Economic Restraints on U.S. Energy Supply and Demand
Authors: Knop D.R. , Roorda J.F. 
Published: December 2007

Authors' Note - This paper was prepared for the 1974 SPE-AIME Eastern Regional Meeting last fall. While events have overtaken some specific items included in the paper, we believe that our basic arguments remain valid. Consequently, our conclusions remain unaltered. For example, a tariff on crude oil and a tax on natural gas, along with decontrol of old oil and new gas prices, have been proposed by the Administration. Since these proposals deal primarily with the level of energy prices and the prices of individual fuels relative to each other, the framework that we have set forth lends itself to an analysis of the effects of those proposals. We specifically mention in the text that the outcome is not proposals. We specifically mention in the text that the outcome is not intended to be a forecast. Rather, it is intended to illustrate a method of assessment. We have not attempted, therefore, to include additional events, recent or prospective; we feel that an assessment of the effects of specific proposals is beyond the scope of our paper.

Introduction

Most studies of U.S. energy markets are very narrow in scope. Traditionally, they focus on the demand for a fuel in a particular consuming sector or set of consuming sectors, on the supply of a particular fuel, or on the demand and supply for a particular fuel. Moreover, in studies that do treat supply and demand of energy in a comprehensive manner, the supply of particular fuels and the total demand for fuels typically are regarded as being more or less independent of price. Finally, developments in energy markets tend to be regarded either as being independent of general economic conditions or as being related to economic conditions in some simple mechanistic way.

This paper analyzes the U.S. energy and economic situation through 1985 with emphasis on the necessary interrelationships. The relationships considered are those between prices and quantity demanded for various fuels in each fuel-consuming sector, the quantity of various fuels supplied from domestic sources, oil imports, and economic conditions.

An ideal approach to the problem would be to build a model incorporating these interrelationships and use it to simulate the effects of alternative fiscal and monetary policies, energy policies, and other world factors on the policies, energy policies, and other world factors on the energy and economic variables of interest. Attempts to do this are being made, but it clear how successful they will be.

A viable alternative is to use several more specialized models in a systematic fashion, taking care to insure consistency between variables in the various models. This approach has been used in this study. Use of the Data Resources, Inc., (DRI) Energy Policy Model allowed treatment of the relationships between economic activity, energy prices, and the quantity of energy demanded. Exogenous estimates of domestic oil and gas production were used to estimate the U.S. demand for oil imports. Some consequences of developments in energy markets for general economic conditions are also discussed.

Projections Projections While the quantitative estimates reported in this paper must be regarded as indicative and should not be regarded as forecasts, the analysis has yielded several important insights. First, a continuation of the current energy prices, which are much higher than prices have been prices, which are much higher than prices have been historically, would be expected to result in significantly lower growth rates of the quantity of energy demanded during the next several years. A sharp decline from previous experience in the growth rate of the quantity of previous experience in the growth rate of the quantity of electricity demanded contributes importantly to this result in the simulations.

JPT

P. 803