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Fundamentals of Global Energy Business Michael J. Orlando University of Colorado - Denver Week 2: Supply of Energy video 7: Financial Markets and Political Markets

3 Global Energy Management Program---- Business School. Introduction to energy markets Markets for Real Goods and Services –i.e. market for energy, markets for inputs to production –price and quantity determined by position of demand and supply curves Price Quantity Market for a Real Good Supply Demand

4 Global Energy Management Program---- Business School. Introduction to energy markets Real Markets Financial MarketsPolitical Markets

5 Global Energy Management Program---- Business School. Introduction to energy markets Financial Markets –i.e. markets for claims on cash flows of a business –i.e. markets for debt and markets for equity Why are Financial Markets particularly important for energy business? –significant share of costs are fixed (economies of scale) => energy business is capital intensive –energy business is risky

6 Global Energy Management Program---- Business School. Introduction to energy markets Financial Markets Why are Financial Markets particularly important for energy business? –significant share of costs are fixed (economies of scale) => energy business is capital intensive –energy business is risky Capital intensity => need lots of financial capital Riskiness => value for diversification

7 Global Energy Management Program---- Business School. Introduction to energy markets Political Markets –political agents – make decisions that structure exchange among participants in real markets, financial markets taxes regulation permitting –political decisions are influenced through political markets elections lobbying comments contributed during legislative debate and regulatory rulemaking court cases

8 Global Energy Management Program---- Business School. Introduction to energy markets Political Markets Why are Political Markets particularly important for energy business? –systemic implications of real activities externalities – pollution, risks to public safety? network effects – interdependencies in supply? –geographically-fixed nature of resources and investment opportunities for takings (rent-seeking)?

9 Global Energy Management Program---- Business School. Introduction to energy markets Political Markets Why are Political Markets particularly important for energy business? –systemic implications of real activities externalities – pollution, risks to public safety? network effects – interdependencies in supply? –geographically-fixed nature of resources and investment opportunities for takings (rent seeking)? => value to understanding, participating in rulemaking

10 Global Energy Management Program---- Business School.