Energy Econ: Midterm

Use a two-period constrained utility maximization diagram to illustrate the consumer's choices in the following situation. The consumer begins with an initial endowment of wealth consisting of present goods only, and no future goods. The consumer can invest in a variety of potential "real" investment opportunities whereby the consumer can convert present goods into future goods at varying rates of return (i.e., various rates of converting present goods into future goods). The consumer can also make transactions in a financial market by either purchasing the right to future goods by giving up a specific amount of present goods (i.e., lend at a fixed interest rate) or purchasing a number of additional present goods by selling his/her right to a certain amount of future goods (i.e., borrow at a fixed interest rate). Making explicit use of indifference curves in intertemporal consumption space, draw the consumer's constrained utility maximization point. · Explain how this simple model illustrates that an individual can maximize his/her intertemporal consumption-possibility set by undertaking all investments with an internal rate of return (IRR) greater than the prevailing market rate of interest. · Explain how this investment behavior could also be described as undertaking all incremental investments having a positive net present value (NPV). Explain how this model also illustrates that the consumer will manage his/her initial assets in such a manner as to maximize the discounted present value of his/her wealth. · Briefly explain how this example also illustrates Fisher's Separation Theorem. (What two distinct decisions does Fisher's Separation Theorem refer to the "separation" of?)

- Can borrow and lend at the same interest rate, can go further by taking property right and giving up future stuff for present stuff - This is the way the marginal rate of transformation interacts with the marginal way you think about things.

three basic ways thermal energy is transferred from one location to another? Briefly explain what is involved in each one. Give a good practical example of each category.

- Conduction(Transfer of kinetic energy from one molecule to another, The heat you feel when you touch the stove) - Convection(Movement of agitated molecules through space to another location where they eventually release their energy to adjacent molecules through conduction,The molecular movement you can feel above a space heater) - Radiation(The transfer of heat through electromagnetic waves (not requiring any intervening molecules, The heat you can feel from a distant campfire or the sun)

Most oil-producing states have "conservation" laws regulating the development and production of oil and gas. In the absence of "conservation" regulation, what specific "anti-social" behaviors are individual oil and gas developers likely to engage in as a result of the "rule of capture"? Name three specific dimensions of regulations that were directed at controlling these specific anti-social behaviors (i.e., what very specific actions did they seek to modify or constrain)?

- External damages Surface contamination Pollution of aquifers -Internal Waste Dense drilling, especially along property lines Venting or flaring of gas Uneconomically rapid production rates -Discriminatory conduct Discrimination by affiliated pipelines and refineries

What is meant by the terms "energy density" and "power density"? What is an example of a fuel with low energy density? What is an example of a fuel with high energy density? Why are these concepts important as a practical matter in the development and deployment of useful fuels, energy-using technologies, and machines?

- High energy density fuels: Hydrogen and Natural Gas - Low energy density fuel: Lead Acid Battery(which run electric cars) and Lignite coal •Energy Density: Energy per unit of volume, area, or weight...E.g., joules per liter or kilogram, BTUs per gallon. Sometimes the term "specific energy" is used to distinguish energy density measured per unit of weight. •Power Density: Power per unit of volume, area, or weight...E.g., watts per pound, or watts per square meter. Sometimes the term "specific power" is used to distinguish power density measured per unit of weight.

Briefly state "Hume's Law" and explain its relevance to the study of normative economics?

- Hume's Law: Normative prescriptions cannot possibly be founded on only positive foundations. There must be at least on normative cornerstone - In terms of economics and public policy, Hume's Law suggests that we need to have an understanding of how the world works and of people's values, which determine utility - The three basic elements of normative theories: - A Theory of Value: Judgements as to what is good or desirable - Principles of Right Action: Actions which must be taken, or must not be taken - The "Moral Reference Class": Who or what really matters?

What is meant by "market failure"? Exactly what is it that markets are failing to accomplish when there is a "market failure"? In other words, in what way are they "failing"?

- Market failures refer to cases for which the market does not take into account the cost or benefit of an economic activity in the price of the good - When the actual price of a good is not reflected in the market, it will either be underproduced or over-produced, reducing total social efficiency

As a response to the objections leveled against some of the premises of Classical Utilitarianism, Wilfred Pareto proposed his now-famous Pareto Principle for judging whether one economic state of the world should be preferred to some other state of the world. Briefly state and explain this Pareto Principle. Is it completely free of controversy (i.e., "value-free")? What is the main shortcoming of the Pareto Principle as a guide to judging whether some public policy should be adopted?

- Pareto Principle: If we can somehow reallocate resources so as to make at least one person better off without making anyone worse off, then we should do it - All points that are Pareto Preferred are points in which we can increase someone's utility without lowering, or even increasing, utility for the other - Pareto principle is said to not be powerful enough to make a bold enough statement for it to be considered and economic policy

one example each of both "mechanical energy" and "chemical energy", explain and distinguish the concepts of potential and kinetic energy.

- Potential Energy: The energy stored in a body due to its position in a force field. Additional potential energy can be stored in an object by applying a force to it (e.g., lifting it to a higher position in a gravitational field. - Chemical potential energy: Potential energy inherent in the structural arrangement of atoms and molecules (fossil fuels). - mechanical potential example: sum of potential energy and kinetic energy, object's ability to do work and is increased as the object is moved in the opposite direction of the direction of the force - Kinetic Energy: The energy contained by a moving object due to its relative motion - Mechanical kinetic energy: A moving object like like falling water (hydro power). - chemical kinetic example: chemical reactions can either release energy or absorb energy, during a chemical reaction potential energy it converted into kinetic energy

Briefly explain the definitional difference between "primary energy" and "secondary energy". Briefly discuss how and why you would classify the following energy sources and forms as "primary" or "secondary" sources: coal, tidal flows, crude petroleum, natural gas, hydrogen, electricity, gasoline.

- Primary energy is found in nature, no conversion is necessary( found in nature - coal, natural gas, crude oil, uranium, falling water, wind, solar insulation, biomass, geothermal, tides) - Secondary energy is a source of energy that has been manipulated by humans to produce quick and instant energy(produced by humans- charcoal, manufactured gas, electricity, hydrogen, refined petroleum, refined natural gas)

In modern engineering terminology, what is usually meant by a "prime mover"? An important part of the energy transition during the past several hundred years has involved the co-evolution of both fuels and prime movers. Briefly discuss the various major fuels and prime movers that have been involved in this transition during the "early industrial age", and the more advanced industrial age in which we now live. Use a good example to illustrate this process of "co-evolution".

- Prime mover: Things that convert energy into mechanical motion - Machines, or prime movers, have adapted and changed with the types of fuels that can power them - fuels: biomass --> fossil fuels - prime movers: humans and animals --> engines and machines - heating: biomass --> coal --> coal and oil --> coal, oil and natural gas - lighting: candles and tallow--> whale oil --> kerosene and town gas --> electricity - mechanical: human and animal muscle --> water wheels and wind wheels --> steam engines --> I.C. engine, steam engines - transport: humans and animals and sails --> steam engines --> I.C. engines, gas turbines

If there is a sequential "dictatorship of the present" (as there appears to be), and if "that's worked out just fine so far", why is there now serious reason to worry that it may not work out so fine going forward into the future from here? That is, why might it have "worked out fine so far", and why might it not continue to do so going forward?

- The future is entirely at the mercy of the present, the future will simply get whatever the present leaves behind for them - To be sure, the present may be motivated by some degree of human altruism and bequest motive. Each generation will love its children and, possibly to a lesser extent, its grandchildren -the past acted largely in its own self interest and its failure to immiserate us due to resource depletion and pollution was simply due to the past's relative lack of power to do so. -hat our selfish pursuit of self-interest may be intergeneratonally unfair to an extent not previously experienced. In short, society may likely need to confront the "dictatorship of the present" as a serious ethical issue and, for the first time in human history, explicitly exercise forbearance in order to achieve intergenerational fairness.

In order to address the major shortcoming of the Pareto Principle, in the 1930s economists Nicholas Kaldor and John Hicks proposed "the Kaldor-Hicks" Compensation Principle. What exactly does the Kaldor-Hicks Compensation Principle say about how to determine whether one allocation of resources is better than another? What is the main shortcoming of the Kaldor-Hicks Compensation Principle? What analytical methodology frequently used for evaluating public policies employs the Kaldor-Hicks Compensation Principle, at least implicitly?

- The main shortcoming is that compensation is by no means mandatory, and therefore probably unlikely - Compensation to the poorest is the most efficient - Cost-benefit analysis uses this principle, saying that if the benefit is greater for the winner than the loss to the losers, then the policy is worth passing - The Kaldor-Hicks Compensation Principle - in evaluating the potential change in the allocation of societies resources, if the winners could hypothetically compensate the losers and still remain better off, then the change is a good one and should be adopted NOTE: there is no requirement that the compensation actually be paid

What two basic categories of energy studies came together and merged into the study of "thermodynamics" in the mid-1800s? First and Second Laws of Thermodynamics say? main significance relative to the economics of energy?

- The studies of motion and the studies of heat came together and led to the Laws of Thermodynamics - The First Law (Conservation of Energy): o In a closed system, energy may be either transferred to work or to heat, but the total amount of energy is conserved. o In an open system, the change in the internal energy of the system is equal to change of heat supplied to the system minus the amount of work done by the system on its surroundings (just "imports" minus "exports"). - The Second Law (The Entropy Law): o In a closed system, the amount of energy available to do work constantly declines (or, at least, does not increase). o When two bodies of different temperatures are connected with each other then the heat always flows from the relatively hotter body to the relatively cold one. o The entropy (degree of randomness or disorderliness) of a closed system always increases or remains constant. · Economic Implications o No process is perfectly reversible. The world can never be "put back to some prior state". In concept, all the matter could be restored to its former configuration, but the amount of energy available to do work could not also be restored to its prior state. o Whenever we act, there are no "free lunches". Something is always given up. (An action may or may not be worthwhile in a cost-benefit sense, but it will always have a cost to be considered.) o Perpetual motion machines are impossible. (That is, machines that do work but without an energy cost.) o The orderly molecular structures of fossil fuels can only release their energy once. (They could be reconstructed, but it would take more energy to do than could ever be recovered by their subsequent combustion.)

Classical economists first coined the term "rent" and it has "stuck" in the economics profession, even though its precise meaning has migrated a bit. When the term "rent" was first coined by classical economists, what was it used to refer to?

"Economic Rent" is the entire Payment Received by a Factor of Production that is in Fixed Supply in a Competitive Market property

What is an MER and what did regulation by MERs—and MERs alone—attempt to achieve as an objective? What is the essential difference between "MER Prorationing" and "Market-Demand Prorationing" (i.e., in what essential way did Market-Demand Prorationing exceed (i.e., be more restrictive than) MER Prorationing)? Which type of prorationing is identified with the elimination of "physical waste" only? Which type is identified with the control of both physical and "economic waste"?

"MER" Prorationing: Main objective is avoidance of "physical waste" A State-employed petroleum engineer establishes an "Maximum Efficient Rate" (MER) of oil production for each well consistent with managing reservoir pressure and "maximizing" ultimate recovery "Unitization" is the most stark form of this regulation—managing the entire reservoir as if owned by a single entity A limited exemption to antitrust laws was usually necessary to adopt unitization. "Market-Demand" Prorationing: Main objective is the control of "economic waste" In addition to individual MERs for each well, the regulator also periodically announces a Market Demand Factor (MDF) Allowed Production Rate = MER * MDF

Some oil producers advocated oil field "unitization". What is meant by "unitization" of an oil field? When "unitization" was applied to an individual field was it mainly directed at controlling "physical waste" or "economic waste" as those terms were used at the time? When oil field unitization was applied to an individual oil field, what basic broad objective did it seek to accomplish at that field? If and when unitization was adopted, what category of laws were the participants in unitization explicitly exempted from so that they could legally participate in unitization?

"Unitization" is the most stark form of this regulation—managing the entire reservoir as if owned by a single entity A limited exemption to antitrust laws was usually necessary to adopt unionization. Unitization" refers to the practice of jointly operating a reservoir as if it were a single unit under one management. (This generally requires that the state legislature grant a limited exemption to its antitrust laws for this purpose.) Even in some states not practicing full-blown unitization, small tracts of land were frequently aggregated into larger "drilling units" for the purpose of joint regulation.

Even if a market system is perfectly allocatively efficient (i.e., Pareto efficient), the system might "fail" in some broader sense to bring about a social welfare optimum for reasons other than allocative inefficiency. In what additional basic way might a market system "fail" under this broader definition of market failure? (For instance, even if markets were to allocate a finite non-renewable resource "efficiently", what broader policy issues would still be raised by the way in which markets allocate such a finite resource?)

In the real world - the pareto efficiency has unintended consequences. This largely depends on the rivalry in consumption and the ease of exclusion in a market. If a market has high rivalry and los ease of exclusion, you have open access market fails. If the market has low exclusion and low consumption the market creates public goods. With low rivalry and high exclusion= mixed bag where markets may be able to organize themselves and work, create private and public clubs and or regulated natural monopolies.

What several other factors in the late 1800s and early 1900s contributed to the eventual erosion of the concentration of economic power in the Standard Oil Trust? Briefly explain how each operated to erode the power of Standard Oil.

Interstate Commerce Act (1887) established railroad regulation Sherman Antitrust Act (1890) State laws mandating that oil pipelines be "common carriers" Hepburn Act (1906) extended federal regulation to interstate oil pipelines Development of crude oil transport by truck Opening of crude oil production in Oklahoma and Texas

Describe the condition (i.e., relationship between market price and production cost) that characterizes the long-run competitive equilibrium of the typical manufacturing firm operating in a perfectly competitive market. Now state the corresponding condition (i.e., relationship between market price and production cost) that characterizes the long-run competitive equilibrium for a mining firm operating in a perfectly competitive market. Carefully explain the reason for the difference between these two different conditions of long-run equilibrium. If there is an additional component in one first-order condition equation compared to the other, be sure to fully explain the nature of that additional component.

Manufacturing firm : P=LRMC Mining firm: P=LRMC + user cost (opportunity cost of not having it to sell at future date)

In what key way does the operational context of the typical manufacturing firm (as learned in Econ 52) differ from the operational context faced by the typical mining firm? In particular, what does each model assume about intertemporal opportunity cost of using a non-renewable natural resource input.

Mining firm owns a fixed and finite stock of non renewable raw materials, Key question is should I produce this today or tomorrow? Manufacturing has indefinitely large supply of resources and key question is how much can I produce today

What is meant by monopoly rents; how do they arise? How do these "monopoly rents" the concept of "producer surplus" found in the analysis of perfectly competitive markets? How do these monopoly rents differ from the concept of "quasi-rents"? How do they differ from the concept of "user cost" in the theory of non-renewable resources?

Monopoly rents refer to monopoly profits. Monopoly profits equal the difference in price and average costs, multiplied by the quantity. These monopoly rents are constant, so long as the monopoly is maintained. Quasi rents are a result of disequilibrium, whereas a monopoly is in equilibrium. User cost refers to the opportunity cost of using them now vs. in the future, this is called the non-renewable resource rent

What is meant in general by the term "hysteresis"? In economics, hysteresis effects are frequently encountered when long-lived sunk investments play an important role in determining the "short-run" equilibrium in an industry. Long-lived sunk investments can be especially important in the energy area. Using the examples of (1) sunk investment in new energy supply development, and (2) sunk investments by consumers in more energy-efficient capital stocks (more efficient cars, better insulated homes, etc), explain how these two different categories of sunk investments can cause significant hysteresis effects in the energy markets. In doing so, make explicit use of simple supply-demand curves.

Path dependence: where we are now Is because we have too many sunk investments in that matter Designed a keyboard that made it less likely for letters that were used together would be close to one another We got on that path, and we haven't changed it, we're not going to get off that path because there is so much sunk investment in that path Hysteresis: when we try to regress we end up taking a different path, not the path we took to get there

What three very broad categories of "anti-social behavior" in the oil patch were addressed by various types of regulations that were adopted in the early days of the oil industry?

Physical conditions at the core of the problem: The fluid and migratory nature of underground oil pools Multiple surface landowners, all with the right to "the rule of capture" Reservoir pressure dependent on pumping rates Ultimate economic recovery amounts dependent of pumping patterns Obvious manifestations of the problems: Dense drilling, especially along property lines All-out frenzied production Rapid dissipation of reservoir pressure Lower ultimate recovery amounts Discrimination by affiliated downstream buyers, transporters, and pipelines

essential distinction between "power" and "energy"? State a couple of commonly used measures of each (i.e., the "units" in which power and energy are frequently measured and reported). In what way is each important in getting work done? For instance, even if you have enough energy, why isn't that enough to get all varieties of jobs done?

Power - instantaneous flow/rate of energy at a particular point of time •Joule:amount of energy expended by a one newton force acting for one second •Watt: amount of power exerted when doing a joule of work per second •Watthour: amount of energy used in expending one watt of power for one hour (3,600 joules) •Calorie: amount of energy used to raise one gram of water by one degree C (about 4.2 joules)

In the simple Hotelling model, the broad conclusion reached is that market price along the equilibrium price path will increase at an increasing rate over time. What happens to this basic conclusion if we simply assume that the mining firms face an increasing marginal cost of production as they proceed with their cumulative production to date? (assume that all other aspects of the Hotelling model hold—such as the finite choke price in demand).

Prices will rise even further and decrease the quantity supplied in the market at the choke price -The Hotelling model is useful in focusing attention on the very real and important economic concept of "user cost". However, in its simplest form, the Hotelling model invites one to conclude that mineral prices will trend ever upward, that rents will increase exponentially at the rate of interest, and that the lowest-cost resources will always be exploited first. None of these inferences will necessarily hold true in the real world for various reasons:

What do economists mean by the term "quasi-rents"? What values can they take—positive, negative, or either? Explain. Do they quasi-rents persist in long-run industry equilibria? Briefly explain.

Quasi-rents are short-term profits that end up equaling to zero as firms enter and exit an industry Long-run rents are a result of long-run scarcity and will not be driven to zero because long-run scarcity precludes competitive entry of additional suppliers

Many of the "fluxes" we observe in the natural and manmade worlds involve the conversion of energy from one form to another. For instance, electrical energy can be converted to mechanical energy by means of an electric motor. List seven distinct manmade energy conversions by indicating: (1) the nature of the initial source of energy (e.g., electrical energy), (2) the nature of the terminal source of energy (e.g., mechanical), and (3) the manmade technology involved in accomplishing the conversion (e.g., an electric motor). (Surprise: You can't use the example I just used as one of your seven examples of energy conversion.)

Radient --> Electrical, solar cell Wind Energy --> mechanical/electrical, windmills Electrical --> heat, electric heater gravitational potential --> electrical, hydroelectric dams Electrical → Light through Fluorescent light bulb Electrical → mechanical through electric generator Chemical → mechanical gas turbine

Using the basic Ramsey Savings Model (i.e., intergenerational Corn-only Economy) and Koopmans' Spaceman Model (i.e., intergenerational Hardtack-only Economy), explain how radically different normative evaluations of the practice of discounting are reached in these two very different models. Briefly discuss what these two models seem to be telling us normatively about the impact of discounting in the real world that we actually live in.

Ramseys Savings Model Assumptions: 1.A fixed initial endowment of an investment/consumption good ("corn"). 2.The investment/consumption good ("corn") is intertemporally productive. 3.Diminishing marginal utility of consumption. 4.Constant population size (not necessary, but it helps simplify things and focus on what really matters). 5.An explicitly intergenerational model with a sequence of generations. Koopmans "cake eating" Model Assumptions: 1.A fixed initial endowment of a consumption good. 2.Consumption good can simply be saved; it has no intertemporal productivity. 3.Diminishing marginal utility of consumption. 4.Intergenerational

What is meant by a consumer's "marginal rate of time preference"? How does this differ from the concept of an individual's "intrinsic rate of time preference?

Rather than measuring the marginal rate of substitution between two goods, we look at the rate of substitution for the consumption of ONE good in two different times periods, the PRESENT and the FUTURE Marginal Rates of Time Preference also exhibit diminishing marginal rates of substitution MRTP = | MRS | - 1 , where MRS = ΔC1 / ΔC0

What are the key challenges in successfully transitioning to a post-fossil energy system based on renewable energy sources?

Renewable energy sources are often either extensive, and low-quality (not energy or power dense) or high-quality, but limited Need to invest in renewable energy infrastructure Easy to continue to use coal because it is power/energy dense and there are already sunk costs in the infrastructure for fossil fuels Innovation and continuing coevolution in prime movers -- machines need to adapt to the fuels we are using Strong public policy

What is meant by "reservoir rock"? What is meant by the "porosity" and permeability" of source rock? What is meant by "tight" reservoir rock and "tight" oil or gas formations?

Reservoir rock is where the oil, water, and and gas are stored. The rock is typically sandstone or carbonate. Two important characteristics of reservoir rock and porosity and permeability. Porosity: % of the rock volume not occupied by solid material (0-5% is too "tight"; 15-20% is good; >20% is excellent) Permeability: ability of fluid to flow through the rock (usually measured in cm/sec—a "Darcy")

In general, petroleum refining can vary from being very simple to very complex. What basic capabilities define this range of refining complexity? In other words, in general, what do the more sophisticated refineries do that the simpler refineries cannot do?

Simple Refining Steps Distillation ("topping", "fractionation") Separates various kinds of molecules by simple heating; the lightest ones simply rise to the top Desulfurization Additional Advanced Refining Step "Reforming" or "Cracking" Invented in 1913 Uses high temperatures and/or catalysts to breaks larger long-chain hydrocarbon molecules into shorter, lighter, and more valuable molecules

The early history of the U.S. oil market is primarily the history of John D. Rockefeller's Standard Oil Company. Explain in broad terms what general strategies and tactics Rockefeller used to assemble his Standard Oil refining monopoly.

Simple answer: Risk-taking, luck, leverage, hard work, and ruthless business tactics On the positive side: Increased efficiencies and cost reductions Achieving larger economies of scale by merger and expansion Getting preferential railroad shipping rates due to his size Through his operating efficiencies, he achieved huge decreases in the retail price of kerosene: from 58 cents in 1865 to 26 cents in 1870 On the negative side: Using unethical methods to force mergers E.g., Temporarily selling below cost to drive out competition ("predatory pricing") Secret rebates from the railroads for shipping his oil versus rivals' oil Buying political influence In less than four months in 1872, Rockefeller absorbed 22 of his 26 competitors in Cleveland.

If energy and matter are each conserved, then what happens when I "produce" heat by burning a ton of coal and getting a few hundred pounds of solid waste ash? The coal was "cold" to begin with, something got hot when I burned the coal, and there appears to be a lot less matter (i.e., apparently, just the ashes) by weight following the combustion. Didn't I just convert some mass into energy? Doesn't the First Law of Thermodynamics say that mass and energy are each "conserved"? I'm confused. Please explain to me what's happening? Or, is the First Law simply incorrect?

The first law states that in an open system( a system that has an input, such as the heat being added to the coal), the change in internal energy equals the change of heat supplied to the system minus the amount of work done by the system. Also, coal is composed of several chemicals, including water, which are burned off.

What is meant by the "Trilateral Oligopoly" that has characterized the evolution, functioning, and performance of the international oil industry over many years? Who are the three groups of players who constitute this trilateral oligopoly? Briefly discuss the nature of the conflicting interests between the three groups? By what general means does each of the three groups typically try to get a bigger piece of the "oil pie" (i.e., the economic "surplus" generated by the oil markets)? Discuss the nature of the conflicts within each group?

The oil industry is a trilateral oligopoly - there are 3 players Producing countries -Have high supply of oil One particular country is not going to be wholly in one point, most are producers and consumers to some extent International Oil Companies -They go into a country and seek rights to look for and develop oil -Buyers and sellers -They want cheap royalties, get the oil, and sell it to consumers & their country govt's for much higher prices -Consumers and their country governments are more consumers and buyers than producers (but they might also be host countries)

Even though we frequently speak of "monopoly power" being exerted in the oil markets, there really never has ever been literally a single supplier of oil. Instead, at any point in time, there has generally been one of more very large supplier and a lot of much smaller suppliers. An import mental-reference model for visualizing and understanding what is likely to happen in such a situation is the model of a single very large "monopolist" making production choices in the presence of a "competitive fringe". Using simple diagrams, briefly explain this "monopolist with a competitive fringe" model. Be sure to explain in the diagram—and in coherent words—how the monopolist goes about choosing its output level, i.e., what does he/she consider?

The supply line refers to all the small little companies, they are dependent on what SA does The Monopolist's MC would be something like Saudi Arabia Low production costs, marginal costs = average costs Dump it in the market - dump a lot, drive down the price, dump a little, drive up the price As you bring up the price, the small companies are going to dump supply and drive down the price As I think about shrinking my supply, I can first try to run out all the small companies first by producing very very little The right- that's the perfect amount, that's what makes that green box the biggest it can be Dnet = D total - little companies' supply

When individuals make intertemporal resource allocation decisions based on maximizing the discounted present value of their wealth, there can be no doubt that they are valuing the receipt of one more dollar in the future at less than one more dollar in the present. This behavior certainly seems to be evidence of their "impatience", i.e., their tendency to not value their future welfare as much as their present welfare. Briefly explain in plain English why this inference about their basic intertemporal attitude is too hasty—that is, the evidence is not sufficient to draw this conclusion. Be sure to include in your explanation the role played by the availability of intertemporally productive investment opportunities in explaining their observed "impatient" behavior.

The theory that higher spending in the present shows "impatient" behavior is only applicable to unproductive capital, i.e. capital that will serve me highest in the present Spending in the present can also incorporate productive capital, i.e. an investment, which creates opportunities or returns in the future as a result of present spending Intertemporal productive investment opportunities often can be analyzed as sacrifices in the present for gains in the future, which actually shows "patient" behavior

Briefly describe the chain of energy conversions involved in burning natural gas to spin a turbine to produce electricity to power a consumer's indoor home heating system. Briefly explain why this energy conversion chain is almost certainly a bad idea compared to a more straightforward alternative way to heat your house?

There are energy losses with each step. There are energy losses when energy is converted into electricity, in the transmission of electricity from a power plant to your home, and then from the electricity delivered to your home and the efficiency of your appliance

What did the Supreme Court do to the Standard Oil Trust in its decision in Standard Oil Co. of New York v. United States? In doing so, under what statutory authority was the Supreme Court acting?

Until 1881, the 41 separate companies controlled by Rockefeller and his partners were managed through cross-holding of shares. Standard Oil's chief lawyer, Samuel Dodd, proposed uniting these corporations by forming a "trust", a sort of holding company—a corporation of corporations. The companies within the trust included operations throughout the entire vertical chain of the oil industry from exploration and drilling to retailing, including: 20,000 wells, 4,000 miles of pipeline, 5,000 tank cars, and over 100,000 employees. Its share of world oil refining topped 90% (but soon eroded to about 80%, largely based on international developments in other countries such as Russia). The Standard Oil Trust soon moved to New York City, as did Rockefeller. In 1904, Ida Tarbell, a leading muckraker, published her scathing book: The History of the Standard Oil Company. In 1909, the U.S. Department of Justice sued Standard under the Sherman Antitrust of 1890 for illegally sustaining a monopoly and restraining interstate commerce. In 1911, in Standard Oil Co. of New Jersey v. United States, the Supreme court ordered the break-up of the Standard Oil Trust. •In 1911, in Standard Oil Co. of New Jersey v. United States, the Supreme court ordered the break-up of the Standard Oil Trust. Original Name Later Names •Std. Oil of New Jersey Esso, Exxon, ExxonMobil •Std. Oil of New York Mobil •Std. Oil of California Unocal, ChevronTexaco, Chevron •Std. Oil of Ohio Sohio (later acquired by BP) •Std. Oil of Indiana Amoco (later acquired by BP) •Continental Oil Conoco •Atlantic Atlantic, Atlantic Richfield, (later acquired by BP) Note: If Rockefeller's empire was hurt by the break-up, it didn't show. Over the next ten years, the separated companies net worth increased fivefold.

Some terminology questions: a. In the petroleum industry, what is meant by "upstream" and "downstream"? What specific three functions are carried out in each of these upstream and downstream segments of the industry? b. What is meant by an "Integrated Oil Company"? c. What is the basic distinction between the "Majors" and the "Independents"? d. What is the distinction between "Integrated Oil Companies" (IOCs), "National Oil Companies" (NOCs), and oil companies that are "Government-Sponsored Entities" (GSEs)? e. What are "Oil Services Companies"? Name several different types of services that they supply to the oil industry?

Upstream: - Exploration and Initial Drilling -Development -Production Downstream: -Transportation -Refining -Marketing/Retailing Integrated Oil Company: engaged in all upstream and downstream functions Majors: refers to the really big integrated oil companies vs. Independents: any company other than the majors, may or may not be very small, may or may not be very vertically integrated International Oil Companies (IOCs): traditional investor-owned corporations National Oil Companies (NOCs): wholly government-owned companies Government-Sponsored Enterprises (GSEs): hybrid companies; partially owned by government but also with publicly traded shares Oil Service companies: -Seismic Imaging -Exploration and Production -Oilfield Equipment and Services -Diversified Oil Services Companies

Carefully explain the concept of "user cost" as it applies in the theory of the mining firm. If there is a change in the productivity of alternative investment activities in the economy such that the equilibrium interest rate increases, how would you expect such a change to alter the intertemporal production plans of the individual competitive mining firm? Explain.

User cost = opportunity cost of not having it to sell at a future date because resources are finite benefit of selling today = P(today) - Marginal cost(today) benefit of selling tomorrow = P(tomorrow) - marginal cost(tomorrow) alternative investment Interest rate increases: produce now, use money to invest in other investments

Were oil producers all immediately and unambiguously in favor of market-demand prorationing? What broad category of producers tended to opposed this type of prorationing and why? What major events and economic forces eventually caused many of these opponents to change their minds?

What really happened took decades to unfold. Industry participants were contentiously divided on the extent and form of desirable production regulation. Industry participants took positions based on both ideology and self-interest. The major divide was between large interstate (and international) oil companies and the horde of independent "wildcatters": The Large Interstate Producers: They tended to support any reasonable measures to keep prices from collapsing, primarily because they had large volumes across all their interstate holdings that were adversely affected by low prices. (Low oil prices weren't just some local phenomenon.) The Local "Independents": Ideology/culture: Wildcatting was a "frontier" way of life to be protected. It was a way that any person could hope to get rich. It shouldn't be regulated. Feared that the large companies wanted to throttle back on local production simply to protect their broad interstate and international interests.

In terms of converting potential chemical energy into kinetic energy, explain basically what happens when you combust a fossil fuel such as gasoline, coal, or natural gas. Explain how the total amount of energy is 'conserved" in terms of the "end-products" of this combustion process.

When natural gas (CH4) is burned, some of the potential chemical energy in the natural gas is released in the form of the kinetic energy of the byproducts, CO2 and water. This increased kinetic energy is what we call heat energy, or thermal energy, and can be measured by the increased temperature of the byproducts. - hydrocarbons in the fossil fuels create energy to electrical energy.

Using a two-time period consumption-investment diagram, lay out a simple model of an economy with some corn capital and some hardtack capital, and use your diagram to illustrate the possibility that using up more than half the hardtack in the first period can be part of an optimal intergenerational investment-consumption plan even when the social welfare function is completely neutral intergenerationally.

You can eat more than half of the hardtack, but make all productive investments of corn up to a zero IRR

What is meant by a "cap rock" and an "oil trap"?

cap rock - impermeable rock layer, usually shales or salts oil trap - several kinds including anticline trap, salt dome and fault trap which are reservoirs of oil •It is estimated that only about 10% of all oil manages to get trapped in economic oil traps -The rest: 1.Doesn't get out of the source rock (too "tight") 2.Gets trapped in small uneconomic traps during migration toward the surface 3.Seeps to the surface and evaporates •Most, but not all, oil traps also contain some amount of natural gas and water -The water is almost always beneath the oil & gas and usually provides some amount of upward pressure in the reservoir -The gas (so-called "associated gas" may either be on top of the oil ("unsaturated") or dissolved within the oil ("saturated") -Although almost all oil is found with gas, some reservoirs contain only gas (called "unassociated gas")

Most states very quickly adopted statutes regulating local "gathering" pipelines for oil and gas as "common carriers". What legal obligation does a "common carrier" pipeline have? Describe the anti-competitive conduct that the imposition of common carrier obligations on gas and oil gathering pipelines was intended to control or eliminate? Why was this anticompetitive conduct especially abusive within the context of a common-pool resource like petroleum?

common carriers are responsible for the transportation of of the goods, and are responsible for any loss/damage of goods the anti-competitive conduct - discrimination by affiliated pipelines and refineries by not transporting some oil for people, having it sit in the ground, other drillers can suck up that oil (your partners)

Carefully explain why, in an industry extracting a non-renewable resource, even if the industry is full of small "price-taking" firms and there is free exit and entry, price will not generally be simply equal to the "direct" marginal cost of production alone (i.e., costs reflective of "out of pocket" expenditures on labor, raw materials, and capital) of extraction even if the industry is in a long-run equilibrium. What do economists call this extra component of "cost"? (Actually, they call it by several names. State as many of these names as you can think of.) Is this cost an "out of pocket" cost or some other kind of "cost" (i.e., by "cost" I mean a reason for not currently producing incrementally more at the margin in the current period)? Carefully explain.

externalities

What are tar sands? Where do the two largest reserves of tar sands in the world reside?

oil mixed with dirt, very dirty Canada (athabascan) and Venezuela (orinoco)

What key categories of changes are likely to affect the trajectory of mineral prices through time. Name as many important broad categories of changes as you can think of, and the directional impact you would expect them to have on the price path and annual production amounts.

ore quality substitutes extraction technology costs of cumulative production due to eventual lower ore quality regulations interest rates fixed and known stocks

What is meant by "the petrochemicals industry"? Give some examples of various petrochemical final products.

petrochemical final products. non - energy products Lubricants Detergents Solvents and cleaners Adhesives Synthetic rubber Plastics Polyvinyl Chloride (PVC) Cosmetics

What is the predominantly accepted theory of the basic original source of geologic deposits of hydrocarbons? What is the alternative "abiogenic theory" of their origins? Why, in general, are most scientists skeptical about the abiogenic theory of the origin of geologic hydrocarbon deposits? As a practical matter, what difference does it make which theory is correct?

predominantly accepted theory is that the bioaccumulation of sediment(and dinosaurs containing lots of lipids) at the bottom of lakes led to degradation and release of co2, methane and hydrogen-sulfide. Then it was put through extreme pressure and formed into source rock. abiogenic theory - The theory of the Inorganic Origin of Petroleum (sometimes called "abiogenic") holds that petroleum and natural gas are formed by non-biological processes deep within the Earth's crust and mantle. The very large and heretofore very underappreciated "deep biosphere" feeds on these rising molecules and contaminates them with the biomarkers we find in crude oil. This theory is more popular in Russia than in the U.S.. Thomas Gold, a leading U.S. astronomer and geoscientist, is the main U.S. scientific advocate of this theory.

List the nine categories of renewable energy and briefly discuss which have characteristics that are most likely to result in some meaningful amount of commercialization in the coming two centuries. In broad terms, what are some of the main challenges usually encountered in producing and distributing renewable energy?

solar radiation falling water (hydroelectricity) wind photosynthesis (biomass) wind generated ocean waves ocean currents ocean thermal gradients geothermal tidal nuclear may be renewable in the future?

What is the meant by "source rock" or "kerogen"? Why is the density of hydrocarbons in source rock important?

source rock contains up to 10% organic material, but usually 1-2% is more typical.

What is the basic distinction between "conventional" and "unconventional" sources of petroleum? Give a few examples of "unconventional" sources of petroleum.

unconventional oil is petroleum that is produced in ways that are different then the oil well(conventional) method. Unconventional methods are becoming more common due to increasing scarcity of conventional oil reserves. Examples include: oil sands (extra heavy crude oil), oil shale (organic-rich, fine grained sedimentary rock) and coal/gas conversion

Layout and explain the logic of the following simple Hotelling model illustrating the equilibrium intertemporal price trajectory of a perfectly competitive mining industry. Use the following assumptions:

· A fixed amount of a non-renewable resource · Resource ownership is divided among many price-taking firms · Cost of production is constant per-pound · The consumers' demand curve is identical in all future periods · The consumers' demand curve has a finite "choke price" Begin by noting that we are looking for the equilibrium paths for annual quantities supplied and annual prices. price and supply on one path, but we will focus on intertemporal price path. Nash equilibrium so everyone is satisfied and doesn't want to change from equilibrium. If the prices rose faster than interest rate then the firm would wait to produce later, but due to nash equilibrium we can see that Ptoday annual rate is equal to interest rate. Only this path satisfies the two necessary and sufficient conditions for the optimal path: (1) the path increases at the rate of interest, and (2) the total available product is exactly exhausted as the price reaches the choke price. Accounting for the cost of production, we actually want the net price to equal the interest rate new tech that lowers MC allows for quicker resource exhaustion

Briefly explain and distinguish the concepts of resource "depletion", "exhaustion", and general "economic scarcity". Which are economic concepts and which are physical concepts? Briefly explain why. What sorts of things might contribute to increased depletion, increased scarcity, or exhaustion? Are depletion, exhaustion, and scarcity reversible, or irreversible? Briefly explain.

•"Depletion": A reduction in the physical volume of economically available reserves. -Depletion occurs in any period in which production exceeds additions to known economic reserves. -Note importantly, additions to economic reserves do not simply take place due to new discoveries. Technological advances may also make previously known deposits now "economic". •"Exhaustion": A resource is said to be "exhausted" when there remains no meaningful amounts that can be economically extracted. -Note that "exhaustion" is not irreversible. Technological advances can render a previously "exhausted" mine economically viable once again. A resource can become an economic scarcity just to demand side changes

Crude oil comes in a wide range of qualities. In distinguishing these qualities, various terms are used to refer to different dimensions of their quality. Briefly and generally, what important dimensions do the following terms refer to: a. "sweet" vs. "sour" crude, b. the "API gravity", and c. the viscosity or "pour point temperature". In what way does each of these dimensions matter? In other words, in terms of each these three characteristic dimensions, what range of each spectrum would indicate a more valuable oil (i.e., sweet vs. sour, light vs, heavy) and why?

•"Sweet" -Sulfur content less than 0.5 % •"Sour" -Sulfur content greater than 2.0 % •Note that the sulfur content of an oil will have serious economic significance because the sulfur is costly to remove making it a higher cost feedstock for making gasoline. For this reason, it is generally more cost-effective to produce higher fractions of gasoline from sweet oil and produce greater fractions of heavy oil, diesel, and fuel oil from sour crude. - API - a measure of how heavy or light a petroleum liquid is compared to water, used to compare densities - pour point - the temperature at which it becomes semi solid and loses its flow characteristics, n crude oil a high pour point is generally associated with a high paraffin content most valuable - sweet, light and with low viscosity (easiest to process and use)

Focusing on the nomenclature used to measure and discuss electric energy and power, briefly distinguish amps (i.e., amperage) from voltage. What unit of measure is usually used to measure the output of electric power? What is the relationship between this measurement unit and volts and amps?

•An electric current is a flow of electrons through a conductor between two terminals with different electrical charges (high potential to low potential). The differential charges of the two terminals is the source of potential energy that produces the kinetic energy of the flowing electrons. •An ampere is a measure of the amount of electrons flowing (at near the speed of light) past a point in a circuit every second. One amp is equal to the passage per second of one columb of electrons (6.241 x 1018) •The voltage of an electric current is determined by the differential charge between the two terminals. One volt is equal to the amount of energy needed to convey one joule to one columb of electrons. -Amps refers to the size of the army of electrons (measured in columbs)flowing past a point in the circuit. -Volts refers to just how energized each member of that army is. Power = voltage x current Energy = energy x columb second columb second Watts = Volts x Amps

In 1890, the Supreme Court borrowed the legal concept of "correlative rights" from riparian water law and began applying it to petroleum law. Within the context of a "common pool" of subsurface oil, what was the general meaning and importance of replacing or qualifying the legal doctrine of "the rule of capture" with the legal doctrine of "correlative rights"? What was the legal implication of this Supreme Court ruling for state's authority to impose petroleum "conservation" regulation?

•In 1890, in the case of Ohio Oil Company v. State of Indiana, the Supreme Court transferred the concept of "correlative rights" from riparian water law to petroleum law. -The Court stated that the Rule of Capture applied only to the extent that it did not lead to the "annihilation of the rights of the remainder" to their "just distribution" of the common pool. -Thus, no landowner had the right to take more than its "fair share" of the oil in a common pool. •Obviously, this doctrine presented some serious challenges of practical implementation, but it did establish the legal doctrinal basis for further state regulation to address these issues.

In the confusing terminology used to refer to shale-related oil, what is the distinction between "oil-bearing shale", "oil shale", and "shale oil"?

•Oil-Bearing Shale: -Shale reservoir rock containing mature crude oil -Usually a "tight" formation that requires fracturing -Example: The Bakken formation in North Dakota •Oil Shale: -Shale containing large amounts of immature organic matter, or "kerogen" (not crude oil itself) -Example: Green River Formation in Colorado, Utah, and Wyoming •Shale Oil -A synthetic crude oil produced by heating oil shale in an anaerobic environment (pyrolysis)

In the process of getting crude oil out of the ground, what in general is meant by "primary recovery", "secondary recovery", and "tertiary recovery" techniques?

•Primary Recovery -Reservoir "drive" (internal pressure) comes entirely from natural forces within the reservoir •Pressure from the oil itself, natural gas, and/or water •Enables recovery of about 5-15% of the oil in the reservoir •Secondary recovery -Use of uplift pumps and/or, re-injection of natural gas, or injection of water ("water flooding") •Increases the total recovery rate to about 35-45% of the oil •Tertiary Recovery ("Enhanced Oil Recovery") -Methods that increase the mobility/fluidity of the oil in the reservoir •Typically injection of chemicals, steam, or CO2, or in situ combustion of a portion of the oil in the reservoir •Increases recovery by 5-15%, enabling total recovery of 40-60%

What is meant by "the rule of capture" in English common law and why was it important in the early days of petroleum development in the U.S.? What specific analogy from the English common law was applied to underground petroleum? What is the legal doctrine of "implied covenants" and how did this principle interact with the "rule of capture" to aggravate and intensify the anti-social effects of "the rule of capture" in the early days of the U.S. petroleum industry?

- Under English Common Law landowners had the right to shoot wild game that wandered onto their property. - Early on, the Pennsylvania Supreme Court ruled by analogy that fugitive underground oil was subject to the same "rule of capture". •The Doctrine of "Implied Covenants" -The legal doctrine of "implied covenants" merely exacerbated the "rule of capture". -An oil developer with a mineral lease on another party's property had an implied obligation to protect the lessor's interest in the lease by proceeding quickly and diligently with oil production. •The initial major oil strike in Pennsylvania, Oklahoma, and Texas were all followed by "overproduction" and severe collapses in oil prices. •Physical conditions at the core of the problem: -The fluid and migratory nature of underground oil pools -Multiple surface landowners, all with the right to "the rule of capture" -Reservoir pressure dependent on pumping rates -Ultimate economic recovery amounts dependent of pumping patterns •Obvious manifestations of the problems: -Dense drilling, especially along property lines -All-out frenzied production -Rapid dissipation of reservoir pressure -Lower ultimate recovery amounts -Discrimination by affiliated downstream buyers, transporters, and pipelines

What exactly is meant by a person's "intrinsic rate of time preference"? What does it have to do with whether a person is, in some broad sense, fundamentally "patient" or "impatient"? Explain.

- a persons intrinsic rate of time preference refers to the numerical value of their rate of time preference in the hypothetical situation in which they are both equally endowed in both periods - Someone with a lot of patience will have a positive Intrinsic Rate of Time Preference, someone with very little patience will have a negative IRTP AT THE MARGIN

if, in accordance with the First Law of Thermodynamics, energy is necessarily "conserved" and cannot be destroyed, then why do we worry about possible energy shortages?

- don't know how to harness energy when it is converted from one form to the next - need to have the energy do useful work - "use" energy to accomplish work, this energy is not destroyed (the First Law) but instead is transformed into a more "disordered" state (the Second Law) in which we lose the ability to use it to do further work

In the simple "slightly modified" Hotelling model (i.e., the model with a constant unit cost of extraction), what effect does a decrease in the per-unit mining cost have on the length of time taken to exhaust all the mines? If, by comparison, we consider the more realistic model in which per-unit extractions costs increase as a result of cumulative production in each mine, what happens to the length of time taken to exhaust the total resource as a result of a reduction (i.e., a downward shift) in the cumulative cost curve? Why do these two models produce such radically different results? Briefly explain the common sense of why you get these very different results depending on the assumptions embedded in the two models. Which of the two modeling assumptions seems to you to better reflect the actual practical reality of the mining (i.e., specifically, petroleum) industry?

- drop in per unit mining cost means less time to exhaust all mines - more realistic increases cause a longer time to exhaust - per unit extraction costs increase is more practical because we have already tapped into most of our largest oil reserves and technology hasn't been growing at a rate that would make up for the lacking reserve

Briefly list and explain five of the broad trends and features that have characterized the energy transition in the world during the past 300 years. What major shifts in fuels and prime movers were most salient in the 1800s? In the 1900s?

- humans and animals(prime movers) → engines and machines biomass(fuel) → fossil fuels - Main fuel transition: biomass(pre-industrial)→ coal → petroleum→ gas→ (the future)uranium and renewables? prime mover evolution: (pre-industrial) human muscle → animal muscle → water wheels → (early industrial age)steam engines → (industrial age) electric motors→ water turbines → internal combustion engines → steam turbines → gas turbines

What makes Energy Econ worth studying? What are the dimensions of energy "specialness", what ways do they correspond to the various issues encompassing "the energy problem"

- large renewable energy stock (are we depleting the fossil fuels too fast?) - Susceptibility to market power (are we getting ripped off?) -Dependence on insecure foreign sources of energy( How do we best attain and maintain energy security?) - Our energy use is causing environmental degradation - politically sensitive commodity, (too much government involvement and regulation? not enough?)

Assume that a consumer has a relatively large amount of wealth in the form of claims to current consumption. Assume that the person can lend at a nice rate of interest such as 20%. Further assume that the person has intertemporal consumption preferences exhibiting a completely neutral intrinsic rate of time preference. Draw a diagram in intertemporal consumption space showing the individual's optimal intertemporal allocation of resources (i.e., optimal lending pattern and intertemporal consumption pattern). What is the person's marginal rate of time preference at this optimum point? Will the person choose to consume more in the present period or in the future period? Will this choice make them look "patient" of "impatient"? If we asked them how much of an increment to future consumption would it take to induce them to forgo one more unit of present consumption, would we expect their response to be greater than or less than 1.2 units? Why? Does their response to this marginal question make them appear to be "patient or impatient? If we focus only on their response to this latter question about incremental willingness to borrow or lend, does their response to this "marginal" choice make them look "patient" or "impatient"? Briefly discuss the seemingly contradictory (but really only superficially contradictory) evidence of "patience" and "impatience" in this example.

- negative marginal rates = patient - positive marginal rates = impatient (this example) more in the future - their future consumption will be greater than 1.2, because the interest rate is 20% and it only makes sense for them to get a return greater than that -Human beings may or may not be basically impatient, but the fact that they adjust their marginal behavior to an intertemporal price signal in the market place (namely, the interest rate) is not in itself empirical evidence of any basic impatience, but rather simply impatience at the margin. ----- In this example because we are looking at the margin it appears our preferences are impatient but in reality this does not explain our preferences as a whole, just at this point when our endowment of future would be greater

Just as an example, when Saudi Arabia sells a barrel of oil at prevailing market prices, what are the various categories of "rents" that may be embedded in the net revenues that it earns? Briefly explain the underlying causes of each of these potential "rent" components.

-Simple supplier surplus: result of getting a higher price than their willingness to sell -User Cost: non-renewable resource scarcity rent (what they get out of using a resource now vs. in the future) -Quasi-rent: disequilibrium profits as firms enter and exit a market -Monopoly rents: the long-term profits that a company, or group of companies make when they have control over price

When neoclassical economists analyze the sustainability issue, they generally adopt a "weak sustainability" framework rather than some form of a "strong sustainability" framework. What's the basic difference between the two different normative criteria of "weak sustainability" and "strong sustainability"?

-Weak vs. strong sustainability: Whether society is, or is not, on a sustainable path -Neoclassical economists like to maximize the capital in the present and discount the value of that capital in the future -How much do we value present consumption over future consumption, and how does it relate to Pareto efficiency?

Because crude oil comes in such diverse quality, there is no single price of crude oil. Nonetheless, people want a "quick and dirty" indicator of whether the prices of crude are going up or going down, and market participants want a specific commodity to hedge. Therefore, at least two leading "marker" or "benchmark" crudes are commonly quoted in the financial press: WTI, and Brent crude. What does each specifically refer to? Which one is higher quality? Which one is more heavily traded in financial derivatives markets in the U.S. and, therefore, more commonly regarded in U.S. markets as "the" price of crude oil?

-West Texas Intermediate (Cushing, Oklahoma) API gravity of around 39.6 (light) Sulfur content around 0.24% (low-sulfur; "sweet") -Brent Crude (East Shetland Basin in the North Sea) API gravity of around 38.1 (light) Sulfur content around 0.37% (low-sulfur but not as sweet as WTI) -Dubai Crude (UAE) API gravity of about 31 (medium to medium-light) Sulfur content of about 2% (high-sulfur; "sour") Used mainly to price Gulf crude going to Asia -Saudi Arabian Light (Ras Tanura, Saudi Arabia) API gravity of about 32.5 (medium-light) Sulfur content around 1.8% (somewhat "sour") -OPEC Reference Basket A weighted average of 11 different oils from OPEC countries

What was meant by "hot oil", and what kind of regulation was imposed under the Connally Hot Oil Act? Why did this federal law seem to be necessary and even get support from "states' rights" advocates at the time?

-policing interstate commerce in "hot oil" (i.e., the Connally Hot Oil Act) Hot oil: oil that is drilled outside of limits set by market demand prorationing (illegal drilling) specifically 1930's in Texas -When the National Industrial Act was being adopted, Senator Tom Connally of Texas added the so-called Connally Amendment requiring the Department of Interior to police the transportation of "hot oil" across state lines, a measure designed to plug the main leakage in states' enforcement of their prorationing statutes. When the Supreme Court invalidated the entire NIRA petroleum code in 1935, Congress immediately passed the Connally Hot Oil Act of 1935 in order to preserve the federal policing of interstate commerce in "hot oil" and thereby provide necessary assistance to states in enforcing their own prorationing codes

What presumably happens to upwardly migrating underground oil and gas if it never hits a cap rock?

-reaches the surface, oil shows (la brea tar pits) -

In the formation of oil and gas, what role is played by natural "thermal cracking" in the "oil window"? What is meant by each of these terms? What will happen if the source rock does not spend sufficient time in the oil window? What will happen if the source rock spends too much time below the oil window under greater heat and pressure?

-thermal cracking is process in which hydrocarbons such as crude oil are subjected to high heat and temperature to break the molecular bonds and reduce the molecular weight of the substance being cracked. -the oil window is the period of time that's just right for oil, you don't want it to be heated for too long or it all turn to methane

In order for perfectly competitive markets to be "Pareto Satisfactory", what several broad assumptions need to be true? In general, markets fail to be Pareto efficient because one or more of these assumptions are violated. Economists use various terms to refer to the market failures associated with the failure of each of these assumptions. Name and briefly explain at least four of these reasonably distinct types and contexts of market failure, including a specific example of a real-world failure in each category. (Be sure that your examples help distinguish at least four reasonably distinct real-world categories of market failure.)

1. Human Happiness is the only thing that matters. 2. Consumer sovereignty should reign. 3. Utility is ordinally measurable and it is revealed through actual behavior 4. Someone has to be better off without making anyone worse. Market Failures Public goods- are goods that anyone can enjoy that do not detract from other peoples enjoyment. eg-listening to music. A movie theater. etc. Adverse selection- Relates to Asymmetric information where a buyer is confronted with the probability of loss due to unknown or disclosed information from the seller or investor eg- Insurance company- someone wanting to buy life insurance. Monopoly- can exercise market power because either one or a few firms are working together. Reduce quantity and drive up the price of the good. eg- monsanto on their genetically modified corn Insecurity of tenure- the possibility that a current available resource could be cut off. The ending of a contract. eg- Oil in Iraq- Our oil contract with Iraq could be cut off at any moment. We extract quickly as a result.

Economic theory says that if markets are universal and perfectly competitive, the market system will be "Pareto Satisfactory". What exactly does this mean? In what way does this theorem tend to broadly influence most American economists' thinking about how best to approach public policymaking.

A- Pareto satisfactory means that if it is possible, we should reallocate resources so as to make one better off without making another person worse off. B- The pareto principle is silent and can't guide policy makers into making decisions. In theory, its basically impossible to make one person better while not making someone else worse off.

In theory, is it possible through a combustion process to convert chemical energy (e.g., as found in coal) into mechanical energy with perfect efficiency? According to Carnot's theory of "heat engines", what would it take (i.e., a necessary design condition) in order to convert heat energy into mechanical energy with 100% efficiency through the use of a heat engine? State and briefly explain the simple Carnot equation governing the theoretical maximum efficiency of this conversion of thermal into mechanical energy.

Carnot's Law: - maximum theoretical efficiency = (input temperature in K of thermal temperature minus exhaust temperature in K of thermal temperature) divided by input temperature in K of thermal temperature - To get 100% efficiency you would need tech that made the exhaust absolute zero degrees Kelvin. - In order to get the highest maximum theoretical efficiency, you can decrease the low temperature or increase the high temperature in a heat engine - Economically cheaper to crank up the heat than to try to refrigerate and lower the temperature

Briefly discuss the nature of the basic challenges presented in transitioning from fossil fuels to renewable fuels due to significant difference in energy and power densities.

Coal is compact, ready available, and energy dense Many renewable energy sources are either low-quality, as in they are not energy or power dense, or they are incredibly hard to collect As Prof puts it, they are subtle, and therefore hard to convert into useable energy sources We need a huge development in technology and investment in infrastructure to implement structures that will harness these energy sources efficiently Energy production from renewable sources is less instantaneous, so we have to find a way to harness all the energy when it is at its peak and then somehow store it in order to be able to use it during high-demand, peak hours

Each generation undertakes various activities that may be either complementary or "competitive" across generations. What broad categories of activities are complementary? Which activities are conflicting or "competitive" across generations?

Complementary: -Investment in human made capital -Preservation of natural capital -Technological advances: advances in basic knowledge and development of practical engineering skills Competitive: -Depletion of natural resources for current consumptive uses -Destruction of natural capital for consumption or incidental to self-interested activities

State the formula for compounding when compounding of interest payments takes place only at discrete intervals (e.g., monthly, quarterly, or annually). State the corresponding continuous mathematical formula for compounding when interest is compounded continuously (i.e., every nanosecond). Now state the two respective formulas for discrete and continuous discounting.

Compounding when compounding of interest payments takes place only at discrete intervals: Bt = A(1+r)^t where Bt = value of deposit after t compounding periods, r = interest rate compounded every period, and A is the amount deposited at time period t= 0 Compounding when interest is compounded continuously: Bt = Ae^rt Discounting at discrete intervals: A = Discounted Present Value of Bt = DPV (Bt) = Bt/ (1+r)^t Continuous discounting: A = DPV (Bt) = Bt*e^-rt

What is the difference between cost-benefit analysis and cost-effectiveness analysis? Which involves "optimization" and which involves "cost-minimization" only? Which one of these techniques involves "weaker" value judgments (i.e., value judgments that it would be easier to build a consensus around)? Which one of these techniques might be regarded by some (many?) as economists being over-reaching in their aspirations?

Cost benefit analysis is the process of avoiding costs while cost-effectiveness analysis is the process of achieving a goal with the least amount of sacrifice/cost. Therefore, cost-effectiveness analysis involves optimization while cost-benefit analysis involves cost-minimization. Cost-effectiveness involves weaker value judgments and cost-benefits is seen by many as over reaching their aspirations.

What is meant by "the dictatorship of the present"? Is it inevitable? Can it be avoided? (To the extent that you have a different take on this question than offered in my "class notes", your sincere insights on this issue would be greatly appreciated.)

Dictatorship of the present refers to the fact that the destiny of future generations is determined by current generations, without any ability of future generations to bargain for their own interests It is inevitable, and there are only three ways in which the future is protected: -The present may lack the technology to destroy the resource base (which seems no longer the case); -Destruction and depletion of the resource base may not be in the self interest of the present; -The present may have an altruistic regard for the future—at least the next generation or two.

What exactly is meant by the concept of "discounted present value" (DPV)? If the prevailing interest rate during the next 10 years is expected to be 5%, write a mathematical expression stating the present value of an asset (e.g., a financial contract) which simply promises to pay the owner of the asset $1,000 ten years from today.

Discounted present value accounts for the fact that value in the future will not have the same value as it does in the present if there is an interest rate above 0% The DPV determines how much a set amount of money in the future is worth in present values In this case B sub-t = 1,000; r = 0.05; and t = 10

What broad class of technology is used in the most thermally efficient heat engines employed today? What product do these machines typically produce?

Electricity (Electric heater, electric motor). Just produce waste heat.

what are the three fundamental forces in nature that form the basis of energy sources in the world? specific forms of "primary energy" associated with each fundamental force?

Gravity: falling water, tidal Nuclear: Fission, fusion Electromagnetic: Wind, wave, biomass, fossil fuels, solar thermal, photovoltaics

Briefly identify and explain the main significance of the following (a few sentences will be sufficient): a. The Standard Oil Trust b. Standard Oil Co. of New Jersey v. United States State regulation of local oil pipelines as "common carriers" d. The Hepburn Act e. The common law doctrine of "the rule of capture" f. The legal doctrine of "correlative rights" g. Market-Demand Prorationing vs. MER Prorationing h. Oil Field "Unitization" i. "Hot Oil" j. The Connally Hot Oil Act k. Interstate Oil Compact Commission

Hepburn Act: 1906 United States federal law that gave the Interstate Commerce Commission (ICC) the power to set maximum railroad rates and extend its jurisdiction. This led to the discontinuation of free passes to loyal shippers. Interstate Commerce Act (1887) established railroad regulation Sherman Antitrust Act (1890) Correlative Rights: In 1890, in the case of Ohio Oil Company v. State of Indiana, the Supreme Court transferred the concept of "correlative rights" from riparian water law to petroleum law. The Court stated that the Rule of Capture applied only to the extent that it did not lead to the "annihilation of the rights of the remainder" to their "just distribution" of the common pool. Thus, no landowner had the right to take more than its "fair share" of the oil in a common pool. Interstate Oil Compact Commission in 1935. OK favored a stronger federal role in coordinating state demand-pro-rationing. TX opposed a strong federal role. In the end, the IOCC was simply authorized to study and recommend ways that states could share information and was expressly prohibited from setting or suggesting any overall production quotas for the states

State and briefly explain at least five significant generalizations that can be gleaned from past energy transitions?

Historical transitions have taken time. The inertia in status quo energy systems has been large. •Discontinuities, surprises, and disappointments occur. •There have been an increasing economically available variety of primary and secondary energy sources. •The world energy system has become steadily more electrified. •The infrastructure requirements of the world energy have become increasingly complex. •The global energy system has become much more interconnected and interdependent. •Energy security is a continuing national strategic concern for most nations. (big deal with fossil fuels) •The world energy system has become gradually more decarbonized largely by happenstance, not by design. •Greater per capita energy use has not been offset by the impressive gains in energy efficiency, have used gains to become more attached to machines, thus continuing process.

What was the Interstate Oil Compact Commission? What did its original advocates hope that it would do? That is, how far did they want it to go in terms of oil conservation regulation and coordinating such regulation? In the end, what lesser role was the IOCC given? That is, what in general was it authorized to do? What role did it play in the implementation and facilitation of individual state market-demand prorationg?

In 1931, 9 state governors formed the Oil States Advisory Committee which advocated: -an interstate compact -a joint federal-state conservation board This effort led to the Interstate Oil Compact Commission in 1935. OK favored a stronger federal role in coordinating state demand-prorationing. TX opposed a strong federal role. In the end, the IOCC was simply authorized to study and recommend ways that states could share information and was expressly prohibited from setting or suggesting any overall production quotas for the states.