ECON 376 - Energy Economics
Note: Please hand in a hard copy of your assignment in class. No late assignment and email copy will be accepted.
1. Use the Energy Information Administration (EIA) site to answer the following questions (see the links below).
b. Calculate R/q for crude oil in Canada, U.S., Venezuela, U.K., Norway, Russia, Iran, and Saudi Arabia.
c. Given the fixed amount of crude oil reserves, and assuming that the current quantity of crude oil production will remain constant in the future, calculate and rank the life time of reserve in each country.
d. Redo (a) and (b) assuming R/q>= 10 (no less than 10).
e. To keep R/q at least at current level, how much the reserves should grow if production increases by 2 percent annually in each country?
[The EIA web site:
For oil production: https://www.eia.gov/countries/,
For oil reserves: https://www.eia.gov/countries/index.cfm?view=reserves].
2. Wondering about some changes in rock colors in her backyard and after consulting with an engineer in the neighborhood, Mrs. Lucky finds out that she has been living on an oil reserve with 30,000 barrels of recoverable oil! The news could not come in a better time as Lucky's farming business was not going well because of bad weather and flooding in the past of couple years. Lucky consults with a few oil drilling companies to liquidify the asset as soon as she can. There are two offers on the table:
i. Given the total amount of crude oil reserve in Lucky's backyard, a company will produce 6000 barrels a year for five years and will split it by the ratio of 50-50 between Lucky and the company.
ii. The second company offers that it will produce 4000 barrel a year and Lucky will pay $100,000 per year for the cost of a small drilling rig and another $150,000 per year for the cost of labour.
Assume the interest rate is 5 percent, inflation rate 2 percent, and oil sells at $120 per barrel, and they are expected to remain constant.
b. Which business plan will make Lucky happier (assuming money buys happiness!)? Show your work.
c. Due to the recent development in fracking technology in the U.S., the oil price is expected to decline to $100 for the next two years and $90 afterward. How will this event change Lucky's decision on business plan? Show your work.
d. At what prices would these two plans break-even?
e. Given the original price of oil ($120), how would the present values of the plans change if interest rate increases to 7 percent? How would Lucky's choice of business plan be different? Show your work.
3. Suppose an economy consists of three sectors: agriculture, industry, and service. Show that total energy intensity will decline if the output share of service increases. Assume the output share of agriculture is constant and industry is the most energy intensive sector followed by service and agriculture sectors.
4. Use the end-use energy modeling approach to calculate the gasoline demand in Canada. Assume each passenger vehicle drives on average for 15,000 kilometers per year and consumes on average 8 liters per 100 kilometer, and there are 20 million vehicles in Canada.
a. How much gasoline is consumed per year?
b. If new technology reduces the gasoline consumption by each car to 5 liters per 100 kilometers, how much gasoline will be consumed per year?
c. Suppose Canadians go green and drive less by 2,000 Kilometers per year. Given the old technology, what would be the total gasoline consumption?
d. New technology makes cars more energy efficient. Do you think the technology effect will automatically decrease the total consumption of gasoline? Explain.