# International Futures Help System

## Energy Equations Investment

Investment in energy is relatively complex in IFs, because changes in investment are the key factor that allows us to clear the energy market in the long term. It is also different and perhaps slightly more complex in IFs than invest"ment in agriculture. Whereas the latter involves computing a single investment need for agricultural capital, and subsequently dividing it between land and capital, in energy a separate demand or need is calculated for each energy type, based on profit levels specific to each energy type.

We begin, however, by caculating a total energy investment need (TINEED) to take to the economic model and place into the competition for investment among sectors. This investment need involves multiple factors. The first is the historic (one-year lag) moving average of energy investment need relative to GDP; that is applied to current GDP in order to obtain the basic estimate of investment. The second is a multiplier the represents the global level of energy stocks (MULWST). The third is a multiplier that represents changes in the global energy demand level (MULENDEM). The fourth is a multiplier that introduces changes in the global capital costs of energy production (MULKENENPR). The fifth is another multiplier from global energy stocks, this one representing only the level of global stocks relative to desired ones. The sixth, and very important factor, is a multiplier that represents regionally-specific profit levels in the energy sector.

The calculation further builds in a multiplier (ENINVM) with which users can shift investment patterns.

This total investment need is prepared for the economic model (IDS) by adjusting it to the empirical initial condition for energy sector investment, using a parameter (SIDSF) calculated the first time period.

The economic model will return a modified value of IDS, which can be reconverted to the actual investment in energy, across all energy categories (INEN).

Back in the energy model proper, we must determine the demand for investment by energy type (INEED) and later allocate total investment (INEN) to the types. The first step is to assume that investment by type will be roughly proportional to the existing capital stocks by type (KEN) and the initial ratio of investment to capital stock. We then modify that by the sectoral energy return rate (EPROFITS) and an energy supply elasticity (ELASS).

where

The initial investment need is based on initial capital, an exogenously specified initial growth rate (ENPRR), and the lifetime of capital parameter that determines capital depreciation annually (LKE).

There are possible adjustments in this basic and initial computation of investment need by energy type. The first is when the user specifies an exogenous desired rate of growth in energy production for a region and energy type (EPRODR). That simply overrides the above calculation with one based on the need to replace depreciated capital and grow as specified.

Whether energy investment patterns have an economic basis or a socio#political one, they will still be subject to resource constraints on fossil fuels. The next stage of energy investment need cal"culation thus bounds investment to that which the known reserve base can support. This final calculation of investment need (INEED) specific to energy type depends on the capital stock (KEN), the capital lifetime (LKE), and a maximum growth possible in production given the resource base (ENPRRM). The maximum growth possible depends in turn on the known reserves (RESER), the minimum ratio of reserves to production that is physically possible (PRODTF), and the current production. Production (ENP) of oil (energy category 1), however, can consist in part of unconventional oil, which is not subject to the constraints of conventional resources. IFs considers only the conventional portion (ENPR) of that energy category when computing maximum growth of production; that portion is conventional production (ENPC) over total production (ENP).

At this point it is possible as an indicator to calculate the anti"cipated energy production growth rate (ENPRR) of each energy type based on investment (SIENED), capital (KEN), and capital lifetime (LKE).

To see how sectoral energy investment updates energy capita, look at the energy equations for capital.