Part One:
Energy Economics in the
st
21 Century
Bill Pike
21 April 2010
DISCLAIMER
I am an employee of Leonardo Technologies Inc.
(LTI), working under contract in the U.S.
Department of Energy’s National Energy Technology
Laboratory. In this capacity, I cannot speak for the
U.S. Department of Energy or any of its divisions,
including the National Energy Technology
Laboratory. Nor may I speak for LTI.
My comments today are personal observations.
Nothing I say here should be taken as, or be
construed to be, a policy or position, official or
unofficial, of the U.S. Department of Energy or any
of its divisions, or of LTI.
Fun Facts:
• Total U.S. Energy Consumption (2010) – 98 quadrillion btu
• Total U.S. Energy Production (2010) – 75 quadrillion btu
• Top Energy Consuming States
• Texas – 12 quadrillion btu
• California – 8 quadrillion btu
• Florida – 4 quadrillion btu
• Top Energy Producing States
• Texas – 11 quadrillion btu
• Wyoming – 11 quadrillion btu
• West Virginia – 4 quadrillion btu
Source : State Energy Data System, U.S. Energy Information Agency, DOE
More Fun Facts:
•Total Energy Consumption per capita (lowest
and highest)
• Rhode Island – 187 million btu per person
• Wyoming – 948 million btu per person
• Top Production by Energy Source
• Oil & Gas – Texas
• Coal – Wyoming
• Nuclear Electric – Illinois
• Renewable – Washington
• Biofuels – Iowa
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.
Unit Price
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
Supply Curve
Unit Price
Demand Curve
Quantity in the Market
The Supply/Demand Model
Unit Price
Price and Supply at Equilibrium
Equilibrium Point
Quantity in the Market
So, What About Global Demand?
Demand Factors
World Demand for Energy
Will Continue to Grow
700
Energy Consumption
Quad. BTU
600
500
400
300
200
100
0
70 973 976 979 982 985 988 991 994 997 000 010 025
9
1
1
1
1
1
1
1
1
1
1
2
2
2
Oil
Natural Gas
Coal
Nuclear
Renewables
Source: EIA, International Energy Outlook
By The Numbers
Primary Energy Demand (1015 btu)
2010 2015 2020 2025
• Petroleum
185
204
224
245
• Natural Gas
108
122
139
156
• Coal
108
117
127
140
• Nuclear
30
31
32
30
• Other
39
43
47
50
Source: Energy Information Administration, U.S. Department of Energy
Petroleum Consumption in Developing Nations Will
Exceed Developed Countries by 2025
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
Million Barrels of Oil/Day
140
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)
Energy and Well Being
United Nations Human Development Index versus per
Capita Electricity Consumption
1
0.9
Canada
Norway
Iceland
HDI (2003 data)
0.8
United States
0.7
Qatar
0.6
0.5
0.4
0.3
0.2
0.1
0
0
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
Instability and Worldwide Oil & Gas Reserves
Nationalizing
Unstable
Unstable
OPERATED BY:
NOC
Unstable
Unstable
NonNOC
Oil & Gas Reserves combined
Source: BP Statistical Review
of World Energy 2004
Unstable
Factors Skewing Supply and Demand Fundamentals
• Political and/or economic instability in major
producing areas
• Speculation in the market place
War – The Ultimate Instability
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 $85 per barrel
Factors Skewing Supply and Demand Fundamentals
• Political and/or economic instability in major
producing areas
• Speculation in the market place
• Artificial pricing through subsidies and taxes
Artificial Pricing Through Subsidies
2007 U.S. R&D Energy Subsidies:$ millions
• Coal
• Refined Coal
• Natural Gas/Petroleum Liquids
• Nuclear
• Renewables
• Total
932
2,370
2,149
1,267
4,875
11,593
Types of Subsidies/Market Intervention
• Direct
Subsidies
• Royalty Relief
• Tax Credits
• Investment Credits
• Depletion Allowance
• Grants
• Accelerated Depreciation
• Import/Export Restrictions
• Price Controls
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
– 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, primarily, to moratoria and complex
permitting and development regulations resulted
in the loss of 200,000 or more barrels of oil per
day in the Gulf of Mexico next year
– Moratoria in other areas, such as the Arctic and
offshore the Atlantic Coast, will forestall or
prevent development of incremental production
So Where Does the U.S. Stand in Terms of Oil and Gas?
• We have significant amounts of mature and
unconventional oil resources.
• However, they may not be enough to end our
dependency on imported oil.
U.S. Primary Energy Consumption by Fuel, 1980-2035
(quadrillion Btu)
Annual Energy Outlook 2011
U.S. Oil Supply, Consumption, and Net Imports,
1960-2030 (million barrels per day) - Revised
History
30
Projections
25
20
Consumption
15
10
Domestic Supply
5
0
1960
1970
1980
1990
2000
Annual Energy
Energy
Information
Outlook
Agency, Department of Energy, Annual Energy Outlook
2010
2020
2030
What is the natural gas 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
10
5
0
1960
1970
1980
1990
2000
2010
2020
2030
Unconventional Gas to the Rescue
Energy Economics in the
21st 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
History
6,000
Projections
5,000
17.0
Renewable
4,000
9.1
Natural gas
21.4
3,000
2,000
1,000
0
1990
20.8
1995
Richard Newell, SAIS,
December 14, 2009
2000
2005
48.5
Coal
43.8
1.5
Oil and other
1.4
19.6
Nuclear
17.1
2010
2015
2020
2025
2030
Source: Annual Energy Outlook 2010
2035
Comparative Electrical Generation Costs
Resource:
Wind
Geothermal
Biomass (direct)
Natural Gas (combined cycle)
Coal
Fuel Cell
Solar (thermal)
Solar (photo voltaic
Source: www.sourcewatch.org
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
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?
• Or a network of electric fueling stations that rivals
that for today’s gas stations.
• How many of you think we have resources or the
intent to totally replace our energy provision and
transportation infrastructure – 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 probably 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 has suppressed gas
prices and slowed 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.
Part Two:
Energy: Policy, Politics and
Reality
Even More Fun Facts:
• With less than 5% of the world’s population, the U.S. consumes 20% of the world's
energy and accounts for 20% of world GDP.
• Each day, the U.S. per capita energy consumption includes nearly 3 gallons of oil,
19 pounds of coal, and 214 cubic feet of natural gas. Residential daily consumption of
electricity is nearly 13 kilowatt-hours (kWh) per person.
• We are high-end energy users in a world that has seen limited or difficult energy
supplies.
• You would think we have had a long running Federal energy policy to ensure
continued supplies of affordable energy.
• In fact, we have had a successful, if unplanned, Federal energy policy since the late
70s. Were there others?
Source : Center for Sustainable Systems, University of Michigan
U.S. Energy Policy?
1890
John Sherman – The Ohio Icicle,
author of the Sherman Anti-Trust Act
which breaks up the Standard Oil
Trust.
That also brought unwanted attention
to the company by Ida M. Tarbell, a
McClure's Magazine reporter, who
began an investigation. Following
publication of her report, the Standard
Oil Company was forced to break up
into separate state companies — the
"Seven Sisters" — each with its own
board of directors.
U.S. Energy Policy?
1942 - 1945
Political
Rhetoric
“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)
Political
Rhetoric
“I am recommending a plan to
make us invulnerable to cutoffs of
foreign oil . . . new stand-by
programs to achieve the
independence we want . . . “
- President Gerald Ford (January
15, 1975)
Political
Rhetoric
“This intolerable dependence
on foreign oil threatens our
economic independence and
the very security of our
nation.”
- President Jimmy Carter
(July 15, 1979)
Political
Rhetoric
“We will continue supportive
research leading to
development of new
technologies and more
independence from foreign
oil.”
- President Ronald Reagan
(February 18, 1981)
Political
Rhetoric
“There is no security for the
United States in further
dependence on foreign oil.”
- President George H. Bush
(August 18, 1988)
Political
Rhetoric
“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)
Political
Rhetoric
“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)
The Response to The 70’s Oil Price
Crisis
• A litany of political rhetoric ungrounded
in reality - until recently.
• A tacit commitment to an energy policy
driven by world events.
U.S. Energy Policy?
1973 - 1974
Yom Kippur War and OPEC Oil Embargo
U.S. Energy Policy?
1978 - 1980
Iranian oil sector strike reduces production by 4.9 million
bopd or 7% of world supply. Oil prices rise to the
equivalent of ~ $200 per barrel in today’s dollars.
The Result?
U.S. Oil Supply, Consumption, and Net Imports,
1960-2030 (million barrels per day)
History
30
Projections
25
20
Consumption
Net Imports
62%
58%
15
10
Domestic Supply
5
0
1960
1970
1980
1990
2000
Annual Energy
Energy
Information
Outlook
Agency, Department of Energy, Annual Energy Outlook
2010
2020
2030
Instability and Reserves
Nationalizing
Unstable
Unstable
OPERATED BY:
NOC
Unstable
Unstable
NonNOC
Oil & Gas Reserves Combined
Source: BP Statistical Review
of World Energy
Unstable
U.S. Energy Policy
1978 - Present
• Identify and Speed Development of Indigenous Resources
• ERDA/DOE/NETL Eastern Gas Shale Program - 1976
• Deepwater Royalty Relief - 1978
• Protect Oil Supplies in the Middle East
• Desert Storm
• The Iraq War
• The Current Iranian Standoff
DOE’s Role
The booming unconventional resource play is thanks to the
development of new technology and, in no small part, to the
creation of the Energy Research & Development
Administration (ERDA), which later became the Department
of Energy. In the mid-1970s, in response to the energy crisis,
ERDA began a massive shale basin characterization
program in addition to R&D work on horizontal, multi-stage
fracturing. Mitchell Energies first shale well in the Barnett
was drilled with DOE input taken directly from these
programs. The President recently gave public recognition of
DOE’s role in the development of America’s shale oil and gas
resources.*
* The Breakthrough Institute, “Where the Shale Gas Revolution Came From:
Government’s Role in the Development of Hydraulic Fracturing in Shale”
(http://thebreakthrough.org/energy.shtml)
Gas Shale Program - Did It Work?
• Natural gas production is through the roof.
• Shale has added 1.4 million bopd to U.S. production.
• It is predicted to add 4.2 million bopd by 2020.
Royalty Relief - Did It Work?
500
450
Deepwater GOM Oil Production – 1985 – 2010
Millions of Barrels per Year
400
350
300
250
200
150
100
50
0
1
2
3
4
5
6
7
8
9
10
11
12
13
Water Depths Greater Than 1,000 Feet
14
15
16
17
18
19
20
21
22
23
24
25
26
Protecting Supply - Did It Work?
• Kuwait production, destroyed by the Iraqis in Desert Storm,
was quickly restored.
• Iraqi production is back to normal and set to rise dramatically.
• Iran has not yet acted on its threat to close the Straits of
Hormuz.
Political
Rhetoric
“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)
Political
Rhetoric
"We're not going to have to
buy oil from the Middle East,
Venezuela, or any other place
we don't want to. We may
even be an exporter of
energy, considering all our
resources."
Presidential Candidate Mitt
Romney, (August 23, 2012)
The Obama Energy Plans
• 2008
– Help create five million new jobs by investing $150 billion in clean
energy through 2018 – spent lots of money with questionable results
– By 2018, save more oil than we imported from the Middle East and
Venezuela annually in 2008 – on track but not related to Obama or
improved energy efficiencies
– Put one million plug-in hybrid cars, that can get up to 150 mpg, on the
road by 2015 – on track to fail on mpg
– Ensure that 10 percent of our electricity comes from renewable
sources by 2012, and 25 percent by 2050 – achieved for 2012
– Implement an economy-wide cap and trade program to reduce
greenhouse gas emissions by 80 percent by 2050 - failed
The Obama Energy Plans
• 2012
– Obama energy priorities for 2012 remain largely
unchanged, save for the abandonment of cap and trade
• Develop and secure America’s energy supplies
• Provide consumers with choices to reduce costs and
save energy
• Innovate our way to a clean energy future
• Within these broader objectives are contained the
elements of Obama’s 2008 energy plan
The Romney Energy Plan
• 2012
– Give control to states over onshore energy development on
Federal lands
– Open more offshore areas for energy development (Virginia and
the Carolinas)
– Restore transparency and fairness to permitting and regulation
– Keystone Pipeline approval
– Facilitate private sector led development of new energy
technologies
– Update resource estimates
– Improve the environmental review process
Obama VS Romney in 2012
Obama
– Government funded energy
R&D
– Strict permitting and
regulatory regimes
– Consider permitting the
Keystone Pipeline
– Retain control of Federal
lands (ANWR)
– Sustain development of fuel
efficient vehicles
– Encourage oil and gas
production
Romney
– Private funding of energy R&D
– More relaxed, transparent
permitting and regulatory
regimes
– Permit the Keystone pipeline
on “day one”
– Relinquish control of Federal
Lands (ANWR)
– Energy efficiency not a large
part of the plan
– Encourage oil and gas
production
Why Are The Plans Similar?
• The supply issues that plagued previous generations are
waning as development of our massive unconventional
resources gathers speed.
• It is highly unlikely that an encompassing energy policy will
come out of future administrations unless we experience
another crisis.
• Both the Republican and Democratic conventions have
confirmed this.
U.S. Petroleum Supply, Consumption, and Net Imports,
1960-2030 (million barrels per day) - Revised
History
30
Projections
25
20
Consumption
15
10
Domestic Supply
5
0
1960
1970
1980
1990
2000
Annual Energy
Energy
Information
Outlook
Agency, Department of Energy, Annual Energy Outlook
2010
2020
2030
U.S. Natural Gas Production, Consumption, and Net Imports,
1960-2030 (trillion cubic feet)
History
Projections
30
25
20
Consumption
Cancelled
Production
15
10
5
0
1960
1970
1980
1990
2000
2010
2020
2030
Where We Go From Here
• The President, and the government, currently have little
control over energy development outside of funding support.
• Barring national emergencies, it is not in their best interest to
pursue additional controls over energy development.
• Most importantly, in today’s environment, additional
government involvement could be detrimental to the speedy
development of our rich unconventional resources.
• On the other hand, our oil and gas resources are not
unlimited. A national energy policy might be advantageous to
the development of alternative energy sources which are
largely uneconomic, without subsidies, in their present form.
• LENR – The ultimate solution?
Thank You.