Markets are crucial in every energy sector. Spot market is one of the markets in the business marketplace. It is worth noting that spot market is a physical market where various assets are sold and delivered immediately. The transaction that takes placed is in terms of cash. The spot market incorporates the sale of securities or commodities in cash basis. One of the major features of spot market is that the contracts that are carried out in the market are effected immediately. In most cases, spot market are confused with futures market. The difference is that the commodities and financial instruments in spot market are delivered immediately (Ding, Kim, & Park, 2014). The settlements of transitions in spot market takes place within t=2 working days. These means that the delivery of financial instruments that have been transacted need to be delivered after two working day in relation to the day that the trade was carried out.
In most cases, spot market tend to be an exchange, organized market or over the counter. In relation to the energy sector, spot energy market comes into play. This market enables the producer’s energy in the energy sector to locate buyers, negotiate prices, as well as deliver energy. The sale of crude oil is one of the commodities that is traded in spot market. Evidently, crude oil is an example of future commodity, which is transacted at spot prices and later delivered in the shortest period possible. Most of the commodities in the energy sector are sold using spot prices, and can be traded later in forward markets. Spot market illuminates the expectation of the market in relation to future prices (Xie, & Huang, 2014). On the same note, spot market is influenced primarily by demand and supply forces. In the global economic sector, spot markets are controlled and operates by government agencies and industry corporations. Some of the examples of spot markets in the energy sector include National Balancing Point and Title Transfer Facility. Both carry out transactions for natural gas. Analytically, spot market tend to be very attractive to economic speculators.
What is Jevons' paradox?
In the contemporary society, there are various policies that have been implemented to reduce dependence of conventional fossil fuels and electricity energy. Economically, Jevons paradox is a proposition that the efficiency of resources increase as technology progresses. It is worth noting that Jevons paradox continue to be relevant in the energy sector due to technological advancement. Jevons paradox means that the increase in efficiency of using coal to produce energy tend to increase consumption instead of decreasing (Hall & Klitgaard, 2012). These were named after William Jevons. Jevons asserted that the cheap price of energy produced by coal encouraged individual to look for new ways to use the energy. Jevons paradox means that the gains that are achieved through efficiency of energy is mostly lost because consumption increase as a response to decreasing of prices (Missemer, 2012). For example, the government needs individual to use fuel-efficient vehicles; hence the demand for gas by vehicles reduces. The decline in prices encourages people to drive more. These is because individual in society will take advantage of the decrease in prices and look for ways to enjoy more.
Critically, in the long-run the rebound effects tend to exceed the benefits gained from energy efficiency (Missemer, 2012). These means that people tend to use more resources when the prices decrease. Despite the move to improve energy supply in the world, a decrease in prices tend to outdo the energy efficiency. Jevons paradox means that increasing efficiency must be supported by government interventions (Hertwich, 2012). These imply that the gains that are gained from energy efficiently is relevant if the government intervenes. Without the intervention, energy efficiency tends to increase consumption of energy since people take advantage of low prices. Technological progress improves energy efficiency leading to gains in the energy sector. The gains are not long lasting since consumption will increase due to decrease in prices. Economically, people tend to demand more when the prices are low.
What is Backstop Resources theory?
Backstop resources theory is a theory that focuses on the aspect of heavily utilized resources. As a matter of fact, the theory indicates that as a limited resource is heavily utilized, other alternative sources of energy by comparison becomes relatively cheap hence making the available alternatives economically viable. The long-term result is through technological advancement, backstop resources would become unlimited, and this means that the development and discovery of new technologies particularly the backstop technology would be cost effective. Backstop resources, therefore, serve to provide economical and affordable alternatives of energy as the largely utilized limited resource becomes expensive (Tsur and Zemel, 2003). Different countries of the world that include Canada and United States of America have shifted the focus to backstop resources by analyzing and evaluating the characteristics and optimal timing of those resources. The backstop resources theory has provided the state with the ultimate solution to energy that is economical and ultimately renewable energy. Over many years, the issue of consistency and continued depletion of nonrenewable sources of energy has led to the backstop substitute. The backstop is featured as cost effective and cost decreases continuously as experts engage in more research and development efforts (Tsur and Zemel, 2003).
The continuous increase in the price of limited energy sources has been a worrying trend. As a result, massive depletion of natural resources and sources of energy has been experienced, and calls for the adoption of technological substitutes continue to increase. Therefore, although there is technological uncertainty regarding backstop theory, a proper implementation of the backstop resources would lead to a decline in the cost of exhaustible sources of energy. The main emphasis in backstop resources is the issue of the optimal cost that is presumed to remain constant when backstop is implemented (Heal, 1976). In conclusion, many scholars have attempted to provide a relationship between the cost and price of the inexhaustible source of energy. However, the implementation of backstop resources serves to provide a relatively cheap alternative source of energy, which is economical in nature.
Ding, H., Kim, H., & Park, S. Y. (2014). Do net positions in the futures market cause spot prices of crude oil?. Economic Modelling, 41177-190. doi:10.1016/j.econmod.2014.05.008
Hall, C. A. S., & Klitgaard, K. A. (2012). Energy and the wealth of nations: Understanding the biophysical economy. New York, NY: Springer.
Heal, G. (1976). The relationship between price and extraction cost for a resource with a backstop technology. Bell Journal Of Economics, 7(2), 371-378
Hertwich, E. (2012). Jevons Paradox or Not? The Myth of Resource Efficiency: The Jevons Paradox by John M. Polimeni, Kozo Mayumi, Mario Giampietro and Blake Alcott Energy Efficiency and Sustainable Consumption edited by Horace Herring and Steve Sorrell. Journal Of Industrial Ecology, 16(3), 453-454. doi:10.1111/j.1530- 9290.2012.00491.x
Missemer, A. (2012). William Stanley Jevons' The Coal Question (1865), beyond the rebound effect. Ecological Economics, 8297-103. doi:10.1016/j.ecolecon.2012.07.010
Tsur, Y., & Zemel, A. (2003). Optimal transition to backstop substitutes for nonrenewable resources. Journal Of Economic Dynamics & Control, 27(4), 551.
Xie, S., & Huang, J. (2014). The Impact of Index Futures on Spot Market Volatility in China. Emerging Markets Finance & Trade, 50167-177. doi:10.2753/REE1540-496X5001S111