Economics of Oil, Gas and Energy

1. Read
   through the Executive Summary of the UKERC report on the Rebound Effect.
   Briefly describe the difference between the “direct” rebound effect and
   the “indirect” rebound effect.
2. Critique
   the figures and the analysis on pages 11–13 of ExxonMobil’s “Outlook for
   Energy – A View to 2030”. Briefly
   address what is being assumed about how energy efficiency gains will affect
   energy demand in the future.
3. Open
   the Microsoft Excel workbook Interactive
   model, week 2.xlsm. This has
   been set up so that the numbers in the white cells can be changed and the
   charts will automatically be updated.
   (You may have to zoom in or out to see the full image clearly,
   depending on your screen resolution.)
1. On the “E vs. Y” tab, experiment
   by changing the entries in the white cells. Try to see how each of these changes
   the chart beside it. (Note: The allowable ranges for
   these inputs are restricted; if you get a result that seems improbable,
   it is probably because you have changed one of the inputs out of range.)
2. After you have played with it for
   a while, you will have forgotten where you started. Click on the Reset to Base Values button to return to the starting point.
3. After you reset to base values,
   increase the energy price from 0.05 to 0.10.

i.What happens to the values of E and Y?

ii.What does this imply about global economic activity if OPEC were
to increase oil prices?

iii.What does this imply about energy demand if a global carbon tax
were to be imposed?

iv.About global economic activity?

v.What happens to the E/Y ratio?
What does this say about how energy price affects the ability of energy
to create output?

1. Still
   on the “E vs. Y” tab, reset to base values. Then,
1. Increase capital from 1.00 to
   1.50.

i.What happens to energy use?

ii.To output?

iii.Why?

iv.What are the new values of energy and output?

1. Reset to base values and then do
   the same with labour.

i.What happens to energy use?

ii.To output?

iii.Why?

iv.What are the new values of energy and output?

1. Reset to base values and change
   the Ease of Substitution
   (technically, the elasticity of substitution between energy and the other
   inputs) to 1.5. Now increase the
   energy price from 0.05 to 0.10.

i.How do the values of energy and output compare to those you saw in
question 3. c.?

ii.How does the E/Y ratio compare?

iii.What does this tell you about the role of ease of substitution in
determining the economy’s response to an energy price increase?

iv.What does this tell you about the relative size of a carbon tax
needed to achieve a given level of energy use for an economy (or economic
sector) that exhibits greater ease of substitution than another economy?

1. Now
   go to the “E vs. Y (with efficiency)” tab.
   Reset to base values.
1. Increase the Energy Efficiency
   Gain from 0% to 100%. (This doubles energy efficiency—half the physical
   energy is now needed to produce the same “effective” energy.)

i.What happens to the value of E?

ii.What happens to the value of Y?

iii.What happens to the E/Yratio?

iv.Why doesn’t the doubling of energy efficiency result in a halving
of energy use?

v.Why does increasing energy efficiency increase output?

1. Now
   go to the “Growth” tab. Reset to
   base values.
1. First note that the long run
   growth rates are all approaching the growth rate of labour, 3%. Increase the savings rate from 5% to
   10%.

i.Does the long-term growth rate of the economy change?

ii.What happens to the overall levels of economic output?

1. Reset to base values. Increase the energy price from 0.20 to
   0.40.

i.Does the long-term growth rate of the economy change?

ii.What happens to the overall levels of economic output?

1. Reset to base values. Increase the ”Energy Price change in
   year 30” from 0.00 to 0.20.

i.Does the long-term growth rate of the economy change?

ii.What does the one-time increase in energy price do to energy use? Does the long-term growth rate of the energy
use change?

iii.What happens to the overall levels of economic output?

iv.What does this tell you about the ability of a one-time energy
price increase to restrain energy demand?

1. Now
   go to the “Growth (with efficiency)” tab.
   Reset to base values.
1. Change the Annual Energy
   Efficiency Gain from 0% to 5%. (Notice that, with Ease of Substitution
   set, as it is, to 0.5, the heavy dashed red line on the “Log Growth”
   chart is the energy demand trajectory you saw without the energy
   efficiency gain—it is the reference base energy demand line you should be
   looking at. The solid red line is the active energy demand line.)

i.What happens to the growth rate of energy demand?

ii.What happens to the growth rate of output?

iii.What happens to the E/Y ratio?

1. Leaving everything else as you now
   have it, increase the Ease of Substitution from 0.5 to 1.5.

i.What happens to the growth rate of energy demand?

ii.What happens to the growth rate of output?

iii.What happens to the E/Y ratio?

iv.What does this tell you about the relevance of ease of
substitution to the effect of continual energy efficiency gains on energy
growth?