Oil Prices, Energy Security, and Import Policy

Oil Prices, Energy Security, and Import Policy

Oil Prices, Energy Security, and Import Policy

Oil Prices, Energy Security, and Import Policy

Excerpt

This book applies the basic principles of microeconomic theory to the central problem of energy policy: How can the nation respond to the high and uncertain price of oil? The analytical tools chosen are the simplest that can provide a comprehensive characterization of the nature of the problem, the reasons for government intervention, and the types of policy instruments that are appropriate to dealing with the problem. In bare outline, the book formulates the energy policy problem as one of maximizing welfare under conditions of price uncertainty. Two analytical constructs are necessary: in order to represent the influence of the United States on the world supply of oil, we posit a relationship between the level of U.S. imports and the world oil price and examine the difference between the price of imports and their marginal cost. In order to represent price uncertainty, we formulate an elementary two-stage dynamic programming problem in which some irreversible decisions must be made before the price of oil is known. Taken together, these two models make it possible to examine why private market outcomes will fail to achieve an economic optimum, and how government intervention can achieve an optimum.

More advanced analytical techniques, such as, for example, using game theory to explore interactions in the world oil market or dynamic models of exhaustible resources to characterize oil production, would provide additional insights, but are not necessary to formulate the central policy problem.

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