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Contents Acknowledgments List of Figures List of Tables 1 Introduction 2 Energy Lessons from the Past for the Future Energy Geological History Energy's Human History Energy Forecasting Summary 3 Perfect Competition and the Coal Industry Introduction Perfect Competition and the Coal Industry Energy Demand and Supply Demand and Supply Elasticities Energy Taxation Summary 4 Natural Monopoly and Electricity Generation Introduction Modeling Electricity Markets Government Policy for a Natural Monopoly Valuing Money Across Time Summary 5 Deregulation and Privatization of Electricity Generation Introduction Models for the Electricity Sector Country Examples of Electricity Restructuring California Power Crisis Summary 6 Monopoly, Dominant Firm and OPEC Introduction Monopoly Model Monopoly Compared to Competition Price Controls in a Monopoly Market Brief History of OPEC Multiplant Monopoly Model Summary 7 Market Structure, Transaction Costs Economics and U.S. Natural Gas Markets Introduction Natural Gas Consumption and Production Worldwide Evolution of Natural Gas Market Structure Evolution of the U.S. Natural Gas Industry Contract New Directions: Electricity Deregulation and Information Technologies Summary 8 Externalities and Energy Pollution Introduction Pollution as a Negative Externality Optimal Level of Pollution Difficulties Measuring Costs and Benefits of Pollution Summary 9 Public Goods and Global Warming Introduction to Public Goods Abatement Policies Energy Conservation and Its Cost Summary 10 Monopsony ; Japan and the Asia Pacific LNG Market Introduction LNG Technologies LNG Production and Trade LNG Monopsony on Input Market, Competitor on Output Market Monopsony Model Compared to Competitive Model Bargaining and Negotiation Summary 11 Game Theory and the European Natural Gas Market Introduction Politics and a Pipeline Cournot Duopoly Duopoly Compared to Competitive Market Monopoly Compared to Competitive and Duopoly Market Bertrand Model Limit Pricing Model Summary 12 Allocating Fossil Fuel Production Over Time and Oil Leasing Introduction Dynamic Two-Period Competitive Optimization Models without Costs Model One (Base Model: No Costs, No Income Growth) Model Two (Base Model: No Costs but Income Growth) Model Three (Base Model: No Costs, No Income Growth but Lower Interest Rate) Model Four (Base Model: No Income Come Growth but With Costs) Model Five (Base Model: No Income Growth with Backstop Technology) Dynamic Multi-Period Models Dynamic Models with Market Imperfections Taxing and Bidding Decisions Summary 13 Computing Energy Costs and Supply Introduction Unit or Levelized Costs of Wind Electricity Above-Ground Costs for Gas and Oil Unit Costs with No Decline Rate Developing Cost Data Estimating Total Energy Resources Summary 14 Oil Refining, Energy Transportation, and Linear Programming Introduction Crude Oil Refining Linear Programming to Optimize Refinery Profits Energy Transportation Summary 15 Energy Futures and Options Markets for Managing Risk Introduction Energy Futures Contracts Hedging with Energy Futures Efficient Market Hypothesis Crack and Spark Spreads Energy Futures Options Valuing Options Option Trading Strategies Energy Swaps Summary 16 Energy and Information Technologies Introduction Steps of Internet Use Optimization Subject to Constraints Management Styles Information and Mission Transaction Costs Changes Wrought by the Information Revolution Summary 17 Managing in the Multinational World of Energy Introduction Culture Time Universalism and Particularism Cognitive Styles Life Values Business Protocols Summary Appendix A: Glossary and Abbreviator Appendix B: Conversion Charts Appendix C: Bibliography Index List of Figures Fig. 2/1 Global Temperatures Throughout Geological History Fig. 2/2 World Primary Energy Substitution Fig. 2/3 Limits to Growth World Model Standard Run Fig. 2/4 Successive Forecasts by the International Energy Workshop Fig. 3/1 World Historical Coal Production by Major Country Fig. 3/2 Coal Production in Major Countries Fig. 3/3 U.S. Historical Coal Prices Fig. 3/4 Supply and Demand Fig. 3/5 Increase in Demand Fig. 3/6 Decrease in Supply Fig. 3/7 Price Controls Fig. 3/8 Representative Business Cycle Fig. 3/9 U.S. Gross National Product in 2000 Dollars Fig. 3/10 Government Share per Barrel of Oil, 1995 Fig. 3/11 Supply and Demand in an Energy Market Fig. 3/12 Supply and Demand with a Unit Tax Fig. 3/13 Supply and Demand with a Tax on the Consumer Fig. 3/14 Incidence of a Unit or Volume Tax Fig. 3/15 Consumer Plus Producer Surplus Fig. 3/16 Supply Equals Marginal Cost in a Competitive Market Fig. 3/17 Producer Plus Consumer Surplus in a Competitive Market Fig. 3/18 Deadweight Loss from an Energy Tax Fig. 4/1 U.S. Retail Electricity Consumption, 1949-2000 Fig. 4/2 Electricity Consumption and Population by Major World Region Fig. 4/3 U.S. and World Electricity Production by Fuel Type, 2000 Fig. 4/4 Decreasing Average Costs Fig. 4/5 Increasing Average Costs Fig. 4/6 Average Variable Cost and Marginal Cost Fig. 4/7 Typical Daily Electric Load Curves for Israel, Jordan, and Egypt Fig. 4/8 U.S. 2000 Net Electricity Consumption by Month Fig. 4/9 Decreasing Cost Industry Fig. 4/10 Monopoly Producer Fig. 4/11 Social Optimum in a Natural Monopoly Market Fig. 4/12 Peak Load Model Fig. 5/1 Deregulation in U.S. Electricity Sector, 1999 Fig. 5/2 Peak Load Demand and Supply Fig. 6/1 Social Welfare in a Competitive Market Fig. 6/2 Monopoly Producer Fig. 6/3 Numerical Example of Monopoly Fig. 6/4 Competitive Supply in a Constant Cost Industry Fig. 6/5 Social Losses from Monopoly Fig. 6/6 (a) and 6/6 (b) Monopolist and Price Controls Fig. 6/7 U.S. Oil Prices, 1861/1999 Fig. 6/8 OPEC Production and Quotas Fig. 6/9 Marginal Cost for a Two-Country OPEC Fig. 6/10 OPEC's Optimal Production Fig. 6/11 Allocating Optimal Production Across OPEC Countries Fig. 6/12 Multiplant Monopoly Numerical Example Fig. 6-13 Developing Demand for OPEC's Oil Fig. 6/14 Dominant Firm Example Fig. 6/15 Dominant Firm Numerical Example Fig. 6/16 Marginal Social Efficiency of Investment Fig. 6/17 Target Revenues and Price Increases for a Low-Absorber Country Fig. 6/18 Target Revenues and Price Increase for High-Absorber Countries Fig. 7/1 Natural Gas World Production and Consumption, 1999 Fig. 7/2 Historical Natural Gas Consumption in the U.S. by Major Sector Fig. 7/3 Historical Natural Gas Prices, 1920/1999 Fig. 7/4 Prominent U.S. Gas Market Hubs Fig. 7/5 Natural Gas Prices by Sector, 1984/2000 Fig. 7/6 Gas in Storage and Gas Spot Prices Fig. 8/1 Supply and Demand in a Market with Negative Externalities Fig. 8/2 Costs and Benefits of Water Pollution Fig. 8/3 Varying Marginal Costs by Area Fig. 8/4 Marginal Abatement Costs for Two Firms Fig. 8/5 SO2 Emissions Rate Reductions for 441 Generating Units Fig. 9/1 Coastal and Inland Demand for CO2 Abatement Fig. 9/2 Total Social Benefits and Social Optimum for CO2 Abatement Fig. 9/3 Social Losses for Private Market Production of Public Goods Fig. 9/4 Social Optimum for a Public Good Fig. 9/5 Permits Issued Under Different Abatement Cost Scenarios Fig. 10/1 Financing Energy Projects Fig. 10/2 LNG Ship Fig. 10/3 Monopsony Purchase of Inputs for Competitive Constant Output Market and Constant Marginal Product up to Generating Capacity Fig. 10/4 Monopsony Purchases of LNG Fig. 10/5 Perfectly Price-Discriminating Monopsonist Fig. 10/6 OLEC as Monopoly Seller of LNG Fig. 10/7 Bilateral Monopoly in the Asia Pacific LNG Market Fig. 11/1 European Gas Grid, 1999 Fig. 11/2 Gas Fields in the Yamal Peninsula Area Fig. 11/3 Reaction Function for a Duopoly Fig. 11/4 Marginal Cost Curves for Producer 1 and 2 Fig. 11/5 Market Supply and Demand in a Competitive Market Fig. 11/6 Two Gas Producers Acting as a Monopolist. Fig. 11/7 Limit Pricing Model Fig. 12/1 R/P Ratios for the U.S. Fig. 12/2 Demand in the Current Period Fig. 12/3 Demand for Oil Fig. 12/4 Optimal Allocation of a Resource in a Two-Period Model Fig. 12/5 Consumer Surplus in a Two-Period Model Fig. 12/6 Dynamic Competitive Solution Maximizes NPV of Social Welfare Fig. 12/7 Change in Resource Allocation over Time with Income Growth Fig. 12/8 Resource Allocation over Time with a Decrease in Interest Rate from r1 to r2 Fig. 12/9 Two-Sector Model with Reserves of 250 Fig. 12/10 Allocation in Two-Period Dynamic Model with Constant Marginal Cost Fig. 12/11 Promising New Technologies Fig. 12/12 Two Period-Model with Backstop Fuel of $30 Fig. 12/13 A Monopoly Producer in a Two-Period Model Fig. 13/1 Gross World Primary Energy Consumption, 2001 Fig. 13/2 Fuel Sources for World Electricity Consumption, 2002 Fig. 13/3 Hydroelectric Power from a Dam Fig. 13/4 Solar One Fig. 13/5 Diagram of a Photovoltaic Device Fig. 13/6 Binary Cycle Power Plant Fig. 13/7 Flash Steam Power Plant Fig. 13/8 U.S. Electricity Production Costs Fig. 13/9 Hubbert Curve for Oil and Gas Reserves Fig. 14/1 Consumption and Production of Oil Products by World Region 2000 Fig. 14/2 Oklahoma Sweet Distillation Curve Fig. 14/3 Isoquants for the Leontief Production Function X1 = 2.5 min (u1, u2/2) Fig. 14/4 Diagram for Gasoline Blending Problem Fig. 14/5 Energy Transport Worldwide Fig. 14/6 Illustrative Gas and Oil Transportation Costs Fig. 15/1 U.S. Oil Prices 1859/2001 Fig. 15/2 Two Markets Before Trade Fig. 15/3 Two Markets After Trade Fig. 15/4 Future Prices Today by Maturity Date Fig. 15/5 Three-Month Convenience Yield for U.S. Light Sweet Crude Oil, January 1985 to January 2003 Fig. 15/6 One-Month and Six-Month U.S. Light Sweet Crude Futures Price Fig. 15/7 U.S. Refinery Mix for Four Most Important Products, April 2003 Fig. 15/8 Value of a European Call Option at Expiration Fig. 15/9 Value of a European Put Option at Expiration Fig. 15/10 Valuing a Call from an Underlying Stock Price Fig. 15/11 Value of One Half of a Stock in One Period Fig. 15/12 Value of a Borrowed Bond in One Period Fig. 15/13 Value of an Underlying Asset in a Binomial Lattice Fig. 15/14 Value of a Put Option in a Binomial Lattice Fig. 15/15 Lattice with the Underlying Asset Value and Probability of Each Node Fig. 15/16 Valuing a European Option with a Two-Period Binomial Lattice Fig. 15/17 Valuing an American Option with a Two-Period Binomial Lattice Fig. 15/18 Valuing a European Straddle at Expiration Fig. 16/1 Consumer Surplus for Markets for Two Types of Light Bulbs Fig. 17/1 Cultural Preferences for Individualism Fig. 17/2 Vertical Structure and Orientation for Four Corporate Structures List of Tables Table 2/1 Cosmological and Geologic Milestones in Energy Table 2/2 The World Largest Oilfields Table 2/3 Data on Some Major Oil Sands Table 2/4 Estimation of the Main Oil Shale Reserves Table 2/5 Major Eras of Coal Formation Table 2/6 Milestones in Recent Human Energy Use Table 3/1 10 Largest U.S. Coal Producers, 2001 Table 3/2 World Coal Producers Table 3/3 Energy Content by Coal Type Table 3/4 World Coal Production, Consumption, and Reserves, 2000 Table 3/5 World Gross Energy Consumption for Electricity Generation Table 3/6 European Coal Subsidies, 2001 Table 3/7 Revenues Related to Elasticities Table 3/8 Severance Tax Rates for the Largest Energy Producing States, 2002 Table 3/9 World Survey Selected Petroleum Product Prices, Including Taxes Table 4/1 Net Electricity Consumption, Growth and Population Table 4/2 World Net Electricity Generation by Type, 2000 Table 4/3 Financing for a Representative Utility Table 4/4 U.S. Average Electricity Prices and Consumption By Customer Class Table 5/1 Electricity Prices and Taxes Table 5/2 Electricity Trade in TWh Table 6/1 Major U.S. Oil Company Mergers and Acquisitions, 1910/2003 Table 6/2 OPEC Average Production and Quotas, 1984/2003 Table 6/3 OPEC Petroleum, Income, and Population Statistics for 2000 Table 7/1 World Dry Natural Gas Consumption and Production Table 7/2 World Natural Gas Reserves Table 7/3 Rents and Quasi-Rents Table 7/4 Likely Governance Structure Matrix Table 7/5 Top 10 Natural Gas Marketers, Second Quarter 2001 Table 7/6 Top 10 Interstate Pipeline Companies, 2001 Table 8/1 World's Largest Oil Spills Table 9/1 Resistivity Measures for Various Construction Materials Table 9/2 World Carbon Emissions and GDP Statistics Table 10/1 LNG Exporting Countries, 2001 Table 10/2 Developing Marginal Factor Cost for LNG Supply Function Table 11/1 Relative Share of Energy Consumption from Major Sources Table 11/2 Energy Production and Imports in Western Europe Table 11/3 Soviet Gas Contracts Table 11/4 Europe Pipeline Natural Gas Imports Table 11/5 Major Gas Companies in Western Europe Table 11/6 Gas Storage in the European Union, 2000 Table 12/1 Typical Lives for Various Equipment and Appliances Table 12/2 Proven Coal, Oil, and Gas Reserves and Production, 2001 Table 12/3 Costs for Gasoline and Backstop Technologies Table 12/4 Companies with Significant Oil or Gas Production or Refinery Capacity Table 13/1 Uranium Production and Resources, 2000 Table 13/2 Largest Uranium Producers in the World Table 13/3 Facilities for Conversion of Yellow Cake to HF6 Table 13/4 World Uranium Enrichment Facilities by Country Table 13/5 Operating Nuclear Electricity Capacity, 2001 Table 13/6 Some of the World's Largest Hydro Capacity Dams Table 13/7 Comparative Electricity Generation Cost Including Capital Table 13/8 World Proven Reserves and Undiscovered Resources Table 14/1 Boiling Ranges for Petroleum Products Table 14/2 Sample Crude API's and Prices, 2003 Table 14/3 Sample Crude Assays Table 14/4 World Refinery Capacity by Region Table 14/5 Reid Vapor Pressure Blending Problem Table 14/6 Summary of Refinery Problem Table 14/7 World Tanker Fleet by Size, 2001 Table 14/8 Tanker Freight Rates (% of Worldscale), January 2003 Table 14/9 Transport of Crude Oil and Products by Mode Table 14/10 Pipeline Diameters, Average Cost, and Capacities Table 14/11 World's Largest Net Exporters and Importers of Refined Petroleum Products in 1998 Table 14/12 U.S Domestic Distribution of Coal by Transportation Method, 2001 Table 15/1 Energy Future Contracts Table 15/2 Sample Futures Quotes for Heating Oil on NYMEX Table 15/3 Gains and Losses in the Spot Market at Various Prices Table 15/4 Gains and Losses in the Spot and Forward Markets at Various Prices Table 15/5 U.S. Refinery Products and Prices, April 2003 Table 15/6 Option Contracts Listed as of July 1, 2002 Table 15/7 Energy Futures and Options Quotes, May 15, 2003 Table 15/8 Variables that Affect American Option Values Before Expiration Table 16/1 Population and Estimated Internet Users for Selected Countries Table 16/2 Consumer Surplus for Bundled Products Table 16/3 Optimal Allocation of Resources Table 17/1 Sample Large Energy Companies International Operations Table 17/2 Cultural Differences
Library of Congress Subject Headings for this publication: Energy industries, International economic relations