General equilibrium models for energy policy analysis

In this paper we shall provide an elementary overview of the concept of general economic equilibrium in the concrete context of the U.S. energy market. * With this aim in mind, we shall introduce and discuss several important, large-scale energy models which embody the assumptions of the methodology of economic equilibrium. The models which will be discussed were all developed since the OPEC embargo of 1973-an event which has provided the impetus for development of sophisticated computer models useful in energy planning and policy-making. In the first section, the models of Hudson and Jorgenson! and Hnyilicza are introduced. The discussion here will hopefully provide the reader with a clear diagrammatic exposition of the concept of general economic equilibrium. ~y "economic equilibrium" we mean a state of the economy In which prices are such as to equate the supply and demand for all commodities under consideration. These two particular models provide a good starting point for our discussion since they are very broad in scope, encompassing both the energy and the non-energy sectors of the U.S. economy. In doing so they take account of the important linkages which exist between the energy and non-energy sectors. Then in the second section, we introduce the SRI National energy model, sometimes referred to as the SRI-Gulf model since it was originally developed with the collaboration of the Gulf Oil Corporation. OUf focus in this section is on the algorithm through which economic equilibrium is determined in a dynamic economic context. An understanding of the algorithm not only sponsors an in-depth understanding of the SRI model and "how it works," but permits an appreciation of the important role of computation in largescale models. Finally, in the last section, we conclude with some remarks on the role of economic models in energy policy analysis.