Mineral and Energy Economics Research Projects
Carbon policy and the Structure of Global Trade
- Dr. Ed Balistreri, Dr. Christoph Bohringer (University of Oldenburg), Dr. Thomas Rutherford (University of Wisconsin)
Alternative perspectives on the structure of international trade have important implications for climate policy and its interaction with global markets. Under this project professors Edward J. Balistreri (Colorado School of Mines), Christoph Bohringer (University of Oldenburg), and Thomas F. Rutherford (University of Wisconsin) are considering carbon policy in the context of three widely applied, yet distinct trade theories. These structures are shown to have important implications for measures of carbon leakage and the spatial distribution of energy-intensive production. Furthermore, predictions about the transmission of carbon policy burdens to non-participating countries are critically dependent on the assumed structure of trade. It is shown that the structure of contemporary policy simulation models might significantly understate the importance of international markets in undermining subglobal climate action.
Mining and oil production is a relatively minor component of Central America's economies. Yet, as exploration success in the more traditional regions of the world decreases mining and oil companies are looking at Central America as a target for production.Belize, Guatemala, Nicaragua, Dominican Republic, and Honduras have all seen mining or oil production increase in the past decade. Central America's extant laws regarding exploration for and production of mining and oil are in most cases outdated and ill-suited for the current world order. In a research project coordinated by the Inter-American Development Bank (IADB), Professor Graham Davis is collaborating with researchers from several Central American countries to plot a path forward regarding public policy for mining and oil production. The final product will be a book co-authored with the IADB's Regional Economic Advisor for Central America, Dr. Osmel Manzano.
Recent evidence suggests that labeling of unconditional cash transfers (food stamps, etc) leads recipients to spend more on the labeled good. This research shows that the Winter Fuel Payment (WFP), a transfer in the UK meant to help older households stay warm in the winter, has distortionary effects on the market for renewable technologies. Although the WFP does not require households to spend the cash benefit on energy, households in receipt of the WFP are statistically less likely to invest in renewable energy technologies, such as solar water heaters, solar panels and micro wind turbines. This is because the WFP name appears to encourage households to use fuel, rather than investing the payment in renewable energy technologies
Since WFP eligibility is based on the date at which a member of the household turns 60 years, and because the WFP is not means-tested, it is possible to compare households who just missed eligibility with those that are only recently eligible. Information on household characteristics such as employment status and income were also controlled for. To ensure that differences in renewable energy installations were attributable to the WFP name, researchers further looked for changes in the propensity to purchase other durable goods. No change in investing in a new kitchen or car was found between those in receipt of the WFP and those not, while there was a clear negative shift in the probability of installing renewable solar or wind technologies.
Keeping older citizens warm in winter could still be achieved by nudging people towards cleaner or more efficient energy sources. Perhaps a benefit name that includes the words ‘renewable energy’ or ‘energy efficiency’ would ensure that households consider more energy efficient technologies while still achieving the health goals of the current WFP policy.
Each year oil companies are faced with important bid decisions regarding lease acquisitions in petroleum producing regions all over the world. As a result, these companies together commit billions of dollars in this competitive bidding environment. The complexities associated with competitive bidding are not new and have historically represented a difficult challenge for E&P decision makers. Analyses of recent lease sales in the Gulf of Mexico confirm this finding as they suggest that bid outcomes can be highly uncertain and the associated results for E&P companies who compete in this bid environment are mixed at best. The empirical data suggest significant over-bidding that can materially impact the economics of petroleum exploration activities. Data show that overbids at times exceed $10 million per block and total overbids can exceed $1 billion on a single lease sale basis.
Recent developments in bidding models offer companies a more robust alternative for evaluating blocks of interest. The decision models we present can replace bidding behaviors that are often due to incomplete information, poor analysis or emotions. These models predict the likelihood of competition and the magnitude of competing bids on blocks of interest, as well as recommend the optimal bid amount to maximize firm value. We discuss these econometric and decision analysis models and show how they can better inform decision makers and significantly improve the firm’s performance in the competitive bid environment.
Since 2007, coal-fired electricity generation in the US has declined by a stunning 25%. At the same time, natural gas-fired generation and wind generation have dramatically increased due to technological advances and policy interventions. We examine the joint impact of natural gas prices and wind generation on coal generation, with a particular focus on the interaction between low natural gas prices and increased wind generation. Exploiting detailed daily unit-level data, we estimate the response of coal-fired generation across six transmission regions within the US. We find that low natural gas prices and increased wind generation have both led to reductions in coal-fired generation. Furthermore, we find evidence that the interaction between natural gas prices and wind generation is statistically and economically significant, and led to a greater reduction in coal-fired generation than would be explained by either factor alone. For example, in the Midwest Independent Transmission System Operator (MISO) region, the reduction in 2013 capacity factors of coal-fired plants due to low natural gas prices was twice as large with wind generation at 2013 levels compared to the case where wind generation stayed at 2008 levels. Similarly, in the Electricity Reliability Council of Texas (ERCOT) region, had natural gas prices remained at 2008 levels, wind generation in 2013 would have reduced coal capacity factors by an inconsequential 0.1 percentage point; however, with natural gas prices at 2013 levels, wind generation reduced capacity factors by 4 percentage points. As a result, policies such as carbon pricing combined with increased renewable portfolio standards would be complimentary in terms of their impact on coal-fired generation.
Recycling, Solid Waste, and Public Policy
- Dr. Dan Kaffine (Co-PI, research lead), Dr. Rod Eggert (Co-PI), Dr. John Tilton (Co-PI), Dr. Edward Balistreri, Dr. Michael Heeley
It has been more than two decades since the modern era of recycling and waste disposal began. This research project, generously funded by the Alcoa Foundation, examines the intersection between public policy and waste and recycling. Specific, on-going projects look at incorporating greenhouse gas emissions into waste and recycling policy-decision models, impacts of carbon pricing on aluminum production and recycling activities, trends in generation and recovery of municipal solid waste, optimal recycling rates of different materials, impacts of waste and recycling policies on secondary scrap markets, and drivers of recycling innovation. It is hoped that the outputs from these projects will provide policymakers with new insights and policy guidance in the selection of waste and recycling management approaches.
An Examination of the Mine Value Curve (Sponsor: Denham Capital Management LP)
- Dr. Graham Davis
There is a belief amongst those in the mining industry that individual project share prices follow a fairly regular path as the project moves from exploration through to production. This price path at first rises, then falls once the major drilling results are in, and then rises again as the project moves towards production. Asset pricing dictates that such a price curve cannot be sustained, as investors would sell at the peak and buy at the trough, causing the curve to migrate towards one that has price increasing at the required rate of discount. This project seeks to explore whether such a curve actually exists, and if so, how it can be sustained given what appears to be trading strategies that would destroy the curve.
Replicating Sachs and Warner
- Dr. Graham Davis
In 1997 Jeffrey Sachs and Andrew Warner published the first of a series of empirical papers examining what has come to be called the Resource Curse. These papers have been cited thousands of times, have influenced development and industrial policies, and are the basis for many extensions and reexaminations of the Resource Curse theory. To my knowledge the papers have never been replicated, and so I undertook a program of research to do just that. I find that most of the regression results can be replicated, but that in some cases Sachs and Warner's policy conclusions are based on erroneous interpretations of the regression coefficients. In a 2011 paper called The Resource Drag (http://www.springerlink.com/content/5616136h56165282/) I also show that their early work suffered from omitted variable bias, and that once this bias is corrected there may no longer be a Resource Curse.
- John T. Cuddington
- Co-Author: Abdel M. Zellou
A number of authors have claimed that the strong upward movement in commodity prices since 2000 represents the early phase of a ‘super cycle’ driven by industrialization and urbanization in Brazil, Russia, India and China (the so-called BRIC countries), especially China. These super cycles are defined as long cycles of, say, 20-70 years in length – including both the expansion and contraction phases. These cycles, therefore, are much longer in duration than business cycles, typically defined as 2-8 or 2-10 years and their underlying causes are different. Heap (2005), Cuddington and Jerrett (2008) and Jerrett and Cuddington (2008) have provided empirical evidence consistent with the presence of super cycles in the prices of LME and a number of other metals. Moreover, the super cycle expansions match the timing of earlier industrialization episodes in Europe, the U.S., and Japan. Evidence on the presence of super cycles in energy commodities should be valuable for national and state governments, financial institutions and oil and gas companies alike. At the government level, countries that rely on the import or export of energy commodities need to take into account the presence of super cycles in energy commodity in order to define appropriate sectoral and development policies. At the firm level, the exploration-development-production-distribution-research-and-development cycle of energy projects often spans several decades, as do super cycles. Hence the investment decision made by oil and gas companies should be informed by the possible presence and timing of both long-term trends, super cycles, and business cycle movements in real energy prices. Our current research has an empirical and an analytical or theoretical component. On the empirical front, we ask whether there is evidence of super cycle behavior in energy commodities. On the theoretical front, we are attempting to build simple models capable of producing super cycle behavior. A summary of the two parts of the research follows.
IS THERE EVIDENCE OF SUPER CYCLES IN ENERGY COMMODITY PRICES? A FOCUS ON OIL AND COAL
On the one hand, the underlying demand drivers of super cycles should presumably hold for energy as well as non-energy minerals. On the other hand, the market structure of the global oil market is much different than the markets for, say, copper, aluminum, tin and zinc. Coal, in contrast, has been characterized by regional rather than an international market due to higher transport to product value ratio. In Zellou and Cuddington (2011), we examine the empirical evidence for super cycles in crude oil prices. The evidence is mixed with apparent SCs during some, but not all, historical episodes where metal price super cycles seem to have occurred. Possible reasons for this include domestic oil price regulations and oligopolistic market structure of the global oil industry. Our current research is looking for SCs in coal prices. Our empirical approach follows Cuddington and Jerrett. Specifically, we apply the asymmetric Christiano-Fitzgerald band-pass filter to real crude oil prices from 1861 to 2010 and to real coal prices from 1800 to 2009 to extract trend and super cycle components. We then examine the super cycle components in our energy commodity prices to see if they are similar in timing to those found in metals prices by Cuddington and Jerrett. Our preliminary analysis detects super cycles in energy commodity prices, with a strong correlation between the super cycles of coal and oil prices after World War II. The super cycle analysis is carried out using both nominal and real prices in order to determine whether these super cycles are an artifact of movements in the price deflator used (the U.S. CPI). We identify four super cycles in oil prices since 1861. These results are consistent with the recent work by Dvir and Rogoff (2009) on the changes in real oil price persistence and volatility.
A SIMPLE MINERAL MARKET MODEL: CAN IT PRODUCE SUPER CYCLES IN PRICES?
The analytical portion of our research is focused on developing a prototypical supply-demand model for a mineral / nonrenewable commodity. It embodies important distinctions between short-run and long-run mineral supply and the derived demand for minerals as intermediate goods in production sectors with differing intensities of use. This framework is used to address the question: under what conditions might one expect to observe super cycles (i.e. cycles with a period of 20-70 years) in minerals prices? We specify a plausible time path for growth and the structural transformation that accompanies economic development. Using these drivers and reasonable supply and demand parameters, price dynamics are simulated. The result is an asymmetric price cycle with a peak price that is about 200% above trend and an expansion phase that lasts for about 20 years. Thus, this simple model is capable of producing cycles of super cycle frequency with similar amplitudes to those estimated in the empirical literature.
Our initial effort has been to build a simple global model, without regional disaggregation. Our follow-on work will consider multiple regions at different stages of economic development.
The Terms of Trade Debate: Implications for Primary Product Producers
-Dr. John E. Tilton
The terms of trade debate initiated by Raul Prebisch and Hans Singer over half a century ago continues to this day, and is unlikely to be resolved soon. Regardless of the ultimate outcome, however, to suggest that countries should diversify away from the production of mineral commodities and other primary products, as Prebisch, Singer, and others have done, may be counterproductive, encouraging countries to abandon their most promising path to faster economic development.
This is because the long-run trends in the real prices of most goods reflect shifts in their market supply curves and in turn production costs. If the prices of primary products are falling but a country’s production costs are falling more, the producer surplus or wealth the country realizes is rising, increasing the benefits it receives from its primary product production and trade. Alternatively, if prices are rising but a country’s costs are rising more, the benefits from primary product production and trade are presumably falling despite the higher primary product prices.
This largely conceptual analysis will eventually be submitted for publication to a professional journal.
Material Efficiency: An Economic Perspective
-Dr. John E. Tilton
-Co-Author: Patrik Söderholm (Luleå University of Technology)
This work presents an economic perspective of material efficiency, and discusses the role of public policy in providing market incentives for a more efficient use of materials. In doing so, it comments on the engineering approach to material efficiency presented in an article that Allwood and others published in 2011 in Resources, Conservation and Recycling. We argue that concerns over potential future resource scarcities do not represent a strong motive for introducing policies to foster greater material efficiency but that various environmental externalities and information failures in the relevant material markets do. Moreover, in such instances, policy makers should opt for regulatory measures that target the relevant market failures (e.g., environmental damages) as closely as possible. This normally means avoiding policies that directly encourage specific material efficiency options. Policy measures that instead address particular environmental problems and information externalities will enhance material efficiency in a more effective manner. This is because ex ante it is difficult for policy makers to know in what ways and by how much to alter material production and use.
The World of Metals: Understanding the Behavior of Metal Markets and Industries
-Dr. John E. Tilton
This book project, which draws on my research and teaching over the past 30 years, aims to provide an overview for the interested non-specialist of how metal industries and markets operate and why they behave as they do.
The first half of the book, which is largely finished, examines the nature of metal demand and supply over both the short and long runs. Here among other things it looks at material substitution, recycling and secondary production, as well as by-product and co-product production. It then focuses on mineral markets and prices, and in particular why metal prices are so volatile in the short run, and why for many metals they have been falling in real terms over the long run. The recent rise in metal prices is also be examined, including the issue of whether this upturn reflects just another cyclical fluctuation or a reversal in the long-run downward trend in real prices. The first half of the book finishes by exploring international metal trade.
The second half will address a number of important policy issues associated with metal production and use. These include: the long-run threat posed by mineral depletion; the resource curse, or more generally the relationship between mineral wealth and the economic development of producing countries; the nature of the economic rents associated with mining and their distribution among mining companies, host governments, local communities, and other interested parties; and finally a host of issues related to mining and sustainable development, including the intergeneration equity and environmental and other social costs arising from mining and metal use.