Department of Economics and Development Studies

Federal University Dutse

Eco 314: (Energy Economics)
Lecture Notes
Module 1.
Teaching objectives:
By the end of this topic, the students should be able to:
 Understand the Concept of Energy Economics
 Know the Significance of the Study of Energy Economics
 Explain why Energy Matters
Definition:
Energy economics is the study of how societies allocate resources to meet their energy needs efficiently
and sustainably while considering economic, environmental, and social factors.
It involves analyzing the production, distribution, consumption, pricing, and policy aspects of various
energy sources, including fossil fuels (such as oil, natural gas, and coal), renewables (such as wind, solar,
and hydropower), and nuclear energy.
Nature of Energy Economics
1. Interdisciplinary: Energy economics is highly interdisciplinary, drawing on principles and
methodologies from economics, engineering, environmental science, and policy analysis.
2. Resource Allocation: It examines how energy resources are allocated across sectors and industries to
maximize societal welfare while addressing scarcity and environmental concerns.
3. Market Dynamics: Energy economics analyzes the behavior of energy markets, including supply and
demand dynamics, price fluctuations, and market structure (e.g., monopolies, oligopolies, or
competitive markets).
4. Policy Implications: This field assesses the impact of government policies and regulations on energy
markets and the environment, including subsidies, taxation, emissions controls, and renewable energy
incentives.
5. Sustainability: Sustainability is a central concern, focusing on the long-term availability of energy
resources, reducing greenhouse gas emissions, and promoting energy efficiency
Scope of Energy Economics
1. Energy Supply and Production: Energy economics encompasses the exploration, extraction, and
production of various energy sources, including fossil fuels and renewable energy technologies.
2. Energy Consumption: It examines how energy is consumed in various sectors, such as residential,
commercial, industrial, and transportation, and seeks ways to optimize energy use.
3. Energy Policy: Energy economics plays a crucial role in evaluating and shaping energy policies,
including regulations, subsidies, and incentives aimed at achieving energy security, sustainability, and
affordability.
4. International Trade: It also examines international energy trade, including the geopolitics of energy
resources and the economic implications of energy imports and exports.
5. Technological Innovation: This field assesses the economic viability of new energy technologies and
their potential to transform energy markets.
Significance of the study of energy economics
1. Global Significance: Energy is a fundamental driver of economic growth and development in every
country. Understanding energy economics helps students grasp the global importance of energy
production, consumption, and trade.
2. Technological Innovation: Energy economics exposes students to the latest technological
advancements in energy production, such as renewable energy technologies, energy storage, and
energy-efficient systems. This knowledge is essential for understanding the evolving energy
landscape.
3. Career Opportunities: Specializing in energy economics can open up diverse career opportunities in
various sectors, including government, consulting firms, energy companies, research institutions, and
international organizations.

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 4. Resource Allocation: Students gain insights into the allocation of scarce resources, as energy
resources are finite. This knowledge is transferable to other areas of economics and resource
management.
5. Mitigating Climate Change: Energy economics plays a crucial role in addressing climate change.
Students can contribute to efforts to reduce greenhouse gas emissions and transition to low-carbon
energy sources.
Why Energy Matters
Energy is important and does matter, its importance arises from several dimensions, and this includes:
 Energy is a key input into economic processes which transform factors of production into goods
and services. As a factor input, the advent of the industrial revolution necessitate access to more
energy sources to expand the production of energy-intensive activities.
 Energy enhances the standard of living. Ever since the discovery and use of fire, energy’s
consumption for human wellbeing has included the material provision of warmth, light, and
improved food, and the provision of leisure.
 Even at local and regional levels, energy matters. Energy tends to be characterized by large,
highly capital-intensive projects which inevitably are intrusive on local communities, either at an
economic level or an environmental level.
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Module: 2
Topic: Energy Classification
Energy types and classifications
1. Primary and Secondary Forms of Energy
 The term primary energy is used to designate an energy source that is extracted or captured
directly from a stock or flow of natural resources and that has not undergone any transformation
or conversion other than separation and cleaning, thus, there Physical and chemical characteristics
remain unchanged.
In other word, it is the type of energy source that are found in nature which can be renewable or
non-renewable. Examples include coal, crude oil, natural gas, solar power, nuclear power, etc.
 Secondary energy on the other hand refers to any energy that is obtained from a primary
energy source employing a transformation or conversion process. Example, petroleum products or
electricity are secondary energies as these require refining or electric generators to produce them.
2. Renewable and Non-renewable source of energy
A renewable energy is primary energy that is obtained from a constantly available flow of energy. Thus,
they are available plentiful in nature and are sustainable because it is a stock of energy resource which can
be replenished by a natural self-regeneration process. One important qualty of these type of energy is, it is
safe for the environment.
On the other hand, non-renewable source of energy is a natural resource that is found underneath the
earth from a finite stock. As the name implies, these type of energy do not replenish itself by natural
regeneration process at the same speed at which it is used. They take millions of years to replenish.
Thus, stock of a non-renewable resource is depletable hence drawing down one unit of the stock leaves
lesser units for future consumption in this case. For example, coal or crude oil comes from a finite
physical stock that was formed under the earth’s crust in the geological past and hence these are non-
renewable energies. There are five main non-renewable energies.
Difference between Renewable and Non-renewable Sources of Energy
Renewable Non-renewable
The resources that can be renewed once they are The resources that cannot be renewed once they are consumed are
consumed are called renewable sources of energy. non-renewable sources of energy.
These resources do not cause any environmental
These resources cause environmental pollution..
pollution.
Renewable resources are inexhaustible. Non- Renewable resources are exhaustible.
Renewable resources are not affected by human
Non- Renewable resources are affected by human activities.
activities.
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Examples of Renewable resources- Air, water and solar Examples of Non-renewable resources- natural gas, coal and n
energy. energy.
3. Commercial and Non – Commercial Energy
Commercial energies are those that are traded wholly or almost entirely in the market place and therefore
would command a market price. Examples include coal, oil, gas and electricity.
On the other hand, non-commercial energies are those which do not pass through the market place and
accordingly, do not have a market price. Common examples include energies collected by people for their
own use.
4. Modern and Traditional Energies
Modern energies are those which are obtained from some extraction and/or transformation processes and
require modern technologies to use them.
On the other hand, traditional energies are those which are obtained using traditional simple methods
and can be used without modern gadgets. Often modern fuels are commercial energies and traditional
energies are non-commercial.
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Module: 3
Topic: Energy Demand and Supply
Energy Demand
Energy Demand refer to all uses or consumption of energy by human activity: electricity, transport fuels
and other fuels to satisfy individual energy needs for cooking, heating, traveling and industrial processes.
It drives the whole energy system, influencing the total amount of energy used; the location of, and types
of fuel used in the energy supply system; and the characteristics of the end use technologies that consume
energy.
Energy demand can also correspond to the amount of energy required in a country (i.e primary energy
demand) or to the amount supplied to the consumer (i.e final energy demand)
Factors that Influence Energy Demand
Population Growth
Population growth influences energy use both directly and indirectly. As the population rises, so will total
household demand for energy services – for transport, heating and electrical equipment. A larger
population means a larger labour force and higher production of goods and services.
Economic Growth
Economic growth results in greater demand for goods and services. This in turn increases energy demand,
both for the production of goods and services and for transport of people and goods. Although economic
growth, population trends and energy demand have become less closely linked in recent years, the level of
activity in the Norwegian economy will continue to have a strong influence on trends in energy demand.
Industrial Structure
The developed economy consists of a large number of sectors and industries, and their energy use varies
considerably. For example, manufacturing industries are generally more energy-intensive than service
industries. Changes in industrial structure therefore influence energy use in an economy. Energy use will
therefore rise more slowly than would be expected if more energy-intensive industries were growing.
Technological advances
The effects of technological advances on energy use are complex. New technology is often more efficient,
which tends to moderate any increase in energy use; on the other hand, energy use may increase as new
machinery and equipment is introduced. For the economy as a whole, technological advances act as a
stimulus for growth.
Energy Prices
Energy prices influence both the energy mix and overall energy use. If the price of one energy carrier
rises, this may both reduce its consumption and increase demand for other energy carriers. In the short
term, however, the technology available limits how much consumption can be reduced and whether it is
possible to switch to another energy carrier.
Demand Elasticities for Energy
Elasticities measure how much (in perecnt) the demand would change if the determining variable changes
by 1%. In economic analysis, three major variables are considered for elasticities:
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 1. output or economic activity (GDP),
2. Price
3. Income.
There are two basic ways of measuring elasticities using
1. Annual growth rates of energy consumption
2. The driving variables, or using econometric relationship estimated from time
series data.
The first provides a point estimate while the second provides an average over a period, and accordingly,
the two will not give exactly the same result.
Example: the primary energy consumption of china increased from 1,970 Mtoe in 2004 2.225 Mteo in
2005. The GDP increased from 14,197 Billion Yuan in 2004 to 15,603 Billion Yuan in 2005 at constant
2,000 prices. What was the GDP elasticity of energy demand of China?
Answer: % change in energy demand = (2,225 – 1,970) / 1,970 = 12.9%
% change in GDP = (15,603 – 14,197) / 14,197 = 9.9%
GDP elasticity = 12.9/9.9 = 1.31
Energy Supply
The supply of energy involve a number of activities – production or procurement of primary energy from
local or external sources, transformation of primary energies to usable forms, transportation of energy in
bulk, distribution of energy to final consumer through retail activities.
World energy supply refers to the global supply of energy resources. The system of global energy supply
consists of the energy development, refinement and trade of energy. Energy supplies may exist in various
forms such as raw resources or more processed and refined forms of energy. The raw energy resources
include for example coal, unprocessed oil and gas, uranium, etc.
Determinants of Energy Supply
1. PHYSICAL FACTORS
Geology affects the availability of fossil fuels such as oil, natural gas and coal. The formation of fossil
fuels involves the storage of organic matter in sediments or sedimentary rocks. Therefore, regions with
predominantly sedimentary geology are likely to have an availability of fossil fuels
2. COST OF EXPLOITATION AND PRODUCTION
As non-renewable energy resources become depleted, they become increasingly expensive to extract. The
cost of exploitation often demands on supply and demand. As demand increases, prices rise, and
extraction becomes more viable.
3. TECHNOLOGY
Developments in technology have enabled new energy resources to be exploited, for example, fracking.
There has also been a considerable growth in renewable energy as technology has made it more
economically viable and productive.
4. POLITICAL FACTORS
Conflicts have occurred as the result of energy insecurity, for example, in the Middle East. Flows of
energy can be interrupted as the result of disputes. An example of this is Libya where oil exports reduced
due to conflict.
Average Cost Pricing
The principle of average cost pricing uses the cost of production of a firm that can represent the average
of the lot of and such a firm neither incur huge losses nor earns high profits.
Marginal Cost Pricing
Marginal cost pricing is the practice of setting the price of a product to equal to the extra cost of
producing an extra unit of output. It focuses on cost of variable cost such as wages and raw materials
rather than fixed cost such rent or interest payment.
Oil grades
The main attribute for crude oil is its viscosity (thickness). viscosity is measured in “API gravity” which
is an industry standard developed by American Petroleum Institute. Oil reserve are classified by API
gravity into light, mdium, heavy and extra heavy oils.
Crude Oil Exchange
There are currently two major exchange in which crude oil is traded;
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i. The New York Merchantile Exchange (NYMEX) in New York City
ii. The Intercontinental Exchange (ICE) in London and Atlanta.
Four light oil blends are graded as benchmarks representing also major oil production areas:
i. West Taxas Intermediate (WTI, United State)
ii. Brent Blend (North Sea, Europe)
iii. Dubai Crude (UAE, Middle East)
iv. The OPEC
Determinants of Oil Price
The price of oil rests on the following factors
1. Supply and Demand
Oil is an exhaustible resources from an economic perspective, as demand increase, (or supply decreases)
price goes up, conversely, as demand decreases (or supply increases) the price goes down. Similarly,
crude oil demand is driven by the demand for refined oil product.
2. OPEC as Cartel
Organization of Petroleum Exporting Countries (OPEC) is probably the single influencer of iol prices. T
is made up of 13 countries (Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, United Arab Emirate and Venezuela. Collectively, OPEC control 40% of the world
supply of oil. Although, the organization charter does not explicitly state this, OPEC was founded in
1960s to fix oil and gas prices.
However, with Canada, China, Russia and the United State as non-members, OPEC is limited in its ability
to ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of oil
to consumers.
3. News on New Supply
Speculation is also another factor that spikes the international oil prices. If it is announced that the major
producers stated tapping huge reserves of oil, this would send waves through the oil market. Changes in
4. Consumer habits
Changes in consumer habits also influence the price of oil in the international market. For instance, if the
news comes that consumers are driving a lot this year, then the riffle would be felt across the market. A
small change in driving habits could cause either a scarcity or a surplus and thereby influence prices.
Moreover, large energy consumers and institutional investors influence the price.
5. Alternative Energy Sources
The availability, accessibility and affordability of alternative energy sources also affect the oil price. In
this case, if solar, fuel cell, or any other alternative source could come, then oil traders would panic,
umping all their oil. That would trigger a downward spiral for now.
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Topic: Environmental issues of energy use
Module: 4
The environment thus provides a number of services to facilitate economic activities. These include:
 Resource base, which can be put to extractive or amenity uses. These are similar to non-renewable
energies that are consumed once and for all.
 A life support system through provision of air and water, and finally,
 A waste sink where the waste of the production processes are rejected. These wastes can be solid,
liquid or gaseous form.
Environmental Damage of Energy Use
 By natural phenomena known as biogenic sources of pollution, and
 From human activities known as anthropogenic sources of pollution.
Types of Pollutants
1. Cumulative Versus Noncumulative Pollutants
Cumulative One simple and important dimension of environmental pollutant is whether they accumulate
over time or tend to dissipate soon after emitted.
The classic case of noncumulative pollutant is noise; as a long the sources operate, noise is emitted into
the surrounding air, but as soon as the sources is shut down, noise stops.
2. Local Versus Regional and Global Pollutants
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Local Some emission have an impact only on restricted localized regions, where as others have an impact
over wider region, perhaps on the global environment. Noise pollution and the degradation of the visual
environment are local in their impact; the damage for any particular source are usually limited relatively
small groups of peoples circumscribed region.
Regional and Global Pollutants on the other hand have widespread impact over a large region or
perhaps over the global environment. Acid rain is a regional problem, emission in one region of the
United State (and of Europe) affect other people in the country or region.
3. Continuous Versus Episodic Emission
Continuous are emissions from electric power plants or municipal waste treatment plant are more or less
continuous. The plants are designed to be in operation continuously, although the operating rate may
differ somewhat over the day, week or season. Thus, the emission from these operations is more or less
continuous and the policy problem is to manage the rate of discharge.
Episodic Emission Many emissions are emitted on episodic basis, however. The classic example is
accidental oil of chemical spill. The policy problem here is to design and manage a system so that the
probability of accidental discharge is reduced.
Options to Address Energy-related Environmental Problems
1. Regulatory Approach to Environmental Management
 Statutes and rule prescribing an acceptable behaviour
 Complains is checked against the set behaviour
 Violation attract penalties
2. Liability Laws
In many countries including United State, liability laws are used for resolving the conflicts between
arising from environmental damage. The main idea behind this type of statutory enactment is to make the
polluters liable for the damage they cause. More specifically, polluters are defendants and those who are
affected by the pollution, the pollutees are the plaintiff.
3. Emission Standard
An emission standard is a maximum rate of effluent discharge that is legally permitted. This can take a
variety of forms. The form that is intuitively most obvious is, of cause a standard that is express in term of
quantity and volume of waste materials released into the ambient environment per unit of time.
4. Effluent Charge (Tax)
An effluent charge is a tax or financial penalty imposed on polluters by government authorities. The
charge is specified on the basis of country currency (e.g USA, Dollar and Cent, Nigeria Naira) per units
of effluent emitted into the ambient environment. For example, a firm may be required to pay an effluent
charge of =N= 10 per unit of waste material disposed into a lake.
Advantages of Effluent Charges
 They are relatively easy to administer
 They are generally cost-effective
 They generate revenue while correcting price distortions
 They tend to provide firm with incentive to invest in pollution control technology
Disadvantages of Effluent Charges
 Monitoring and enforcement cost tend to be high
 They could have a disproportionate effects on income distribution
 They do not condemn the act of polluting on purely moral grounds, it is acceptable to pollute,
provided one pays for it.

GOOD LUCK
Wishing you the best of luck in your upcoming exams!
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