Economics of Oil and Gas Markets
Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM
- Chair: Christopher R. Knittel, Massachusetts Institute of Technology
Did the Renewable Fuel Standard Shift Market Expectations of the Price of Ethanol?
AbstractIt is commonly believed that the response of the price of corn ethanol (and hence of the price of corn) to shifts in biofuel policies operates in part through market expectations and shifts in storage demand, yet to date it has proved difficult to measure these expectations and to empirically evaluate this view. We utilize a recently proposed methodology to estimate the market’s expectations of the prices of ethanol, unfinished motor gasoline and crude oil at horizons from three months to one year. We quantify the extent to which price changes were anticipated by the market, the extent to which they were unanticipated, and how the risk premium in these markets has evolved. We show that the Renewable Fuel Standard (RFS) is likely to have increased ethanol price expectations by as much $1.50 in the year before and in the year after the implementation of the RFS had started. Our analysis of the term structure of expectations also supports the view that a shift in ethanol storage demand starting in 2005 caused an increase in the price of ethanol. There is no evidence that the tightening of the RFS in 2008 shifted market expectations, but our analysis suggests that policy uncertainty about how to deal with the blend wall raised the risk premium in the ethanol futures market in mid-2013 by as much as 50 cents at longer horizons. Finally, we present evidence against a tight link from ethanol price expectations to corn price expectations and hence to storage demand for corn in 2005-06.
The Costs of Inefficient Regulation: Evidence from the Bakken
AbstractEfficient pollution regulation equalizes marginal abatement costs across sources.
Here we study a new flaring regulation in North Dakota’s oil and gas industry and
document its efficiency. Exploiting detailed well-level data, we find that the regulation
reduced flaring 4 to 7 percentage points and accounts for up to half of the observed
flaring reductions since 2015. We construct firm-level marginal flaring abatement cost
curves and find that the observed flaring reductions could have been achieved at 20%
lower cost by imposing a tax on flared gas equal to current public lands royalty rates
instead of using firm-specific flaring requirements.
Informing SPR Drawdown Policy through Oil Futures and Inventory Dynamics
AbstractWe examine how information on the time pattern of expected future prices for crude oil, based on the term structure of futures contracts, can be used in informing whether to draw down, or contribute to the Strategic Petroleum Reserve (SPR). Such price information provides insight on expected changes in the supply-demand balance in the market and can also facilitate cost-effective transitions for SPR holdings. Backwardation in futures curves suggests that market participants expect shocks to be transitory, creating a stronger case for SPR releases. We use vector autoregression to analyze the relationship between the term structure of futures contracts, the management of private oil inventories, and other variables of interest. This relationship is used to estimate the magnitude of the impacts of SPR releases into the much larger global inventories system. Under the assumption that strategic releases can be modeled as surprise inventory additions, impulse response functions suggest that a strategic release of 10 million barrels would temporarily reduce spot prices by about 2% to 3% and mitigate backwardation by approximately 0.8 percentage points. Historical simulations suggest that past releases reduced spot prices by 15% to 20% and avoided about 5 percentage points of backwardation in futures curves, relative to a no-release counterfactual. This research can help policymakers determine when to release SPR reserves based on economic principles informed by market prices. It also provides an econometric model that can help inform the amount of SPR releases necessary to achieve given policy goals, such as reductions in prices or spreads.
- Q4 - Energy