Journal of Energy Markets

This issue of The Journal of Energy Markets contains a selection of papers that were presented at the Conference on Energy Finance that was held in Rotterdam in October 2011. The conference is an annual event that is organized by a different university each year. The Erasmus School of Economics was the host for the 2011 edition. Academics presented their latest research on energy finance and related topics; about sixty papers in total. The energy finance research field covers many commodities, methodologies and topics and we think that this special issue of The Journal of Energy Markets gives a good idea of the field's scope.

The first two papers in the issue focus on gas storage. Gas storage facilities are vital to the operation of energy markets. Gas storage acts as a buffer between inelastic supply and volatile demand by facilitating physical delivery at peak demand periods, thereby smoothing the price of gas.

Alan Holland and Christopher Walsh adopt a game-theoretical approach to study the effects of competition when firms share space and injection/withdrawal resources. By sharing storage capacity, firms interact strategically, and from their model, Holland and Walsh simulate the contest for injection and withdrawal resources in successive periods and show that the problem of strategic manipulation in natural gas storage is significant. The authors recommend that an effort is launched to recover losses due to competition given the enormous value of these resources and their importance in energy markets.

Denis Mazières and Alexander Boogert study gas storage from a different perspective: they tackle the complex real options task of valuing gas storage facilities. They introduce new least squares Monte Carlo regression methods to value gas storage facilities: one based on radial basis functions in two dimensions and another based on the tensor of two univariate basis functions. They compare the value of a slow (depleted field) facility and a fast (salt cavern) facility with the proposed two dimensional regression approach next to a one-dimensional variant. The authors show that their two-dimensional approach yields consistently higher values than the one-dimensional method, and they conclude that their new methodology will prove to be beneficial in solving valuation problems with several volume levels.

Claudio Dicembrino and Pasquale Lucio Scandizzo shift the focus from gas to oil. They examine the dynamics of recent oil prices, with the objective of analyzing the main drivers that describe the volatile path of oil prices over the last fifteen years. They not only describe the behavior of oil prices in terms of fundamentals, but also assume that speculation drives oil prices. Therefore they assume that spot oil prices exhibit both fundamental components (depending on the interaction of supply and demand) and speculative components (caused by unclear changes in the price structure linked to speculative activity). Using a structural equation model, they find that using a real options methodology to describe speculation in the oil market improves the results of traditional models in explaining the consistent part of oil price fluctuations.

Finbarr Murphy, Na Li, Bernard Murphy and Mark Cummins remain in the oil market but focus on the price of jet fuel, a refined product, and how this price and carbon credits affect airline firm value. The authors find that jet fuel prices have little impact on airline firm value, as is commonly known, but by applying a regression, cointegration and vector autoregression analysis they find that carbon price changes explain airline firm value changes better than oil price changes do. Also some limited evidence is found of airline stock reaction to shocks in energy and carbon prices.

Electricity is another energy commodity that is discussed in two papers in this issue, and the first one is by Ralf Becker, Adam E. Clements and Wan Nur R. A. Zainudin. Electricity prices are very volatile and exhibit sudden price spikes due to frictions between inelastic demand and fixed supply in the short run. The authors examine whether the occurrences of these extreme price events exhibit any regularities that can be captured using an econometric model. For the Australian electricity market, they are able to identify relevant exogenous variables that explain variation in the intensity of price events. These variables include load, maximum and minimum temperatures and the number of price events that occurred on the previous day.

In the issue's last paper, Steinar Veka studies the efficiency of prices in the Nordic electricity market. The prices of electricity futures contracts are examined for linear and nonlinear dependence, and hence for conformity with the martingale difference hypothesis. The results indicate that possible profitable trading opportunities have sustained in recent periods when market participants were reminded of the risk associated with electricity forward markets, and therefore may have been hesitant to take positions in the market. This finding is in accordance with the observation that the market seems to have been weak form efficient through most of its lifespan.