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Peak Oil and REMI PI+: State Fiscal Implications Jim Peach Arrowhead Center Prosper Project and Department of Economics and International Business New.

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Presentation on theme: "Peak Oil and REMI PI+: State Fiscal Implications Jim Peach Arrowhead Center Prosper Project and Department of Economics and International Business New."— Presentation transcript:

1 Peak Oil and REMI PI+: State Fiscal Implications Jim Peach Arrowhead Center Prosper Project and Department of Economics and International Business New Mexico State University This presentation was prepared for the annual REMI User Conference in Portland, Oregon, October 13-16, The presentation is one of a series of reports on energy and economic development in New Mexico and was prepared as part of New Mexico State Universitys Arrowhead Centers PROSPER project funded by U.S. Department of Energy Grant Award Number DE-NT

2 DISCLAIMER This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof.

3 Special Slide for Jim M The REMI PI+ model is the most widely used regional (state and county) economic forecasting and simulation model by both business and governments. In New Mexico and several other energy states, the model is used as one of many inputs into the preparation of state revenue estimates. The model is also used in transportation planning in the state. NMSU-Arrowhead acquired the model a few months ago –mainly in support of the DOE project I am working on. In the process of checking out the model, I quickly learned that peak oil is a built in feature of the model. The assumed peak is 2016 in both the national and NM models. My problem with this assumption is not with peak oil as a concept (though that bothers me as well) but with the assumption that the peak occurs everywhere at the same time. (continued on next slide).

4 Special Slide for Jim M (2) This assumption has profound implications in model simulations for both the oil and gas sector and for state revenues. My intent is to show the REMI analysts and users (at their annual conference in October): (a) the implications of the assumed peak and (b) that the peak can be moved around by users –something that is not obvious. The following slides are not complete or polished but I would appreciate your comments By the way, the REMI model is in two parts: –The national model (referred to here as the national control) that feeds into –The state model.

5 Outline What is peak oil? Why peak oil (and gas) matters –(In energy and non-energy states) –National Real GDP, employment and income –State Real GDP, employment and income –State fiscal issues Reserves and Production Peak oil in REMI PI+ Conclusions

6 Hubberts Peak: From M. King Hubberts Nuclear Energy and Fossil Fuela paper delivered to the American Petroleum Institutes 1956 annual conference No copyright notice appears on this paper. Mr. Hubbert is deceased.

7 Hubberts Peak Again (page 9)

8 For the mathematically inclined Production at time t The peak is given by the first derivative of the production equation From: Hubberts Petroleum Production Model: An Evaluation and Implications for World Oil Production Forecasts, Alfred J. Cavallo, Natural Resources Research,Vol. 13,No. 4, December 2004

9 National and State Timing of Peak OIl Hubbert (1956) maintained that the peak oil concept could be applied to: –A particular oil field –A region such as a state –A nation –The World Hubbert was very careful not to suggest that all of these various peaks would occur at the same time! –Hubbert also considered the possibility of multiple maxima (peaks) There is no particular reason why peak oil in New Mexico or some other state will occur at the same time as peak oil in the US or the World. There are many reasons to assume that these peaks will not occur at the same time.

10 The Oil Peak in New Mexico Source: Starbuck and Peach, 2009.

11 The Natural Gas Peak in New Mexico ? Source: Peach and Starbuck, 2009.

12 What are Proved Reserves? Proved reserves of crude oil are the estimated quantities which geological and engineering data demonstrate with reasonable certainty can be recovered in future years from known reservoirs, assuming existing economic and operating conditions. Proved reserves make up the domestic production base and are the primary source of oil and gas. (Energy Information Administration)

13 Problems with Proved Reserves Ambiguous definition –no specific criteria Self-reported by oil and gas companies –Vested interest in low reserve figures? Proved reserves keep growing (world, nation, and states) Shale oil not included –Shale oil reserve estimates 2.0 Trillion bbls in US –Known technology, –No drilling risk –Cost of production estimates: $25 - $30 per barrel for in situ (retort recovery) –Environmental risk ? –Energy intensive production

14 World Crude Oil Production: 1980 to 2008 (1,000s of barrels per day)

15 World Crude Oil Reserves (Source: U. S. Department of Energy, Energy Information Administration)

16 US Reserves and the Peak

17 Are reserves being depleted?

18 Where are US Reserves? Thirty-one states have crude oil reserves (2007). The top five are: Texas, with 5.1 billion barrels Alaska, with 4.2 billion barrels California, with 3.3 billion barrels New Mexico, with 735 million barrels Wyoming, with 690 million barrels

19 New Mexico Crude Oil Reserves and Production: (millions of barrels)

20 New Mexico Oil and Gas Why the Peak Matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009

21 New Mexico Oil and Gas Why it matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009 and State Board of Finance, Continuing Disclosure Reports, various years.

22 New Mexico Oil and Gas Why it matters?

23 New Mexico Oil and Gas Why peak oil matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009

24 New Mexico Oil and Gas Why peak oil matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009

25 New Mexico Oil and Gas Why peak oil matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009

26 New Mexico Oil and Gas Why peak oil matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009

27 New Mexico Oil and Gas Why peak oil matters? Source: New Mexico Department of Taxation and Revenue Consensus Revenue Estimates, August 14, 2009

28 Peak Oil in the REMI PI+ Model: Standard National and Regional Controls New Mexico

29 Value Added in Oil and Gas Extraction: REMI PI+ Standard National Control (Billions of $2000) REMI Peak OIL? 2016

30 Employment in Oil and Gas Extraction: REMI PI+ Standard National Control (1,000s of jobs) Peak Oil 2016

31 Fuel Price Assumptions in the REMI PI+ Model

32 Alternative Scenario 1 National Assumptions Goal: Remove peak oil assumption (at least partly) Scenario: –Changes were made only to employment/output in Oil and Gas Extraction –No changes made 2007 to 2016 (current peak) –Maintain 2016 employment/output in Oil and Gas Extraction 2017 to 2050 No direct changes made to other sectors including –Natural Gas Distribution –Support Activities for Mining –Transportation –fuel costs, or –oil/gas price assumptions In other words, this is less than a complete removal of peak oil.

33 Alternative Oil and Gas Scenario (Maintain employment/output share in oil and gas extraction) Simulation major results (No change through 2016 Peak) Total Employment increases by average of 1.85% per year –1.9 million jobs per year average –(2.6 million in 2050) Real GDP ($2000) increases by average of 2.03% per year –$551 billion in GDP per year –($1,080 Billion in 2050) Real Disposable Personal Income increases by average of 1.79% –$250 billion per year average –$485 billion in 2050

34 Alternative Scenario for the National Economy: (Maintain employment output share in oil and gas extraction) Differences in Real GDP (Billions of 2000$) No change

35 Alternative Scenario for the National Economy: (Maintain employment output share in oil and gas extraction) Differences in Employment (1,000s of Jobs economy wide) No Change

36 Alternative Scenario for the National Economy: (Maintain employment output share in oil and gas extraction) Differences in Value Added in Oil and Gas Extraction (Billions of $2000) No Change

37 Alternative Scenario for the National Economy: (Maintain employment output share in oil and gas extraction) Differences in Employment in Oil and Gas Extraction (1,000s of jobs)

38 Prices In New National Control Yellow = Gasoline and Oil Blue = Fuel Oil and Coal Red = Gas 2050 prices Blue Yellow Blue Yellow Standard Control Blue Yellow Standard Control Blue Yellow 6.627

39 New Mexico Value Added in Oil and Gas Extraction: REMI PI+ Standard Regional Control (Billions of $2000) Peak Oil 2016

40 New Mexico Employment in Oil and Gas Extraction: REMI PI+ Standard Regional Control (1,000s of Jobs) Peak Oil 2016

41 New Mexico Scenario 1 National Changes Only That means, the alternative national scenario was used as input to create a new Regional Simulation for New Mexico. There were no other changes made to the model! Not really

42 Alternative Regional Simulation for New Mexico (1) National control without peak –no changes to NM model Changes in Value Added (Billions of $2000) No changes

43 Alternative Regional Simulation for New Mexico (1) National control without peak –no changes to NM model Percent Changes in Value Added (black) and employment (red) No changes

44 Alternative Regional Simulation for New Mexico (1) National control without peak –no changes to NM model Changes in Employment (1,000s of Jobs) No changes

45 Alternative Regional Simulation for New Mexico (1) National control without peak –no changes to NM model Changes in State Revenue (Billions of $) No changes

46 Alternative Regional Control for New Mexico Percent Changes in State Revenue

47 A changing peak? The peak in 2008 and 2009 versions of the REMI model National Value Added in Oil and Gas Extraction in billions of constant (2000) dollars. Standard national controls in 2008 and 2009 models.

48 Some Tentative Conclusions Peak oil (and gas) may or may not occur soon The REMI PI+ peak oil assumption is quantitatively important in national and state level simulations in energy and non-energy states. –Removing the peak at the national level results in substantial increases in Real GDP, employment and income –Using a peak-less national control results in large changes in state GDP, employment, personal income and state tax revenue –at least for New Mexico. –Non-energy states should also be careful of the national peak oil assumption in the standard national control Scenarios other than peak oil in 2016 should be considered in any long- run modeling exercise –If you are still convinced that peak oil is coming (or has already arrived), at least run alternative dates for the peak in long term simulations

49 Thank you! Questions?


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