Introfuction

Question 1

What are the main characteristics of energy projects?

Answer 1

1. Big size
2. Capital intensive
3. High risk
4. Price sensitive
5. Asset specific
6. Long gestation period
7. Natural monopolies common
8. Long life of assets

Question 2

What is Hubbert’s peak?

Answer 2

The rate of oil production tends to follow a bell shaped curve (peak oil)
- Infrastructure and production increase until decline due to resource depletion

Question 3

Describe a super simple two period model

Answer 3

Each firm chooses the amount to extract and sell to maximize the sum of its discounted profits

Question 4

What are the explicit and implicit assumptions of the Hotelling rule?

Answer 4

1. Fixed and homogeneous stock of known size
2. Rates are constant over time
3. Constant marginal cost
4. At each point in time identical demand curves
5. Fixed choke price (backstop technology)
6. No technical change
7. No externality

Question 5

Do resource prices actually follow Hotelling rule?

Answer 5

1. Berck (1955) ‘The results from such testing are mixed’
2. Barnett and Morse - resource prices for copper silver and timber fell over time, however this is the net price not market price! Not conclusive to disproving Hotelling
3. Miller and Upton - valuation principle ( relatively strong evidence)
4. Farrow tests for asset efficiency condition - rejects

Question 6

Problems with Hotelling

Answer 6

1. Uses ex ante rate not ex post
2. The discount rate needs a time manuscript, therefore price will not necessarily rise at a constant rate
3. Utilities are unobservable
4. Resource prices may fall because of new discoveries + better tech
5. Non competitive markets