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Our videos to this point, provided an introduction or summary of the
economics of energy markets and what I'd like to do in this video.
Is to close our examination of real
market considerations by bringing together supply and demand.
And discussing how prices are determined, at least
in the somewhat ideal abstract world we've been discussing.
Think of this as a minimum essential set
of tools for thinking about how global markets function.
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Now surely most of you know where we're headed here, that the price and quantity
of a good traded in the market places
determined by our supply and demand curves, okay.
But when we talk about the market for good, it's important to also
recall that we're referring to a good of a particular quality, at a particular.
Place, and at a particular time.
So, think of you know, that degree
of specificity, basically, is, is how we're thinking.
So, let's take the example of the market for natural gas.
When we talk about natural gas we
might think we're talking relatively generically, but
we tend when we're, when we're quoting
particular prices, we're actually quoting something very specific.
So, what is natural gas for instance?
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often what we're talking about is gas traded at the Henry Hub.
Okay.
At the Henry Hub we, we.
In all gas markets, we quote gas in dollars per million BTU.
Nymex contracts are for 10,000 million BTU increments.
But the gas we're talking about when we're talking about
gas traded at the Henry Hub is a specific quality.
It's the BTU content is determined by in-line gas chromatographs.
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So at the transaction point is actually measured when custody goes from one,
one one organization or one business to another.
There's also going to be inline measures, when
we're talking about this kind of basic.
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Plain vanilla, high quality gas.
There's going to be in, in line measures to verify that there's no hydrogen sulfide
which is a corrosive and costly to
remove, that they'll be relatively little moisture.
So, it's actually a lot of technical controls on the specific quality
of what we're dealing with, so we know exactly what we're buying.
If we buy an IMAX contract.
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it's a, it's a location near Erath, Louisiana, where they price the
exchange of custody from one organization or one business to another.
But it's a specific point in the United States,
in Louisiana, when we talk about" Henry Hub" gas.
And lastly a contract for trading this gas refers to a particular point in time.
So, if it's a spot market exchange, then it's talking about
gas that's available right now and is going to be exchanged for.
but.
The New York Mercantile Exchange also,
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constructs futures to trade this gas out up to ten years.
So, you can buy gas for March delivery, or April
delivery, or May delivery and you can sell those contracts.
So, when, when we're talking about, through these examples, I
want you to be thinking about where a very specific product.
At a particular point in space and a particular point in time.
And so, price and quantity are going to be
determined by the position of our demand and supply curves.
So, the, as I mentioned, the.
The price that will be determined in the market place
is that which equates the quantity demanded to the quantity supplied.
So, when we're talking about factors driving energy markets, we don't
want to be thinking about, you know, what happened to price.
Price is the thing that pops out of the model, and
the quantity is the thing that pops out of the model.
It's these external or exogenous factors that we're more
interested in that are not determined within the model.
What is happening in, with productivity or population growth in a
particular country in which the, the commodity is, is being traded?
Those things determine income.
And we recall.
That income is one of the determinants of demand.
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What is happening possibly with technology or, or just with
other factors in goods markets that might be
changing the relative valuation of compliment and substitute to
good in question, in this case we're talking of gas.
I'm not going to talk about preferences really because for the most part.
These things are relatively hard to account for.
And because they're hard to account for, and there aren't very many great theories
of what changes preferences, in my humble judgement I think explaining away
things by changes and preferences is often just admitting that you can't really
explain them, because it's almost unprovable if
someone says it's a change in preference.
But in principle, of course, preferences are a determinant of demand.
Then on the supply side, the main, recall the principal determinants were
changes in technological capabilities, technological advance, things like that.
And then, other non-technological
Michael J. OrlandoLecturer
