). Briefly describe the national security implications of the dependence on imported oil.

The United States has depended mostly on imported oil. This is because its oil wells cannot satisfy high fuel usage bearing in mind that the country has one of the world’s largest vehicle population. According to a report published in November 2009, U.S. rising imports had widened the country’s deficit. This was increasing the gap between the country’s imports and exports. This is an indication that the long-term growth and economic recovery is linked to this reliance on foreign oil. It is estimated that USA spends more than 1 billion a day on oil. These funds could, otherwise, be used in other more important areas. Gases from burning oil also exacerbate global warming that is a threat to not only the national security but also the global security.

b). Why Energy Independence is unrealistic

One of the longest debates on energy in USA is Energy Independence. The nation believes that the energy independence would finally lower prices of gasoline. This would be achieved through application of free market principles to the US energy markets which would eventually eliminate various distortions. The oil market is not a free market and does not operate on a free market basis. Majority of the biggest oil producers are members of OPEC. More than 90% of all inexpensive oil reserves are owned by national companies (Stern, 140). The decisions made in these companies are far much far from the ideal free market that USA dream of. More than 40% of world’s oil reserves are located in Iraq, Iran, and Saudi Arabia where a significant portion of this portion is developed by national companies. Meaning is somehow unrealistic to achieve energy independence in the United States.

c). The Concept of Running out of Oil

One of the world’s hotly debated questions on energy is whether the world will run short of energy. This might not really happen. This is because according to several researches, total accessible oil reserves continue to grow every year. This has been perpetuated by technological advancement such as horizontal wells and increased in exploration, in both conventional and unconventional oil. Additionally, increase in oil prices has made production especially in unconventional sources more viable. This has led to increasing in oil supply. According to other reports, even non-OPEC countries and other unconventional sources of oil perpetuate the growth of overall oil supply. Thus, the idea of “Running out of Oil” is not realistic (Stern, 141).

d) Impacts of Changes in Oil Prices in the US Macro Economy since 1970

During the 1970s, increase in prices of oil was closely associated to a sharp decrease in total output. This led to a large increase in the country’s inflation in the 2000s until the end of 2007. More increase in these prices led to milder movements in inflation and output of different commodities (Krishnamurthy, 37).

e) How has the elasticity of gasoline changed over time and what are the implications of this change.

The rapid increase in prices of gasoline since 2008 was followed by a significant fall in total sales. In June 2009, during the official end of the recession, sales had started reversing the direction. The average daily sales in January 2011 are said to have been the lowest within a decade (Katz, 141). This is an implication that the price elasticity of demand for gasoline is not zero.

Question 2

a)         The Rule of Capture and the Seminal Case

The Rule of Capture

This is a common law that originated from England, but later adopted the US jurisdiction. The law establishes a rule comprising of non-liability and ownership of several captured natural resources such as oil, gas, ground water and game animals.

Seminal Case

Seminal Case is as a highly influential case which is believed to have brought about to a significant line of other cases that follow the original holding (Krishnamurthy, 37). In general, this case is believed to bring some major changes or brought a new idea into the law.

b)         The context of Trapping Foxes and the Rule of Capture

The trapping foxes theory relates to repeatedly doing the same mistakes. The rule of capture relates to this theory where mistakes are severally repeated which is not good to the fuel sector

c) Economic arguments against the rule of capture

Rule of Capture for Asset Flows

This argument is based on “catch what you can” idea under the rule of capture. This is, however, unhealthy for an economy as it leads to overharvesting of certain resources.

The Dynamics of Open Access Harvest

The effect of the rule of capture on the rate by which a resource depletes is dependent on two separate systems. The system states that the rate of depletion of a given natural resource depends on either economic or biological systems. In the biological side, the basic dynamics claim that the periodic change in the natural resource’s stock is equivalent to its natural growth or its delay subtract its harvest.

d)         Would the rule of capture be a serious problem if the oil field were only shared by one or two individuals?

The rule of capture states that natural resources such as gas and oil become property of the owner of the land in which the resource has been discovered. If an oil field is shared by only one or two individuals, the rule of capture will not be a serious problem as different conflicts would be easily handled.

e)         Would the rule of capture be a serious problem if the oil field were shared by many property owners?

Sharing oil fields by many property owners means several conflicts. Each owner will come claiming sole ownership or more shares in the property than the others (Stern, 143). This might lead to a serious problem with the rule of capture.

f)         “Regulatory” solution if an oil field is shared by many property owners

The solution that would work best is pooling and unitization. Unitization creates a private interest that is consolidated with the public interest. This is in line with efficient use of resources to make sure that the pursuit of private profit in extraction of petroleum is conserved.

g)         Problems of pooling and utilization

Pooling and unitization are associated with a number of shortcomings. One is that it comes with operation problems that include excessive possession of natural resources by unit operations, changes in unit boundaries, and being liable for injuries that might occur by unit of unit operations. This regulation also has some fiduciary problems such as fiduciary relationships of different participants in unitization or pooling agreements and different operating interests such as trust res. Finally, the regulation may sometimes face some operation problems during its life (Krishnamurthy, 37).

Question 3

a)         A number of people have suggested that the US should transition to an economy that is more focused on natural gas. Discuss the environmental advantages of natural gas compared other hydrocarbons.

The first benefit of natural gas to other fuels is that it is less harmful than oil or coal. When compared to coal or petroleum, natural gas has less damage to the environment than the two. Natural gas is made up of methane that results to less carbon emission to the atmosphere. In actual sense, carbon dioxide emission is 45% less than most conventional fuels and 30% less than the emission from oil.

The gas has easy transportation and storage. It is easier to store and preserve than other fuels. The gas can be transported and stored in pipes, tankers, cylinders and small storage units.

Additionally, natural gas is friendlier to the environment because it burns cleaner. After burning, it does not leave any smell, smoke or ash.

Unlike Propane, natural gas is lighter than air and dissipates in case there is a leakage. Propane is heavier than air. It thus collects into dangerous explosive pockets

b)         Are there any limitations or costs that may create an impediment to this development.

There exists some cost limitations that may pose a challenge in the transition from oil to natural gas. The cost of natural gas may be cheaper than that of oil. However, the cost of the transition might be so high. According to Oil Heating Council, some advertisements from gas industry are misleading. Even though the prices of oil have been dropping, heating oil prices are expected to remain high. Therefore, change in use of oil to natural gas may be expensive.

(c). How might vertical integration or contracts resolve some of these impediments?

The advantage of using vertical integration is that it gives organizations the opportunity to control access to inputs. In addition, they also provide control to cost, delivery times and quality of those inputs. This logic has, however, become less compelling in line with the changing trend in the 21st century organizational structure.

(d). How might the history of natural gas regulation (with a particular focus on the period prior to restructuring) resolve these issues.

The vertical integration in the oil industry was pioneered by John D. Rockefeller in the 19th century. This was meant to come up with standard oil. The company had control of more than 85% of all U.S. industry until 1911 when the company was broken up into several smaller companies. This happened under the antitrust legislation and ruling that was made by the US Supreme Court. Other oil corporations in the United States adopted vertical integration on a small scale after the breakup. The vertical integration spread roots in the 1970s and 1980s and there were a number of mega-mergers in 1990s and 2000s (Katz, 37). The mergers led to the creation of corporations such as ExxonMobil and ConocoPhillips.

(e)        Discuss other regulatory structures the government might adopt that would increase the amount of natural gas used to meet energy supply needs.

Regulation of Distribution

The regulation of local distribution in USA has almost the same aim such as that of pipelines. They include the restriction the exercise of market power, ensuring that prices and rates that have been set by and LDC are equitable and fair, and protecting several customers who rely on different supply of natural gas from captive customers (single source).

The Natural Gas Act of 1938

This was an action that was implemented after the federal government became directly involved in several interstate natural gas productions after passing the Natural Gas Act (NGA). The action was made up of the first real involvement by the federal government about the rates charged through transmission of gas from one state to another.

Question 4

(a). Discuss the economic theory underlying public utility rate making.

Requirements of utility revenues (the amount of money required for any utility to operate and maintain various facilities, providing an opportunity to earn some profit and covering capital experience) are frequently evaluated using follow-up phase. During this process, rates to collect the revenue are usually set. For some given utilities, costs of purchasing natural gas and other fuels for their customers and fuel used to generate power is included as part of the revenue requirement. However, it might be reviewed frequently in proceedings that are made separately (Krishnamurthy, 37).

Steps involved in Cost-of-Service ratemaking:

1. Coming up with cost-of-service or a revenue requirement
2. Functionalizing the revenue requirement/cost-of-service
3. Classification of Cost
4. Cost Allocation
5. Rate Design

c)         Discuss the traditional “cost-of-service” method of regulating public utilities including a discussion of what it seeks to accomplish and its limitations.

Limitations

One limitation is that the expenses are sometimes approved based on forecasts. These expenses are later reviewed after purchases have been made to make sure that the expenses were reasonable.

(c) What particular problems arise if the regulated utility is not a natural monopoly in all of its market?

The main challenge with monopolies is that if they are not regulated, they may end up producing less. This might result in them charging much higher than what is socially accepted. In this case, marginal benefit is equal to the marginal cost. Therefore, there is a need to regulate such operations (Stern, 138).

(d)       What inefficiencies might cost-of-service regulation generate?

The regulator always has some inefficiency while executing the regulations. Analysis done on cost-benefit relationships show that any extra income earned through provision of additional services mostly outweigh additional costs.

(e)        How does the unregulated market address the issue of stranded costs?

Stranded costs are caused by faulty decision making such as source of purchased power and plant technology. Formation of a regulated monopoly is never intended to form an entitlement program. It is meant to give the utility return on the initial capital in exchange for fair prices. According to other economics, the reasons why stranded costs exist are because the existing systems can be replaced with others that lower prices (Stern, 145). The effort to emulate different competitive prices has not succeeded. Therefore, it is argued that these stranded costs should be shared by shareholders.

(f)        How do regulators address the issue of stranded costs?

When recovering stranded costs, two simple propositions are used. First, retail competition is likely to reduce revenues from the industry. Due to this reason, net cash flows might not be sufficient to amortize most investments made from fuel utilities. The other proposition is based on statutory language that is used to create utility commissions. Rates are usually set by regulators. This is to provide a fair rate of return to different investors.

Works Cited

Stern, David I. “Energy and economic growth in the USA: a multivariate approach.” Energy Economics 15.2 (2013): 137-150.

Krishnamurthy, N., et al. “Oil and oleoresin of turmeric.” Tropical Science 18.1 (2006): 37.

Katz, Donald La Verne, and K. A. T. Z. Donald La Verne. Handbook of natural gas engineering. New York: McGraw-Hill, 2009.