Energy in the Middle East – poverty, markets, and outlooks · - 21 - The shale revolution Source: Azreki et al. (2017), Rystad energy • US shale is typically seen as the main

"Nature, Wealth & Power" Summer School 2018

Energy in the Middle East – poverty, markets, and outlooks

Dawud Ansari

26th Aug 2018


Energy in the Middle East – poverty, markets, and outlooks | Dawud Ansari- 2 -

Energy in the Middle East

DemandSupply

Fossil fuel markets

Resource economies & economic

diversification

Political economy

Geopolitics

Energy transitionin the Middle East

Energy systems & power grids

Energy poverty& access

Decoupling scenarios & energy efficiency



Introduction



Introduction

2014

2016



Introduction

19141916



Introduction



Introduction

“A pointless conflict has caused the worst humanitarian crisis in the world”

Sana’a, Yemen, Apr 2015



Introduction



Introduction

0102030405060708090

100

Total resource rents (% GDP) Energy use (Qatar = 100) Power generation from oil (%)

World Bank for 2012



Stylised facts for fossil fuels

PresentEmerging Fossil fuels sectors exhibit

typically…

• (Very) long project cycles and high investment costs

• Geographically unequal distribution

• Are central for producing and consuming economics

• Strong subadditivities• Natural monopolies• Prone to corruption



Fossil fuels globallyBP

Statistical Review of

World Energy

2017





World Energy

2017





World Energy

2017



Fossil fuels and their “certain” futureBP Statistical

Review of World Energy 2017




Review of World Energy

2017




Review of World Energy 2017

A global gas market?



Energy outlooks - BP



Energy outlooks - Four scenarios Business as usual Survival of the Fittest

ClimateTechGreen Democracy

• Tech transfer, openness, climatefunds, and mild political climate support transformation.

• Most efficient FF suppliers continue due to CCS and base demand.

•Dominance of energy security increases FF demand, but benefits partially offset

by global conflict and oversupply.

•Isolationism and conflictsupport short-termed

decision-making.

• Delayed global transition createsstranded assets (unequallydistributed)

• National transitions largelydependent on short-termcosts of opportunity

•Mostly no transformationdue to lacking (global) interest

•High-cost producers will be phased out due to new

technologies and late decarbonisation

From Ansari et al. (forthcoming)



Energy outlooks - Four scenarios

From Ansari et al. (forthcoming)

0

2000

4000

6000

8000

10000

12000

14000

2015 2025 2035 2045 2055

Mtoe

YearElectricity Bioenergy

Oil products Crude oil

Coal Lignite

Natural Gas

0

2000

4000

6000

8000

10000

12000

14000

16000

2015 2025 2035 2045 2055

Mtoe

YearElectricity Bioenergy

Oil products Crude oil

Coal Lignite

Natural Gas

Global final energy consumptionBAU SotF

0

5000

10000

15000

20000

25000

2015 2025 2035 2045 2055

Mtoe

YearCoal

Lignite

Crude oil

Natural gas

Nuclear

Bioenergy

Renewables

Hydro

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2015 2025 2035 2045 2055

Mtoe

YearCoalLigniteCrude oilNatural gasNuclearBioenergyRenewablesHydro

Global final energy production

BAU SotF



Influences on fossil fuel producers

Fossil fuel producers

• (Non-)compliance• Counter-lobbying• Eligibility for

compensation aid?

• Global energy demand• Foreign direct investment• Trade openness• Burden-sharing

• Decarbonised energy technologies

• Alternatives for local energy

• World marketdemand

• Fuel subsidies

• Political priorities• Regional stability• Cooperation and

technical spillover• Institutional

quality



The shale revolution

Source: Azreki et al. (2017), Rystad energy

• US shale is typically seen as the main driver of low oil prices

• Shale oil (informally): Conventional oil extracted using hydraulic fracking or

horizontal drilling

Crude oil production capacities

Data: IEA, own calculations



OPEC at war

“[Ali al-Naimi’s] biggest move was the latest one of defending Saudi market share, and

abandoning the OPEC swing role.”

Mohammad al-Sabban, June 2015

[…] It is not in the interest of OPEC producers to cut their production. […] Whether [the price] goes down to $20/B, $40/B, $50/B, $60/B, it is irrelevant. […] But if it goes down, others will be harmed greatly before we feel any pain.

Ali al-Naimi, November 2014

OPEC states:We will flood the marketand defend our marketshare!

Does history backthis decision?



Is OPEC actually a cartel?

e.g. Kisswani (2016)

Plaut (1981)

e.g. Huppmann & Holz (2012)Almoguera et al. (2011)

e.g. Kisswani (2014), Hochman and Zilberman (2015)

NoCartel

Some-what of a Cartel

Something weird

And even worse: How to model that?

Fattouh and Mahadeva (2013): Changing OPEC objectives and behaviour over time

make it impossible to have a single model explaining all OPEC history.



A model of the crude oil marketActual and computed price trajectories

ARME in % KSA-FR PC KSA-CO Cournot UNI-CO

Overall 23 27 35 52 120

First period 25 31 24 43 121

Second period 18 18 63 75 119

Perfect Competiton

Lower-end benchmark

Cournot

Equal market power

Stackelberg:

KSA / United OPEC vsCournot / Fringe

Asymmetric market power

max𝑞𝑖𝑡

𝑝𝑡 ∙ 𝑞𝑖𝑡 − 𝐶𝑖𝑡 𝑞𝑖𝑡 | 𝑞−𝑖𝑡𝑠 ∀𝑖, 𝑡

from Ansari (2017)



The new economics of oil

Peak demand

Eastward oil flows

Higher elasticities

No ultimate swing role

New logistics, new players,

new geopolitics?

Market conditions change over time,New pressure on fossil

fuel producers

Is OPEC dead?Definitely not!

But it has many challenges.

Asset stranding?

Green paradox?

Instability?

based on Dale (2016)

Oil is not pricedas an exhaustible resource!

Energy in the Middle East – poverty, markets, and outlooks | Dawud Ansari

Energy poverty:globally and in the Middle East



Energy poverty from a global view

Energy poverty

Non-clean cooking

Lack of electricity

No access Instability

Electricity access in 2014 - Regional aggregates.Data: IEA (2016)

Region National Urban RuralDeveloping countries 79% 92% 67%

Africa 45% 71% 28%

North Africa 99% 100% 99%

Sub-Saharan Africa 35% 63% 19%

Developing Asia 86% 96% 79%

China 100% 100% 100%

India 81% 96% 74%

Latin America 95% 98% 85%

Middle East 92% 98% 78%

Transition economies & OECD 100% 100% 100%

WORLD 84% 95% 71%




from Pachauri et al. (2013)



Energy poverty in the Middle EastSOURCE: IEA, World Energy Outlook 2017

Electricity access in the Middle East - 2016

RegionPopulation without

electricity millions

National electrification rate

%

Urbanelectrification rate

%

Ruralelectrification rate

%

Bahrain 0.0 100% 100% 100%Iran 1 99% 100% 96%Iraq 1 98% 100% 95%Jordan 0.0 100% 100% 100%Kuwait 0.0 100% 100% 100%Lebanon >1 100% 100% 99%Oman >1 98% 100% 93%Qatar >1 100% 100% 99%Saudi Arabia >1 99% 100% 98%Syria n.a. n.a. n.a. n.a.United Arab Emirates

0.0 100% 100% 100%

Yemen 14 48% 72% 32%

Middle East 17 93% 98% 79%



Energy poverty in the Middle East

Power outages in a typical month

(Worldbank EnterpriseSurveys)



Energy poverty in the Middle East

Fuel usage in Yemen – from Fattouh & El-Katiri (2012)




from Steckel et al. (2013)



The energy ladder

from Schwan (2011)



Sustainable Development Goals

Energy access…

“ensure access to affordable, reliable, sustainable and modern

energy for all”

.... as a directdevelopment goal!

.... as an indirect development goal!

... in a trade-off to development?



Electrification strategies

How can cut-off village be electrified?



Electrification strategies Two different ways of electrifying areas without access:

NG extension

Central government planning

Transmission costs

Inheriting of (in-)stability

Subject to militant attacks

Economics: near-urban and high-density regions

Off-grid solution

Local decision

Potential undermined by NG extension, competition issues

Financing issues

Self-responsible use

Economics: remote and low-density regions



Electrification strategies



Subadditivities

Non-decreasing returns to scale

Non-decreasing marginal costs

Subadditivity

Absence of competition

Natural Monopoly

Market failure

Sunk costs



Subadditivities

Network effects

Private Investors

Natural monopoly

Long-run inefficiencies

Large profit margins

Attraction of competitors

Competitive market

Public-private partnerships

Private investment in competitive

parts and public ownership in

subadditive ones

A chance ?

𝑪 𝒒𝟏 + 𝒒𝟐 < 𝐂 𝐪𝟏 + 𝐂 𝐪𝟐



Subadditivities

• A lack of regulation of natural monopolies can lead to long-run inefficiencies!

• Strong subadditivities for all networks• Sunk costs

• Economies of scope

• Standardisation effect

• Generation does not necessary involve subadditivities (particularly for PVs)

• Open question: Are there subadditivities via electrical equipment?



Off-grid systems: Decentralised technologies

Fuel generator

Solar PV

Impound. Hydro

Diversion Hydro

Wind

Scal

e

Dependency on environmental factors

Dispatchability

Solar Cookers + DIY;

reduces fuel expenses

- Usability; short-lived

Solar Water Heaters+ Reduces electricity cons.; DIY

possible

- Weather-dependent; Maintenance

Solar Cooling + Reduces

electr. cons.

- non-DIY; high cost



Off-grid systems: Ind. suppl. and hybrid grid

Individual PV supply Hybrid grid



Off-grid systems: Swarm electrification

from Hoffmann & Ansari (2018)



Energy Access Policies

Energy and fuel subsidies• Easiest solution • Induces heavy market distortions and creates adverse incentives

Microfinance• Very small loans, usually locally administrated and monitored • Specialised micro-energy formats

Grants & Aids• Several programs by development banks, NGOs, etc.

Public Private Partnerships (PPP)• Cooperation with private companies and later refinancing• Often rather for bigger projects and finally often more expensive



Energy subsidies

Nigeria

• “Optimal subsidy” (spatial and social discrimination) in reality not feasible due to smuggling and corruption

• Lack of competent policy designers for other policies

• Poor households depend crucially on the subsidies➢Substitution policies necessary for social

security

➢Dynamics of policy redesign count to the hardest tasks in applied economics

➢Failure stories: e.g. Yemen, Nigeria

Yemen



Energy subsidies



Discussion

How should future energy access governance in the Middle East look like?



Thanks for attending!

Documents

Energy in the Middle East – poverty, markets, and outlooks · - 21 - The shale revolution Source: Azreki et al. (2017), Rystad energy • US shale is typically seen as the main