Mountains & Minds

The Economics of the Energy Market

Dr. Myles WattsDepartment of Ag. Econ. & Econ.

Montana State Universityand

April 20121

Energy Market Discussion

• Energy Facts Quiz

• Domestic Energy Flow and Use

• Oil and Gasoline Prices

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Energy Facts Quiz

• List in order of magnitude:1. The U.S. energy sources

Coal, Natural Gas, Nuclear, Petroleum, Renewable

2. France’s energy sourcesCoal, Natural Gas, Nuclear, Petroleum, Renewable

3. The U.S. energy usesCommercial, Industrial, Residential, Transportation

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Energy Facts Quiz

• List in order of magnitude (cont.):

4. The top three oil producing nations5. The top six nations that produce oil

consumed in the United States

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Energy Facts Answers

1. The U.S. energy sources(Coal, Natural Gas, Nuclear, Petroleum, Renewable).

•Petroleum (includes Crude Oil) – 41.5%•Natural Gas – 22.1%•Coal – 22.08%•Nuclear – 8.4%•Renewable – 8.0%

U.S. Energy Information Administration (www.eia.gov), Energy Statistics5

Energy Facts Answers

2. France’s energy sources (2008) (Coal, Natural Gas, Nuclear, Petroleum, Renewable)

•Nuclear – 39%•Petroleum – 36%•Natural Gas – 17%•Renewable – 7%•Coal – 4%

U.S. Energy Information Administration (www.eia.gov), International Energy Statistics6

Energy Facts Answers

3. The U.S. energy uses (Commercial, Industrial, Residential, Transportation)

• Industrial – 30.14%• Transportation – 27.51%• Residential – 22.51%• Commercial – 18.21%

U.S. Energy Information Administration (www.eia.gov), Energy and International Energy Statistics7

Energy Facts Answers

4. The top three oil producing nations

(in order of magnitude)

•Saudi Arabia•Russia•United States

U.S. Energy Information Administration (www.eia.gov), Energy and International Energy Statistics8

Energy Facts Answers5. The top six nations that produce oil

consumed in the United States

Source 1 M Barrels (2010) Percentage

Total Imports & Domestic 5,361 100

Domestic Crude Production 1,998 37

Total Crude Imports 3,363 63

Canada 719 13

Mexico 421 8

Saudi Arabia 395 7

Nigeria 359 7

Venezuela 333 6

U.S. Energy Information Administration (www.eia.gov) Energy and International Energy Statistics9

Energy Flow 2010

U.S. EIA Annual Energy Report 2010 Figure 1 (see report for footnotes)

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Oil and Gasoline Prices

• Historical Energy Prices

• Montana Oil Production

• Exchange Rates

• World Income

• U.S. Refinery Capacity

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U.S. Energy Consumptionby Source and Sector 2011 (quadrillion Btu)

U.S. EIA Annual Energy Report 2010 Figure 2 (See report for footnotes)12

Crude Oil Prices Since 1861

U.S. EIA: BPCrudeOilPrices.xls, Cushing OK WTI Spot Price FOB, Inflation Data BLS and Minneapolis Federal Reserve

Russianoil exports began

Fears of shortage in US Yom Kippur

warDiscovery of Spindletop,Texas

Growth of Venezuelan production

Suez crisis

Loss of Iranian suppliesPost-war

reconstruction

Netback pricing introduced

Asian financial crisis

Invasion of Iraq

Sumatraproduction

began

PennsylvanianOil Boom

Iraq invaded Kuwait

Iranian revolution

East Texas field discovered

CRUDE OIL PRICES 1861 – 2011 (US dollars/barrel)1861-1944 US Average1945-1985 Arabian Light posted at Ras Tanura1986-2011 OK WTI Spot Price FOB

Proven Oil Reserves (%)

1028Billion Barrels

U.S. Energy Information Administration (www.eia.gov), International Energy Statistics

997Billion Barrels

1469Billion Barrels

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Reserves at End 2011Total 1469 Billion Barrels

U.S. Energy Information Administration (www.eia.gov), International Energy Statistics and Annual Energy Outlook 2011

Oil Reserves-to-Production (R/P) Ratios

U.S. Energy Information Administration (www.eia.gov), International Energy Statistics and Annual Energy Outlook 2011

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Capitol Commodity Services: www.ccstrade.com17

Gasoline Prices Since 1919Dollars per Gallon

U.S. EIA Motor Gasoline Regular Grade Retail Prices (Annual)

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Recent Gas & Diesel Prices

U.S. EIA Petroleum and Other Liquids Pricing19

Montana Crude First Purchase Price

U.S. EIA Petroleum and Other Liquids Pricing BLS CPI

$0

$20

$40

$60

$80

$100

$120

$140

Do

llars

pe

r B

arr

el

Nominal Dollars 2011 Dollars

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Exchange Rates

Barrels-Millions (2010)

Percentage

Total Crude Imports 3,363 100

Canada 719 21

Mexico 421 13

Saudi Arabia 395 12

Nigeria 359 11

Venezuela 333 10

• Most crude oil purchased elsewhere:

U.S. Energy Information Administration (www.eia.gov) Energy and International Energy Statistics

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Financial Influences(Inflation and Exchange Rates)

DateU.S. Gasoline

Price ($)Inflation

(CPI)Exchange

Rate (Euro)

Annual Avg 1999 1.14 166 1.06

Annual Avg 2000 1.49 172 0.92

Annual Avg 2002 1.34 179 0.94

Annual Avg 2008 3.26 215 1.47

Annual Avg 2009 2.35 214 1.39

Annual Avg 2011 3.53 225 1.39U.S. EIA Petroleum and Other Liquids Pricing, BLS CPI, Federal Reserve Exchange Rates

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Intervals1/31/99-1/31/00

1/31/00- 1/31/02

1/31/02- 1/31/08

1/31/08-1/31/09

1/31/09-1/31/11

Total Price Change 30.7% -10.1% 143.3% -27.9% 50.2%

Financial Influences

Inflation 3.6% 4.1% 20.1% -0.5% 5.1%

Exchange Rate -13.2% 2.2% 56.4% -5.4% 0%

Total -9.6% 6.3% 76.5% -5.9% 5.1%

Price Change Net of Financial Influences

40.3% 16.4% 66.8% 22.0% 45.1%

23NOTE: Subject to “Fallacy of Composition” criticism.

Financial Influences(Inflation and Exchange Rates)

U.S. EIA Petroleum and Other Liquids Pricing, BLS CPI, Federal Reserve Exchange Rates

World Income

• China’s personal income has been increasing at about 10% per year (real) for nearly two decades.

• U.S. personal income has also increased substantially.

• Personal income and GDP worldwide continues to increase.

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U.S. Personal Real Income

Bureau of Economic Analysis National Income and Accounts Tables BLS CPI All Urban Consumers

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World GDP: Historical Trend

World Bank National Accounts Data

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U.S. Refinery Capacity

• No new refineries built in the United States since 1978

• Some expansion in U.S. refinery capacity

U.S. Refinery Capacity

(1000 barrels/day)

Utilization (%)

U.S. Personal Income

(Billions 2012$)

Refine Capacityto Income Ratio

1990 15,623 87.1 8,341 1.87

2000 16,525 92.6 11,181 1.48

2010 17,575 86.4 12,764 1.38U.S. Energy Information Administration U.S. Refinery Utilization and Capacity

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Montana Oil Production1981 - 2011

U.S. Energy Information Administration Montana Crude Oils First Purchase Price and Field Production28

Montana Oil Production Forecast

Qt = Oil Production (1000 barrels) in year tP = Price of Oil (2011$/barrel)

Qt = 1.9P.087Qt-11.48Qt-2

-.704

R2 = .96 Price Elasticity = 9%

(Estimated in Logs)

Data: EIA Annual MT Crude First Purchase Price, 1983 to 2011Estimated by Doug Young

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Mountains & Minds

QUESTIONS

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