Expectations and adjustment in energy markets

Thesis/Dissertation · Tue Jan 01 04:00:00 EST 1985

OSTI ID:5638062

Craig, R S

This thesis develops and then implements two models - one a short run model of oil supply, and the other a model of energy demand that together describe the determination of oil prices in the short and the long run. Both models rely on a common methodology of dynamic optimization under rational expectations, and are estimated using the same econometric techniques. Dynamic behavior is introduced into the energy demand model by specifying costs of adjusting capital, while in the oil supply model it results from the maximization of profits subject to a stock adjustment constraint. The distinguishing feature of this methodology is that the linear quadratic structure of each optimization problem permits an analytic solution for the optimal adjustment path for the stock variable in each model. This solution can be formulated as a partial adjustment model that allows the optimal long-run values for these variables to be identified. Then, using this result, some theoretical properties of each model can be established by deriving demand, supply, and substitution elasticities. The energy demand model describes how the demand for oil shifts and industrialized countries adjust their capital stock in response to higher oil prices. It gives the conditions under which capital and energy will be short run complements but long run substitutes. The model of short run supply shows that given the unique structure of the oil industry, the sharp increases in the price of oil can be explained as the rational response of oil companies to supply disturbances in oil markets.

• Research Organization: Boston Univ., MA (USA)
• OSTI ID: 5638062
• Country of Publication: United States
• Language: English

Related Subjects

02 PETROLEUM
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29 ENERGY PLANNING, POLICY, AND ECONOMY
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Demand & Forecasting
DEMAND
ENERGY DEMAND
ENERGY MODELS
ENERGY SOURCES
ENERGY SUPPLIES
FOSSIL FUELS
FUEL SUBSTITUTION
FUELS
MARKET
PERFORMANCE
PETROLEUM
PRICES