1. 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

2. 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

3. One Big World Oil Market?

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

5. The Costs of Increasing US Production 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 197419761978198019821984198619881990199219941996 Fraction 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.

6. A Competitive Market Prices Oil Efficiently Prices Oil Efficiently

7. -60 -40 -20 0 20 40 60 80 19001910192019301940195019601970198019902000 Annual Change in Real Oil Prices Competitive Market Texas Railroad Commission Commission OPEC Kaufmann, R.K. 1995. A model of the world oil market for Project LINK Economic Modelling 12:165-178

8. OPEC Control 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 19381943194819531958196319681973197819831988199319982003 Fraction

9. The Impact of Higher Oil Prices

10. 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 Percentage

11. And Less on Other Goods and Services And Less on Other Goods and Services

12. Household Energy Expenditures & Mortgage Delinquency Household Energy Expenditures & Mortgage Delinquency

13. Prices: Speculation or Fundamentals?

14. Market Fundamentals

15. OPEC Capacity Utilization

16. 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. 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

17. 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.

18. US Oil Inventories

19. 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. 31:550-558.

20. The Dubai-WTI Far Month Spread

21. The Role of Traders

22. Speculative Effects?

23. Speculative Bubble?

24. Is the World Running Out of Oil?

25. 0 20 40 60 80 100 120 140 160 180 19001920194019601980200020202040 This Will Never Happen….But 1 trillion barrels 2.5 trillion barrels Million barrels per Day

26. Hubbert’s Forecast for a Global Peak 0 20 40 60 80 100 120 18991919193919591979199920192039205920792099 Million barrels per Day

27. When Will Global Production Peak? 0 20 40 60 80 100 120 140 160 180 19001920194019601980200020202040206020802100 2014 0.8 trillion 2021 1.5 trillion 2026 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 production of alternatives, Ecological Economics.67:405-411.

28. Growth and Decline Rates 0 20 40 60 80 100 120 140 160 190019251950197520002025205020752100 Million Barrels 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 production of alternatives, Ecological Economics.67:405-411.

29. The Need for Alternatives Current Production by Saudi Arabia 0 5 10 15 20 25 30 35 40 45 50 0123456789101112131415 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.67:405-411.

30. Do Gasoline Prices Rise Faster Than They Fall?

31. Do Gasoline Prices Rise Faster Than They Fall?

32. Rising Crude Oil & Motor Gasoline Prices 10 15 20 25 30 35 40 45 50 55 161116212631

33. Falling Crude Oil & Motor Gasoline Prices 0 10 20 30 40 50 60 161116212631

34. 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

35. Demand is Forecast to Rise 0 20 40 60 80 100 120 140 196019651970197519801985199019952000200520102015202020252030 OECD Global Non-OECD

36. Changes in OECD Demand -3 -2.5 -2 -1.5 -0.5 0 0.5 Electricity Refineries Industry TransportAgriculture Commercial Residential Non-energy Million barrels per day 1985 - 1978 20 30 40 50 60 70 80 90 1960196519701975198019851990199520002005 Million Barrels per Day

37. Squeeze Blood From a Stone? 19732004

38. Hubbert’s Prediction 0 1 2 3 4 5 6 7 8 9 10 19001910192019301940195019601970198019902000 Million Barrels per Day

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

40. Geological Maturity Outside OPEC 0 2 4 6 8 10 12 19401945195019551960196519701975198019851990199520002005 Million barrels per day Lower 48 States North Sea

41. Will Opening ANWR Or Large Discoveries Solve US Supply Constraints?

42. 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.

43. The Story Behind the Headlines

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

45. 15 20 25 30 35 40 45 50 55 60 1970197519801985199019952000200520102015202020252030 Million barrels per day Will OPEC Increase Production to Facilitate Demand?

46. Should OPEC Increase Capacity? -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 0123456789101112 Percentage -20 -10 0 10 20 30 40 50 60 70 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

47. Before and After the Peak

48. Being On-Time Matters!

49. Environmental Regulations, Demand, and US Refinery Capacity 5000 8000 11000 14000 17000 20000 194919541959196419691974197919841989199419992004 Thousand Barrels per Day

50. Non-US Refinery Capacity & Demand Refinery Capacity Demand 0 10 20 30 40 50 60 70 1970197519801985199019952000

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

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

53. Measuring Energy CalorieThe heat required to raise the temperature of one gram of water one degree Celsius

54. Reading Food Labels Ask students to bring in their favorite food

55. 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

56. 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 ____?

57. Touch Measure of Energy Efficiency

58. Law of Conservation Matter is neither created nor destroyed in a physical or chemical transformation

59. Second Law of Thermodynamics In all energy conversion processes, energy loses its ability to do work and is degraded in quality

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

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

62. Lightbulbs Incadescent bulb Compact Flourescent Halogen bulb

63. Light Bulb Efficiency

64. 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?

65. 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

66. 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?

67. Energy Used to Move Track how far you go each week by type of vehicle

68. 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)

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

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

71. Comparisons

72. Oil Prices & Exchange Rates Chicken vs Egg 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 2000:01:072002:01:042004:01:022005:12:302007:12:28 Dollars per Euro 15 35 55 75 95 115 135 155 Dollars per Barrel

73. The Bubble Bursts…. 18 18.5 19 19.5 20 20.5 21 21.5 JanFebMarchApril May June July AugustSeptember OctoberNovember December Million Barrels per Day 2008 2007