Substitution and Reallocation Responses to Energy Price Changes

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This project involves a structural approach to the study of plant level substitution and reallocation responses to energy price changes. The role of plant entry and exit is examined in the determination of aggregate substitution and factor demand responses to energy price changes. Plant level technology parameters related to energy intensity and energy substitution are estimated. Further, the joint distribution of these parameters in the population of manufacturing plants is characterized, its evolution over time tracked, the consequences for aggregate outcomes spelled out, and the efficiency costs of government policies that impede factor mobility quantified. The main focus of the analysis is a rich source of annual data on U.S. manufacturing plants from 1972 to 1993. The following sorts of questions are addressed: 1. How are plant level technology parameters (energy intensity and energy substitution elasticities) related to observable plant and industry characteristics? 2. To what extent is energy intensity embodied in the capital stock? 3. How has the plant level distribution of energy related technology parameters evolved over time? Were large changes in this distribution triggered by the oil price shocks of 1973 74, 1979 80 and 1985 86? 4. What contribution do plant entry and exit, between plant factor reallocation, within plant substitution responses and between industry output shifts make to the aggregate substitution and factor demand responses to energy price shocks? 5. Does the asymmetric aggregate response to oil price ups and downs reflect changes over time in the plant level distribution of energy related technology parameters? 6. How costly are the frictions in factor reallocation and technology adjustment that slow the economic response to energy price changes? 7. How large are the efficiency costs of government policies that impede plant exit and between plant reallocation responses to energy price changes? 8. How have spatial and industry differences in energy prices evolved since 1972? 9. How large were the efficiency costs of government policies that hampered the spatial arbitrage of energy prices?