Non-Renewable Energy Resources

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Non-Renewable Energy Resources Lecture 15 edmp: / / 21A.341/ Non-Renewable Resources: 92% of US Primary Energy Lawrence Livermore National Laboratory. All rights reserved. This content
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Non-Renewable Energy Resources Lecture 15 edmp: / / 21A.341/ Non-Renewable Resources: 92% of US Primary Energy Lawrence Livermore National Laboratory. All rights reserved. This content is excluded from our Creative Commons license. For more information, see 2 Also 92% of World Marketed Primary Energy World consumption Million tonnes oil equivalent Coal Renewables Hydroelectricity Nuclear energy Natural gas Oil World primary energy consumption grew by 2.5% in 2011, less than half the growth rate experienced in 2010 but close to the historical average. Growth decelerated for all regions and for all fuels. Oil remains the world s leading fuel, accounting for 33.1% of global energy consumption, but this figure is the lowest share on record. Coal s market share of 30.3% was the highest since Courtesy of BP Statistical Review of World Energy June Used with permission. 3 Non-Renewables Likely Dominant for Many More Decades Source: Koonin, Steven. E. What s Next in Energy? U.S. Energy Information Administration. 4 Topics Economic theory of non-renewable resources Classic Hotelling theory Recent advances & implications Some basic facts about the markets for Petroleum Coal Uranium Natural gas, Part 1 5 Classic Hotelling Theory: The Timing Decision Suppose you own a well containing exactly 1,000 barrels of oil. Each barrel can be produced for $30. You have complete flexibility as to when to produce the oil. Currently the price of oil is $80 per barrel. If you knew future oil prices, how would you decide when to produce your oil? Pick t (or ts) to max discounted net revenue: (P t MC)/(1 + R) t If all the oil in the world is produced from oil wells exactly like yours, what will happen to the price of oil? (P t MC)/(1 + R) t = (P 0 MC) 0; (P MC) rises at interest rate If LHS RHS, raise output today, which lowers today s price Note: P MC despite competition; today s output lowers later revenue; there is an opportunity cost of producing today 6 Classic (Hotelling) Theory II P T P T Demand Price Price P 0 P - c P 0 C C Marginal Extraction Cost Time T Quantity Q 0 (a) (b) Under those assumptions, when should you produce your oil? Doesn t matter Image by MIT OpenCourseWare. What if a monopoly has 99.5% of all oil, MC = $30? (MR MC) rises at rate R; P typically rises more slowly, so produce NOW 7 But Prices of Non-Renewables Don t Rise Smoothly! Crude oil prices US dollars per barrel World events Yom Kippur war Fears of shortage in US Post-war reconstruction Iranian revolution Growth of Venezuelan production Loss of Iranian supplies Netback pricing introduced Asian financial crisis Pennsylvanian oil boom Russian oil exports began Sumatra production began Discovery of Spindletop, Texas East Texas field discovered Suez crisis Iraq invaded Kuwait Invasion of Iraq Arab Spring $ 2011 $ money of the day US average Arabian Light posted at Ras Tanura Brent dated. Courtesy of BP Statistical Review of World Energy June Used with permission. 8 What s Missing from the Classic Theory? Exploration: Reserves are an inventory; decisions to search, to prove, & to drill are intertemporal choices, like classic model. End 1976 to end 2009, US proved reserves B bbl.; production? Production during that period was B bbl. Depletion: Costs of finding, extracting likely to rise as more is produced from any given area (e.g., US). Innovation: Technologies for finding, extracting improve over time a race with depletion. Uncertainty: Future demand, supply are not known. SR Inflexibility: Simple model over-states flexibility in output choice little SR supply flex for oil + inelastic demand SR P volatility. Cartel Behavior: OPEC behavior is complicated Politics: Why else drill miles deep, miles offshore when it is much cheaper to produce in the Middle East? 9 Basic Market Facts: Oil Transport (pipelines, ships) relatively cheap; market has been global (single pool) since at least 1970s Active spot and futures markets, with good data; the latter used for hedging and speculation Production is concentrated geographically, reserves even more so; much of both in unstable nations OPEC is a cartel of the big (national) oil firms, power has varied; Saudi Arabia has historically been the main holder of excess capacity As we have seen, price has been volatile since the embargo 10 International Oil Trade: 65% of Production Major trade movements 2011 Trade flows worldwide (million tonnes) US Canada Mexico S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific Courtesy of BP Statistical Review of World Energy June Used with permission. 11 Middle East: 30% of World Production Production by region Million barrels daily Asia Pacific Africa Middle East Europe & Eurasia S. & Cent. America North America Courtesy of BP Statistical Review of World Energy June Used with permission. 12 Middle East: Over Half of Proved Reserves Distribution of proved reserves in 1991, 2001 and 2011 Percentage Middle East Europe & Eurasia Asia Pacific Africa North America S. & Cent. America Total trillion cubic metres Total trillion cubic metres Total trillion cubic metres Courtesy of BP Statistical Review of World Energy June Used with permission. 13 OPEC s Share of World Output Has Varied 14 The Big Oil/Gas Companies are National Companies ranked in order of 2007 worldwide oil equivalent oil/gas reserves as reported in OGJ 200/100 , Oil & Gas Journal, September 15, Courtesy of Oil & Gas Journal. Used with permission. 15 Basic Market Facts: Coal Reserves, production concentrated in a few leading nations in several regions Mainly moved by rail and ship; high weight-to-value ratio limits trade Markets tend to be mainly national; US has abundant supplies, relatively low prices, regional differences Long-term contracts dominate; spot and (since 2001) futures markets less important Huge recent increase in Chinese use of coal 16 Production, Reserves Fairly Concentrated 2010, Pct. of World Output Reserves China United States Australia India Russia Total Coal Exports: 15% of Production Leading Exporters, 2010 Country Share Australia 27.1 Indonesia 26.1 Russia 10.1 U.S. 6.9 Leading Importers, 2010 Country Share Japan 17.5 China 16.6 S. Korea 10.7 India Prices Differ; Not a Global Market US dollars per tonne Northwest Europe market price US Central Appalachian coal spot price index Japan coking coal import cif price Japan steam coal import cif price *Source: McCloskey Coal Information Service. Prices fo are the average of the monthly marker, the average of weekly prices. **Source: Platts. Prices are for CAPP 12,500Btu, 1.2 SO 2 coal, fob. Prices for are by coal price publication date, by coal price assessment date. Note: CAPP = Central Appalachian; cif = cost + insurance + freight (average prices); fob = free on board. Source: BP plc. BP Statistical Review of World Energy June Large Increase in Chinese Coal Use Consumption by region Million tonnes oil equivalent Asia Pacific Africa Middle East Europe & Eurasia S. & Cent. America North America Courtesy of BP Statistical Review of World Energy June Used with permission. 0 20 US: Production Concentrated, Usage Less So Leading States' % Shares of Total US 2007 Coal Production Consumption* Wyoming 39.6 Texas 9.8 West Virginia 13.4 Ohio 6.6 Kentucky 10.1 Indiana 5.8 Pennsylvania 5.7 Illinois 5.4 Montana 3.8 Pennsylvania 5.3 Total 72.5 Total 33.0 *For electric power only, 93.3% of total consumption 21 Basic Market Facts: Uranium Market for uranium is global; economically recoverable reserves fairly dispersed: Low prices caused mine closures through the mid- 90s Subsequent tripling of prices then through 2010 induced new mining activity No organized market; Longterm contracts dominate; short-term volatility on (thin) spot market Courtesy of World Nuclear Association. Used with permission. 22 Global Market, Production Fairly Concentrated EIA: 92% of uranium delivered in 2010 was imported: 44% from Australia and Canada 33% from Kazakhstan, Russia, & Uzbekistan Production of U 3 O 8 is more concentrated than reserves: 2010 Production Shares Country Share Kazakhstan 33.2 Canada 18.2 Australia 11.0 Namibia 8.4 Niger 7.8 Russia 6.6 Uzbekistan 4.5 U.S.A. 3.1 Total: Basic Market Facts: Natural Gas Natural distinguishes from gas manufactured from coal, in US since 1816 (Baltimore) Gas can be moved by pipeline, but must be liquified (expensive) to go by ship (LNG); market is not global US supplies: 84% domestic, 12% Canadian US prices EU (Russian gas), Asia (LNG). Gas tends to occur with oil; historically gas reserves also concentrated in unstable regions, BUT Next class: recent advances in hydraulic fracturing (fracking) make shale gas cheap; lots in the US If exploited, serious market & CO 2 impacts, but also serious environmental issues. 24 Gas Trade: 31% of Use (69% via pipelines) Major trade movements 2011 Trade flows worldwide (billion cubic metres) US Canada Mexico S. & Cent. America Europe & Eurasia Middle East Africa Asia Pacific Pipeline gas LNG Source: Includes data from Cedigaz, CISStat, GIIGNL, Poten, Waterborne. Courtesy of BP Statistical Review of World Energy June Used with permission. 25 Output: Russia 15%, Middle East 14% Production by region Billion cubic metres Rest of World Asia Pacific Europe & Eurasia North America Courtesy of BP Statistical Review of World Energy June Used with permission. 26 Proved Reserves: Russia 24%, Middle East 40%, US 5% This picture will change Distribution of proved reserves in 1991, 2001 and 2011 Percentage Middle East Europe & Eurasia Asia Pacific Africa North America S. & Cent. America Total trillion cubic metres Total trillion cubic metres Total trillion cubic metres Courtesy of BP Statistical Review of World Energy June Used with permission. 27 The US Natural Gas Pipeline Network The Henry Hub is in south-central Louisiana; a junction of 13 pipelines; 28 the pricing point for futures contracts. Three Regional Markets, For Now? Prices $/Mmbtu 16 US Henry Hub Average German Import Price cif UK NBP Japan LNG cif Courtesy of BP Statistical Review of World Energy June Used with permission. 29 US Prices Historically Volatile Source: EIA. Weekly averages shown; most recent years omitted. Source: U.S. Energy Information Administration. 30 MIT OpenCourseWare J / 14.43J / 21A.341J / J Energy Decisions, Markets, and Policies Spring 2012 For information about citing these materials or our Terms of Use, visit:
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