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Energy Economics in the 21st Century
Bill Pike
21 April 2010
Part One:
DISCLAIMERI 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.
The Demand Curve
Equilibrium Point
Quantity in the Market
Un
it P
rice
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 CurveDemand Curve
Un
it P
rice
Quantity in the Market
The Supply/Demand Model
Equilibrium Point
Quantity in the Market
Un
it P
rice
Price and Supply at Equilibrium
So, What About Global Demand?
World Demand for Energy Will Continue to Grow
0
100
200
300
400
500
600
700
En
erg
y C
on
sum
ptio
n Q
uad
. BT
U
Oil Natural Gas Coal Nuclear Renewables
Source: EIA, International Energy Outlook
Demand Factors
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
By The Numbers
Petroleum Consumption in Developing Nations Will Exceed Developed Countries by 2025
0
20
40
60
80
100
120
140M
illio
n B
arr
els
of
Oil/
Da
y
1970
1975
1980
1985
1990
1995
2000
2003
2010
2015
2020
2025
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)
United Nations Human Development Index versus per Capita Electricity Consumption
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 5,000 10,000 15,000 20,000 25,000 30,000
Electricity, kWh (2002 data)
HD
I (20
03 d
ata)
IcelandNorway
Canada
United States Qatar
Energy and Well Being
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
NOC
Non-NOC
OPERATED BY:
Oil & Gas Reserves combinedSource: BP Statistical Review
of World Energy 2004
Unstable
Unstable
Unstable
Nationalizing
Unstable
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 932• Refined Coal 2,370• Natural Gas/Petroleum Liquids 2,149• Nuclear 1,267• Renewables 4,875
• Total 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
Company profit on a $3 per
gallon gasoline at the pump is
about 10 cents a
gallon.
The Role of Taxes
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
Annual Energy Outlook
0
5
10
15
20
25
30
1960 1970 1980 1990 2000 2010 2020 2030
U.S. Oil Supply, Consumption, and Net Imports,1960-2030 (million barrels per day) - Revised
Consumption
Domestic Supply
History Projections
Energy Information Agency, Department of Energy, Annual Energy Outlook
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)
0
5
10
15
20
25
30
1960 1970 1980 1990 2000 2010 2020 2030
Consumption
Production
History Projections
Cancelled
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.
Richard Newell, SAIS, December 14, 2009
Renewables Gain Electricity Market Share; Coal Share Declines
0
1,000
2,000
3,000
4,000
5,000
6,000
1990 1995 2000 2005 2010 2015 2020 2025 2030 2035
billion kilowatt-hours and percent shares
Natural gas
Renewable
ProjectionsHistory
Nuclear
Oil and other
Coal48.5 43.8
21.4
20.8
19.6 17.1
9.1
17.0
1.41.5
Source: Annual Energy Outlook 2010
Comparative Electrical Generation Costs
Cents per kwh (2008)Resource:
Wind 5.7 – 11.3Geothermal 5.8 – 9.3Biomass (direct) 6.5 – 11.3Natural Gas (combined cycle) 7.4 – 10.2Coal 11.0 – 14.1Fuel Cell 12.7 -- 15.0Solar (thermal) 12.9 – 20.6Solar (photo voltaic 16.0 – 19.6
Source: www.sourcewatch.org
Comparative Electrical Generation CostsWith Federal Tax Subsidies Removed
Cents per kwh (2008)Resource:
Natural Gas (combined cycle) 7.4 – 10.2Biomass (direct) 7.8 – 13.6Wind 8.2 – 16.1Geothermal 8.3 – 13.3 Coal 11.0 – 14.1Fuel Cell 15.2 – 18.0Solar (thermal) 20.6 – 33.0Solar (photo voltaic) 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.
Energy: Policy, Politics and Reality
Part Two:
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
“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)
Political Rhetoric
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?
Annual Energy Outlook
0
5
10
15
20
25
30
1960 1970 1980 1990 2000 2010 2020 2030
U.S. Oil Supply, Consumption, and Net Imports,1960-2030 (million barrels per day)
Consumption
Domestic Supply
Net Imports
58%
62%
Energy Information Agency, Department of Energy, Annual Energy Outlook
History Projections
NOC
Non-NOC
OPERATED BY:
Oil & Gas Reserves CombinedSource: BP Statistical Review
of World Energy
Unstable
Unstable
Unstable
Nationalizing
Unstable
Unstable
Instability and Reserves
U.S. Energy Policy1978 - 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
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.*
DOE’s Role
* 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?
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 260
50
100
150
200
250
300
350
400
450
500
Deepwater GOM Oil Production – 1985 – 2010Millions of Barrels per Year
Water Depths Greater Than 1,000 Feet
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.
“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)
Political Rhetoric
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.
Annual Energy Outlook
0
5
10
15
20
25
30
1960 1970 1980 1990 2000 2010 2020 2030
U.S. Petroleum Supply, Consumption, and Net Imports,1960-2030 (million barrels per day) - Revised
Consumption
Domestic Supply
History Projections
Energy Information Agency, Department of Energy, Annual Energy Outlook
U.S. Natural Gas Production, Consumption, and Net Imports,1960-2030 (trillion cubic feet)
0
5
10
15
20
25
30
1960 1970 1980 1990 2000 2010 2020 2030
Consumption
Production
History Projections
Cancelled
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.