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Since the Industrial Revolution, the efficiency with which energy resources are extracted and converted into work has played a prominent role in the accumulation of material wealth. The prominent role of energy resources, in conjunction with their scarcity and their uneven geographic distribution, has had significant repercussions. Collaboration, competition and conflict among nation states for energy resources have created global, geopolitical and market risks. In this volume, academic scholars and practitioners assess these risks from global, geopolitical and market perspectives. They do so by presenting empirical research and discussing our current understanding of this quickly changing and developing field.

This is the third volume in a series on energy organized by the Centre for Energy and Value Issues (CEVI). The previous volumes in the series were Financial Aspects in Energy (2011) and Energy Economics and Financial Markets (2012).



1. Introduction

Since the Industrial Revolution, the efficiency with which energy resources are extracted and converted into work has played a prominent role in the accumulation of material wealth. The prominent role of energy resources, in conjunction with their scarcity and their uneven geographic distribution, has had significant repercussions. Collaboration, competition and conflict among nation states for energy resources have created global, geopolitical and market risks. In this volume, academic scholars and practitioners assess these risks from global risk, geopolitical risk and market risk perspectives.
André Dorsman, Timur Gök, Mehmet Baha Karan

Global Risks


2. Changing Dynamics and Risks in World Energy: The Way Forward

The energy world has been going through some “game-changing” developments arising from strong demand growth in emerging economies, new supply sources, fuel diversification, technological innovations, “resource nationalism”, investment decline, climate change and CO2 trading, as well as changing geopolitical dynamics. This paper discusses the changing dynamics of the world energy, and emerging new risks in the energy industry and major regions of production, transit and consumption. It also elaborates on the problems of energy “dependence,” “independence,” and “interdependence” before setting out the future path in the world energy and messages for key stakeholders on key energy dynamics and risks.
Mehmet Öğütçü

3. Slack Resources, Innovation and Growth: Evidence from the US Energy Sector

Recent studies show that the US energy sector’s investment (particularly by the private sector) in technology development and innovation has been declining, lagging behind other sectors in the economy, and mainly focused on the fossil fuel-based areas related to the needs of the oil and gas industry. In this paper, we offer new insights on whether the U.S. energy sector has optimally managed the deployment of different types of slack (unused) resources in pursuing investment in R&D and new technologies vs. existing assets and core efficiencies. Using a multi-industry sample of technology-intensive firms provided by the Boston Consulting Group (BCG), our results show that the energy sector’s slack resources and R&D investment profile were, on average, markedly different from those in other sectors. The energy sector did not pursue a balanced investment strategy by simultaneously exploiting existing assets and exploring new opportunities – being ambidextrous. Energy was the most “exploitative” and the least “explorative” sector with the highest (the lowest) average capital expenditures (R&D) intensities among the remaining sectors in the sample. The results also show that, in terms of longer-term profitability, the majority of other technology-intensive sectors have significantly outperformed the energy sector.
From a public policy perspective, our results call for more effective regulatory and tax policies focused on enhancing private-sector investment in energy innovation. We further believe as more adaptable technology intensive companies achieve higher profitability over time, energy firms will be pressured to better manage the balance between their slack resources and investment strategies to achieve higher performance through innovation.
Abol Jalilvand, Sung Min Kim

4. Measuring Risk in Energy Markets

In this chapter we intend to provide the practitioner and academic interested in energy markets with an overview of the most popular risk measures and how they can be utilized for energy assets. These risk measures differ on their construction and focus since risk is not straightforwardly quantified. We discuss the advantages and limitations of each measure and we apply these methods in electricity, natural gas, and crude oil energy assets.
Bert Scholtens, Konstantionos Sklavos

Geopolitical Risks


5. The Natural Gas Revolution and Central Asia

This article examines the ongoing natural gas revolution and assesses its impact on the energy industry and societies of Central Asia, conceived as the five “Stans”: Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan. The natural gas revolution consists of three related technological developments—hydraulic fracturing, horizontal drilling, and the increasing build-out of the world liquid natural gas (LNG) infrastructure.
The article focuses on Turkmenistan and its rich reserves of natural gas and explores the conditions under which Turkmen gas currently reaches international markets through pipelines to China, Iran, and Russia. It also assesses Turkmenistan’s future prospects for reaching additional world markets and for sustaining the markets it presently serves. Finally, the article analyzes the difficulties that Turkmenistan’s gas industry, and other Central Asia energy industries, are likely to face.
Robert W. Kolb

6. The Influence of Economic, Financial and Political Indicators in South East Asian Electricity Markets

Dynamic models of electricity pricing in South East Asian countries are studied in this chapter. The motivation is to attempt to explain the extent of regulation in South East Asian electricity markets using political, economic and financial indicators as reflected in risk ratings and energy stock market sectoral data. Electricity market models in China, Thailand and the Philippines show evidence of cointegration, implying relative market efficiency and deregulation in those countries in the long-term. Those in Malaysia and Hong Kong are not cointegrated implying that electricity pricing in those countries has little to do with domestic and international financial, economic factors over the long-term. This in turn indicates significant government pricing interference in the case of Malaysia and domestic share market influences in the case of Hong Kong. In their demonstration of long-run equilibrium and short-run exogeneity effects, the specified models of can be useful in studies of electricity market deregulation. The results may be useful as a starting point to analyse long-term and short-term electricity pricing policy.
John Simpson

7. Geopolitical Market Concentration (GMC) Risk of Turkish Crude Oil and Natural Gas Imports

This chapter explores the geopolitical risk of Turkey’s crude oil and natural gas diversification portfolios. We use the methodology of Chaterjee (Strateg Anal 36(1):145–165, 2012) to forecast the Geopolitical Market Concentration (GMC) risk of Turkey’s diversification portfolios under worst and best case scenarios. Our analysis is based on the market shares and the political stability of countries supplying crude oil and natural gas to Turkey. The results are robust to the choice of parameters in the double exponential smoothing method, which we use for forecasting.
Özgür Arslan-Ayaydin, Inna Khagleeva

8. Re-examining Turkey’s Potential of Becoming a Natural Gas Transit Hub

The aim of this study is to investigate the potential for Turkey to play a role as a natural gas hub in view of its location adjacent to the most important gas producer and energy consuming countries. In spite of the importance of the location of Turkey for the energy security of the EU, the current gas stream to Turkey and infrastructure are inadequate due to technical, political and economic factors affecting the Southeastern European energy corridor. During the last 15 years, Turkey has achieved considerable reforms in energy markets and complied with all directives of the European Union. However, Turkey still needs to adopt a more transparent framework regarding liberalization of its internal energy market. Our study shows that Turkey should not only improve her market structure, but also continue to develop new projects that will improve her position in the competitive world energy environment. Turkey is in a key location in this international game: in addition to the current BTE pipeline, TANAP is the most promising pipeline passing through Turkey in the east–west energy corridor. A SWOT analysis reveals many factors that favor Turkey as the major European natural gas transit hub. However, many obstacles that may hinder the achievement of its full potential remain.
Mehmet Baha Karan, C. Coşkun Küçüközmen, Arif Aktürk

Market Risks


9. Hedging and Speculation: A Discussion on the Economic Role of Commodity Futures Markets (Including the Oil Markets)

In the United States, there is a rich historical experience with controversies over futures trading that date back to the nineteenth century. After a brief recounting of history, this chapter notes that a review of U.S. history provides valuable lessons in figuring out what is necessary for commodity futures trading (including oil trading) to continue and prosper during times of political pressure. Essentially, one finds that the following actions have been indispensable in responding to past controversies over futures trading: (1) an increase in transparency in showing how these markets actually work; and (2) an improvement in public education on the economic usefulness of commodity markets. This chapter endeavors to help in providing precisely that education.
Hilary Till

10. The Influence of Renewables on the German Day Ahead Electricity Prices

During the last 5 years European wholesale electricity markets have been confronted with a rapid increase in Renewable Energy Source (RES)-generation. RES-generation is characterized by (1) more decentralized production at typically dissimilar locations compared to traditional production and (2) more intermittent patterns of production depending on weather conditions. This chapter will focus on solar and wind energy, which have in common that they cannot be ordered to our disposal when we need them. However, the share of these renewables in the total energy supply in Germany has increased to such levels that the electricity prices on the day ahead spot market depend highly on the expected supply of solar and wind energy. In addition, regulations in favor of RES-generation in Germany have forced the Transmission System Operators (TSOs) to use all generated solar and wind energy. On windy and sunny days this has led to some exceptional cases of negative energy prices. This chapter identifies the influence of solar and wind energy supply on day ahead electricity prices.
Nabi Adaduldah, André Dorsman, Geert Jan Franx, Paul Pottuijt

11. Corporate Financing and Investment Decisions in the Renewable Energy Sector

Increasing investments in renewable energy (RE) are expected to contribute to the growth of the energy sector as a whole, and thus to general economic growth. Recent research indicates that increasing investments in RE has several potential benefits such as achieving sustainable economic recovery from the financial crisis, ensuring a country’s energy security, and fighting climate change and environmental pollution. Apart from public support in the form of energy policies and mechanisms such as governmental grants and subsidies, the growth of the RE sector largely depends on private external financing. This chapter analyzes the corporate financing and investment activities of RE companies by focusing on firm-level and country-level factors. An investor protection perspective is taken when choosing the country-level factors, since the type of external financing obtained by companies is largely driven by outside investors’ willingness to supply it. Given the growth opportunities of firms, the evidence indicates the importance of the relationship between debt level and investment.
Halit Gonenc, Nalbertina Yurukova

12. Prospective Costs for the Aviation Sector of the Emissions Trading Scheme

This chapter analyses the cost impact to the aviation sector of the European Union Emissions Trading Scheme (EU ETS) being extended to include the sector. To motivate our cost impact simulation work, we initially study ultra-high frequency data utilising the December 2012 European Union Allowance (EUA) futures contract. We find evidence indicative of EU ETS market efficiency. Hence, we inform our simulation specification using information set related to fundamental price determinants. We find a minimal cost impact of an EU ETS extension to the industry sector of almost 9 billion Euros for the period 2012–2020. Such a material cost accrues from a nominal price of 10 Euro per tonne of CO2 emissions. This chapter contributes to emerging research on the cost impact of the EU ETS to the aviation sector.
Gerard Mooney, Cal Muckley, Don Bredin
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