Oil and the American Way of Life: Don’t Ask, Don’t Tell Robert K. Kaufmann Boston University August 4,

Basic 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 Barrrels

One Big World Oil Market?

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

The Costs of Increasing US Production Fraction Kaufmann, R.K. and C.J. Cleveland Policies to increase US oil production: Likely to fail, damage the economy, and damage the environment. Annual Review of Energy and the Environment 16:

A Competitive Market Prices Oil Efficiently Prices Oil Efficiently

Annual Change in Real Oil Prices Competitive Market Texas Railroad Commission Commission OPEC Kaufmann, R.K A model of the world oil market for Project LINK Economic Modelling 12:

OPEC Control Fraction

The Impact of Higher Oil Prices

We Spend More Money on Energy… We Spend More Money on Energy… I 1964-I 1969-I 1974-I 1979-I 1984-I 1989-I 1994-I 1999-I 2004-I Percentage

And Less on Other Goods and Services And Less on Other Goods and Services

Household Energy Expenditures & Mortgage Delinquency 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 Futures Market Contango vs Backwardation OECD Stocks Days of forward consumption Kaufmann et al Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4): Temporary Disruptions: Hurricane Season Refinery Utilization Percentage

Changes in Market Fundamentals? Kaufmann et al Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):

US Oil Inventories

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

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 1 trillion barrels 2.5 trillion barrels Million barrels per Day

Hubbert’s Forecast for a Global Peak Million barrels per Day

When Will Global Production Peak? trillion trillion trillion trillion 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:

Growth and Decline Rates Million Barrels per Day 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:

The Need for Alternatives Current Production by Saudi Arabia Years after the Peak Millions of Barrels of Oil Per Day 0.8 trillion 2.9 trillion 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:

Do Gasoline Prices Rise Faster Than They Fall?

Do Gasoline Prices Rise Faster Than They Fall?

Rising Crude Oil & Motor Gasoline Prices

Falling Crude Oil & Motor Gasoline Prices

Gasoline price rise faster than they fall in: Texas, Michigan, Pennsylvania, Florida, Illinois, Minnesota, Ohio, Louisiana, Idaho Yes…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 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 OECD Global Non-OECD

Changes in OECD Demand Electricity Refineries Industry TransportAgriculture Commercial Residential Non-energy Million barrels per day Million Barrels per Day

Squeeze Blood From a Stone?

Hubbert’s Prediction Million Barrels per Day

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

Geological Maturity Outside OPEC Million barrels per day Lower 48 States North Sea

Will Opening ANWR Or Large Discoveries Solve US Supply Constraints?

USGS Projections For ANWR United States Geological Survey, The oil and gas resource potential of the Arctic National Wildlife Refuge 1002 Area, Alaska, Open File Report

The Story Behind the Headlines

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

Million barrels per day Will OPEC Increase Production to Facilitate Demand?

Should OPEC Increase Capacity? Percentage Percentage 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 price Change in OPEC Production

Before and After the Peak

Being On-Time Matters!

Environmental Regulations, Demand, and US Refinery Capacity Thousand Barrels per Day

Non-US Refinery Capacity & Demand Refinery Capacity Demand

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

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

Lightbulbs Incadescent bulb Compact Flourescent Halogen 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: ( $ * $0.10 * 1 ) / ( 800 * 1 / 1000 ) = ( $ $6.00 ) / 0.8 = $8.75 / megalumen-hour 15-watt CFL bulb, 800 lumens (680 average), 6,000 hours lifetime, $5.00 initial cost: ( $ * $0.10 * 6 ) / ( 680 * 6 / 1000 ) = ( $ $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

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

Comparisons

Oil Prices & Exchange Rates Chicken vs Egg :01:072002:01:042004:01:022005:12:302007:12:28 Dollars per Euro Dollars per Barrel

The Bubble Bursts… JanFebMarchApril May June July AugustSeptember OctoberNovember December Million Barrels per Day