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Essays On Risk In Energy Economics


My dissertation consists of three distinct but related chapters on Energy Economics and Finance. My first chapter is an empirical evaluation of market conduct in global crude oil markets. "Hotelling rule" states that even in competitive equilibrium, price of an "exhaustible resource" exceeds its marginal cost due to the opportunity cost of depleting the non-renewable resource. This cost is called "scarcity rent". Oil price exceeds its marginal extraction cost significantly. This can be attributed to two different sources: effect of scarcity of oil on prices or exercising market power by OPEC (collusion). In this paper, I use Porter (1983) approach considering the possibility of "scarcity rent" component involved in the gap between price and marginal extraction cost in the oil market. The novelty of my approach is to empirically estimate scarcity rent using data on cost of production of oil. Two benchmark cases, where scarcity rent is either zero (non-exhaustible resources hypothesis (Adelman 1990)) or equal to minimum price-cost margin are considered. The results show that in both cases OPEC failed to cooperate effectively and in second case, market conduct estimated is closer to Cournot behavior. In the second chapter of my dissertation, we employ a real options approach to evaluate oil and gas companies' investment decisions in an empirical setup. We develop a theoretical model to derive testable predictions. A unique measure of investment costs is obtained from energy industry data vendors. This novel dataset contains details of contract terms and pricing for offshore drilling equipment, which constitute the major share of investment costs in offshore oil field development. The investment database is combined with financial and macroeconomic data, which enables us to perform a panel data analysis of investments' response to variations in investment costs and market variables such as the slope of futures curve, firms' past earnings, cost of capital and implied oil price volatility. Our results show that the larger firms, facing less financial friction, are more forward looking while the smaller firms, who have less access to capital markets, are more dependent on their past earnings. The third chapter of my dissertation is about the effect of recent natural gas production boom on U.S. manufacturing. Natural gas production in North America has increased significantly over the past decade causing the prices to plunge during past 5 years. The purpose of this research is to investigate the effect of low natural gas prices on energy intensive U.S. manufacturing industries using market data. I empirically evaluate the stock market reactions of publicly traded companies in energy intensive industries to arrival of new information about the unexpected price shocks in natural gas futures markets. My results show that the stock market does not react significantly to innovations in the expected price of natural gas, proxied for by monthly changes in natural gas futures contracts with a fixed maturity date. I then split the sample into two groups based on their expenditure on natural gas as a ratio of their total production value. The stock market valuation of companies in high "natural gas intensity" industries were positively affected by unexpected downward shocks in natural gas prices and the results are significant.



My dissertation considers examples of how social, economic, and political incentives associated with energy production, distribution, and consumption increase the risk of harm to society and the environment. ,In the first essay, "Why America should move toward dry cask consolidated interim storage of used nuclear fuel," my co-authors and I discuss how the confluence of the U.S. Government and electricity utilities' political and economic incentives created a gridlock preventing a long-term nuclear waste disposal solution. We find that our current policies undermine the safety and security of the nuclear waste, and so, suggest a temporary, consolidated storage solution.,In the second essay, "Import-Adjusted Fatality Rates for Individual OECD Countries Caused by Accidents in the Oil Energy Chain," my co-authors and I adopt a technique from the greenhouse gas accounting literature and assign CO2 emissions to the final consumer (rather than the producer) by allocating the risk -- measured in fatalities -- associated with oil production to the final consumer. The new assignments show that normal methods of tracking oil production impacts only capture part of the actual costs.,In the third essay, "Insurgent Attacks on Energy Infrastructure and Electoral Institutions in Colombia," my co-authors and I consider the economic and political incentives that an energy resource create in a conflict environment. Our research shows that insurgents in Colombia, Las Fuerzas Armadas Revolucionarias de Colombia (FARC) and Ejército de Liberación Nacional (ELN), strategically time attacks on critical energy infrastructure during elections. These results are the first to quantify insurgent tactics to target critical energy infrastructure, which potentially undermine state capacity and democratic processes.

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