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Energy Economics in the 21 st Century Bill Pike 21 April 2010.

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Presentation on theme: "Energy Economics in the 21 st Century Bill Pike 21 April 2010."— Presentation transcript:

1 Energy Economics in the 21 st Century Bill Pike 21 April 2010

2 Points to Remember as We Discuss Energy Economics The global oil and gas industry is the worlds 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.

3 The Basics Bill Pike 21 April 2010

4 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.

5 The Demand Curve Equilibrium Point Quantity in the Market Unit Price

6 Supply and Demand Economics Few of us have experience with the supply side of the market. Supply is derived from producers 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.

7 The Supply Curve Supply Curve Demand Curve Equilibrium Point Unit Price Quantity in the Market

8 The Supply/Demand Model Equilibrium Point Quantity in the Market Unit Price Price and Supply at Equilibrium

9 World Demand for Energy Will Continue to Grow Source: EIA, International Energy Outlook

10 Primary Energy Demand (10 15 btu) 2010 2015 2020 2025 Petroleum 185 204 224 245 Petroleum 185 204 224 245 Natural Gas 108 122 139 156 Natural Gas 108 122 139 156 Coal 108 117 127 140 Coal 108 117 127 140 Nuclear 30 31 32 30 Nuclear 30 31 32 30 Other 39 43 47 50 Other 39 43 47 50 Source: Energy Information Administration, U.S.Department of Energy Source: Energy Information Administration, U.S. Department of Energy By The Numbers

11 Petroleum Consumption in Developing Nations Will Exceed Developed Countries by 2025

12 Global Energy Demand by sector, billions barrels of oil equivalent

13 Energy Demand and GDP (1980 – 2002) Primary energy demand per capita (Gigajoules)

14 Energy and Well Being

15 But What About Supply? We Know Where There is Enough Oil – Mature Fields – Unconventional Assets – Ultra-Deepwater – Arctic Regions

16 But What About Supply? We Know Where There is Enough Gas – Shale Gas – Tight Gas – CBM – Methane Hydrates to Fuel the Worlds Economy and Society for Many Decades.

17 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.

18 Factors Skewing Supply and Demand Fundamentals Political and/or economic instability in major producing areas

19 War – The Ultimate Instability

20 Factors Skewing Supply and Demand Fundamentals Political and/or economic instability in major producing areas Speculation in the market place

21 Instability and Worldwide Oil & Gas Reserves NOC Non- NOC OPERATED BY: Oil & Gas Reserves combined Source: BP Statistical Review of World Energy 2004 Unstable Nationalizing Unstable

22 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

23 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

24 Artificial Pricing Through Subsidies 2007 U.S. Energy Subsidies: $ millions Coal 932 Refined Coal2,370 Natural Gas/Petroleum Liquids2,149 Nuclear1,267 Renewables4,875 Total 11,593

25 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

26 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.

27 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

28 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.

29 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

30 Company profit on a $3 per gallon gasoline at the pump is about 10 cents a gallon. The Role of Taxes

31 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

32 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

33 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 wont be enough to end our dependency on imported oil.

34 U.S. Primary Energy Consumption by Fuel, 1980-2035 (quadrillion Btu) Annual Energy Outlook 2011

35 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)

36 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)

37 This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation. - President Jimmy Carter (July 15, 1979)

38 We will continue supportive research leading to development of new technologies and more independence from foreign oil. - President Ronald Reagan (February 18, 1981)

39 There is no security for the United States in further dependence on foreign oil. - President George H. Bush (August 18, 1988)

40 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)

41 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)

42 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 Americas innovation and seize control of our own destiny. - President Barack Obama (June 15, 2010)

43 Annual Energy Outlook U.S. Petroleum Supply, Consumption, and Net Imports, 1960-2030 (million barrels per day) Consumption Domestic Supply Net Imports 58% 62% Annual Energy Outlook HistoryProjections

44 Instability and Worldwide Oil & Gas Reserves NOC Non- NOC OPERATED BY: Oil & Gas Reserves combined Source: BP Statistical Review of World Energy 2004 Unstable Nationalizing Unstable

45 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.

46 U.S. Natural Gas Production, Consumption, and Net Imports, 1960-2030 (trillion cubic feet) 15% 21% Net Imports Consumption Production Natural Gas Net Imports, 2004, 2025, and 2030 (trillion cubic feet) Annual Energy Outlook 2005 and 2006 History Projections Cancelled

47 Unconventional Gas to the Rescue

48

49 Energy Economics in the 21 st Century Renewable Energies

50 Renewable Energy Consumption in the Nations 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.

51 Richard Newell, SAIS, December 14, 2009 Renewables Gain Electricity Market Share; Coal Share Declines billion kilowatt-hours and percent shares Natural gas Renewable ProjectionsHistory Nuclear Oil and other Coal 48.5 43.8 21.4 20.8 19.617.1 9.1 17.0 1.4 1.5 Source: Annual Energy Outlook 2010

52 Comparative Electrical Generation Costs Cents per kwh (2008)Resource: Wind 5.7 – 11.3 Geothermal 5.8 – 9.3 Biomass (direct) 6.5 – 11.3 Natural Gas (combined cycle) 7.4 – 10.2 Coal11.0 – 14.1 Fuel Cell12.7 -- 15.0 Solar (thermal)12.9 – 20.6 Solar (photo voltaic16.0 – 19.6 Source: www.sourcewatch.org

53 Comparative Electrical Generation Costs With Federal Tax Subsidies Removed Cents per kwh (2008)Resource: Natural Gas (combined cycle) 7.4 – 10.2 Biomass (direct) 7.8 – 13.6 Wind 8.2 – 16.1 Geothermal 8.3 – 13.3 Coal11.0 – 14.1 Fuel Cell15.2 – 18.0 Solar (thermal)20.6 – 33.0 Solar (photo voltaic)25.6 – 31.4 Source: Lazard, Levelized Cost of Energy Analysis – Version 3.0, 2009

54 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

55 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 todays usage levels – in the next 10 years?

56 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 todays 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.

57 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

58 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

59 But There May Be Wider Consequences EIA Short Term Energy Outlook 2011 Will Economic Recovery Be Killed By Higher Oil Prices?

60 Thanks for Your Attention. Questions?


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