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

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

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

4. 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.

5. Oil Reserves (at current production levels)

6. 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)

7. Oil consumption per capita
1. Singapore barrels per day per 1000 people
2. United Arab Emirates barrels per day per 1000 people
3. Qatar barrels per day per 1000 people
4. United States barrels per day per 1000 people
5. Canada barrels per day per 1000 people
6. Saudi Arabia barrels per day per 1000 people
7. Brunei barrels per day per 1000 people
8. Israel barrels per day per 1000 people
9. Australia barrels per day per 1000 people
10. Norway barrels per day per 1000 people

8. Source of Oil consumed in US

9. Time Series of Oil Imports

10. 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

11. 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?

12. 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).

13. Gas Prices: Time Series

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

15. 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.

16. 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.

17. 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.