For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices ... more For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes. JEL Code: Q4
A key selling point for the restructuring of electricity markets was the promise of lower prices,... more A key selling point for the restructuring of electricity markets was the promise of lower prices, that competition among independent power suppliers would lower electricity prices to retail customers. There is not much consensus in earlier studies on the effects of electricity deregulation, particularly for residential customers. Part of the reason for not finding a consistent link with deregulation and lower prices was that the removal of the transitional price caps led to higher prices. In addition, the timing of the removal of price caps coincided with rising fuel prices, which were passed on to consumers in a competitive market. Using a dynamic panel model, we analyze the effect of participation rates, fuel costs, market size, a rate cap and a switch to competition for 16 states and the District of Columbia. We find that an increase in participation rates, price controls, a larger market, and high shares of hydro in electricity generation lower retail prices, while increases in natural gas and coal prices increase rates. The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation and raise prices in states that have little customer participation.
An important facet of the shale boom is that the crude oil produced from shale plays is predomina... more An important facet of the shale boom is that the crude oil produced from shale plays is predominantly “light” crude. Although the U.S. has one of the largest refining capacities in the world, it is mostly for non-light crudes. Only 37% of this capacity is for light sweet crude. Hence, the increase of “light” crude oil from shale may have resulted in a mismatch in light inputs and heavier refining capacity.
As the Texas economy diversified after the 1980s oil bust, the link between overall economic grow... more As the Texas economy diversified after the 1980s oil bust, the link between overall economic growth and the oil and gas sector weakened. The sector?s connectedness with the state economy increased again with the shale boom. However, service sector employment, especially in financial activities and professional business services, became increasingly prominent following the Great Recession.
Economic activity in the U.S. overall will benefit from the oil price collapse. The decline will,... more Economic activity in the U.S. overall will benefit from the oil price collapse. The decline will, however, negatively affect oil-producing states such as Texas and North Dakota.
We build and estimate a dynamic, structural model of the world oil market in order to quantify th... more We build and estimate a dynamic, structural model of the world oil market in order to quantify the impact of the shale revolution. We model the shale revolution as a dramatic decrease in shale production costs and explore how the resultant increase in shale production affects the level and volatility of oil prices over our sample. We find that oil prices in 2018 would have been roughly 36% higher had the shale revolution not occurred and that the shale revolution implies a reduction in current oil price volatility around 25% and a decline in long-run volatility of over 50%.
Oil price shocks have had significant effects on the U.S. economy, keeping energy supply, energy ... more Oil price shocks have had significant effects on the U.S. economy, keeping energy supply, energy policy, and energy security always in focus. The U.S. energy industry has become more efficient and productive, with increased output despite a smaller energy sector. Since the oil price shocks of the 70s, both the impact of oil price shocks and the way we think about them have changed. The impact of an oil price shock on GDP and core inflation is much smaller in magnitude than in the past and depends on the source of the price shock. The recent shale boom in the U.S. has significantly increased oil production to a record high. The short-cycle supply response of shale producers to price changes have trimmed the peaks and troughs of oil prices in the medium term. The shale boom has lowered our dependence on foreign oil and made us less vulnerable to a classic oil supply shock, but we need to contemplate the vulnerabilities that arise from the externalities of our energy use, which will become more critical as we go forward.
This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where coun... more This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, refined oil products, and a non-oil good. The model incorporates different types of crude oil that are imperfect substitutes for each other as inputs into the refining sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). We investigate the implications of a significant increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. refiners. In addition, fuel prices fall and U.S. GDP rises. We then use our model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint in 2013 through 2015. We find that the distortions introduced by the policy are greatest in the refining sector. Light oil prices become artificially low in the U.S., and U.S. refineries produce inefficiently high amount of refined products, but the impact on refined product prices and GDP are negligible.
The Federal Reserve Bank of Dallas, in cooperation with the Semiconductor Industry Association (S... more The Federal Reserve Bank of Dallas, in cooperation with the Semiconductor Industry Association (SIA), hosted a conference on nanoelectronics and the economy in Austin on Dec. 3, 2010. Economists and scientists explored how information technology has affected U.S. productivity and output growth and prospects for the future.
We wish to thank a number of people who helped make the conference possible. We especially thank ... more We wish to thank a number of people who helped make the conference possible. We especially thank Federal Reserve Bank of Dallas President Robert D. McTeer, Jr. for encouraging us to organize a conference on the economics of biotechnology. We are grateful to John Thompson of the Research Department for his help in hosting the conference. We also thank the conference speakers for sharing their insights and particularly Michael Lawlor for suggesting many of his fellow participants.
This paper analyzes the effects of a severance tax on the behavior of a profit maximizing firm wh... more This paper analyzes the effects of a severance tax on the behavior of a profit maximizing firm which explores and produces an exhaustible resource. The producer's response to the tax is studted and the deadweight losses from the tax are calculated. Time paths of exploratory effort, extraction and prices are computed. It IS shown that, in this dynamic equihbrium process. severance taxes induce the producer to reduce production and exploration and cause a shift in the time path for prices, similar to the static results. The deadweight losses associated with the tax are found to be very low, especially for low tax rates. 'Drawn from the Rice Univrrsify doctoral dissertation, 'An Optimal Control Approach to the Taxation of Exhaustible Resources'. I wish to thank Peter Mieszkowskt. Carol Dahl. Richard D. Young and an anonymous referee for their comments and suggestions. 'A severance tax is an excise tax imposed on producers of natural resources for the prtvtlege of severmg the resource from the soil. The IJX may be a flat per-unit rate or a given percentagr of the value of the resource produced (ad valorem). We have employed ad valorem taxes since ad valorem taxes are used most commonly by states. 'Although resources are traded internationally, thus making it reasonable to assume that any state will be small relattve to the market and will be a price taker; high transport costs in certain cases give rise to local markets. In the case of coal or natural gas, transport costs are relatively high and local markets do exist. For a distance of 1.000 miles, costs can be up to 50 percent of price per tcf for natural gas and 100 percent of price per ton for coal. Texas. for example, is clearly not a price taker in the U.S. natural gas marhet. [See Jane's Publishing Company (1984) and Dahl (n.d.).] 016%0572/X6/$3.50 0 1986. Elsevier Science Pubhshers B.V. (North-Holland) 'This has laker been relaxed to allow for ;I diminishing returns to scale productton function. 'See Adelman et al. (19113) for a comprehensive summary. 'A Cobb-Douglas exploration function has been estimated l'or the Powder River Basin in Wyoming by Drew (1974) and TV similar one (although not strictly Cobb-Douglas) by Pmdyck (1978) for the Permian Basin Regton in Texas. As cited by Drew et al. (1979, 1980). an exploration function must exphcitly specify some form of decline to be consistent with empirical observations, and discoveries should decline with time as more wells are drilled.
Many oil-exporting countries have subsidies on oil products. Plante (2014) has shown that fuel su... more Many oil-exporting countries have subsidies on oil products. Plante (2014) has shown that fuel subsidies can create significant distortions when considered in the context of an individual country which takes the world price of oil as given. Our paper extends the results of Plante (2014) by considering how fuel subsidies distort the global oil market and the global economy. We focus not only on how fuel subsidies could distort the world price of oil but also how it could influence other economic variables, such as trade flows, investment decisions, and consumption in oilimporting and exporting countries.
For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices ... more For many years, fuel switching between natural gas and residual fuel oil kept natural gas prices closely aligned with those for crude oil. More recently, however, the number of U.S. facilities able to switch between natural gas and residual fuel oil has declined, and over the past five years, U.S. natural gas prices have been on an upward trend with crude oil prices but with considerable independent movement. Natural gas market analysts generally emphasize weather and inventories as drivers of natural gas prices. Using an error-correction model, we show that when these and other additional factors are taken into account, movements in crude oil prices have a prominent role in shaping natural gas prices. Our findings imply a continuum of prices at which natural gas and petroleum products are substitutes. JEL Code: Q4
A key selling point for the restructuring of electricity markets was the promise of lower prices,... more A key selling point for the restructuring of electricity markets was the promise of lower prices, that competition among independent power suppliers would lower electricity prices to retail customers. There is not much consensus in earlier studies on the effects of electricity deregulation, particularly for residential customers. Part of the reason for not finding a consistent link with deregulation and lower prices was that the removal of the transitional price caps led to higher prices. In addition, the timing of the removal of price caps coincided with rising fuel prices, which were passed on to consumers in a competitive market. Using a dynamic panel model, we analyze the effect of participation rates, fuel costs, market size, a rate cap and a switch to competition for 16 states and the District of Columbia. We find that an increase in participation rates, price controls, a larger market, and high shares of hydro in electricity generation lower retail prices, while increases in natural gas and coal prices increase rates. The effects of a competitive retail electricity market are mixed across states, but generally appear to lower prices in states with high participation and raise prices in states that have little customer participation.
An important facet of the shale boom is that the crude oil produced from shale plays is predomina... more An important facet of the shale boom is that the crude oil produced from shale plays is predominantly “light” crude. Although the U.S. has one of the largest refining capacities in the world, it is mostly for non-light crudes. Only 37% of this capacity is for light sweet crude. Hence, the increase of “light” crude oil from shale may have resulted in a mismatch in light inputs and heavier refining capacity.
As the Texas economy diversified after the 1980s oil bust, the link between overall economic grow... more As the Texas economy diversified after the 1980s oil bust, the link between overall economic growth and the oil and gas sector weakened. The sector?s connectedness with the state economy increased again with the shale boom. However, service sector employment, especially in financial activities and professional business services, became increasingly prominent following the Great Recession.
Economic activity in the U.S. overall will benefit from the oil price collapse. The decline will,... more Economic activity in the U.S. overall will benefit from the oil price collapse. The decline will, however, negatively affect oil-producing states such as Texas and North Dakota.
We build and estimate a dynamic, structural model of the world oil market in order to quantify th... more We build and estimate a dynamic, structural model of the world oil market in order to quantify the impact of the shale revolution. We model the shale revolution as a dramatic decrease in shale production costs and explore how the resultant increase in shale production affects the level and volatility of oil prices over our sample. We find that oil prices in 2018 would have been roughly 36% higher had the shale revolution not occurred and that the shale revolution implies a reduction in current oil price volatility around 25% and a decline in long-run volatility of over 50%.
Oil price shocks have had significant effects on the U.S. economy, keeping energy supply, energy ... more Oil price shocks have had significant effects on the U.S. economy, keeping energy supply, energy policy, and energy security always in focus. The U.S. energy industry has become more efficient and productive, with increased output despite a smaller energy sector. Since the oil price shocks of the 70s, both the impact of oil price shocks and the way we think about them have changed. The impact of an oil price shock on GDP and core inflation is much smaller in magnitude than in the past and depends on the source of the price shock. The recent shale boom in the U.S. has significantly increased oil production to a record high. The short-cycle supply response of shale producers to price changes have trimmed the peaks and troughs of oil prices in the medium term. The shale boom has lowered our dependence on foreign oil and made us less vulnerable to a classic oil supply shock, but we need to contemplate the vulnerabilities that arise from the externalities of our energy use, which will become more critical as we go forward.
This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where coun... more This paper examines the effects of the U.S. shale oil boom in a two-country DSGE model where countries produce crude oil, refined oil products, and a non-oil good. The model incorporates different types of crude oil that are imperfect substitutes for each other as inputs into the refining sector. The model is calibrated to match oil market and macroeconomic data for the U.S. and the rest of the world (ROW). We investigate the implications of a significant increase in U.S. light crude oil production similar to the shale oil boom. Consistent with the data, our model predicts that light oil prices decline, U.S. imports of light oil fall dramatically, and light oil crowds out the use of medium crude by U.S. refiners. In addition, fuel prices fall and U.S. GDP rises. We then use our model to examine the potential implications of the former U.S. crude oil export ban. The model predicts that the ban was a binding constraint in 2013 through 2015. We find that the distortions introduced by the policy are greatest in the refining sector. Light oil prices become artificially low in the U.S., and U.S. refineries produce inefficiently high amount of refined products, but the impact on refined product prices and GDP are negligible.
The Federal Reserve Bank of Dallas, in cooperation with the Semiconductor Industry Association (S... more The Federal Reserve Bank of Dallas, in cooperation with the Semiconductor Industry Association (SIA), hosted a conference on nanoelectronics and the economy in Austin on Dec. 3, 2010. Economists and scientists explored how information technology has affected U.S. productivity and output growth and prospects for the future.
We wish to thank a number of people who helped make the conference possible. We especially thank ... more We wish to thank a number of people who helped make the conference possible. We especially thank Federal Reserve Bank of Dallas President Robert D. McTeer, Jr. for encouraging us to organize a conference on the economics of biotechnology. We are grateful to John Thompson of the Research Department for his help in hosting the conference. We also thank the conference speakers for sharing their insights and particularly Michael Lawlor for suggesting many of his fellow participants.
This paper analyzes the effects of a severance tax on the behavior of a profit maximizing firm wh... more This paper analyzes the effects of a severance tax on the behavior of a profit maximizing firm which explores and produces an exhaustible resource. The producer's response to the tax is studted and the deadweight losses from the tax are calculated. Time paths of exploratory effort, extraction and prices are computed. It IS shown that, in this dynamic equihbrium process. severance taxes induce the producer to reduce production and exploration and cause a shift in the time path for prices, similar to the static results. The deadweight losses associated with the tax are found to be very low, especially for low tax rates. 'Drawn from the Rice Univrrsify doctoral dissertation, 'An Optimal Control Approach to the Taxation of Exhaustible Resources'. I wish to thank Peter Mieszkowskt. Carol Dahl. Richard D. Young and an anonymous referee for their comments and suggestions. 'A severance tax is an excise tax imposed on producers of natural resources for the prtvtlege of severmg the resource from the soil. The IJX may be a flat per-unit rate or a given percentagr of the value of the resource produced (ad valorem). We have employed ad valorem taxes since ad valorem taxes are used most commonly by states. 'Although resources are traded internationally, thus making it reasonable to assume that any state will be small relattve to the market and will be a price taker; high transport costs in certain cases give rise to local markets. In the case of coal or natural gas, transport costs are relatively high and local markets do exist. For a distance of 1.000 miles, costs can be up to 50 percent of price per tcf for natural gas and 100 percent of price per ton for coal. Texas. for example, is clearly not a price taker in the U.S. natural gas marhet. [See Jane's Publishing Company (1984) and Dahl (n.d.).] 016%0572/X6/$3.50 0 1986. Elsevier Science Pubhshers B.V. (North-Holland) 'This has laker been relaxed to allow for ;I diminishing returns to scale productton function. 'See Adelman et al. (19113) for a comprehensive summary. 'A Cobb-Douglas exploration function has been estimated l'or the Powder River Basin in Wyoming by Drew (1974) and TV similar one (although not strictly Cobb-Douglas) by Pmdyck (1978) for the Permian Basin Regton in Texas. As cited by Drew et al. (1979, 1980). an exploration function must exphcitly specify some form of decline to be consistent with empirical observations, and discoveries should decline with time as more wells are drilled.
Many oil-exporting countries have subsidies on oil products. Plante (2014) has shown that fuel su... more Many oil-exporting countries have subsidies on oil products. Plante (2014) has shown that fuel subsidies can create significant distortions when considered in the context of an individual country which takes the world price of oil as given. Our paper extends the results of Plante (2014) by considering how fuel subsidies distort the global oil market and the global economy. We focus not only on how fuel subsidies could distort the world price of oil but also how it could influence other economic variables, such as trade flows, investment decisions, and consumption in oilimporting and exporting countries.
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