Willi Semmler Discusses Oil Prices, Shale Energy, and Green Energy Implications

Willi Semmler, Arnhold Professor of International Cooperation and Development at The New School for Social Research, co-authored a blog post for Schwartz Center Economic Policy Analysis at The New School, based on a paper that he co-wrote with Arkady Gevorkyan. The blog post and paper discusses the growth in unconventional energy, shale energy in particular, and how its bust could lead to a boom in green energy. The paper’s abstract is as follows:

In recent years, we have observed significant growth in unconventional energy, shale energy, in particular in the United States. There was a boom, followed by a bust. The plunge in oil price triggered a prolonged bust in the energy sector. Which firms will benefit, and which will be squeezed out due to this persistent oil price decline? A new equilibrium is about to evolve under these conditions. In this paper, we develop a theoretical model that accounts for recent features in the energy sector. In particular, we focus on the shale energy companies and illustrate a trend toward a boom in external borrowing, overleveraging, and, now, a high risk of insolvency. With the use of a new method, called nonlinear model predictive control (NMPC), we show dynamic paths toward two equilibria: either a tight oligopoly or extensive competition, with the shakeout of some firms. This is also tracked by studying leveraging and overleveraging by groups of firms. We further undertake an empirical analysis using a vector error correction model (VECM), which helps identify the short- and long-term effects of those new challenges on the stock performance of the energy companies. The main finding is that large-cap companies are less dependent on the fluctuation in oil price than are mid- and small-cap firms.

Read the full paper.