Oil, gas prices, and conflict in the middle east An informal discussion

Outline Facts on oil producers and consumers Topics for class discussion Energy Independence Gas Prices Oil and the war in Iraq

Top 10 Petroleum Producers (2003?) Country Production Rank & Production Early 2002   1. Saudi Arabia 7.7 million barrels/day 3. 7.7 mb/d   2. Former Soviet Union 7.1 million barrels/day 1. 8.6 mb/d   3. USA 5.9 million barrels/day 2. 8.1 mb/d   4. Iran 3.6 million barrels/day 4. 3.7 mb/d   5. China 3.2 million barrels/day 7. 3.3 mb/d   6. Norway 3.0 million barrels/day 6. 3.4 mb/d   7. Mexico 5. 3.6 mb/d   8. Venezuela 2.8 million barrels/day 8. 2.8 mb/d   9. United Kingdom 2.7 million barrels/day 10. 2.6 mb/d   10. Iraq 2.5 million barrels/day 11. 2.4 mb/d

More Oil Production Facts In 1996, the USA was the world's leading producer, with about 7.5 million barrels per day. 86% of "former Soviet Union" production is from Russia, with Kazakstan at 7% and Azerbaijan at 3%. The top 20 countries produce about 57 million b/d, about 87% of world production. OPEC countries account for about 24 million b/d, or 40% of world production.

Oil Reserves (at current production levels)

Oil Consumption 1. United States 19.7 million barrels per day (2002E) 2. Japan 5.4 million barrels per day (2002E) 3. China 4.9 million barrels per day (2001E) 4. Germany 2.71 million barrels per day (2002E) 5. Russia 2.38 million barrels per day; (2001E) 6. Brazil 2.2 million barrels per day (2001E) 7. Canada 2.0 million barrels per day (2002E) 8. India 2.0 million barrels per day (2002E) 9. France 1.96 million barrels per day (2002E) 10. Mexico 1.93 million barrels per day (2002E)

Oil consumption per capita 1. Singapore 162.15 barrels per day per 1000 people 2. United Arab Emirates 144.32 barrels per day per 1000 people 3. Qatar 76.89 barrels per day per 1000 people 4. United States 70.22 barrels per day per 1000 people 5. Canada 62.69 barrels per day per 1000 people 6. Saudi Arabia 57.84 barrels per day per 1000 people 7. Brunei 48.45 barrels per day per 1000 people 8. Israel 45.28 barrels per day per 1000 people 9. Australia 44.61 barrels per day per 1000 people 10. Norway 44.2 barrels per day per 1000 people

Source of Oil consumed in US

Time Series of Oil Imports http://www.factcheck.org/UploadedFiles/Overview-of-Petro-Trade.pdf

Technically recoverable oil from ANWR (USGS estimates, 1998) 95 percent probability (19 in 20 chance): at least 5.7 billion barrels are recoverable. 5 percent probability (1 in 20 chance): at least 16 billion barrels of oil are recoverable. The mean (expected value) estimate is 10.3 billion barrels of recoverable oil. Recall (from prior slides) US consumption approx 20 mil/day ≈ 7 billion per year 1998 US proved reserves: 21 billion US Production: 6 mil per day ≈ 2.2 bil/year http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/arctic_national_wildlife_refuge/html/execsummary.html

In Class assignment #1 Both John Kerry and George Bush Promised to make the USA “Energy Independent” Given the data, does this seem plausible? Would energy independence mean that the USA would be (economically) unaffected by events in the middle east?

Economics of Oil Oil is an example of a perfect substitute (undifferentiated product) In perfect competition, we would expect no economic profits. OPEC is a cartel of oil producers Accounts for 40% of world production Mexico, Russia and Norway all react to OPEC decisions (implicitly collude?). Like any cartel, OPEC works by restricting output in order to keep prices high. Like economic theory predicts, OPEC often has problems with “cheating” (free-riding).

Gas Prices: Time Series http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html

Explanations for high prices: Domestic (US) Demand Increase International Demand Increase “Price Gouging,” Exploitation, or Cartel Power. Increasing Extraction and Production Costs.

In Class assignment #1 Identify data that would best support each of the four explanations: Domestic Demand Increase International Demand Increase “Price Gouging,” Exploitation, or Cartel Power. Increasing Extraction and Production Costs.

Arguments about why the Iraq war might be about oil To damage OPEC and lower world prices To maintain stability in oil supplies To help “big oil.” By keeping prices high. Providing contracts for American oil firms.

In Class Assignment #2 Explain the degree to which each of the explanations seems plausible/reasonable To damage OPEC and lower world prices To maintain stability in oil supplies To help “big oil.” By keeping prices high. Providing contracts for American oil firms.