Oil and the American Way of Life Don t

Oil and the American Way of Life: Don’t Ask, Don’t 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 2008 10 Billion Barrrels 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

One Big World Oil Market?

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

The Costs of Increasing US Production 0. 08 0. 07 Fraction 0. 06 0. 05 0. 04 0. 03 0. 02 0. 01 0 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 Kaufmann, R. K. and C. J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and damage the environment. Annual Review of Energy and the Environment 16: 379 -400. 1996

A Competitive Market Prices Oil Efficiently

80 Annual Change in Real Oil Prices 60 Competitive Market OPEC Texas Railroad Commission 40 20 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 -20 -40 -60 Kaufmann, R. K. 1995. A model of the world oil market for Project LINK Economic Modelling 12: 165 -178

OPEC Control 1 0. 9 0. 8 0. 7 Fraction 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 0 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003

The Impact of Higher Oil Prices

We Spend More Money on Energy… 10 9 Percentage 8 7 6 5 4 1959 -I 1964 -I 1969 -I 1974 -I 1979 -I 1984 -I 1989 -I 1994 -I 1999 -I 2004 -I

And Less on Other Goods and Services

Household Energy Expenditures & Mortgage Delinquency

Prices: Speculation or Fundamentals?

Market Fundamentals

OPEC Capacity Utilization

The Determinants of World Oil Prices OPEC Capacity Utilization OPEC production divided by OPEC Capacity OECD Stocks Days of forward consumption Refinery Utilization Percentage Futures Market Contango vs Backwardation Temporary Disruptions: Hurricane Season Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4): 2609 -2622.

Changes in Market Fundamentals? 120 100 Real Dollars per Barrel 80 60 40 20 0 : mm: ss : mm: ss : mm: ss : mm: ss Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4): 2609 -2622.

26 US Oil Inventories 24 Days Forward Consumption 22 20 18 16 14 12 10 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 January January January January

Price Discovery WTI_Far_Month Brent_Far_Month WTI_Near_Month Brent_Near_Month Dubai_Near_Month WTI_Spot Brent_Spot Bonny_Spot Maya_Month Dubai_Spot Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures prices, Energy Economics. 31: 550 -558. Economics.

The Dubai-WTI Far Month Spread

The Role of Traders

Speculative Effects?

Speculative Bubble?

Is the World Running Out of Oil?

This Will Never Happen…. But 180 Million barrels per Day 160 140 2. 5 trillion barrels 120 100 80 1 trillion barrels 60 40 20 0 1900 1920 1940 1960 1980 2000 2020 2040

Hubbert’s Forecast for a Global Peak Million barrels per Day 120 100 80 60 40 20 0 1899 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099

When Will Global Production 2032 2. 9 trillion Peak? 180 160 2026 2 trillion 140 2021 1. 5 trillion 120 2014 0. 8 trillion 100 80 60 40 20 0 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics. 67: 405 -411. 2100

160 Growth and Decline Rates 2023 140 Million Barrels per Day 120 2017 2036 100 2025 80 60 40 20 0 1900 1925 1950 1975 2000 2025 2050 2075 Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics. 67: 405 -411. 2100

The Need for Alternatives 50 Millions of Barrels of Oil Per Day 45 0. 8 trillion 40 35 30 25 2. 9 trillion 20 15 Current Production by Saudi Arabia 10 5 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Years after the Peak Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, Ecological Economics. 67: 405 -411. 15

Do Gasoline Prices Rise Faster Than They Fall?

Do Gasoline Prices Rise Faster Than They Fall?

Rising Crude Oil & Motor Gasoline Prices 55 50 45 40 35 30 25 20 15 10 1 6 11 16 21 26 31

60 Falling Crude Oil & Motor Gasoline Prices 50 40 30 20 10 0 1 6 11 16 21 26 31

Yes…But Gasoline price rise faster than they fall in: Texas, Michigan, Pennsylvania, Florida, Illinois, Minnesota, Ohio, Louisiana, Idaho 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 response Kaufmann, 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 Rise 140 120 100 80 Global 60 OECD 40 20 0 1960 Non-OECD 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

0. 5 Changes in OECD Demand 1985 - 1978 Million barrels per day Non-energy Residential Commercial -1 Agriculture Transport Industry Refineries -0. 5 Electricity 0 90 80 -2 -2. 5 Million Barrels per Day -1. 5 70 60 50 40 30 -3 20 1965 1970 1975 1980 1985 1990 1995 2000 2005

Squeeze Blood From a Stone? 1973 2004

Hubbert’s Prediction 10 9 Million Barrels per Day 8 7 6 5 4 3 2 1 0 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Million Barrels per Day Hybrid Model After: Kaufmann (1991)

Geological Maturity Outside OPEC 12 Lower 48 States Million barrels per day 10 8 6 4 North Sea 2 0 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Will Opening ANWR Or Large Discoveries Solve US Supply Constraints?

USGS 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 Headlines

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

Will OPEC Increase Production to Facilitate Demand? 60 55 Million barrels per day 50 45 40 35 30 25 20 15 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Should OPEC Increase Capacity? 3. 5 70 3. 0 60 2. 5 50 40 Change in OPEC Production 1. 5 30 1. 0 20 0. 5 10 0. 0 Percentage 2. 0 0 Change in price -0. 5 -10 -1. 0 -20 0 1 2 3 4 5 6 7 8 9 10 11 12 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

Before and After the Peak

Being On-Time Matters!

Environmental Regulations, Demand, and US Refinery Capacity Thousand Barrels per Day 20000 17000 14000 11000 8000 5000 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004

Non-US Refinery Capacity & Demand 70 Refinery Capacity 60 50 40 Demand 30 20 10 0 1975 1980 1985 1990 1995 2000

Bringing Energy Into the Classroom - Understanding energy - Touch measures of energy efficiency - A home energy audit - How much energy do I use directly

What is Energy? Anything that has the ability to do work

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

Reading Food Labels Ask students to bring in their favorite food

Human Body Temperature ‘Normal’ body temperature 37 o. C Active Range 36 o. C - 38 o. C Stability Range 34 o. C - 41 o. C Critical thermal maximum 43 o. C Critical thermal minimum 28 o. C

So Let’s 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 60 M 55 F) How many calories are needed to maintain each gram of your body __? How many calories do you need to eat ____?

Touch Measure of Energy Efficiency

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 Out Efficiency = Work out/Energy in Energy In Machine Work out Waste Energy (Heat)

Energy Flows in Light Bulbs Efficiency = Work out/Energy in Electricity In Light Bulb Light Waste Energy (Heat)

Lightbulbs Compact Flourescent Halogen bulb Incadescent bulb

Light Bulb Efficiency

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? 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 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 Move Track how far you go each week by type of vehicle

Home 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 Data Heating Degree Days = 65 o. F – Outside Temperature Cooling Degree Days = Outside Temperature – 65 o. F

Energy Use per Month Measuring Energy Use Slope = Energy Use HDD Heating Degree Days or Cooling Degree Days per Month

Comparisons

1. 5 135 1. 4 Dollars per Euro 155 115 1. 3 95 1. 2 75 1. 1 55 1 0. 9 35 0. 8 2000: 01: 07 15 2002: 01: 04 2004: 01: 02 2005: 12: 30 2007: 12: 28 Dollars per Barrel 1. 6 Oil Prices & Exchange Rates Chicken vs Egg

20. 5 20 19. 5 19 2008 Million Barrels per Day The Bubble Bursts…. 21. 5 2007 21 18. 5 18 December November October September August July June May April March Feb Jan