Real Prices Method – Value of the Danish and Norwegian Oil and Natural Gas in the North Sea
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Real prices method
Thereafter the present value method is chosen to set the value of the Danish and Norwegian
oil and natural gas in the North Sea. With the present value method, the future earnings from
oil and natural gas are discounted by using a discount rate of 4 percent and a normal yield on
capital of 8 percent, the value of the Danish oil stock in 2003 was 221,521 million dkr. By
pertaining to the same conditions regarding Norway, it is the case that the value of Norwegian
oil stock in 2003 was 2,861,973 million nok.
Ultimately, the sensitivity of the value of oil is depicted by choosing different compositions of
discount rate and normal yield on capital.
Natural monopolies arise on subadditive markets, which are characterised by large fixed costs, e.g. due to initial infrastructural investments. These fixed costs causes the average costs to be declining overall, and this means, that the costs are lower with a single firm than it would be with more firms. Without competition, this monopolist has no incentive to lower prices, and therefore there will be a deadweight loss in the market. In addition to this alloca-tive inefficiency the single firm hasnt got any incentive being efficient in any manner. This is known as X-inefficiency, and these two types of inefficiency are what the regulator of the natural monopoly tries to eliminate through regulation.
The regulator has several different solutions to the inefficiency problems, each with its own distinct properties. A good mechanism takes care of the inefficiencies, as well as it is cheap to work out and implement. The most intuitive solutions dictate the prices of the firm, but setting price equal to marginal costs doesnt cover the large fixed costs, and trying to just cover the fixed costs requires much knowledge of the market, and the mechanism is therefore rather ex-pensive. This has forced other mechanism to be invented. Some try to put a lid on the profits, but these dont eliminate X-inefficiency. Therefore incentive regulation tries to give the firm the right incentives in order to minimize both types of inefficiency. These mechanism, how-ever, are often quite expensive, which leaves the regulator without a single best mechanism.
The Danish energy sector has been liberalised, which means that the natural monopolies only facilitate markets with market errors. Energinet.dk handles the energy transmission in Den-mark, which is one of the last natural monopolies in the Danish energy sector. Its regulated using the cost-plus mechanism, which leaves no profits to be earned. Clearly