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Fundamentals ofGlobal Energy Business

Michael J. Orlando

University of Colorado - Denver

Week 2: Supply of Energy

video 6: Market Equilibrium

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Global Energy Management Program----Business School .

Equilibrium in energy markets• What determines a particular level of price and

output for a particular good?

A1: what is a good?

a product (or service) of

- a particular quality

- at a particular place

- at a particular time

A2: market price is that which equates quantity demanded with quantity supplied

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Global Energy Management Program----Business School .

Equilibrium in energy markets e.g.• What determines the price of natural gas?

A1: what is ‘natural gas’? – need to be specific – e.g. if quoting ‘Henry Hub’ gas• traded in 10,000 MMBtu increments, quoted in MMBtu’s• a particular quality:

– energy content (BTU’s), typically determined via in-line GC– also in-line measures to verify no H2S, little moisture

• at a particular place:– Henry Hub = Sabine Pass Pipe Line LLC, near Erath, LA

• at a particular time:– spot market– futures contracts for various months, up to 10 yrs out

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Global Energy Management Program----Business School .

Equilibrium in energy markets• Price and Quantity will be determined by position of

demand and supply curves• recall determinants of demand

– income <= productivity, population– cost of complements, substitutes <= technology?– preferences <= ?

• recall determinants of supply– technological capabilities– cost of production <= input factor market conditions,

technological change

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Global Energy Management Program----Business School .