Global Scan
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Why Conduct a Global Scan?
• Importance of questioning, understanding
our assumptions for energy outlooks
• First rule of scenario analysis, “understand
the present”
• “Backcasting” reveals errors in data and
analysis that influence forward thinking
• Models are static, behavior is dynamic
• Technology, innovation are difficult to
predict
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Impact of Assumptions on Forecasts
140
U.S. DOE Annual Outlooks
1978-2002
120
80
60
40
20
0
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
1999$/BBL
100
ACTUAL
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Cumulative U.S. Oil & Gas
Production, MMBOE
(Includes
Alaska)
U.S. Example: Impact of
Technology and
Frameworks
2000
1990
1980
Micros Work Stations
1970
Minis
1960
1950
1940
2
98
94
90
86
82
Mainframes
1930
1900
1850
IT Pathway
78
74
70
66
62
58
54
50
•Hydrates?
GTL?
•Offshore
below
10,000ft
•4-d seismic,
On a BOE basis, production
offshore below
has not yet peaked
5,000ft
•3-d seismic, horizontal drilling, measurement
while drilling, offshore below 1,000ft
•Pipeline trenching and welding, compression,
pressure control, metering; national grid develops
•Directional drilling, offshore below 250ft water depth
•Long-line pipeline transmission
•Advances in drilling, early seismic, shallow offshore E&P
•Oil discovered at Spindletop (Texas), 1901
•Oil discovered in Titusville, Pennsylvania, 1859; natural gas replaces town gas, 1870s
?
Not to scale
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Plus Ça Change, Plus C’est la Même Chose?
Source: 2004 International Energy Outlook, EIA
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Efficiency – Existing Technology
Input: 35 MBOE/D
THERMAL
Oil
4
Coal
13
Gas
4
Nuclear
6
Hydro
8
Combustion
Heat and/or
mechanical
energy
Electricity
Other
Photovoltaic
Fuel Cell
Generator
system
Output:
11 MBOE/D
or 6,825
TWh/yr
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Efficiency – What Can Change
the Equation?
• Technologies and price signals to facilitate
demand-side response
• New energy conversion technologies
• New fuel sources
• New grid materials (superconducting)
• Facilitating frameworks to support market
signals, choice, and innovation
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Source: Robert L. Bradley Jr. Various publications
and presentations.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Hydrocarbon usage
& potential (EJ)
Exa= 1018
Joules  0.001 Btu
Additional
Occurrences
992000
Resource
Base 212193
1860-1998
Consumption
13508
Source for data: IPCC 2001 Mitigation, p. 236
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Driving Forces
• Energy and economy
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State of the World
• Energy is necessary for economic growth 
– Energy resources and industries have been
considered strategic and/or national
– Energy industries have been vertically integrated
– But, there is now deregulation or restructuring
• Fossil fuels have been the major source for
generating energy, but
– These resources are increasingly concentrated in
politically sensitive parts of the world
– Burning of these fuels are increasingly blamed for a
variety of environmental problems
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State of the World
• How to address environmental concerns in a
more competitive industry while fueling
economic and social development?
– Fossil fuels-based technologies have cost
advantages to “clean” alternatives
– Developing economies want to use these
technologies and their fossil resources
– Developed economies do not want to risk slow-down
with heavy regulation
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Economic Growth Requires Energy
Correlation = 0.77 (2000)
Total E
15
12
9
6
140 Countries (excluded
five richest and/or largest
energy users)
3
0
0
250
500
750
1,000
1,250
1,500
1,750
GDP (Billions of 1995$)
Nigeria (0.83, 105)
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2,000
Energy per Capita Increases with Wealth
Correlation = 0.78 (2000)
139 countries
E per capita
500
450
400
Nigeria (7.2, 0.91)
350
300
250
200
150
100
50
0
0
5
10
15
20
25
30
35
GDP per capita (1,000 1995$)
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
40
Energy Intensity Decreases with Wealth
EI (Btu per 1995$ of GDP)
Correlation = -0.30 (2000)
125000
100000
Nigeria (7900, 0.91)
75000
50000
25000
0
0
5
10
15
20
25
30
35
GDP per capita (1,000 1995$)
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
40
Relationships constant over time
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
average
Total E & GDP
0.87
0.87
0.83
0.83
0.84
0.85
0.85
0.86
0.87
0.88
0.88
0.86
Total E & GDP per
capita
0.30
0.32
0.30
0.30
0.30
0.28
0.28
0.28
0.28
0.28
0.28
0.29
E per capita & GDP
0.22
0.21
0.20
0.19
0.20
0.21
0.21
0.20
0.20
0.21
0.21
0.21
E per capita & GDP
per capita
0.57
0.54
0.52
0.50
0.52
0.59
0.60
0.58
0.58
0.61
0.60
0.56
E per GDP & GDP
-0.05
-0.06
-0.09
-0.09
-0.08
-0.08
-0.08
-0.08
-0.08
-0.09
-0.11
-0.08
E per GDP & GDP per
capita
-0.12
-0.11
-0.20
-0.20
-0.20
-0.20
-0.19
-0.19
-0.20
-0.21
-0.25
-0.19
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Implications
• Greater GDP  more energy consumption.
• Greater GDP  more energy consumption per
capita.
• Richer countries consume more energy.
• Richer countries also consume more energy per
capita but the ratio is not 1:1.
• As countries get richer, energy intensity declines,
i.e., they use less energy to generate an additional
dollar of GDP!
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Use Per Unit GDP
MMBtu per dollar Gross Domestic Product, using market
exchange rates in 1995 U.S. dollars, as of 2000
450,000
400,000
Tajikistan
350,000
OPEC
Nigeria ~8,000
300,000
Russia
250,000
200,000
150,000
100,000
50,000
China
India
Canada
Mexico
U.S.
Turkey
U.K.
France, Germany
Japan
Burma
0
Sources: U.S. Energy Information, International Energy Agency, BP
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Intensity & Income
Figure 1: Energy Intensity by Income Grouping (1995)
0.6
0.5
0.4
Energy
Intensity 0.3
kg oil eq.
per $GDP 0.2
0.1
38%
22%
41%
19%
30%
51%
11%
34%
55%
3%
31%
65%
Share of GDP
Agriculture
Industry
Services
0.0
Low
0-1000
Lower Middle
1001-3000
Upper Middle
High
3001-10000
10001-
Income Classification
GDP per capita
1985 international $
Sample of 83 countries
Sources: World Bank Development Indicators, Penn World Tables
Medlock & Soligo (Energy
Journal, 2001)
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Growth of the Middle Classes
Purchasing Power Parity Population in millions
based income in U.S.
China
India
Brazil
Dollars
Greater than $20,000
2
7
9
$10,000 to $20,000
60
63
15
$5,000 to $10,000
330
125
27
Less than $5,000
800
700
105
Source: “The End of Corporate Imperialism” by Prahalad &
Lieberthal, Harvard Business Review, July-August 1998, pp. 69-79.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Disparity I
Source: www.bp.com/centres/energy2002/
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Energy Disparity II
Source: www.bp.com/centres/energy2002/
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Driving Forces
• Energy and economy
• Global distribution of energy resources
relative to demand
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Total Oil and Gas
Resource
Discovered
Undiscovered
Recoverable
Resources
Nonrecoverable
Resources
Reserves
Proved
Reserves
OIL AND GAS RESERVE
TERMINOLOGY
Recoverable Resources
(Society of Petroleum
Engineers); See
Supplemental Information,
below
Cumulative
Production
Unproved
Reserves
Probable
Reserves
Possible
Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Oil Reserves
WORLD
OPEC
End
End
End
End
Middle East
Former Soviet Union
Africa
2004
2000
1990
1980
North America
USA
South & Central America
Asia Pacific
0
100
200
300
400
500
600
700
800
900
1, 000 1, 100 1, 200
Billions of Barrels
Proved reserves with current technology and prices. Source: BP Statistical Review of World Energy 2005.
OPEC includes Iran, Iraq, Kuwait, Qatar, Saudi Arabia, UAE, Algeria, Libya, Nigeria, Indonesia, Venezuela.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Oil Producing Regions
OPEC
Middle East
North America
2004
USA
2000
Africa
1990
Asia Pacific
FSU
Central and South
America
Million b/d
0
5
10
15
20
25
30
35
Source: BP Statistical Review of World Energy, 2005. OPEC includes Iran, Iraq, Kuwait, Qatar, Saudi
Arabia, UAE, Algeria, Libya, Nigeria, Indonesia, Venezuela.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Petroleum Geography
Source: BP Statistical Review of World Energy, 2005
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World Oil Production
90000
Thousand b/d
80000
70000
Non-OPEC
OPEC
60000
50000
40000
30000
20000
10000
0
65 68 71 74 77 80 83 86 89 92 95 98 01 04
Source: BP Statistical Review of World Energy 2005.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
U.S. Crude Oil Replenishment
(billion barrels)
160
160
140
120
100
80
60
40
20
29
20
0
1944 Reserves
1945-04
Production
2005 Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Crude Oil Replenishment
(billion barrels)
1189
1200
949
1000
800
600
400
68
200
0
1947 Reserves
1948-04
Production
2005 Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Oil Consuming Regions
OECD
North America
USA
Asia Pacific
2004
Europe
2000
Central and South America
1990
Middle East
FSU
Million b/d
Africa
0
10
20
30
40
50
60
Source: BP Statistical Review of World Energy, 2005.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Thousand b/d
World Oil Demand
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Non-OECD
OECD
65 68 71 74 77 80 83 86 89 92 95 98 01 04
Source: BP 2005. OECD region includes all of Western Europe; Poland, Hungary and the Czech
Republic; Turkey; Australia and New Zealand; Japan and South Korea; North America.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Gas Reserves
World
FSU
Middle East
North America
USA
End 2004
Africa
End 2000
Asia Pacific
End 1990
Central and South America
Europe
0
1000
2000
3000
4000
5000
6000
7000
Trillion Cubic Feet
Source: BP Statistical Review of World Energy, 2005.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Gas Producing Regions
WORLD
North America
USA
Former Soviet Union
2004
Europe
2000
Asia Pacific
1990
Middle East
Africa
Trillion CF
South & Central America
0
10
20
30
40
50
60
70
80
90
100
Source: BP Statistical Review of World Energy, 2005.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Natural Gas Geography
Source: BP Statistical Review of World Energy, 2005
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Natural Gas Production
Russian production
is 85% of FSU
300
Rest of World
FSU
U.S.
250
200
Bcf/d
150
100
50
03
00
97
94
91
88
85
82
79
76
73
70
0
Source: BP Statistical Review of World Energy 2005.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
U.S. Natural Gas Replenishment
(trillion cubic feet)
900
800
700
600
500
400
300
200
100
0
847
167
147
1944 Reserves
1945-00
Production
2001 Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Canadian Natural Gas Replenishment
(trillion cubic feet)
100
100
80
60
61
46
40
20
0
1964 Reserves
1965-00
Production
2001 Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Natural Gas Replenishment
(trillion cubic feet)
6000
5304
5000
4000
3000
2000
2053
1041
1000
0
1966 Reserves
1967-00
Production
2001 Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Gas Consuming Regions
OECD
North America
USA
FSU
2004
Europe
2000
Asia Pacific
1990
Middle East
Central and South America
Trillion CF
Africa
0
10
20
30
40
50
60
Source: BP Statistical Review of World Energy, 2005.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Natural Gas Demand
300
Rest of World
250
FSU
Rest of OECD
U.S.
150
100
50
01
98
95
92
89
86
83
80
77
74
71
68
0
65
Bcf
200
Sources: BP Statistical Review of World Energy 2004
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Is Natural Gas the Future?
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Distribution of Coal Reserves
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World Coal Producing Regions
Asia Pacific
North America
USA
Europe
FSU
2000
Africa
1990
Central and South America
Middle East
0
200
400
600
800
1000
Million Tons Oil Equivalent
Source: BP Statistical Review of World Energy, 2001.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Coal Consuming Regions
OECD
Asia Pacific
North America
USA
Europe
2000
FSU
1990
Africa
Central and South America
Middle East
0
200
400
600
800
1000
1200
Million Tons Oil Equivalent
Source: BP Statistical Review of World Energy, 2001.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Coal Replenishment
(billion short tons)
1200
1089
1000
800
600
256
400
173
200
0
1949 Reserves
1950-99
Production
2000 Reserves
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Net Electricity Generation
Hydro
17%
2001 Total = 14,813 Billion Kwh
Nuclear
17% Other
2%
Thermal
64%
Source: U.S. EIA
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Net Thermal Electricity Producing
Regions
North America
Far East and Oceania
East Europe and FSU
West Europe
1999
Africa
1991
1982
Middle East
Central and South America
0
500
Billion Kw
1000 1500 2000
2500
3000
Source: EIA
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Net Hydroelectric Producing
Regions
North America
West Europe
Far East and Oceania
1999
Central and South America
1991
1982
East Europe and FSU
Africa
Middle East
0
200
Billion Kw
400
600
800
Source: EIA
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
World Net Nuclear Producing
Regions
West Europe
North America
Far East and Oceania
1999
East Europe and FSU
1991
1982
Africa
Central and South America
Middle East
Billion Kw
0
200
400
600
800
1000
Source: EIA
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Driving Forces
• Energy and economy
• Global distribution of energy resources
relative to demand
• Key factors impacting energy demand
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Developing World is Key
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Regional Differences
Source: www.bp.com/centres/energy2002/
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The Asian “Gulp”: Asia is Swing Demand
As Asia’s share grows, economic cycles
in the region will have a bigger impact.
25,000
35%
Asia Pacific
% Asia
20,000
30%
20%
15%
10,000
Percent of World
15,000
10%
5,000
5%
3
1
99
97
95
93
91
89
87
85
83
81
79
77
75
73
71
69
0%
67
0
65
Thousands b/d
25%
Sources: BP Statistical Review of World Energy, 2004
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Development means cars!
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Is Oil Becoming a Niche Fuel?
As oil is concentrated
in the transport
sector, new
technologies will have
a larger impact.
Sources: U.S. EIA IEO 2004
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Electricity is Vital for Economic
Development
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We Prefer Gas for Power Generation
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Driving Forces
• Energy and economy
• Global distribution of energy resources
relative to demand
• Key factors impacting energy demand
• Key factors impacting energy supply
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Sector Investment
Requirements: Who Will Invest?
Total investment: 16 trillion dollars
E&D
72%
Refining
Other
13%
15%
E&D
55%
LNG Chain
8%
T&D and
Storage
37%
46%
Oil 19%
Electricity
60%
Gas 19%
Coal 2%
Power
generation
54%
T&D
88%
Mining
12%
Shipping
and ports
Source: IEA Global Energy Investment Outlook 2003
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Access to Resources is Limited
Iraq
10%
National
companies only
(Saudi Arabia,
Kuwait, Mexico)
35%
Concession
21%
Production
sharing
12%
Limited access National
companies
22%
1,032 billion barrels
Source: IEA Global Energy Investment Outlook 2003
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Typical NOC* Structure
•
•
•
•
Single Shareholder -- state
Link to national budget
Direct reporting to ministry level
Vertical integration
– Exploration and production to refining and
marketing
• Large employment base
• Non-energy responsibilities
* NOC = national (sovereign owned) oil company
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Typical, IOC** Structure
• Many shareholders -- concept of “publicly-held”
private companies
• No link to national budgets
• No direct reporting to ministry-level
• Shift away from vertical integration
– Joint ventures for value chain participation
• Relatively small employment base
• Focus on core business
** IOC = International oil company
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Typical IOC Stock Ownership*
Individuals
40%
Employees
12%
48%
Institutions
• Employee stock plans to build
incentives
• Institutions are major investors
(insurance companies,
pension funds, etc.)
• Individual ownership is both
individual stocks and mutual
funds
• All publicly-held companies
tend to have similar ownership
structures
100 percent total equity
* Based on a major U.S. oil company
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Ownership Implications
• Shareholders’ expectations with respect to returns on
equity drive the investment portfolios of IOC, publiclytraded, private companies.
– In order to increase shareholder equity value, IOCs must
achieve profits from their investments equal to or greater than
the expected growth in value of shares.
• NOCs are dominated by the “golden share”
– Issue of political control interfering with commercial
requirements
• IOCs will only invest if ROR is sufficient to meet
shareholder expectations. NOCs will only invest to the
extent that political masters allow.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Comparative Risks and Returns:
Electricity Lags Oil & Gas
16
14
12
per cent
10
8
6
4
2
0
Oil and gas upstream
Electricity
OECD
Gas downstream
Non-OECD
Source: IEA Global Energy Investment Outlook 2003
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Driving Forces
• Energy and economy
• Global distribution of energy resources relative
to demand
• Key factors impacting energy demand
• Key factors impacting energy supply
• Critical uncertainties:
–
–
–
–
Role of OPEC
Energy sector restructuring
Geopolitics
Environment
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Oil & Gas Investment Hinges on Price
Expectations
U.S. domestic first purchase price (real $)
$60
$50
“Cheap Oil”
What kind of business are
we in???
$40
“Oil Crisis”
$30
With OPEC
$20
$10
Without OPEC
$0
50
53
56
59
62
65
68
71
74
77
80
83
86
89
92
95
98
01
Source: U.S. EIA.
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Long-term oil price trends
Source: BP Statistical Review of World Energy 2005
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
The price is mean-reverting
91:03-06:04
86:01-06:04
80
70
60
40
30
20
10
0
6
38 42 46
34
30
26
10 14 18 22
Price
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Frequency
50
But mean changes over time
70
65
60
55
50
45
40
35
30
25
20
15
10
1986 1989 1992 1995 1998 2001 2004
spot
24.6
26.5
19.1
34.4
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
OPEC (Saudi Arabia) has potential
Share of the World (%)
80
70
Production
Reserves
60
50
40
30
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
20
Do Cartels Succeed in the Long Run?
Nominal cartel commodity prices, U.S.$, indexed
14
It depends on how much
of the market they control and:
- Group cohesion
- Market anticipation vs.
policy action
- Data transparency
12
10
8
Cocoa
Coffee
Sugar
Tin
Copper
Oil
1997 and 1999-00 were
OPEC influenced
6
4
2
0
60
62 64
66 68
70 72
74
76 78
80 82
84
86
88
90
92
94 96
98
Sources: Industry trade publications and U.S. EIA
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
An Effective Cartel Requires:
Minimum conditions:
• Narrowly defined target
• A good with no easy substitutes
• An entry cost for new producers that is
very high relative to the marginal cost of
cartel producers
• Incentives to cooperate
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
Energy Geopolitics ca. 1990s
to Present
• Dominance
• New Great Game
(Central Asia pipelines)
Petroleum
Heartland
(OPEC,
FSU,
Non-OPEC
Africa)
U.S.
Turkey
• Competition for Petroleum
Heartland supply
• Pacific region role and the
“Middle Kingdom”
China N Korea
S Korea
Iran
S and SE Asia
Japan
Russia
NIS
Europe
• New Great Game
• Northeast Asian affairs
00s Flashpoints
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Climate Change Dominates
Environmental Uncertainties
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Developing World is Key!
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But Rich Countries Face Internal
Hurdles
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Contrarian Viewpoints
Science epicenters: Antarctic and
Greenland cooling, sediment
coring; solar cycles, magnetism
and atmospheric water vapor
“Paleoclimatic data also
show the great complexity
of Earth's climate system,
including large (1/3-1/2 of
the entire glacialinterglacial amplitude),
abrupt (order of a
decade), and widespread
(to hemispheric or broader
scale) climate changes
that are not explainable
directly by changes in
greenhouse gases.”
Sources: Doran, et. al., Nature, 2002. Richard Alley, Penn State, GSA, 1999.
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World Wind Power Installed Capacity
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Import and Export Shipments
of Solar Thermal Collectors,
1990-2004
Source: EIA
4000
3500
Imports
1000sqft
3000
Exports
2500
2000
1500
1000
500
0
9
19
0
9
19
1
9
19
2
9
19
3
9
19
4
9
19
5
9
19
6
9
19
7
9
19
8
9
19
9
0
20
0
0
20
1
0
20
2
0
20
3
0
20
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4
Shipments of Photovoltaic
Cells and Modules, 19912004
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
04
20
03
20
02
20
01
20
00
20
99
19
98
19
97
19
19
96
PV shipments
95
19
Peak kW
Source: EIA
© Center for Energy Economics. No reproduction, distribution or attribution without permission.
U.S. Generation from Renewables
(GWh)
40,000
35,000
30,000
Wood
25,000
Waste
Geothermal
Solar
Wind
20,000
15,000
10,000
5,000
Source: EIA
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
0
Wood: Wood, black liquor, and other wood waste.
Waste: Municipal solid waste, landfill gas, sludge waste,
tires, agriculture byproducts, and other biomass.
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Supplement: Economics of
Exhaustible Resources
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Costs Have Declined
• From $25/bbl in the 1980s to $10/bbl today
(outside the Middle East). See Simon’s book
Ultimate Resource II or Bjorn Lomborg’s Skeptical
Environmentalist for examples of other resource
prices declining.
• Some analysts calculate that the marginal cost for
oil would be about $10 if oil were produced and
supplied to the world from the cheapest cost
places first.
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Hubbert Curve
• M. King Hubbert was a geologist with
Shell Oil in the 1950s.
• He observed that:
– Flow of oil from any basin starts to fall when
about half of the crude is gone.
– Largest fields tend to be discovered sooner.
• Aggregation of all “known” basins at the
time led him to predict a peak level of
production for the lower 48 U.S. in 1969.
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Hubbert Curve
• His life-cycle model is based on a logistic
equation:
Q
Qt 
 a ( t t0 )
(1  N 0 e
)
• Where N0=(Q-Q0)/Q0 with Qt is cumulative
production at time t and Q is ultimate
recoverable reserves (URR).
• When differentiated with respect to time, t, this
equation yields the time path for production.
• This path is symmetrical.
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Hubbert Curve Debate
Source: “The End of Cheap Oil”, Campbell and Laherrere in Scientific American
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Hubbert Curve Debate
• Campbell & Laherrere refer to the accuracy
of the U.S. prediction and build on it. They
estimate that:
– Global cumulative production by 1997 was 800
billion barrels (most analysts agree).
– 850 billion barrels of remaining P50 reserves
(1,019 by OGJ & 1,160 by World Oil).
• With these almost symmetrical numbers,
they predict a peaking of world oil
production between 2001 & 2010.
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Hubbert Curve Debate
• They refute three most important
arguments against their view. In particular,
they argue that:
– New large discoveries are unlikely,
– New technologies leading to improved
recovery is already accounted for and/or will
not have significant impact, and
– Unconventional oil will only contribute about
700 billion barrels within the next 60 years.
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But..
• In the U.S., environmental regulations limit drilling
in California, Florida, parts of the Rockies, Alaska,
etc. since the 1970s
• When Hubbert made his prediction in the late
1950s, offshore was not a factor!
• R/P ratio of 10 years has been almost an industry
standard in the U.S.
• Also, from the global perspective:
– Why would oil companies drill in the U.S. while they can
drill for cheaper somewhere else?
– Like with the offshore, many areas of the world has been
opening for exploration since Hubbert made his
predictions!
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Counter Arguments
• Drilling density in sedimentary basins is about 2%
of that of the U.S. in non-OPEC Third World
where oil production is about 15 mb/d.
• Unlike his oil prediction, Hubbert’s forecast of
U.S. gas production was 65% too low, and his
world oil production was 50% too low.
• Based on his prediction, production in Texas
should have already exhausted all resources
(and, in 1956, Texas was already a mature area).
• Others, including Campbell, continuously
underestimated world production based on
Hubbert’s model.
Source: articles by Michael Lynch
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Counter Arguments
• There are two fundamental errors:
– These models take URR as a static variable
when it is dynamic.
• In the 1950s & 60s, URR was estimated at 1 trillion
barrels; now, the number is about 2.5-3 trillion.
– The depletion rate is overestimated.
Source: articles by Michael Lynch
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Geologic v Economic Life of Resources
• Economic life would be < geologic life if
– Cost of extraction in a particular field rises at
a rate faster than the increase in price
– In other words, resources in this field/basin
are being depleted at a rate faster than the
depletion of worldwide resources
• Economic life depends on:
– Technology
– Fluctuations in price
– Alternative investment opportunities
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Life of Resources
• Life of resources also depend on market
structure
– Is there regulation or a cartel restricting supply?
TRRC, OPEC, etc.
– Is competition extreme enough to damage total
recoverability? Conservation in early days of the
industry in the U.S.
• And also on perception of the resource:
– National or privately owned? Different discount
rates!
• The ultimate question: What is the optimal
rate of extraction over time?
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Theory of Optimum Extraction – The
Hotelling Principle
• Allocate the “fixed” resource over time
to maximize its value
• Socially optimal solution = perfect
competition solution
• Key issue: production of one unit today
has an opportunity cost = the foregone
value of producing that unit at a later
date
– So, instead of P=MC, we have P=MC+OC
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Theory of Optimum Extraction
Instead of competitive profit max
rule of P=MC, we have
P=MC+OC
Price
A
P*
Pe
AB = user cost (Hotelling rent)
B
Marginal Cost
Demand
Q*
Qe
Quantity
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Theory of Optimum Extraction
• The behavior of this rent over time is important: a
barrel of oil not produced today will be worth
something tomorrow.
• What is, then, the profit maximizing resource
extraction pattern?
• Answer: Output will be decreasing over time as
the price increases over time.
• Hotelling rule: the rent will increase at the rate of
interest (discount rate)
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Theory of Optimum Extraction
Price,
Output
Price
Backstop
technologies
Output
Time
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But..
• The model does not have widespread
acceptance either in academia or in
industry.
– Again, the assumption of fixed resource stock is
not realistic.
– Alternative sources, technological development,
political developments, market imperfections
can all change the analysis.
• For example, a simple modification allowing the cost
to increase with cumulative production may change
the predicted pattern of decreasing production.
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Other Challenges
• Other issues that would cause Hotelling
principle to falter:
–
–
–
–
Market power
Contracts
Industry practice of updating reserves
Investment, new technology and their impact
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Oil Price Forecasts
Source: “Forecasting Oil Supply: Theory and Practice” by Michael C. Lynch, July 2001.
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Life of Oil Reserves
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Life of Gas Reserves
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Caution! R/P Ratios
• Production (consumption) does not remain
constant over time
– If R = 100 and P remains the same at 10, R/P=10
– But if P grows 10% (P1=10, and P2=11), at year 2
R/P=8.2! And if the same growth continues,
reserves will be exhausted within year 8.
• But, reserves does not remain constant either
although changes in reserves may be less
well observed.
– If R grows at 5% and P grows at 10%, R/P8.6 at
year 2, reserves exhausted within year 9.
– If R grows at 10% and P grows at 5%, R/P9.5 at
year 2, reserves exhausted within year 15.
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Reserves v Resources
Low
cost
High
cost
Known
Proved
reserves
Possible
reserves:
Higher
prices may
prove
Speculative
Probable reserves:
Exploration and Development activity
can prove
Undiscovered resources
Another look: www.world-petroleum.org/mart1.htm
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