Oil and the American Way of Life: Dont Ask, Dont Tell

1
Oil and the American Way of LifeDont Ask,
Dont Tell

• Robert K. Kaufmann
• Fermi National Accelerator Laboratory
• June 1, 2005

http//www.bu.edu/cees/people/faculty/kaufmann/ind
ex.html
2
Basic Facts of the Oil Market 2004
World oil demand 80.47 million barrels per
day OPEC produces 41 percent of the world
market US Consumed 20.5 million barrels per day
US imports 61 percent of its consumption
3
General Beliefs About the Oil Market

• A competitive market will solve all problems in a
  timely fashion
• Higher prices will elicit increased supply
• Technical change has freed us from the resource
  base

4
Does The Source of US Oil Imports Matter?
5
(No Transcript)
6
Reducing US Dependence on Imported Oil is a Good
Thing
7
The Costs of Increasing US Production


8
A Competitive Market Prices Oil Efficiently
9

Annual Change in Real Oil Prices
Competitive Market
OPEC
Texas Railroad Commission
Kaufmann, R.K. 1995. A model of the world oil
market for Project LINK Economic Modelling
12165-178
10
Does the Market See the Future?
Future contracts do not predict future prices
better than naïve models
Abosedra, S and H. Baghestani, 2004, On the
predictive accuracy of crude oil futures prices,
Energy Policy 321389-1393
11
Does OPEC Matter?
12
OPEC Controls Marginal Supply
1973
OPEC
Capacity Utilization

TRC
Kaufmann, R.K. 1995. A model of the world oil
market for Project LINK Economic Modelling
12165-178
13
Why Are Prices So High?
WTI near Month Contract--NYMEX
14

The Determinants of World Oil Prices
OPEC Capacity Utilization OPEC production
divided by OPEC Capacity
Kaufmann et al. 2004 Does OPEC Matter? An
econometric analysis of oil price The Energy
Journal 26(4)67-90.
15
OPEC Capacity Utilization
16

The Determinants of World Oil Prices
OPEC Capacity Utilization OPEC production
divided by OPEC Capacity
OPEC Quotas Levels of production agreed on at
OPEC meetings
Cheating Production beyond quotas
OECD Stocks Days of forward consumption
Fear of Supply Disruptions Iraq, Nigeria, Russia
Kaufmann et al. 2004 Does OPEC Matter? An
econometric analysis of oil price The Energy
Journal 26(4)67-90.
17
Can The US Do Anything About High Oil Prices in
the Short Run?
18
Low Levels of Stocks
19
Do Gasoline Prices Rise Faster Than They Fall?
20
Rising Crude Oil Motor Gasoline Prices
55
50
45
40
35
30
25
20
15
10
1
6
11
16
21
26
31
21
Falling Crude Oil Motor Gasoline Prices
60
50
40
30
20
10
0
1
6
11
16
21
26
31
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YesBut
Gasoline price rise faster than they fall in
Texas, Michigan, Pennsylvania, Florida, Illinois,
Minnesota, Ohio, Louisiana, Idaho (not Washington)
Effect caused by stocks and refinery utilization
As demand declines, producers slow refining and
sell from stocks, which slows the price drop As
demand rises, refinery capacity limits supply
response
Kaufmann, R.K and C Laskowski, In press, Causes
for an asymmetric relation between the price of
crude oil and refined petroleum products, Energy
Policy
23
Will the World Run Out of Oil?
24
This Will Never Happen.But
180
160
140
120
100
Million barrels per Day
80
1 trillion barrels
60
40
20
0
1900
1920
1940
1960
1980
2000
2020
2040
25
The Pattern of Production
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Dates for a Global Peak
120
100
80
Million barrels per Day
60
40
20
0
1899
1919
1939
1959
1979
1999
2019
2039
2059
2079
2099
27
Can Hubberts Bell-Shaped Curve Predict The
Future?
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The Economic, Geological, andInstitutional
Determinants of Oil Production in the Lower 48
States

Prod Oil Production in the lower 48 states
(billion barrels) Price Real wellhead oil
prices (1982 dollars per barrel) Cost Average
cost of production in the lower 48 States (1982
dollars per barrel) Ration Fraction of Texas
capacity allowed to operate by the TRC
(dimensionless)
Kaufmann, RK and CJ Cleveland, 2001 The Economic,
geological and institutional determinants of oil
production in the lower 48 States, The Energy
Journal 2227-49.
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Oil Production in the Lower 48 States
Predicted

Actual
Billion Barrels

Hubbert
Kaufmann, RK and CJ Cleveland, 2001 The Economic,
geological and institutional determinants of oil
production in the lower 48 States, The Energy
Journal 2227-49.
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Implications
Results imply Hubbert was lucky Accuracy of US
forecast was spurious Cannot be used for other
regions Government intervention Production
will not change smoothly towards
depletion Prices will not increase smoothly
towards choke price More government
intervention that currently envisioned?


31
Does The Peak Matter?
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Oil Production Lower 48 States
50
3.5
40
3.0
30
2.5
Billion Barrels
1982 Dollar per Barrel
20
2.0
10
1.5
1940
1950
1960
1970
1980
1990
2000
33
Energy Return on Investment
From Cleveland, C.J. 2005, Net energy from the
extraction of oil and gas in the United States,
Energy 30( 5) 555-784
34
Time to Plan Ahead
Gever, J, R.Kaufmann, D. Skole,, C. Vorosmarty,
1986, Beyond Oil Ballinger Publishing Company,
Cambridge, Ma
35
Will Opening ANWR Solve US Supply Constraints?
36
USGS Projections For ANWR
United States Geological Survey, 1999. The oil
and gas resource potential of the Arctic National
Wildlife Refuge 1002 Area, Alaska, Open File
Report 98-34.
37

US Refining CapacityEnvironmental or Market
Failure?

38
US Refinery Capacity
US Oil Demand

US Refinery Capacity

39
World Refinery Capacity Demand
Refinery Capacity

World Oil Demand

40

Where Will the Worlds Supplyof Oil Come From?

41
Remaining Supplies of Oil
Figure From The End of Cheap Oil National
Geographic 2004
42
Will OPEC be Able and Willing to Expand
Production to Maintain Prices?
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Political Economic Limits On OPEC Capacity

Multinational firms have the capital needed to
increase OPEC capacity significantly, but. OPEC
nations currently prohibit foreign investment in
productive capacity, but.. OPEC nations dont
have the capital needed to expand capacity
significantly
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OPEC Has Little Incentive To Increase Capacity
Production?
Increasing capacity leads to higher
production Increasing production leads to lower
prices Lower prices reduce Non-Opec production
increase demand But...
Increase in OPEC demand is less than price
decrease So..
Higher capacity production reduce OPEC revenue
Gately, 2004 OPECs Incentive for Higher Output
Growth, The Energy Journal, 25(2) 75-96
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Do Increases in Oil Prices Matter?
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Real Oil Prices US Recessions
Recessions
Real Oil Prices
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Is the US Becoming More Energy Efficient?
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Decline in the US Energy/Ratio
Thousand Kcal per chained 2000 dollar
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Determinants of the Energy/GDP Ratio
Fuel Mix Coal 1km Diesel locomotive 3
km Electric locomotive 15km Household Energy
Use Oil personal consumption
310,024 kcal/ 1972 ) Durable personal
consumption 13,561 kcal/1972 Product
Mix Iron ore mining
65,904 kcal/ Wholesale and retail trade
29,302 kcal/ Energy Prices
Kaufmann, R.K, 2004 The mechanisms for autonomous
increases in energy efficiency a cointegration
analysis of the US energy/GDP ratio The Energy
Journal 25(1) 121-144
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What Do Americans Need to Know?
OPEC will increase its market share, but may not
be willing or able to produce enough to keep oil
prices low
The world will not run out of oil, but it will
run out of inexpensive oil in our lifetime
The depletion of inexpensive oil will have
important implications for the US and world
economy
The market will not solve the impending oil
transition in a timely fashion
There are no simple solutions to avoid these
changes, but good policy can reduce the effects
while ignoring these changes will make matters
worse