1. AGEC/FNR 406 LECTURE 24

2. “America is addicted to oil” - President George Bush (2006 State of the Union Address) Three reasons for concern: 1. Volatile & upward swings in oil prices 2. Political instability in oil-exporting regions 3. Global warming due to fossil fuel use

3. U.S Oil Consumption (2005) 22 billion barrels/day

4. http://tonto.eia.doe.gov/FTPROOT/other/perspectives04.pdf US Domestic Petroleum Overview

5. Oil Supply – global reserves -Middle East = 60% -Canada = 14% -Africa = 10% -Venezuela = 6% -Russia = 5% -US = 2%

6. Oil Supply – top US sources -???? -Saudi Arabia -????? -Venezuela -Nigeria -Angola -Iraq -Algeria -Canada (16.5%) - 14.5% -Mexico (13.4%) - 11.3%

7. Supply Disruptions -Iraq -Iran -Nigeria -Venezuela World production is at 98% of capacity… …a disruption anywhere leads to price increases everywhere!

8. “Hubbert’s Peak” “Peak Oil” is the idea that oil production (from an area) follows a bell-shaped curve, based on the fact that oil supplies are finite. It provides a method for predicting maximum production in advance, based on discovery and productivity of fields. The theory is named after geophysicist M. K. Hubbert, who correctly predicted (in 1956) that US production of oil would peak in the US in the late 1960s.

9. Are we “post peak”? Almost all “easy” reserves are known. Some evidence suggests several large oil fields (in Mexico, Kuwait, and Saudi Arabia) have already peaked in production and are declining. Finding new reserves, methods for extraction, and alternatives is difficult and costly (e.g. Tar Sands, Heavy Oil, coal-to-liquid oil synthetics)

10. 40% of all energy used in the US comes from oil. How does it get used? 2/3 for transport

11. Prices Since 2002 crude oil prices have tripled gasoline prices have doubled For each $10/barrel increase in the crude oil price, gasoline prices rise about $0.25 Most of the recent increase in gasoline prices is due to increases in crude oil prices. Shortages of refining capacity play a secondary role.

12. Oil prices vs. Gasoline prices, US 1975-2005

13. GAS: $3.33/gallon Distribution/Marketing/Profits $ 0.10 Crude Oil Cost $ 2.22 Refinery Cost and Profits $ 0.38 Underground Tank Fee $ 0.01 State and Local Sales Tax $ 0.25 State Excise Tax $ 0.18 Federal Excise Tax $ 0.18 source: http://www.energy.ca.gov/gasoline/margins/index.html

14. Implications Most oil price spikes have led to inflation and (ultimately) a recession US wealth sent to oil producing countries - $240 billion in oil imports in 2005 But… oil intensity of US economy (oil consumption/GDP) has been declining

15. Predictions Current forecasts are for crude oil prices to range from $35-$55/barrel over next 20 years More demand from developing world Economic theory suggests that as prices rise …demand falls …alternatives become attractive

16. Predictions? http://www.nytimes.com/interactive/2008/02/19/business/20080220_CENTURY_GRAPHIC.html

17. Alternatives Alberta Tar Sands requires water and natural gas Ethanol (from corn in US, sugar cane in Brazil) 2000: 106K barrels/day 2006: 250K barrels/day 2010: 500K barrels/day (assuming current $0.51/gal federal subsidy)

18. Alternatives, continued Gas-to-liquid Coal-to-liquid used in South Africa for 2 decades new Chinese plants under construction Cellulosic ethanol made from grasses, biomass not currently profitable, more R&D required 2005 Energy Policy Act – requires some use

19. Supply-side options Increased drilling for domestic oil Subsidies for alternatives - won’t influence world prices unless the supply shift is enormous

20. Demand-side options Directly or indirectly raise fuel costs (reduce demand, and therefore price) - tax on gasoline - carbon tax - cap and trade Raise vehicle fuel economy - Corporate Average Fuel Economy (CAFÉ) standards

21. Average fuel economy of US light-duty vehicles

22. Great source of unbiased information: http://www.gravmag.com/

23. Source material for this lecture includes: Newell, R. G. “What’s the Big Deal about Oil?” Resources 163:6-10, Fall 2006 Pizer, W. A. “The Economics of Improving Fuel Economy” Resources 163:21-25, Fall 2006 “Oil Change” OECD Observer, December 2006 US Energy Information Agency, Annual Reports (various years)