Introduction

[Econ 3391](http://www.richard-sweeney.com/energy-econ)
[Prof. Richard L. Sweeney](http://www.richard-sweeney.com/)

[(print this presentation)](http://www.richard-sweeney.com/energy-econ/slides/Intro.html?print-pdf)


Energy is important

One goal of this course is to simply provide an economic introduction to these important markets


title_img_1row


Home energy use

title_img_2row


Keeping prices down is important

title_img_2row


Recent energy price surges worst in decades

title_img_2row


Much of this class will focus on regulation and public policy aimed at improving energy markets.

Two reasons why we think unregulated energy markets will not be economically efficient:

1) Market power

2) Externalities from energy production/ consumption

These are textbook market failures: ALL economists agree regulation can increase welfare.


Historically some markets thought to be natural monopolies

title_img_2row


Problem: Monopoly price is too high

title_img_1row


Last four decades characterized by deregulation


Deregulated markets have not always performed well

title_img_2row


Many energy markets remain imperfectly competitive


How much regulation is optimal?


Energy production and consumption also associated with many social costs

title_img_2row

BP Oil Spill, Gulf of Mexico, 2010


Many of these costs are externalities

An externality exists when the consumption or production choices of one person or firm enter the utility or production function of another entity without that entity’s permission or compensation.

title_img_2row


Problem: Market price is too low

Negative externalities will be oversupplied by the market.

title_img_2row


Local air pollution is currently the most costly externality

title_img_2row


Going forward the biggest challenge is climate change

full_img


To produce energy, humans took a lot of previously sequestered carbon and put it in the atmosphere.

title_img_2row


Caused a dramatic increase in the GHG stock

title_img_2row


Well understood physical relationship with temperature

title_img_1row


Clearly observed in real data

title_img_2row


Need abrupt action to avoid worst outcomes

title_img_1row


Good News: Basic outline of a solution is well known


Renewables now at cost-parity in many locations


But still occupy a small share of the market

title_img_1row


Tesla now the world’s biggest car company


title_img_1row


title_img_1row


How should we alter energy systems to meet our environmental goals?


title_img_2row


US currently undergoing an oil and gas boom

title_img_2row

Source: Forbes


Gas production in the US had been flat for decades

title_img_2row


Due to fracking

title_img_2row


Hydraulic fracturing also involves many negative externalities

title_img_2row


We’ll take an economic approach to thinking about energy policy


Theory and engineering are important, but many policy questions are empirical


Course logistics

Required Readings