AØKK08318U Seminar: Energy Economics

Energy is a vital component for any society. The access to cheap, clean, and secure energy is high on the agenda of any country and region. Thus, energy has received much notice from both politicians and from economists.

The energy market is heavily influenced by nature. On the supply side we have windmills that only produce when it is windy, and hydro plants that can only use the water available in the reservoirs. On the demand side, we use more energy in cold winters than in warm ones. As implied, the demand for energy is very seasonal. This leaves room for storage of energy (oil tanks, gas storages), financial price hedging, and possibly arbitration. Countries and regions prepare for extreme weather conditions and cold spells in dry years, as the unavailability of energy under these circumstances means casualties. However, this ‘insurance’ has the characteristics of a public good – so how do societies ensure that sufficient security of supply is provided?

Energy commodities on the exchange are as easy to trade as stocks and bonds, but not as easy to transport. Commodities have physical constraints that must be taken account of when priced in the financial market. The constraints include transportation capacity (e.g. tankers, gas pipelines), transportation time, political instability (e.g. Ukraine), storage capacity (gas storages, oil storages), transportation tariffs, production capacities and production fallouts. Thus, physical constraints like these will affect prices, trade, and availability.

Yet, these commodities are traded in vast volumes, globally. This leaves room for much financial analysis – a particular question of interest is how the market pricing corresponds to the monopolistic/oligopolistic domination of the supply of commodities. Further, energy has experience huge price fluctuations. One prominent example is the increase in the oil price from a level around $60 to around $150 prior to the crash in 2008, and the subsequent drop to $40 (a decline of approx. 75 per cent) in only half a year. There is much to analyze on the financial side of oil, gas, and electricity.

Looking at the supply side of energy, there are many examples of monopoly and oligopoly. The most obvious example is OPEC, which is a prime example of a cartel that dictates price. However the market power is not isolated to oil – there are only few major coal producers in the world, and Russian Gazprom has a huge influence on the European natural gas market. But even within Europe, large monopolies exists. State owned distribution companies (like DONG used to be) is seen in many countries (e.g. PGNiG in Poland).

Energy is a topic very much influenced by politics – climate politics, trade politics, and even social politics in some countries. Topics of interest here include security of supply, ‘energy independence’, the market liberalization in EU of first the electricity and since the gas market, and finally how auctioning of capacity constrained infrastructure can be implemented.

Finally, this seminar is on energy. In particular on issues related to power, oil, and gas. Although the relationship to environmental issues is close (emissions, CO2 quota, efficiency), environmental issues are not the aim of the seminar.