Online Economics 2022-2023

This course will introduce students to key techniques from economics and finance allowing them to understand the business decision making relevant to the petroleum industry and decommissioning.  Students will learn how these principles help explain how investment and disinvestment decisions (such as cessation of production) are taken, how oil markets operate, and the government's role in setting environmental regulations and taxation allowances. 

The energy and the financial sector relies heavily on analysis based on quantitative and empirical methodologies. This course develops a mathematical and statistical ‘toolbox’ for the participant, essential for the in-depth understanding of economic analysis. This course surveys some of the basic methods used to understand the underlying theories and empirical examples and tests found in these fields. 

The first part of the course covers basic mathematical models common across these fields. The second part of the course develops standard data analysis methods, including multivariate regression. Applications from various energy economic areas are used in order to illustrate the mathematical and statistical concepts.

This module will seek to answer the following questions

1. What is it that Governments are attempting to tax?
2. How should a Government measure the size of the tax base?
3. How should a Government ensure that it collects a fair share of the tax base without distorting a company’s decision to invest?

To answer these questions we will examine the theory of rent, which lies at the heart of petroleum taxation. In addition, we will look at the financial calculations that oil companies make in reaching a decision to explore for and to produce oil. These decisions are rooted in the assessment of risk, the accounting for time, and the calculation of a sufficient return on the investment planned. Finally, we will examine the instruments that governments use to collect a share of rents, and, by employing practical spreadsheet models, that you will build, examine the interplay of these instruments to understand how an effective and efficient fiscal regime can be constructed.

The course focuses on the procedures that firms use to make investment decisions. An important example is the decision about whether or not to proceed with a proposed project, and we will consider this example in some detail.

Decisions about projects and other investments are some of the most important decisions facing firms in the energy industry. 

The course is divided into four sections that focus on various aspects of economics and finance.

One section studies how decision makers in firms assess trade-offs over time.

An investment typically involves costs in order to obtain benefits in the future. But the future benefits, as well as any future costs, may occur at different times and in different amounts.

To take a very simple example, suppose that, by paying an amount I now, a firm can receive a cash flow of either 5 million pounds in five years or 10 million pounds in 8 years. How should a firm choose between two such investments?

A second section of the course studies the decision rules that firms use to compare investments. These decision rules involve comparing the patterns of present and future cash flows associated with various investments.

We will consider several types of commonly used decision rules. Our main focus will be on rules that involve net present value calculations, but we will also consider other decision criteria including the internal rate of return and the payback period. 

The third section consists of a number of workshops that will help you to construct Excel spreadsheets to implement the analysis of investment projects. These workshops provide a valuable complement to the more conceptual material in the course.

The fourth section of the course involves the question of risk and how the risk associated with an investment is factored into a firm’s decision about whether or not to make the investment.

How should risk be measured? How much should a firm be willing to pay to limit the risk associated with a project? How should the level of risk be incorporated into the decision rules that a firm uses to evaluate investments?  

These are some of the questions discussed in this section

In the face of climate change the energy system is undergoing a structural transition from fossil fuels to more sustainable methods of energy.  This is an unprecedented challenge what is required in terms of cooperation between countries, changes in technologies, and consumer behaviours. 

Learn about the international challenges as the energy system moves from fossil fuels to more sustainable methods of energy sources.  Expand your ability to analyse the key issues important in understanding how the world might make this transition.

Managing resource wealth can impact the economic growth and development of a country for generations. Many countries with large natural resource endowments do not have the institutional structures to exploit the potential of the vast revenues they receive and can suffer as a result, potentially leading to the so-called “resource curse”.  

Learn about the economics and politics of natural resource extraction, the problems that can arise for countries with abundant natural resources, and the ways which governments can better manage this wealth.