Transcript Slide 1
Energy Economics in the 21
st
Century
Bill Pike 21 April 2010
Points to Remember as We Discuss Energy Economics • The global oil and gas industry is the world’s largest private sector enterprise, generating approximately $4.5 - $5 trillion in • gross revenue yearly.
Oil and gas are commodities. Oil is a global commodity but gas remains, mostly, a regional commodity subject to local economic • factors.
Simple supply and demand economics should explain supply, • demand and pricing of oil and gas, but most often do not.
Despite the rising level of political rhetoric, carbon-based energy sources (oil, gas and coal) will remain our primary energy sources through 2035, at the very least.
The Basics
Bill Pike 21 April 2010
Supply and Demand Economics
(Groan) • Demand – The Law of Demand holds that, other things being equal, as the price of a good rises, demand for that good will fall, and vice versa.
The Demand Curve Equilibrium Point Quantity in the Market
Supply and Demand Economics
Few of us have experience with the supply side of the market. Supply is derived from producer’s desire to maximize profits.
• Supply – The Law of Supply holds that, other things being equal, as the price of a good rises, its quantity supplied will rise, and vice versa.
The Supply Curve Demand Curve Supply Curve Equilibrium Point Quantity in the Market
The Supply/Demand Model Price and Supply at Equilibrium Equilibrium Point Quantity in the Market
World Demand for Energy Will Continue to Grow 700 600 500 400 300 200 100 0 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 19 94 19 97 20 00 20 10 20 25 Oil Natural Gas Coal Nuclear Renewables
Source: EIA, International Energy Outlook
By The Numbers Primary Energy Demand (10 15 btu)
• Petroleum • Natural Gas • Coal • Nuclear • Other
2010 2015 2020 2025 185 204 224 245 108 122 139 156 108 117 127 140 30 31 32 30 39 43 47 50 Source: Energy Information Administration, U.S. Department of Energy
Petroleum Consumption in Developing Nations Will Exceed Developed Countries by 2025 140 120 100 80 60 40 20 0 19 70 19 75 19 80 19 85 19 90 19 95 20 00 20 03 20 10 20 15 20 20 20 25 Developed Countries Rest of World
Global Energy Demand
by sector, billions barrels of oil equivalent
Energy Demand and GDP (1980 – 2002)
Primary energy demand per capita (Gigajoules)
0.5
0.4
0.3
0.2
0.1
0 1 0.9
0.8
0.7
0.6
0 Energy and Well Being United Nations Human Development Index versus per Capita Electricity Consumption United States Canada Qatar Norway Iceland 5,000 10,000 15,000 20,000 Electricity, kWh (2002 data) 25,000 30,000
But What About Supply?
• We Know Where There is Enough Oil – Mature Fields – Unconventional Assets – Ultra-Deepwater – Arctic Regions
But What About Supply?
• We Know Where There is Enough Gas – Shale Gas – Tight Gas – CBM – Methane Hydrates to Fuel the World’s Economy and Society for Many Decades.
So, We Should Be Set to Let Supply and Demand Economics End This Global Price Roller Coaster Ride?
If You Believe This, See Me Later for a Really Good Deal on a Bridge.
Factors Skewing Supply and Demand Fundamentals
• Political and/or economic instability in major producing areas
War – The Ultimate Instability
Factors Skewing Supply and Demand Fundamentals
• • Political and/or economic instability in major producing areas Speculation in the market place
Instability and Worldwide Oil & Gas Reserves
Nationalizing Unstable Unstable
OPERATED BY: NOC Non NOC
Unstable
Oil & Gas Reserves combined Source: BP Statistical Review
of World Energy 2004
Unstable Unstable
Speculation in the Market Place
• • • • Hedging: The spot and futures markets Fear that wars, political maneuvering and/or nationalizations will disrupt oil and gas supplies leads market traders to buy and hedge upwards to guarantee supply This probably accounts for as much as $15 of the price of a barrel of oil today Most producers would be happy with an oil price of $75 to $85 per barrel
Factors Skewing Supply and Demand Fundamentals
• • • Political and/or economic instability in major producing areas Speculation in the market place Artificial pricing through subsidies and taxes
Artificial Pricing Through Subsidies
2007 U.S. Energy Subsidies: $ millions • Coal • Refined Coal • Natural Gas/Petroleum Liquids • Nuclear • Renewables 932 2,370 2,149 1,267 4,875 • Total 11,593
Types of Subsidies/Market Intervention
• Direct Subsidies • Royalty Relief • Tax Credits • Investment Credits • Depletion Allowance • Research and Development Funding • Grants • Accelerated Depreciation • Import/Export Restrictions • Price Controls
Linkage – Subsidies and Prices
In the aggregate, subsidies throughout the world to any particular form of energy will tend to depress prices and encourage consumption, and overconsumption, of the resource.
However, that does not always apply. Many subsidies to domestic producers, and many import restrictions, for example, keep these producers competitive with less expensive imports and/or options.
Removal of subsidies will save taxpayers billion of dollars.
Factors Skewing Supply and Demand Fundamentals
• • • • Political and/or economic instability in major producing areas Speculation in the market place Artificial pricing through subsidies Cost variations – reserve types and recovery costs
Cost Variations: Price Sensitivity for Development
Source: Martin Wolf, “
Coal and open markets are the best hope for energy security,” The Financial Times
, 5 July 2006, p 13.
Cost Variations: Processing Costs
• Cost to process a barrel of oil for the refinery gate – 160 various types of crude produced worldwide – a price differential of $15 barrel, or higher – depending on the composition of the oil, processing cost can vary widely
The Role of Taxes
Company profit on a $3 per gallon gasoline at the pump is about 10 cents a gallon.
Factors Skewing Supply and Demand Fundamentals
• • • • • Political and/or economic instability in major producing areas Speculation in the market place Artificial pricing through subsidies Cost variations – reserve types and recovery costs Regulatory restrictions - Macondo
Regulation and Prices
• Macondo – Delays due to moratoria and complex permitting and development regulations will result in the loss of 82,000 barrels of oil per day in the Gulf of Mexico next year – Moratoria in other areas, such as the Arctic, will forestall or prevent development of incremental production
What is the story for the U.S.?
• • We have significant amounts of mature and unconventional resources to moderate declines in domestic oil production.
However, they won’t be enough to end our dependency on imported oil.
U.S. Primary Energy Consumption by Fuel, 1980-2035 (quadrillion Btu)
Annual Energy Outlook 2011
“Let us set as our national goal, in the spirit of Apollo, with the determination of the Manhattan Project, that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign energy source.” - President Richard Nixon (November 7, 1973)
“I am recommending a plan to make us invulnerable to cutoffs of foreign oil. … [a] new stand-by emergency programs to achieve the independence we want…” President Gerald Ford (January 15, 1975)
“This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation.” - President Jimmy Carter (July 15, 1979)
“We will continue supportive research leading to development of new technologies and more independence from foreign oil.” - President Ronald Reagan (February 18, 1981)
“There is no security for the United States in further dependence on foreign oil.” - President George H. Bush (August 18, 1988)
“We need a long-term energy strategy to maximize conservation and maximize the development of alternative sources of energy.” - President Bill Clinton (June 28, 2000)
“This country can dramatically improve our environment, move beyond a petroleum-based economy, and make our dependence on Middle Eastern oil a thing of the past.” - President George W. Bush (January 31, 2006)
“For decades, we have known the days of cheap and accessible oil were numbered…. Now is the moment for this generation to embark on a national mission to unleash America’s innovation and seize control of our own destiny.” - President Barack Obama (June 15, 2010)
U.S. Petroleum Supply, Consumption, and Net Imports, 1960-2030 (million barrels per day)
History Projections
30 25 20 15 10 5 0 1960 1970 Consumption Domestic Supply 1980 1990 2000 58% 2010 Net Imports 62% 2020 2030
Instability and Worldwide Oil & Gas Reserves
Nationalizing Unstable Unstable
OPERATED BY: NOC Non NOC
Unstable
Oil & Gas Reserves combined Source: BP Statistical Review
of World Energy 2004
Unstable Unstable
What is the story for the U.S.?
• • • We have more gas than we know what to do with. We are set to become a net exporter of natural gas at current resource development rates.
However, basic economics may hinder development of these resources in the near and mid term.
U.S. Natural Gas Production, Consumption, and Net Imports, 1960-2030 (trillion cubic feet)
History Projections
30 25 20 Consumption
Cancelled
Production 15% 15 10 5 Natural Gas Net Imports, 2004, 2025, and 2030 (trillion cubic feet) 7 2004 6.4
6 AEO2005 5 4 AEO2006 - 2025 AEO2006 - 2030 4.1
4.4
2.8
3 2.3
2 1.2
1.2
1 0.6
0 Pipeline Liquefied Natural Gas 0 1960 1970 1980
Annual Energy Outlook 2005 and 2006
1990 2000 2010 Net Imports 2020 21% 2030
Unconventional Gas to the Rescue
Energy Economics in the 21
st
Century Renewable Energies
Renewable Energy Consumption in the Nation’s Energy Supply, 2008
Source: http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/rea_prereport.html
The British thermal unit (BTU or Btu) is a traditional unit of energy. It is approximately the amount of energy needed to heat one pound of water one degree Fahrenheit.
Renewables Gain Electricity Market Share; Coal Share Declines
billion kilowatt-hours and percent shares 6,000 History Projections 5,000 4,000
9.1
21.4
Renewable Natural gas
17.0
20.8
3,000 2,000 1,000
48.5
1.5
19.6
0 1990 1995 2000 2005 2010 2015 Coal Oil and other Nuclear 2020 2025
43.8
1.4
17.1
2030 2035 Richard Newell, SAIS, December 14, 2009 Source:
Annual Energy Outlook 2010
Comparative Electrical Generation Costs Resource: Wind Geothermal Biomass (direct) Natural Gas (combined cycle) Coal Fuel Cell Solar (thermal) Solar (photo voltaic Cents per kwh (2008) 5.7 – 11.3
5.8 – 9.3
6.5 – 11.3
7.4 – 10.2
11.0 – 14.1
12.7 -- 15.0
12.9 – 20.6
16.0 – 19.6
Source: www.sourcewatch.org
Comparative Electrical Generation Costs With Federal Tax Subsidies Removed Resource: Natural Gas (combined cycle) Biomass (direct) Wind Geothermal Coal Fuel Cell Solar (thermal) Solar (photo voltaic) Cents per kwh (2008) 7.4 – 10.2
7.8 – 13.6
8.2 – 16.1
8.3 – 13.3 11.0 – 14.1
15.2 – 18.0
20.6 – 33.0
25.6 – 31.4
Source: Lazard, Levelized Cost of Energy Analysis – Version 3.0, 2009
And, That Is Just With Federal Tax Subsidies Removed
• It does not take into account state, regional and local tax breaks • Direct subsidies • Land donations • And myriad other concessions that can and are made
An Additional Cost: Infrastructure Retooling
• How many of you think that all Americans will be driving totally electric cars in 10 years?
• How many of you think that all your goods will be moved in totally electric vehicles?
• How many of you think you will have a photovoltaic array in your backyard?
• Or a geothermal well in your neighborhood?
• How many of you think we have resources or the intent to totally replace our energy provision and transportation systems – at today’s usage levels – in the next 10 years?
Conclusions
• The economics of oil and gas are subject to external forces and respond to altered supply and demand models.
• Despite assurances to the contrary, we will not end our dependency on foreign oil nor our vulnerability to fluctuating oil prices.
• We have massive reserves of clean, inexpensive natural gas.
• The sheer volume of increased gas production may suppress gas prices and slow future reserves development.
• Wide spread adoption of renewable energy is, at present, a pipe dream.
• Alternative energy is too expensive, especially in today’s strained economy, and can currently only be made competitive with generous subsidies. And the economic limitations are only part of the reason that renewable energy is not now viable.
• Renewable energy must be developed and made economic. We must, however, be realistic about how and when this will happen.
Macondo – The 800 lb. gorilla in the room
• • •
What we know:
The accident occurred because of a combination of mistakes The U.S. offshore oil and gas industry will never be the same The resultant impact on the Gulf Coast economy is severe
Macondo Fallout – Direct Loss of Revenue • EIA estimates a daily production shortfall in the Gulf of Mexico of 200,000 bbl in 2011, primarily as a result of moratoria and new regulations arising from Macondo.
• The estimated development and production cost of a deepwater GOM project is $65/bbl.
• The multiplier for local and regional economies contacted by deepwater development is calculated at 2.7.
Using these figures, the revenue shortfall for the Gulf Coast economies affected by the Macondo incident in 2011 alone will be: $35,100,000/day $12,812,100,000/year
But There May Be Wider Consequences U.S. Oil Supply Projections – Production VS Imports 2 0 6 4 12 10 8 1 2 2011 3 4 5 6 2012 7 8 U.S. Production Imports
Will Economic Recovery Be Killed By Higher Oil Prices?
EIA Short Term Energy Outlook 2011