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International Energy Markets

In poorer countries, a significant amount of biomass is consumed to provide energy. This consumption, along with the associated land clearing and timber harvest, allegedly reduces the biodiversity on the planet, which might be considered a public good. In addition, the reduction in forest reduces the capacity of flora to absorb carbon dioxide (CO2) while at the same time, the burning of fossil fuels (largely from industrial countries) increases the amount of CO2 in the atmosphere. It is generally agreed that this buildup will cause global climate change, although when, where, and the exact effects of this buildup are more uncertain. Since everyone enjoys the benefits of biological diversity and lower levels of CO2––but they are non-excludable and non-rivalrous––they have the characteristics of public goods. An analysis of the provision of such public goods as well as current policies towards global climate change will be considered in chapter 9.

Market power in the hands of either buyers or sellers leads to an inefficient allocation of resources. If there is only one buyer in a market, we refer to this market structure as monopsony. One buyer is able to depress the buying price and reap monopsony profits. A multinational company with exclusive rights to buy energy resources in a small developing country with a weak government would be an example of market power on the part of the buyer. With the so-called redline agreement in 1928, the multinational oil companies of the time carved up the Middle East and agreed not to compete with one another over resources, preserving their monopsony power. We develop the monopsony model in chapter 10 and apply it to Japan’s purchases of liquefied natural gas (LNG) in the Asia Pacific market.

A single multinational company dealing with a strong government in an energy-rich developing country would be an example of a bilateral monopoly, which is a monopsonist buying from a monopolist. In such a case, the outcome is ambiguous and depends on the negotiation skills of the two players in the market. We conclude chapter 10 with pointers on negotiation along with “dirty tricks” to watch out for.

Few buyers or few sellers in a market constitute oligopsony and oligopoly, respectively. These models get more complicated as their outcome depends on the strategies of all the players in the market. We consider these market structures in the context of game theory with an application to the European natural gas market in chapter 11.

In chapters 2–11, we apply only static economic analysis to the allocation of energy resources. However, many energy sources––such as fossil fuels and uranium––are nonrenewable, depletable resources. For such a fuel, if we use the resource today it will not be available tomorrow, and dynamic analysis in which we maximize net present value of the resource is more appropriate. In chapter 12, we look at a basic two time-period model with applications to oil production and leasing.

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