Domestic Energy: A Forgotten Factor in Simple Energy-Economy Models

Abstract

This paper focuses on the impacts of changes in world energy prices on an energy-importing economy such as the United States. To this end, we use a simple energy-economy model developed by Sweeney [7] and having affinities to the earlier work of Hogan and Manne [5]. This model takes explicit account of the fact that the U.S. energy sector is linked to the rest of the world and that the United States is a net importer of energy. Comparative static analysis of this model enables us to pinpoint the most important parameters in the determination of relative price effects on the domestic economy. We show that the presence of energy consumption taxes and energy production subsidies does not affect the impacts of changes in world energy prices on national output.