Browsing by Author "Medlock, Kenneth B., III"

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    Aggregate Economic Implications of New Technologies in Energy Industry
    (2013-09-16) Zhang, Xinya; Hartley, Peter R.; Medlock, Kenneth B., III; Loch-Temzelides, Ted; Embree, Mark
    This thesis studies technological progress in the energy sector and the transition path from fossil fuels to renewable energy, with a particular emphasis on the conse- quences to the whole economy. Currently, there is an active discussion regarding sub- sidizing renewable energy sources, which are often portrayed as the sole future source of energy and the driver of signi cant employment and economic growth. However, innovation in the fossil fuel sector and its continuing development can also be a game changer and should not be ignored. In the rst chapter, we use a dynamic general equilibrium model with endogenous technological progress in energy production to study the optimal transition from fossil fuels to renewable energy in a neoclassical growth economy. We emphasize the importance of modeling technology innovation in the fossil fuel sector, as well as in the renewable energy industry. Advancements in the development of shale oil and gas increase the supply of fossil fuel. This implies that the \parity cost target" for renewables is a moving one. We believe that this important observation is often neglected in policy discussions. Our quantitative analysis nds that these advancements allow fossil fuels to remain competitive for a longer period of time. While technological breakthroughs in the fossil fuel sector have postponed the full transition to renewable energy, they have also created many jobs and stimulated local economies. In the third chapter, we use an econometric analysis to compare job creation in the shale gas and oil sectors with that in the wind power sector in Texas. The results show that shale development and well drilling activities have brought strong employment and wage growth to Texas, while the impact of wind industry development on employment and wages statewide has been either not statistically signi cant or quite small. The rst and third chapters question the current enthusiasm in policy circles for only focusing on alternative energy. Chapter 2 provides some theoretical support for subsidizing renewable energy development. Here we develop a decentralized ver- sion of the model in Chapter 1 and allow for technological externalities. We analyze the e ciency of the competitive equilibrium solution and discuss in particular dif- ferent scenarios whereby externalities can result in an ine cient outcome. We show that the decentralized economy with externalities leads to under-investment in R&D, lower investment and consumption, and delayed transition to the renewable economy. This may provide an opportunity for government action to improve private sector outcomes.
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    Essays in Structural Econometrics of Auctions
    (2012-09-05) Bulbul Toklu, Seda; Sickles, Robin C.; Medlock, Kenneth B., III; Cox, Dennis D.
    The first chapter of this thesis gives a detailed picture of commonly used structural estimation techniques for several types of auction models. Next chapters consist of essays in which these techniques are utilized for empirical analysis of auction environments. In the second chapter we discuss the identification and estimation of the distribution of private signals in a common value auction model with an asymmetric information environment. We argue that the private information of the informed bidders are identifiable due to the asymmetric information structure. Then, we propose a two stage estimation method, which follows the identification strategy. We show, with Monte-Carlo experiments, that the estimator performs well. Third chapter studies Outer Continental Shelf drainage auctions, where oil and gas extraction leases are sold. Informational asymmetry across bidders and collusive behavior of informed firms make this environment very unique. We apply the technique proposed in the second chapter to data from the OCS drainage auctions. We estimate the parameters of a structural model and then run counterfactual simulations to see the effects of the informational asymmetry on the government's auction revenue. We find that the probability that information symmetry brings higher revenue to the government increases with the value of the auctioned tract. In the fourth chapter, we make use of the results in the multi-unit auction literature to study the Balancing Energy Services auctions (electricity spot market auctions) in Texas. We estimate the marginal costs of bidders implied by the Bayesian-Nash equilibrium of the multi-unit auction model of the market. We then compare the estimates to the actual marginal cost data. We find that, for the BES auction we study, the three largest bidders, Luminant, NRG and Calpine, have marked-down their bids more than the optimal amount implied by the model for the quantities where they were short of their contractual obligations, while they have put a mark-up larger than the optimal level implied by the model for quantities in excess of their contract obligations. Among the three bidders we studied, Calpine has come closest to bidding its optimal implied by the Bayesian-Nash equilibrium of the multi-unit auction model of the BES market.
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    Modeling competition in natural gas markets
    (2013-09-16) Cigerli, Burcu; Hartley, Peter R.; Medlock, Kenneth B., III; Embree, Mark
    This dissertation consists of three chapters; each models competition in natural gas markets. These models provide insight into interactions between changes in market conditions/policies and market players’ strategic behavior. In all three chapters, we apply our models to a natural gas trade network formed by using BP’s Statistical Review of World Energy 2010 major trade flows. In the first chapter, we develop a model for the world natural gas market where buyers and sellers are connected by a trading network. Each natural gas producer is a Cournot player with a fixed supply capacity. Each of them is also connected to a unique set of importing markets. We show that this constrained noncooperative Cournot game is a potential game and its potential function has a unique maximizer. In the scenario analysis, we find that any exogenous change affecting Europe also has an effect in the Asia Pacific. The reason is that two big producers, Russia and the Middle East, are connected to both markets. We also find that a collusive agreement between Russia and the Middle East leads them to specialize in supply to markets based on their marginal costs of exporting natural gas. The second chapter is devoted to analyzing the impacts of North American shale gas on the world natural gas market. To better represent the North American natural gas market, this chapter also allows for perfect competition in that market. We find that North America exports natural gas when its supply curve is highly elastic and hence the domestic price impact of its exports is very small. Even so, the price impacts on the importing markets are substantial. We also find that shale gas development in North America decreases dominant producers’ market power elsewhere in the world and hence decreases the incentive of any parties to form a natural gas cartel. In the third chapter, we relax the assumption of fixed supply capacities and allow for natural gas producers to invest in their supply capacities. We assume a two period model with no uncertainty and show that there is a unique Cournot-Nash equilibrium and the open-loop Cournot-Nash equilibrium and closed-loop Cournot-Nash equilibrium investments coincide.
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    Oil and Macroeconomy
    (2013-09-16) Rizvanoghlu, Islam; Temzelides, Ted; Hartley, Peter R.; Ostdiek, Barbara; Narajabad, Borghan N.; Medlock, Kenneth B., III
    Traditional literature on energy economics gives a central role to exogenous political events (supply shocks) or to global economic growth (aggregate demand shock) in modeling the oil market. However, more recent literature claims that the increased precautionary demand for oil triggered by increased uncertainty about a future oil supply shortfall is also driving the price of oil. Based on this motivation, in the first chapter, we propose to build a DSGE model to explore macroeconomic consequences of precautionary demand motives in the crude oil market. The intuition behind the precautionary demand is that since firms, using oil as an input in their production process, are concerned about the future oil prices, it is reasonable to think that in the case of uncertainty about future oil supply (such as a highly expected war in the Middle East), they will buy futures and/or forward contracts to guarantee a future price and quantity. We simulate the effects of demand shocks in the oil market on macroeconomic variables, such as GDP and inflation. We find that under baseline Taylor-type interest rate rule, real oil price, inflation and output loss overshoot and go down below steady state at the next period if uncertainties are not realized. However, if the shock is realized, i.e. followed by an actual supply shock, the effect on inflation and output loss is high and persistent. Second chapter analyzes the effect of storage market on the monetary policy formulation as a response to an oil price shock. Some recent literature suggests that although high oil prices contributed to recessions, they have never had a pivotal role in the creation of those economic downturns. A general consensus is that the decline in output and employment was due to the rise in interest rates, resulting from the Fed’s endogenous response to the higher inflation induced by oil price shocks. However, traditional literature assumes that oil price shocks are exogenous to the U.S economy and they ignore the storage market for the crude oil. In this regard, a model with an endogenous (demand shock) or exogenous (supply shock) price shock may produce a totally different monetary policy proposal when there exists a market for storage for the crude oil. The rationale behind this idea is that when goods’ prices are sticky in the economy, the monetary authority can effect the level of inventories through the changes in the real interest rates. Thus, lower interest rate rules, as proposed in the literature, will cause additional oil supply scarcity in the spot market. Therefore, an optimal monetary policy that maximizes the welfare in the economy should consider the adverse affect of low interest rates on the crude oil market.
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    Tax Policy Analysis in a Flexible Computable General Equilibrium Model: Applications to Energy and Gross Receipts Taxation
    (2014-04-18) Barbe', Andre' Jean-Curtis; Zodrow, George R.; Medlock, Kenneth B., III; Sickles, Robin; Stein, Robert M.
    In this paper, I construct a new general equilibrium model of the United States economy that is better able to analyze energy and gross receipts taxes than previous models. Existing models in the energy literature fall into two groups: general equilibrium models of the entire economy with exogenous energy resource supply and partial equilibrium models of the energy sector with endogenous resource supply. I combine the main advantages of these two strains of the literature by incorporating endogenous resource supply in a computable general equilibrium model with highly disaggregated and flexible industry cost and consumer expenditure functions. My new model is able to analyze all the major inefficiencies caused by energy taxation, i.e. those related to production, consumption, resource rents, and externalities. In addition to its application in energy, my model is also ideal for looking at gross receipts and retails sales taxes. Gross receipts and retail sales taxes are important revenues sources for most US states and share many of the same issues as energy taxes. Retail sales taxes are commonly viewed as more efficient than gross receipts taxes because the latter apply to intermediate goods and thus result in production and consumption inefficiencies. However, in reality the retail sales taxes used by the US states are not pure consumption taxes, but tax many intermediate inputs while exempting many consumption goods. My model determines whether retail sales taxes are still more efficient than gross receipts taxes when these realistic factors are included. As an application, I use the model to analyze two tax reforms for energy or gross receipts taxes. First, President Obama's 2014 budget proposes to reform energy taxation by eliminating fossil fuel tax preferences. I find that the budget's tax increases for fossil fuels increase household welfare if the social cost of carbon emissions is over $15 per ton but otherwise reduce welfare. Second, I also use the model to examine a tax reform that replaces a typical retail sales tax with a generic gross receipts tax. Contrary to the conventional wisdom, I find that the gross receipts tax is more efficient than the retail sales tax, with an efficiency cost that is 6.8 percent of revenues less than that of the retail sales tax. These results demonstrate that the predicted impacts of the tax reforms are significantly altered by the features included in my model: general equilibrium effects, flexible substitution, resource rents, and externalities.
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    Three Essays in Energy Economics
    (2012-09-05) Li, Jianghua; Hartley, Peter R.; Medlock, Kenneth B., III; Fleming, Jeff; Kaminski, Vincent
    This thesis includes three chapters on electricity and natural gas prices. In the first chapter, we give a brief introduction to the characteristics of power prices and propose a mean reversion jump diffusion model, in which jump intensity depends on temperature data and overall system load, to model electricity prices. Compared to the models used in the literature, we find the model proposed in this chapter is better to capture the tail behavior in the electricity prices. In the second chapter, we use the model proposed in the first chapter to simulate the spark spread option and value the power generations. In order to simulate power generation, we first propose and estimate mean reversion jump diffusion model for natural gas prices, in which jump intensity is defined as a function of temperature and storage. Combing the model with the electricity models in chapter 1, we find that the value of power generation is closer to the real value of the power plants as reflected in the recent market transaction than one obtains from many other models used in literature. The third chapter investigates extremal dependence among the energy market. We find a tail dependence that exceeds the Pearson correlation ρ, which means the traditional Pearson correlation is not appropriate to model tail behavior of oil, natural gas and electricity prices. However, asymptotic dependence is rejected in all pairs except Henry Hub gas return and Houston Ship Channel gas return. We also find that extreme value dependence in energy market is stronger in bull market than that in bear market due to the special characteristics in energy market, which conflicts the accepted wisdom in equity market that tail correlation is much higher in periods of volatile markets from previous literature.