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Construction of a fuel demand function portraying interfuel substitution, a system dynamics approach

Ibrahim Abada, Vincent Briat and Olivier Massol

No 2011-13, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Most of the recent numerical market equilibrium models of natural gas markets use imperfect competition assumptions. These models are typically embedded with an oversimplified representation of the demand side, usually a single-variable affine function, that does not capture any dynamic adjustment to past prices. To remedy this, we report an effort to construct an enhanced functional specification using the system dynamics-based model of Moxnes (1987, 1990). Thanks to a vintage representation of capital stock, this putty-clay model captures the effect of both past and current energy prices on fuel consumption. Using a re-calibrated version of this model, we first confirm the pertinence of this modeling framework to represent interfuel substitutions at different fuel prices in the industrial sector. Building on these findings, a dynamic functional specification of the demand function for natural gas is then proposed and calibrated.

New Economics Papers: this item is included in nep-cmp and nep-ene
Date: 2011
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Journal Article: Construction of a fuel demand function portraying interfuel substitution, a system dynamics approach (2013) Downloads
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