energy economics in the 21 st century

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


The Supply/Demand Model

Equilibrium Point


Un

it P

rice

Price and Supply at Equilibrium

So, What About Global Demand?

World Demand for Energy Will Continue to Grow

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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

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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

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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



• 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



• 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



• 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



• 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

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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)

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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

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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.


Yom Kippur War and OPEC Oil Embargo


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?


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U.S. Oil Supply, Consumption, and Net Imports,1960-2030 (million barrels per day)

Consumption

Domestic Supply

Net Imports

58%

62%


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)

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

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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.


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U.S. Petroleum Supply, Consumption, and Net Imports,1960-2030 (million barrels per day) - Revised

Consumption

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History Projections


U.S. Natural Gas Production, Consumption, and Net Imports,1960-2030 (trillion cubic feet)

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Consumption

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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.

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