Oil and the American Way of Life:Oil and the American Way of Life:DonDon’’t Ask, Dont Ask, Don’’t Tellt Tell

Robert K. Kaufmann

Boston University

August 4, 2011

http://www.bu.edu/cees/people/faculty/kaufmann/index.html

Basic Facts of the Oil Market 2008Basic Facts of the Oil Market 2008

World oil demand 85.5 million barrels per day

OPEC produced 44 percent of the world market

US consumed 20.6 million barrels per day

US imported 57 percent of its consumption

10 Billion Barrrels10 Billion Barrrels

One Big World Oil Market?One Big World Oil Market?

Reducing US Dependence on Reducing US Dependence on Imported Oil is a Imported Oil is a ““Good ThingGood Thing””

The Costs of Increasing US ProductionThe Costs of Increasing US Production

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996

Fra

ctio

n

Kaufmann, R.K. and C.J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and Kaufmann, R.K. and C.J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and damage the environment. damage the environment. Annual Review of Energy and the EnvironmentAnnual Review of Energy and the Environment 1616:379-400:379-400..

A Competitive MarketA Competitive Market Prices Oil EfficientlyPrices Oil Efficiently

-60

-40

-20

0

20

40

60

80

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Annual Change in Real Oil PricesAnnual Change in Real Oil Prices

Competitive MarketCompetitive Market

Texas RailroadTexas Railroad CommissionCommission

OPEC

Kaufmann, R.K. 1995. A model of the world oil market for Project LINK Economic Modelling 12:165-178

OPEC ControlOPEC Control

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

Fra

cti

on

The Impact of Higher Oil PricesThe Impact of Higher Oil Prices

We Spend More Money on Energy…We Spend More Money on Energy…

4

5

6

7

8

9

10

1959-I 1964-I 1969-I 1974-I 1979-I 1984-I 1989-I 1994-I 1999-I 2004-I

Perc

en

tag

e

And Less on Other Goods and And Less on Other Goods and ServicesServices

Household Energy Expenditures & Household Energy Expenditures & Mortgage DelinquencyMortgage Delinquency

Prices: Speculation or Fundamentals?Prices: Speculation or Fundamentals?

Market FundamentalsMarket Fundamentals

OPEC Capacity UtilizationOPEC Capacity Utilization

The Determinants of World Oil PricesThe Determinants of World Oil PricesOPEC Capacity Utilization OPEC production

divided by OPEC Capacity

Futures Market Contango vs Backwardation

OECD Stocks Days of forward consumption

Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.

Temporary Disruptions: Hurricane Season

Refinery Utilization Percentage

Changes in Market Fundamentals?Changes in Market Fundamentals?

Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.

US Oil InventoriesUS Oil Inventories

WTI_Far_MonthWTI_Far_Month Brent_Far_Month

WTI_Near_Month Brent_Near_Month

Dubai_Near_Month

WTI_Spot Brent_Spot

Bonny_Spot

Maya_Month Dubai_SpotDubai_Spot

Price DiscoveryPrice Discovery

Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures prices, prices, Energy EconomicsEnergy Economics. 31:550-558. . 31:550-558.

The Dubai-WTI Far Month SpreadThe Dubai-WTI Far Month Spread

The Role of TradersThe Role of Traders

Speculative Effects?Speculative Effects?

Speculative Bubble?Speculative Bubble?

Is the World Running Out of Oil?Is the World Running Out of Oil?

0

20

40

60

80

100

120

140

160

180

1900 1920 1940 1960 1980 2000 2020 2040

This Will Never This Will Never Happen….ButHappen….But

1 trillion barrels

2.5 trillion barrels

Mil

lion

bar

rels

per

Day

HubbertHubbert’’s Forecast for a Global Peaks Forecast for a Global Peak

0

20

40

60

80

100

120

1899 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099

Mil

lion

bar

rels

per

Day

When Will Global Production When Will Global Production Peak?Peak?

0

20

40

60

80

100

120

140

160

180

1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100

2014 0.8 trillion

2021 1.5 trillion

2026 2 trillion2026 2 trillion

2032 2.9 trillion

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, production of alternatives, Ecological Economics.Ecological Economics.67:405-411.67:405-411.

Growth and Decline RatesGrowth and Decline Rates

0

20

40

60

80

100

120

140

160

1900 1925 1950 1975 2000 2025 2050 2075 2100

Mil

lion

Barr

els

per

Day

2023

2025

2017

2036

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, production of alternatives, Ecological Economics.Ecological Economics.67:405-411.67:405-411.

The Need for AlternativesThe Need for Alternatives

Current Production by Saudi Arabia

0

5

10

15

20

25

30

35

40

45

50

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years after the Peak

Mil

lion

s of

Bar

rels

of

Oil

Per

Day

0.8 trillion

2.9 trillion2.9 trillion

Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, production of alternatives, Ecological Economics.Ecological Economics.67:405-411.67:405-411.

Do Gasoline Prices RiseDo Gasoline Prices RiseFaster Than They Fall?Faster Than They Fall?

Do Gasoline Prices RiseDo Gasoline Prices RiseFaster Than They Fall?Faster Than They Fall?

Rising Crude Oil & Motor Gasoline Rising Crude Oil & Motor Gasoline PricesPrices

10

15

20

25

30

35

40

45

50

55

1 6 11 16 21 26 31

Falling Crude Oil & Motor Gasoline Falling Crude Oil & Motor Gasoline PricesPrices

0

10

20

30

40

50

60

1 6 11 16 21 26 31

Gasoline price rise faster than they fall in: Texas, Michigan, Pennsylvania, Florida, Illinois, Minnesota, Ohio, Louisiana, Idaho

Yes…ButYes…But

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 responseKaufmann, R.K and C Laskowski, 2004, Causes for an asymmetric relation between the price of crude oil and refined petroleum products, Energy Policy

Demand is Forecast to RiseDemand is Forecast to Rise

0

20

40

60

80

100

120

140

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

OECD

Global

Non-OECD

Changes in OECD DemandChanges in OECD Demand

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

Electricity

Refineries

Industry

Transport

Agriculture

Com

mercial

Residential

Non-energy

Mill

ion

barr

els

per

day

1985 - 1978

20

30

40

50

60

70

80

90

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Mill

ion

Barr

els

per

Day

Squeeze Blood From a Stone?Squeeze Blood From a Stone?

1973 2004

HubbertHubbert’’s Predictions Prediction

0

1

2

3

4

5

6

7

8

9

10

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Mil

lion

Barr

els

per

Day

Hybrid ModelHybrid ModelM

illi

on B

arre

ls p

er D

ayM

illi

on B

arre

ls p

er D

ay

After: Kaufmann (1991)After: Kaufmann (1991)

Geological Maturity Outside OPECGeological Maturity Outside OPEC

0

2

4

6

8

10

12

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Mil

lion

bar

rels

per

day

Lower 48 States

North Sea

Will Opening ANWR Or Large Will Opening ANWR Or Large Discoveries Solve US Supply Discoveries Solve US Supply

Constraints?Constraints?

USGS Projections For ANWRUSGS 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.

The Story Behind the HeadlinesThe Story Behind the Headlines

Remaining Supplies of OilRemaining Supplies of Oil

Figure From The End of Cheap Oil National Geographic 2004Figure From The End of Cheap Oil National Geographic 2004

15

20

25

30

35

40

45

50

55

60

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Mil

lion

bar

rels

per

day

Will OPEC Increase Production to Will OPEC Increase Production to Facilitate Demand?Facilitate Demand?

Should OPEC Increase Capacity?Should OPEC Increase Capacity?

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0 1 2 3 4 5 6 7 8 9 10 11 12

Per

cent

age

-20

-10

0

10

20

30

40

50

60

70

Per

cent

age

Source: Dees, S, P. Karadeloglou,. R.K. Kaufmann, and M. Sanchez, 2007, Modeling the world oil market: assessment of a quarterly econometric model, Energy Policy

Change in priceChange in price

Change in OPEC ProductionChange in OPEC Production

Before and After the PeakBefore and After the Peak

Being On-Time Matters!Being On-Time Matters!

Environmental Regulations, Demand, Environmental Regulations, Demand, and US Refinery Capacityand US Refinery Capacity

5000

8000

11000

14000

17000

20000

1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

Th

ou

san

d B

arr

els

per

Day

Non-US Refinery Capacity & DemandNon-US Refinery Capacity & Demand

Refinery CapacityRefinery Capacity

DemandDemand

0

10

20

30

40

50

60

70

1970 1975 1980 1985 1990 1995 2000

Bringing Energy Into the Bringing Energy Into the ClassroomClassroom

- Understanding energy- Touch measures of energy efficiency- A home energy audit- How much energy do I use directly

What is Energy?What is Energy?

Anything that has the ability to do work

Measuring Energy Measuring Energy

Calorie The heat required to raise the temperature of one gram of water one degree Celsius

Reading Food LabelsReading Food Labels

Ask students to bring in their favorite food

Human Body Temperature

‘Normal’ body temperature 37oCActive Range 36oC - 38oCStability Range 34oC - 41oCCritical thermal maximum 43oCCritical thermal minimum 28oC

So LetSo Let’’s Do a Simple Calculations Do a Simple Calculation

How much do you weigh? ________(kilograms)What is normal room temperature? ____ (degrees Celsius)What percentage of your body is water ______ (percentage 60M 55F)How many calories are needed to maintain each gram of your body __?How many calories do you need to eat ____?

Touch Measure of Energy Touch Measure of Energy EfficiencyEfficiency

Law of Conservation

Matter is neither created nor destroyed in a physical or chemical transformation

Second Law of Thermodynamics

In all energy conversion processes, energy loses its ability to do work and is degraded in quality

Energy In Equals Energy OutEnergy In Equals Energy Out

Energy In Work out

Waste Energy (Heat)

Machine

Efficiency = Work out/Energy in

Energy Flows in Light BulbsEnergy Flows in Light Bulbs

Electricity In Light

Waste Energy (Heat)

Light Bulb

Efficiency = Work out/Energy in

LightbulbsLightbulbs

Incadescent bulbIncadescent bulb

Compact FlourescentCompact Flourescent

Halogen bulbHalogen bulb

Light Bulb EfficiencyLight Bulb Efficiency

What Kind of Bulb to Buy?What Kind of Bulb to Buy?

How much does the bulb cost?How much does electricity cost?How long does the bulb last?How often is the bulb on?What is the interest rate?

A Calculation?A Calculation?

dollars/megalumen-hour=( initial-dollars+watts-consumed*dollars-per-kilowatt-hour*thousand-hours-lifetime) ( average-lumens * thousand-hours-lifetime / 1000 )

60-watt incandescent bulb, 800 lumens, 1,000 hours lifetime, $1.00 initial cost:

( $1.00 + 60 * $0.10 * 1 ) / ( 800 * 1 / 1000 ) = ( $1.00 + $6.00 ) / 0.8 = $8.75 / megalumen-hour

15-watt CFL bulb, 800 lumens (680 average), 6,000 hours lifetime, $5.00 initial cost:

( $5.00 + 15 * $0.10 * 6 ) / ( 680 * 6 / 1000 ) = ( $5.00 + $9.00 ) / 4.08 = $3.43 / megalumen-hour

Home Energy AuditHome Energy Audit

- How much energy do you use to move around?- How much energy do you use to heat your house ?- How much energy do you use to cool your house?

Energy Used to MoveEnergy Used to Move

Track how far you go each week by type of vehicle

Home Energy AuditHome Energy Audit

Obtain Information- Electric Company (monthly bills)- Gas Company (monthly bills)- Oil Company (monthly bills)- - Weather Data (daily temperature)- Size of home (square meters)

Weather DataWeather Data

Heating Degree Days = 65oF – Outside TemperatureCooling Degree Days = Outside Temperature – 65oF

Measuring Energy UseMeasuring Energy Use

Heating Degree Days or Cooling Degree Days per MonthHeating Degree Days or Cooling Degree Days per Month

Ene

rgy

Use

per

Mon

thE

nerg

y U

se p

er M

onth

Slope = Slope = Energy UseEnergy Use HDDHDD

ComparisonsComparisons

Oil Prices & Exchange RatesOil Prices & Exchange Rates

Chicken vs EggChicken vs Egg

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

2000:01:07 2002:01:04 2004:01:02 2005:12:30 2007:12:28

Do

lla

rs p

er

Eu

ro

15

35

55

75

95

115

135

155

Do

lla

rs p

er

Ba

rre

l

The Bubble Bursts….The Bubble Bursts….

18

18.5

19

19.5

20

20.5

21

21.5

Jan

Feb

March

April

May

June

July

August

Septe

mber

Octo

ber

Novem

ber

Dece

mber

Million

Barr

els

per

Day

2008

2007