Energy Policy: Does it Achieve its Intended Goals? Mine Yocel Senior Economist & Policy Advisor
and ShengyiGuo Consultant March 1994
RESEARCH! J!)EPARTMENT
WORKING PAPER 94-04
tr=ederal Reserve Bank at Dallas This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (
[email protected])
ENERGY P0LICY:D0ESIT ACHIEVE ITS II{TENDED l'line K. Y0cel and Shengyi Guo'l
A good understandingof narkets targeted by energy policy is necessaryfor energy tax policy to be successful. This paper analyzescoal, natural gas and oil narkets to deternine the extent to which these fuel prices nove together. lle find that there ]yasa stable long-run relationship betweencoal and oil prices until 19/4 and that this relationship changedafter 1974, The long-run relationship found betweencoal, natural gas and oil prices inplies that a single-fuel tax in these narkets would not be effective as a single tax Policy. Sinilarly, an equal percentagetax on these energy sources,which does not changerelative prices initially, would not keep relative prices unchangedin the long run. 0ur results show that energy policy nust take accountof the long-run relationship betweendifferent energy prices. 0therwise, the Iong-run results of energypolicy could be quite different than i ntended.
I.
INTRODUCTION
G o v e r n m e en nt e r g yp o 1i c i e s g e n e r a l l y h a v em u l t i p l e o b j e c t i v e sw h i c h a r e n o t n e c e s s a r i l yc o m p a t i b l ea n d a r e n o t a l w a y sf u l f i l l e d ,
F o r e n e r g yp o 1i c y t o
be successful, a good understandingof the rnarketstargeted by po1icy is n e c e s s a r y . I n p a r t i c u l a r , t h e l o n g - r u nr e l a t i o n s h i p b e t w e e ne n e r g yp r i c e s w i l l d e t e r m i n et h e d e g r e eo f s u c c e s so f a n y p o li c y w h i c ht a r g e t s a p a r t i c u l a r energy source. I f t h e g o a l o f e n e r g yt a x p o 1i c y i s t o c h a n g et h e c o n s u m p t i oonf a ' S e n i o rE c o n o m i s t a n d P o l i c y A d v i s o r , F e d e r a lR e s e r v eB a n ko f D a l l a s and Managerof Market Forecasting, Sprint Corporatjon, respective]y. l,Jethank StephenP.A. Brown,DonA. Norman,Mary Lashley Barcella and two referees for valuable comments.The views expressedare those of the authors and do not necessarily reflect the Federal ReserveEankof Dallas or the Federal Reserve System. An earl ier version of this paper was presentedat the Western EcononicAssociation International, 68th Annual Conference,LakeTahoe, N e v a d aJ, u n e 1 9 9 3i n a s e s s i o no r g a n i z e db y S t e p h e nP , A , B r o w n ,F e d e r a l ReserveBankof DalI as.
particular enengysource becauseof environmentalconcerns,then the fuel w h i c h p o l l u t e s m o s t s h o u l db e t a x e d t h e h e a v i e s t . I f t h e g o a l i s e n e r g y s e c u r i t y , t h e p o 1i c y s h o u l dd e c r e a s ec o n s u m p t i ownh i l e i n c r e a s i n gp r o d u c t i o n of the targeted fuel . initially
The Clinton admini strati on' s Btu tax proposal was
hai'led as a tax to curb pollution and promoteenergy security, but
the proposedtax rates were not consistent with either goal.
Coal and natural
gas were taxed at equal rates, although natural gas is clearly the cleaner burning fuel , and oil was taxed at twice that rate,
However,if the goal of
energy taxation is only to raise revenue,then the tax should be structured so as not to changerelative energy prices and consumptionpatterns. Whetheror not coal, natural gas and oil prices have a long-run relationship will be important in determiningthe successof energy po1icy, In t h i s p a p e r , w e i n v e s t i g a t ew h e t h e rs u c h a l o n g - r u n r e l a t i o n s h i p e x i s t s , a n d w h e t h e rt h e r e l a t i o n s h i p h a s c h a n g e d gn the o v e r t h e y e a r s . T h e n ,d e p e n d i n o g o a l s o f e n e r g yp o l i c y , o u r a n a l y s i s c a n c a s t a l i g h t o n w h e t h e rt h e p o l i c y w i - l l a c h i e v ei t s i n t e n d e dq o a l s .
II.
COAL,NATURAL GASANDOIL MARKETS
W h e t h e cr o a l, n a t u r a l g a s a n d o i 1 p r i c e s a r e r e l a t e d i n t h e l o n g r u n dependson whetherthey are ciose substitutes for each other.
If the three
fuels serve the samemarkets, they are closer substitutes and one price will ref.lect movements in the other prices. Coal, natural gas and oil constitute nore than 88 percent of total U.S. e n e r g yc o n s u m p t i o no,f w h i c h2 3 . 8 p e r c e n ti s i m p o r t s , T h e U n i t e d S t a t e s i s r e 1a t i v e l y s e l f s u f f i c i e n t i n c o a i a n d n a t u r a l g a s , e x p o r t i n g l 3 p e r c e n to f c o a l p r o d u c t i o na n d i m p o r t i n go n l y 9 , 2 p e r c e n to f n a t u r a l g a s c o n s u m e d T , he
U n i t e d S t a t e s i s s o m e w h amt o r er e l i a n t o n w o r l d s u p pile s o f o i l , i m p o r t i n g 4 4 . 7 p e r c e n to f t h e t o t a l o i l a n d p r o d u c t sc o n s u m eddo m e s t i c a l l y . The marketsthat these fuels serve, and the fuel baianceof U.S. energy consumptionhas changedsubstantially since the end of the secondworld war. Fromaccountingfor almost 50 percent of energyconsumptionin 1947, coal use h a s d e c l i n e dt o 2 3 . 5 p e r c e n to f t o t a l e n e r g yc o n s u m p t i oinn 1 9 9 0 . O i l ' s s h a r e in consumptionhas increasedsomewhat, to from 34.4 percent of consumption 41.3 percent of consumption. Natural gas has madesomeinroads, increasing from 16 percent of total energy consumptionin 1947to near 24 percent in 1990 ( s e e F i g u r e1 ). 1 Aside from changingshares in energyconsumption,the fuels' end-use marketshave also changed. As Figure 2 shows,coal dominatedthe industrial market in the 1940's with a 55 percent share, with natural gas comprising23 p e r c e n to f i n d u s t r j a i f u e l i n p u t .
I n 1 9 9 0 ,o i l a n d n a t u r a l g a s w e r e c o m p e t i n g
f o r t h e i n d u s t r i a l m a r k e ta n d c o a l u s e h a d s h i f t e d m a i n l y t o e l e c t r i c i t y g e n e r a t i o n . C o a l ' s s h a r e i n e l e c t r i c i t y g e n e r a t i o nh a s a l w a y sb e e nh i g h , b u t i t i n c r e a s e di n t h e p a s t f e w y e a r s a s n a t u r a l g a s a n d o i l ' s s h a r e sd e c l i n e d . I n 1 9 9 0 ,8 6 p e r c e n to f a l l c o a l c o n s u m ewda s u s e di n e l e c t r i c i t y g e n e r a t i o n F i g u r e3 ) .
I n 1 9 4 7 ,c o a l a l s o d o m i n a t e tdh e r e s i d e n t i a l a n d c o m m e r c i ael n d -
u s e m a r k e t sw i t h a 4 8 p e r c e n ts h a r e . T h e p i c t u r e h a s c h a n g e d significantly s i n c e t h e n a s F i g u r e 4 s h o w s . C o a l ' s s h a r ei n t h e r e s i d e n t i a l a n d c o m m e r c i a l s e c t o r h a s d w i n d l e dt o o n e - t e n t ho f o n e p e r c e n t ,w h i l e t h e s h a r eo f n a t u r a l g a s h a s i n c r e a s e df r o m 1 5 . 7 t o 4 6 . 6 D e r c e n t . T h e s h a r eo f o i l i n t h e residential and commercialmarket has beenhalved in the past 45 years to 14 percent of the market.z One sector wherethe three fuels are clearly no longer competitive is
t h e t r a n s p o r t a t i o ns e c t o r ( F i g u r e 5 ) .
fuels in C o a l a n d o i l w e r ec o m p e t i n g
t h e t r a n s p o r t a t i o ns e c t o r i n t h e 1 9 4 0 ' s , c o a l w i t h 3 4 . 4 p e r c e n to f t h e n a r k e t , a n d o i l w i t h 6 5 . 3 p e r c e n to f t h e r n a r k e t , I n 1 9 9 0 ,t h e s h a r eo f c o a l i n transportation was zero, and ojl had grabbed96 percent of the market. Natural gas had a measly3.7 percent share. The share of natural gas is projected to grow, as a result of pollution and natjonal security concerns a b o u tU .S . o i l d e p e n d e n c e .
I I I.
EI,IPIRICAL ANALYSIS
To examinewhetheror not coal, natural gas and oii prices move together, time series methodsare utilized,
lle first
checkwhetherthe price
series are stationary, and find that all of themhave stochastic trends (or are integrated), For each of the series, we then test for cointegration. Estination and testing uses annualdata from 1947to 1990. lle use m i n e m o u tphr i c e s f o r b i t u m i n o u sc o a l a n d l i g n i t e f o r t h e c o a l p r i c e v a r i a b l e , U . S . c r u d e o i l p r i c e a t t h e w e l l h e a df o r o i l , a n d w e l l h e a dp r i c e s f o r n a t u r a l g a s . 3A l l p r i c e s a r e c o n v e r t e dt o a d o l l a r s p e r B t u b a s i s . T h e r eh a v eb e e n s t r u c t u r a l c h a n g e si n t h e o i l m a r k e td u r i n g 1 9 4 7 - 1 9 9t0i m e p e r i o d . 0 P E C becamea muchmore potent force in the wor1doil market after the ear'ly s e v e n t i e s . T h e e n d o f 1 9 7 3a n d b e g i n n i n go f 1 9 7 4w e r e t u m u l t u o u st i m e s i n t h e o i l m a r k e t . I n o c t o b e r 1 9 7 3 ,o P E Cr a i s e d t h e p r i c e o f o i l b y 7 0 p e r c e n t . B y J a n u a r y1 9 7 4 ,t h e p r ' i c e o f o i l h a d t r i p l e d t o m o r et h a n $ 1 1 . 0 0p e r b a r r e l. T h e s ed r a m a t i cc h a n g e si n t h e o i l m a r k e tc o u l d c h a n g et h e r e l a t i o n s h i p b e t w e e n c o a l, o i l a n d g a s p r i c e s ( s e e F i g u r e 6 ) .
T h e r e f o r e ,i n a d d i t i o n t o u s i n g t h e
f u l I s a m p l e ,w e d i v i d e t h e s a m p l ep e r i o d u p i n t o t w o s u b - s a m p l e s1,9 4 8t o 1 9 7 4 and 1975to 1990to see whetherthe relationship betweencoal, gas and oil
prices has changedover the two periods.
A.
I n t e g r a t io n As an initial
step in our econometricwork, we checkedwhetherour price
series }rere integrated or stationary, A time series which is integrated is said to have a stochastic trend or a unit root,
A non-stationary, integrated
s e r i e s s i g n i f i e s t h a t a n y s h o c kt o t h e t i m e s e r i e s v { i l l b e p e r m a n e n t ,U n li k e a stationary series which reverts back to its meanafter a shock, an integrated time series will not revert back to its pre-shocklevel even in the long run, Applying conventionaleconometrictechniquesto an integrated time s e r i e s c a n g i v e r i s e t o m i s l e a d i n gr e s u l t s . l T h e r e f o r e ,w e t e s t e d f o t " i n t e g r a t i o n w i t h b o t h a n a u g m e n t eDdi c k e y - F u l ' l ear n d a P h i l l i p s - P e r r o nt e s t , lle checkedfor integration with and without a linear time trend for the fuil s a m p l e( 1 9 4 7 - 1 9 9 0a)n d f o r t h e t w o s u b s a m p l e(s1 9 4 7 - 1 9 7 41; 9 7 5 - 1 9 9 0a)n d f o u n d t h e s e r i e s t o b e i n t e g r a t e di n a l l c a s e s . A l 1 p r i c e s e r i e s w e r e i n t e g r a t e do f o r d e r o n e , i . e . , t h e f i r s t d i f f e r e n c e so f a l l s e r i e s w e r e s t a t i o n a r y . T a b l e I r e p o r t s t h e a u g r n e n t eDdi c k e y - F u l l e rs t a t i s t i c s t e s t i n g f o r t h e n u 1 1h y p o t h e s i s t h a t e a c hs e r i e s i s i n t e q r a t e d .
B.
Cointegrati on After determiningthat each price series was integrated of order one, we
tested the three prices describedfor cointegration. Two integrated time s e r i e s a r e c a l l e d c o i n t e g r a t e di f t h e y m o v et o g e t h e r . C o i n t e g r a t i o ni m p l i e s a s t a t i o n a r y , l o n g - r u n r e l a t i o n s h i p b e t w e e nt h e t w o s e r i e s a n d t h e c o i n t e g r a t i n g term provides information about the long-run relationship.
Furthermore,if
cointegration is not accountedfor, any model involving the two cointegrated variables would be misspecified and/or the parameterestimates could be underesti mated.5 lle ernpl oyed the Johansenprocedureto estimate the c o i n t e g r a t i n gr e l a t i o n s h i p b e t w e e n c o a l, n a t u r a l g a s a n d o i l p r i c e s . 6 T h e c o i n t e g r a t i o nr e l a t i o n s h i p sv a r i e d w i t h t h e s a m p l ep e r i o d s . l r l e found no cointegration amongthe variables for the fu'll sample,1947to 1990. The lack of cointegration in the fu1I sampleis natural if the sub- samples h a v ec o m p l e t e l yd i f f e r e n t c o i n t e g r a t i n gr e l a t i o n s h i p s . T h i s i s i n d e e dt h e case. For the subsample period 1947- 1974,we find a cointegrating r e l a t i o n s h i p b e t w e e nc o a l a n d o i 1 , a n d f o r t h e s u b s a m p lpee r i o d 1 9 7 4 - 1 9 9 0w, e f i n d a c o i n t e g r a t i n gr e 1a t i o n s h i pb e t w e e na l l t h e t h r e e v a r i a b l e s . B e c a u s e a c he s t i m a t e dc o i n t e g r a t i n gr e 1a t i o n s h i p i s s t a t i o n a r y , t h e c o i n t e g r a t i n gt e r m s p r o v i d ea n e f f i c j e n t e s t i m a t eo f t h e l o n g - r u n r e l a t i o n s h i p sb e t w e e nt h e c o i n t e g r a t e dv a r i a b l e s .
I n t h e 1 9 4 7 - 1 9 7s4u b -
s a m p l eo n l y t h e p r i c e s o f c o a l a n d o j l a r e c o i n t e g r a t e d , T h i s i n p l i e s t h a t a one percent increase in the price of oil will be met by a B percent increase i n t h e p r i c e o f c o a l i n t h e l o n g r u n . S i m i l a r l y , a o n e p e r c e n t i n c r e a s ei n t h e p r i c e o f c o a l w i l l b e m e t b y a l / B p e r c e n ti n c r e a s ei n t h e p r i c e o f o i l i n the long run.
I n o u r t e s t , F i s l e s s t h a n o n e , i m p l y i n gt h a t t h e c h a n g ei n
t h e p r i c e o f c o a l i s l e s s t h a n t h e c h a n g ei n t h e p r i c e o f o i l . A s T a b l e 2 s h o w s ,a p e r m a n e notn e p e r c e n t i n c r e a s ei n t h e p r i c e o f o i 1 b r i n g s a b o u t a 0 . 6 3 p e r c e n ti n c r e a s ei n c o a l p r i c e s . T h i s r e s u l t i s c o n s i s t e n tw i t h o u r k n o w l e d goef t h e s e t w o m a r k e t s . P r i c e s i n t h e c o a l industry were largely basedon long-term contracts, vrhichwere of the order of t h i r t y y e a r s o r m o r e , a n d h e n c ew o u l db e l e s s v a r i a b l e t h a n o i l p r i c e s . T h e o n s e t o f p o l l u t i o n r e g u l a t i o n si n t h e c o a l i n d u s t r y i n 1 9 6 9a n d t h e e a r l y
1 9 7 0 sc o u l d a l s o b e a f a c t o r j n t h e s m a l l e r c h a n g e si n c o a l p r i c e s , E e c a u s e coal is a dirtier
fuel , consumers maynot be switching out of oil into coal,
a n d e q u i l i b r i u m i s r e a c h e dw i t h o u t c o a l p r i c e s r i s j n g a s m u c h . A n o t h e r argumentcould be that productivity in the coal sector was increasing d r a s t i c a l l y , a n d - h e n c ceo a l p r i c e s d i d n o t g o u p a s m u c ht o g e t b a c k i n t o l o n g run eouilibrium. The natural gas market was a heavily regulated market in the 1947-1974 p e r i o d , a n d t h i s i s l i k e l y t h e m a j o r c a u s ef o r t h e l a c k o f c o i n t e g r a t i o n betweennatural gas and the other fuels in the first
subsample. l,lellhead
prices of natura'l gas were regulated in 1954, with the price of natural gas basedon averagehistorical costs. This regulated price was belowthe market value of natural gas in the 1960sand 1970sand was quite unrespons.ive to market forces. Moreover,natural gas, like coal, was sold under long-term c o n t r a c t sw h i c hl i k e l y c o n t r i b u t e dt o t h e l a c k o f c o i n t e g r a t i o no f g a s w i t h coal andoil. In the secondsubsample period 1974- 1990, the results are q u a l i t a t i v e i y s i m i l a r t o t h e f i r s t s u b s a m p lael t h o u g hw e f i n d c o i n t e g r a t i o n b e t w e e na l l t h r e e v a r j a b l e s , B e c a u s e i t w a sd i f f i c u l t t o i d e n t i f y t h e c h a n g e s i n t h e p r i c e s f r o m t h e t h r e e - p r i c e c o i n t e g r a t i n gr e j a t j o n s h i p , t . l ea l s o c h e c k e d f o r p a i r w i s e c o i n t e g r a t i o ni n t h i s s u b s a m p l e . To obtain a lower and upper boundfor the changesin coal and natural g a s p r i c e s , g i v e n a c h a n g ei n t h e p r i c e o f o i 1 , w e a s s u m oe n e o f t h e p r i c e s stays constant and calcul ate howthe other price would have to respondto a c h a n g ei n t h e o i l p r i c e i n o r d e r t o r e t u r n t o l o n g - r u ne q u i li b r i u m . I f t h e p r i c e o f o i l j n c r e a s e sb y o n e p e r c e n t , h o l d i n g t h e p r i c e o f n a t u r a l g a s c o n s t a n t , c o a l p r i c e s w o u l dh a v et o f a l l b y I . 6 p e r c e n tt o g e t b a c k t o l o n g -
run e q u i li b r i u m . 0 n t h e o t h e r h a n d , i f c o a l p r i c e s a r e k e p t c o n s t a n t ,n a t u r a l 9 a s p r i c e s w o u l dh a v et o i n c r e a s eb y 0 . 7 5 p e r c e n tt o b e b a c k a t e q u i 'ilb r i u m . The aboveexperimentseemsto suggestthat as oil prices increase, there i s n o t m u c hs u b s t i t u t i o n i n t o c o a l.
If the price of natural gas falls
r e l a t i v e t o o i i ( i , e . n a t u r a l g a s p r i c e s k e p t c o n s t a n t ) , c o n s u n e rrsr o u l ds h i f t into gas fromoil.
But, since the price of coal has to fall to get backinto
e q u il i b r i u m , c o n s u n e r m s u s tb e s h i f t i n g o u t o f c o a l i n t o g a s . T h i s c o u l d c o m e about if gas was perceivedto be a better substitute for oi'l than coal.
0n
the other hand, there probably is not be nuch shifting out of gas into coal, becausethe price of natural gas has to rise to return to the long-run e q u iI i b r i u mr e l a t i o n s h i p . I n t h e p a i r r i i s e c o i n t e g r a t i o nt e s t s f o r t h e 1 9 7 4- 1 9 9 0p e r i o d , w e f i n d s o n e w h ast i m i l a r r e s u l t s . l . l h e no i l i s p a i r e d w i t h n a t u r a l g a s , w e f i n d a B o f 1 . 1 2 9 . T h i s i m p l i e s t h a t a o n e p e r c e n tc h a n g ei n t h e p r i c e o f o i l , r { o u l dl e a d t o a 0 . 8 9 p e r c e n tc h a n g ei n t h e p r i c e o f n a t u r a l g a s i n t h e l o n g r u n . O i l a n d n a t u r a l g a s a r e r e l a t i v e l y g o o ds u b s t i t u t e s , a n d t h e p v a l u e sc l o s e t o 1 . 0 a r e c o n s si t e n t w i t h t h i s f a c t . l,lhencoal and oil are paired together, the cointegrating relationship is s i n i l a r t o t h e o n e f o u n d i n t h e e a r l i e r s u b s a m p l e .A s T a b l e 2 s h o w s ,i f t h e p r i c e o f o i l i n c r e a s e db y o n e p e r c e n t , t h e p r i c e o f c o a l w o u l dh a v et o i n c r e a s eb y 0 . 5 3 5 p e r c e n tt o b r i n g t h e r e l a t i o n s h i p b a c k i n t o e q u i l i b r i u m , a l t h o u g ht h i s p v a i u e i s n o t s i g n i f i c a n t .
T h eF i n t h e l a t e r s a m p l ei s
s o m e w h as tm a l l e r t h a n t h e F i n t h e e a r l i e r s a m p l e ,p o s s i b l y i m p l y i n gt h a t o i l and coal have begunto serve morediverse markets. F i n a l l y , i f c o a l a n dn a t u r a l g a s a r e p a i r e d t o g e t h e r ,w e s e e t h a t t h e p a i r w i s er e l a t i o n s h i p i s q u i t e s i m i l a r t o t h e t h r e e - p r i c e c o i n t e g r a t i n g
r e l a t i o n s h i p . A o n e p e r c e n tc h a n g ei n t h e p r i c e o f c o a l w o u l dl e a d t o a 0 . 5 percent changein the price of natural gas in the long run, sameas in the e a r l i e r r e s u l t , w h e no i l p r i c e s w e r eh e l d c o n s t a n t . T h i s s e e m st o i m p l y t h a t i n t h e l a t e r s u b s a m p l e1, 9 7 4 - 1 9 9 0t h , e price of coal did not affect oi1 prices m u c h . T h i s f i n d i n g i s c o n s i s t e n tw i t h t h e i n s i g n i f i c a n t p w e f o u n d i n t h e c o a l- o i l r e l a t i o n s h o i above.
SUMMARY ANDCONCLUSION A good understandingof marketstargeted by energy policy is necessary for energy tax pol icy to be successful.
Given that we find a long-run
r e l a t i o n s h i p b e t w e e nc o a l, n a t u r a l g a s a n d o i l p r i c e s , i t i s i m p e r a t i v et h a t e n e r g yt a x p o 1i c y t a k e a c c o u n to f t h i s r e l a t i o n s h i p , o t h e r w i s et h e l o n g - r u n r e s u l t s o f e n e r g yp o 1i c y c o u l d b e q u i t e d i f f e r e n t t h a n i n t e n d e d . The iong-run relationship that we found betweencoal , natural gas and o i l m a r k e t ss u g g e s t st h a t a s i n g l e - f u e l t a x i n t h e s e m a r k e t sw o u l dn o t b e e f f e c t i v e a s a s i n g l e - f u e l p o li c y ,
B e c a u sa e l l t h r e e m a r k e t sa r e
c o i n t e g r a t e d ,a t a x o n a n y s i n g l e f u e l w o u l db e r e f l e c t e d i n o t h e r f u e l p r i c e s in the l ongrun. If the goal of energy tax po1icy is to only raise revenue, the best tax w o u l db e o n e w h i c hd i d n o t c h a n g et h e l o n g - r u nr e l a t i o n s h i p b e t w e e nt h e f u e l s , a s s u m i n tgh a t w e a r e i n i t i a l l y
a t a l o n g - r u ne q u i l i b r i u m . T h e l e a s t
d i s r u p t i v e t a x w o u l db e t o t a x o i l a n d n a t u r a l g a s a t r e l a t i v e l y s i m i l a r rates, andtax coal at half that rate.
I n s u c h a c a s e , t h e t a x w o u l dn o t
d i s t u r b t h e c o n s u m p t i opna t t e r n s i n t h e c o a l, n a t u r a l g a s a n d o i l m a r k e t s . A n equal percentagetax on these energy sources, which does not changerelative prices initially,
w o u l dn o t k e e pr e l a t i v e p r i c e s u n c h a n g eidn t h e l o n g r u n .
0 n t h e o t h e r h a n d , i f t h e g o a l i s t o a l t e r e n e r g yp r i c e s ' i t i s n o t n e c e s s a r yt o t a x a i l f u e l s i n o r d e r t o c h a n g et h e i r p r i c e s , g i v e n t h e c o i n t e g r a t i o nb e t w e e nc o a l, n a t u r a l g a s a n d o i l p r i c e s . A p o l i t i c a l l y feasible tax on one fue'l could be used to changeprices and consumption patterns of other fue'ls. For example,a gasoline tax which is relatively easy t o a d m i n i s t e ra n d c o l l e c t , h a s a p r e d i c t a b l ei m p a c to n o i l p r i c e s . A c h a n g e i n t h e g a s o l i n et a x , w o r k i n gt h r o u g ht h e o i l p r i c e , w i l l a l s o c h a n g et h e prices of natural gas and coa.l in a mannerdictated by the long-run c o i n t e g r a t i n gr e l a t i o n s h i p b e t w e e nt h e f u e l s .
K n o w l e d goef t h e c o i n t e g r a t i n g
relationship betweenenergy sourceswill be helpful in ensuring that energy p o 1i c y a c h i e v e si t s i n t e n d e dg o a l s i n t h e l o n g r u n .
IO
REFERENCES Ba1ke, NathanS., "Modeling Trends in Macroeconomic TimeSeries," Economic R e v i e w ,F e d e r a lR e s e r v eB a n ko f D a 1 l a s ,M a y1 9 9 1 . Engle, RobertF. and C.l,l.J. Granger, "Co-integration and Error Correction: Representation,Estimation, and Testing," Eqtgrnc!.fjsa, March1987' 25176. Eng1e,Robert F. and ByungSamYoo, "Forecastingand Testing in Co-integrated S y s t e m s , J" o u r n a l o f E c o n o m e t r i c s1,9 8 7 , 1 4 3 - 5 9 . Stock, JamesH. and Marktl. l{atson, "Variab'leTrends in EconometricTime Series," The Journal of EconomicPersoectives,Summer 1988, 147-74. S i m s ,C h r i s t o p h e A r . , J a m e sH. Stock, and Hark ll, llatson, "Inference .in Linear T i m eS e r i e s M o d esl w i t h SomeUnit Roots," Econometrica,January1990, 1 t 3- 4 4 . U.S, Department of Commerce, H i s t o r i c a l S t a t i s t i c s o f t h e U n i t e dS t a t e s ' 1 9 6 0 . U.S. Departnentof Energy, EnergyInforrnationAdmininstration, The U.S. Coal Industrv. 1970-I990:TwoDecadesof Chanqe,November 1992. U.S. Department of Energy, EnergyInformation Adrnininstration,Coal Data: A R e f e r e n c e1, 9 8 0 .
I1
Table l.
Augmented Dickey-Fuller Tests for Unit Roots
1974- 1990
1947- 1990
t947 - t974
T
T-
T
T
T
t_
COAL
- 5 .t 9
- 7. 7 2
17.89
-7.51
-22.tl'
-3.92
0 .893 -2.68
- 9. 6 4
NATGAS
0.154 -1.00
OIL
-5.25
- 15.00
- 7. 7 9
- 1 5 .1 0
-3.59
-3.54
-0.918
T h e a b o v es t a t i s t i c s a r e f o r t e s t i n g t h e n u l l h y p o t h e s i st h a t e a c hv a r i a b l e c o n t a i n sa u n i t r o o t . T . . i s w i t h o u t a I i n e a r d e t e r m i n i s t i ct i m'e t r e n d a n d r , i s w i t h a l i n e a r d e t e i m i n i s t i c t i m e t r e n d . A 1 1 , e x c e p tt h e c o m p o n e n t , a r e i n s i g n i f i c a n t a t t h e 1 0 p e r c e n tl e v e l .
t2
Table 2.
Cointegration of Coal, Natural cas and Oil Prices
Cointegration Betweenthe Three Fuels
1975 - 1990
1947 - t974
B
siS.
B
sig.
Coal
1.0
.01
1.0
.045
Natural gas
.244
.30
2.087
.000
0i I
.628
.007
-1.569
.000
Pairwise Cointeoration 1975-1990
P
sis.
Natural Gas - Coal
.466
.001
Coal - Oil
.535
>.20
1.129
.000
Oil - NaturalGas
l3
1.1'luclearenergywhich was nonexistent in 1947nowaccountsfor 8 percent of total energy consumption(21 percent of electricity generation is from nuclear f u e ls ) . 2 . T h er e l a t i v e share of coal is actually greater than 0.1 percent. Twentyone percent of the r e s i d e n t i a l / c o m m e r c i a ml a r k e t i s s e r v i c e db y e l e c t r i c i t y , o f w h i c h c o a l i s the main energy source. 3 . T h ec o a l d a t a i s f r o m l / i s t o r i c a l S t a t i s t i c s o f t h e U . S , p u b l i s h e db y t h e U.S. Departmentof Conmerce, Bureauof the Census;The U.S. CoaI Industry, 1970-1990:Two Decades of Changepublished by the U.S. EnergyInformation Administration, Departmentof Energy; and Coal Data: A Reference,published by the EnergyInformation Administration, Departmentof Energy. The natural gas and oil data are from the lil and GasiJournalEnergyDatabase. 4. See Balke (1991), Sims, Stock and !,atson (1990) and Stock and llatson
( ls88).
S . S e eE n g l ea n d Y o o ( 1 9 8 7 ) . 6 . T h eJ o h a n s e p n r o c e d u r ei s a m a x i m ulm i k e l i h o o d m e t h o d . l l e c h o s ei t o v e r severa] other proceduresbecauseit provides the most efficient estimatesof t h e c o i n t e g r a t i n gr e l a t i o n s h i p s . I n a d d i t i o n , i t p r o v i d e se s t i m a t e so f t h e n u m b eor f c o i n t e g r a t i n gr e 1a t i o n s h i p s . T h e c o i n t e g r a t i o nt e s t s w e r ed o n e without a trend becausethe real price data do not appearto have a time trend .
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Are Deep RecessionsFollowed by Strong Recoveries? (Mark A Wynne and Nathan S. Balke)
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New Face of I-atin America: Financial Flows. Markets. and Institutions in the 1990s(John Welch)
9303 A General Two Sector Model of Endogenous Growth with Human and Physical Capital (Eric Bond, Ping Wang, and Chong K. Yip) 9304 The Political Economy of School Reform (S. Grosskopf, IL Hayes, L. Taylor, and W, Weber) 9305 Money, Output, and Income Velocity (Theodore Palivos and Ping Wang) 9306 Constructing an Alternative Measure of Changesin Reserve Requirement Ratios (JosephH. Haslag and Scott E. Hein) 930f
Money Demand and Relative Prices During Episodes of Hyperinflation (Ellis W. Tallman and Ping Wang)
9308 On Quantity Theory Restrictionsand the SignallingValue of the Money Multiplier (JosephHaslag) 9309 The Algebra of Price Stability (Nathan S. Balke and Kenneth M. Emery) 931.0 Does It Matter How Monetary Policy is Implemented? (JosephH. Haslag and Scott E. Hein) 9311 Real Effects of Money and Welfare Costsof Inflation in an Endogenously Growing Economy with Transactions Costs (Ping Wang and Chong I( Yip) 9312 Borrowing Constraints,HouseholdDebt, and Racial Discrimination in Loan Markets (John V. Duca and Stuart Rosenthal) 9313 Default Risk, Dollarization, and CurrencySubstitutionin Mexico (William Gruben and John Welch) 9314 TechnologicalUnemployment(W Michael Cox) 9315 Output, Inflation, and Stabilizationin a Small Open Economy:EvidenceFrom Mexico (John H. Rogers and Ping Wang)
9316 Price Stabilization,Output Stabilizationand CoordinatedMonetary Policy Actions (JosephH. Haslag) 9317 An Alternative Neo-Classical Growlh Model with Closed-Form Decision Rules (Gregory W. Huffman) 9318 Why the CompositeIndex of I-eadingIndicators Doesnt l.ead (Evan F. Koenig and Kenneth M. Emery) 9319 Allocative Inefficiency and l-ocal Government: Evidence Rejecting rhe Tiebout Hypothesis (I-ori L. Taylor) 9320 The Output Effects of Government Consumption: A Note (Mark A Wynne) 9321, Should Bond Funds be Included in M2? (John V. Duca) 9322 Recessionsand Recoveriesin Real BusinessC.lcle Models: Do Real Business Clcle Models Generate Clclical Behavior? (Mark A. Wynne) 9323* Retaliation, Liberalization, and Trade Wars: The Political Economy of NonstrategicTrade Policy (David M. Gould and Graeme L. Woodbridge) 93'24 A General Two-Sector Model of Endogenous Growth with Human and Physical Capital: Balanced Growth and Transitional Dynamics (Eric W. Bond, Ping Wang, and Chong K. Yip) 9325 Growth and Equity with Endogenous Human Capital: Taiwan's Economic Miracle Revisited (Maw-Lin Lee, Ben-ChiehLiu, and Ping Wang) 9326 ClearinghouseBanks and Banknote Over-issue(Scott Freeman) 9327 Coal, Natural Gas and Oil Markets after World War II: What's Old, What's New? (Mine K. Yricel and Shengri Guo) 9328 On the Optimality of Interest-Bearing Reservesin Economies of Overlapping Generations(Scott Freeman and JosephHaslag) 9329* Retaliation, Liberalization, and Trade Wars: The Political Economy of NonstrategicTrade Policy (David M. Gould and Graeme L Woodbridge) (Reprint in eror of 9323) 9330 On the Existenceof Nonoptimal Equilibria in Dynamic StochasticEconomies (JeremyGreenwoodand Gregory W. Huffman) 9331 The Credibitty and Performance of Unilateral Target Zones: A Comparison of the Mexican and Chilean Cases(Raul A. Feliz and John H. Welch)
9332 Endogenous Growth and Intemational Trade (Roy J. Ruffin) 9333 Wealth Effects,Heterogeneityand D].namic Fiscal Policy (Zsolt Becsi) 9334 The Ineffrciency of Seignioragefrom Required Reserves(Scott Freeman) 9335 Problems of Testing Fiscal Solvencyin High Inflation Economies: Evidence from Argentin4 Brazil, and Mexico (John H. Welch) 9336 Income Taxes as Reciprocal Tariffs (W. Michael Cox, David M. Gould, and Roy J. Ruffin) 9337 Assessingthe Economic Cost of Unilateral Oil Conservation(StephenP.A Brown and Hillard G. Huntington) 9338 Exchange Rate Uncertainty and Economic Growth in l-atin America (Darryl Mckod and John H, Welch) 9339 Searching for a Stable M2-Demand Equation (Evan F. Koenig) 9340 A Surveyof MeasurementBiasesin Price Indexes(Mark A Wynne and Fiona Sigalla) 9341 Are Net Discount Rates Stationary?:SomeFurther Evidence(JosephH. Haslag Michael Nieswiadomy,and D. J. Slottje) 9342 On the Fluctuations Induced by Majority Voting (Gregory W. Huffman) 9401 Adding Bond Funds to M2 in the P-Star Model of Inflation (Zsolt Becsi and John Duca) 9402 Capacity Utilization and the Evolution of Manufacturing Output: A Closer l-ook at the "Bounce-BackEffect" (Evan F. Koenig) 9403 The Disappearing January Blip and Other State Employment Mysteries (Frank Berger and Keith R. Phillips) 9404 Enerry Policy: Does it Achieve its Intended Goals? (Mine Yricel and Shenryi Guo)
