomics is required.

ACADEMIC INTEGRITY

This course adopts the College's academic integrity policy, which can be found at
http://www.ems.psu.edu/students/integrity/statement.html.

ASSIGNMENTS AND GRADING

Your grade will be determined by your performance on several assignments with
the following due dates and weighting scheme:

The essay topics will be assigned one week prior to the due date. The writing assignments are short essays (3-5 double spaced pages with one inch margins) on the
economics of energy policies. Your essays should contain a logical progression of ideas
and precise documentation of any references. There will also be unannounced writing
assignments in class. The midterm and final tests will be in-class essay exams to
determine your ability to analyze the economics of energy markets and related policy
issues.

READING LIST AND COURSE OUTLINE

* optional

Part I. Overview of Energy Policy Issues & Market Trends

Class 1: Energy Policy Overview

National Energy Policy Development Group, (2001) “Reliable, Affordable,
and Environmentally Sound Energy for America’s Future,” Forward &
Chapters 1-2. http://www.whitehouse.gov/energy/.

Set America Free, (2005) “An Open Letter to the American People,”
http://www.iags.org/safn.pdf.

Class 2: Recent Trends in Energy Markets

Ruhl, Christif (2007) “BP Statistical Review of World Energy 2007,”
http://www.bp.com/statisticalreview.

Part II. Energy Demand Analysis

Class 3: Overview of Energy Demand

Energy Information Administration (EIA), “Energy Demand Projections,”
Annual Energy Outlook, http://www.eia.doe.gov/oiaf/aeo/pdf/trend_2.pdf

Class 4: Seasonality & Energy Demand

Considine, Timothy J. (2000) “The impacts of weather variations on energy
demand and carbon emissions,” Resource and Energy Economics 22, 4, 295-312.

Class 5: Energy Demand in Transportation

Dahl, Carol and T. Sterner (1991) “Analyzing Gasoline Demand Elasticities:
A Survey,” Energy Economics, 13, 3, 203-210.

Gately, Dermot (1988) “Taking Off: The U.S. Demand for Air Travel and Jet
Fuel,” The Energy Journal, 9, 4, 63-94.

Class 6: Economics of Energy Conservation

Joskow, Paul L.& D.B. Marron (1992) “What does a Negawatt Really Cost?
Evidence from the Utility Conservation Programs,” The Energy Journal, 13, 4, 41-67.

Part III. Energy Supply: Costs and Technology

Class 7: Coal Supply

EIA (2005) “Coal Production In The United States,” 1-18.

Class 8: Natural Gas Production & Delivery

American Petroleum Institute (2007) “Understanding Natural Gas Markets,”
26 pgs.

EIA (2007) “Natural Gas Year-in-Review 2006.

Class 9: International Markets for Liquefied Natural Gas (LNG)

Pirog, Robert (2004) “Liquefied Natural Gas (LNG) Markets in Transition:
Implications for U.S. Supply and Price,” Congressional Research Service.

Class 10: Economics of Crude Oil Production

EIA (1999) “Petroleum: An Energy Profile,” DOE/EIA-0545(99), 1-25.

Cuddington, John T. and D.L. Moss (2001) “Technological Change,
Depletion, and the U.S. Petroleum Industry,” The American Economic
Review, 91, 4, 1135-1148.

*Wiggins, Steven N. and Gary D. Libecap (1985) “Oil Field Unitization,” The
American Economic Review, 75, 3, 368-385.

Class 11: Economics of Petroleum Refining

EIA (1999) “Petroleum: An Energy Profile,” DOE/EIA-0545(99), 25-35.

Considine, Timothy J. (1992) “A Short-Run Model of Petroleum Product
Supply,” 13, 2, 61-91.

Class 12: Peak Oil & Unconventional Hydrocarbons

Considine, Timothy and M. Dalton (2006) “An Economic Analysis of the
Peak Oil Debate,” The International Journal of Environmental and natural
Resource Economics, (forthcoming), 35 pgs.

Class 13: Ethanol and Biodiesel

Farrell, Alexander, R.J. Plevin, B.T. Turner, A.D. Jones, M. O’Hare, D.M.
Kammen, “Ethanol Can Contribute to Energy and Environmental Goals,”
Science, 311, Jan 27, 506-508.

Ragausak, Arthur, et al. (2006) “The Path Forward for Biofuels and
Biomaterials,” Science, 311, Jan. 27, 484-489.

Philpott, Tom (2006) “Give Green, Go Yellow: How Cash and Corporate
Pressure Pushed Ethanol to the Fore,” Grist, 5 pgs.

Class 14: Electric Power Generation & Service

Brennan, Timothy J., K.L. Palmer, S.A. Martinez (2002) “Understanding the
Electricity Industry,” in Alternating Currents: Electricity Markets and Public
Policy, Resources for the Future, 13-26.

Considine, Timothy J. (2000) “Cost structures for fossil fuel-fired electric
power generation,” The Energy Journal 21, 2 83-104.

Class 15: Advanced Nuclear and Clean Coal Technology

Thomas, Steve (2005) “The Economics of Nuclear Power: Analysis of Recent Studies,” Public Service International Research Unit, 31 pgs.

National Coal Council (2002) “Increasing Coal-Fired Generation Through
2010: Challenges & Opportunities,” May, 31 pgs.

Class 16: Economics of Solar and Wind Energy

Brito, Dagobert and J., Rosellon (2005) “Energy and Nanotechnology:
Prospects for Solar Energy in the 21st Century,” Baker Institute for Public
Policy, Rice University, 19 pgs.

Wiser, Ryan and M. Bolinger (2006) “Annual Report on U.S. Wind Power
Installation, Cost, and Performance Trends,” U.S. Dept. of Energy, 24 pgs.

Part IV. Energy Price Determination

Class 17: Competitive Energy Prices & Tax Incidence

Dahl, Carol A. (2004) International Energy Markets, (Penn Well: Tulsa, OK),
Chapter 3, 49-80.

Class 18: Natural Monopoly & Electricity Restructuring

Dahl, Carol A. (2004) International Energy Markets, 81-109.

Joskow, Paul L. (2003) “Electricity Sector Restructuring and Competition:
Lessons Learned,” MIT Center for Energy & Environmental Policy Research.

Class 19: The Emergence of the Standard Oil Monopoly

Granitz, Elizabeth and B. Klein (1996) “Monopolization by Raising Rival’s
Costs: The Standard Oil Case,” Journal of Law and Economics, April, 1-48.

Class 20: The International Oil Cartel and Oil Policy Issues

Griffen, James E. and H.B. Steele (1986) “OPEC Behavior and World Oil
Prices,” in Energy: Economics and Policy, 96-162.

Class 21: Dominant Firm Pricing Model for World Oil

Dahl, Carol A. (2004) “Monopoly, Dominant Firm and OPEC,” International
Energy Markets, (Penn Well: Tulsa, OK), Chapters 6, 135-168.

Class 22: Hotelling Model of Resource Pricing

Griffen, James E. and H.B. Steele (1986) “Criteria for Efficient Dynamic
Resource Allocation,” in Energy: Economics and Policy, 68-95.

Class 23: The Classic Theory of Storage

Brennan, Michael J. (1958) “The Supply of Storage,” The American
Economic Review, 48, 1, 50-72.

Verleger, Philip K. “Petroleum Markets: Function, Nature, and Performance,” in Adjusting to Volatile Energy Prices, 41-84.

Class 24: Energy Price and Inventory Dynamics

Considine, T.J. and K.M. Dowd (2005) “A Superfluous Petroleum Reserve?” Regulation, The Cato Institute, 18-25.

Part V. Energy & Environmental Policy Issues

Class 25: A General Equilibrium View

Ayers, Robert U. and A.V. Kneese (1969) “Production, Consumption, and
Externalities,” The American Economic Review, 59, 3, 282-297.

Class 26: Regulating Criteria Air Pollution

Considine, T.J. (2006) “The Environment as Factor of Production,” Journal of Environmental Economics and Management, 52, 3, (2006), 645-662.

Class 27: Economics of Climate Change

Arrow, Kenneth J. (2007) “Global Climate Change: A Challenge to Policy,”
Economists’ Voice, www.bepress.com/er, June.

Schelling, Thomas C. (2007) “Climate Change: The Uncertainties, the
Certainties, and What They Imply About Action,” Economists’ Voice,
www.bepress.com/er, June.

Class 28: Economic Instruments for Controlling Greenhouse Gas Emissions

Nordhaus, William D. (2007) “To Tax or Not to Tax: Alternative Approaches
to Slowing Global Warming,” Rev Environ Econ Policy, 1, 1, 26-44

Class 29: Economic Impacts of Carbon Cap & Trade

Paltsev, Sergey, J.M. Reilly, H.D. Jacoby, A.C. Gurgel, G.E. Metcalf, A.P.
Sokolov, and J.F. Holak (2007) “Assessment of U.S. Cap-and-Trade
Proposals,” MIT Joint Program on the Science and Policy of Global Change,
April, 65 pages.

Class 30: Carbon Regulations & the Transition to Unconventional Hydrocarbons

Brandt, Adam R, and A.E. Farrell (2007) “Scraping the bottom of the barrel:
Greenhouse gas emissions consequences of a transition to low-quality and
synthetic petroleum resources,” Climate Change (forthcoming).

Verleger, Philip K. “Oil to Triple Digits?” Petroleum Economics Monthly,
June 2007.

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Last updated September 18, 2007.