Mathematical Model Analysis Of OPEC Pricing Policy Impacts On Long-Range Energy Supplies
Authors: Rapoport Leo A. , Rohrer Michael W. , Hirshfeld David S. 
Published: December 2007

This paper outlines the nature and scope of a linear-programming model system (LORENDAS) designed for quantitative analysis of world-wide Long-range Energy Developments and Supplies. Basic projections, to the year 1996, of U.S. and European energy resource developments, conversions and imports as indicated by the model solution are reviewed, and the variations of these projections in response to a range of OPEC pricing policies are presented. pricing policies are presented

Introduction

Until fairly recently, the semblance of resource abundance and freedom of choices made it justifiable to approach individual energy issues separately, on the basis of individual analyses. However, with the rapidly vanishing margin between requirements and reserves practically all the slack may soon be gone from the world energy system. As a result, changes in any one component of the energy system - including constraints imposed by policies - are likely to impinge on everything else.

Conversely, whenever one seeks to assess the implications of a given policy or technological alternative concerning energy supplies, he is inevitably faced with a complex set of technical, economic and often political interactions. These interactions stem from the choice among different processes for the development and supply of a given form of energy, from the substitution possibilities among the different energy forms and/or different supply sources and, finally, from the competition between different energy consuming areas and end-use sectors for the supplies of energy. In addition, one has to account for the tight temporal interdependence between the capabilities of energy supply available at any given moment and previous investments in reserves and/or plant capacity, on the one hand, and the decline of the natural resources, on the other.

The need for analyzing these interactions between a multitude of variables has motivated the development of LORENDAS, a comprehensive mathematical modeling system, in linear-programming format, of the worldwide Long-Range Energy Development and Supplies. This computer-based system serves essentially to simulate all the different operations and processes concerning the supply of energy, accounting for their technical and geographical interdependence, as well as their evolution through time.

At this stage the LORENDAS modeling system is a fully operational tool available to government agencies, universities and industry. The system has been used for a number of preliminary investigations concerning the impacts of taxation on North Sea oil production, the effects of strip mining moratoria on U.S. production, the effects of strip mining moratoria on U.S. energy supplies, the impacts of oil and gas price regulations, and various other sensitivity analyses.

In this paper, following a review of the LORENDAS formulation and of the basic model inputs, we present the initial results of a series of studies focusing on the effects of possible OPEC price variations over time on the indigenous energy resource developments in the U.S. and Europe, the volumes of oil imports, and the mix of fuels or energy forms supplied. The term "OPEC" is used as a surrogate for all major oil exporters including Mexico, Canada and other prospective exporters. Thus, the presented results and conclusions deal only with the impacts of possible price paths for world oil, and do not treat the question of how the various exporters arrive at pricing decisions.

OUTLINE OF LORENDAS MODELING SYSTEM

Overview

The LORENDAS modeling system used in the present studies provides an explicit engineering type description, in Linear Programming format, of the complete set of operations and investments in the chain of energy resource development, conversion and distribution.