AGEC/FNR 406 LECTURE 24

“America is addicted to oil”

- President George Bush(2006 State of the Union Address)

Three reasons for concern:

1. Volatile & upward swings in oil prices

2. Political instability in oil-exporting regions

3. Global warming due to fossil fuel use

U.S Oil Consumption (2005)

22 billion barrels/day

http://tonto.eia.doe.gov/FTPROOT/other/perspectives04.pdf

US Domestic Petroleum Overview

Oil Supply – global reserves

- Middle East = 60%

- Canada = 14%

- Africa = 10%

- Venezuela = 6%

- Russia = 5%

- US = 2%

Oil Supply – top US sources

- ????

- Saudi Arabia

- ?????

- Venezuela

- Nigeria

- Angola

- Iraq

- Algeria

- Canada (16.5%)

- 14.5%

- Mexico (13.4%)

- 11.3%

Supply Disruptions

- Iraq

- Iran

- Nigeria

- Venezuela

World production is at 98% of capacity…

…a disruption anywhere leads to price increases everywhere!

“Hubbert’s Peak”

“Peak Oil” is the idea that oil production (from an area) follows a bell-shaped curve, based on the fact that oil supplies are finite.

It provides a method for predicting maximum production in advance, based on discovery and productivity of fields.

The theory is named after geophysicist M. K. Hubbert, who correctly predicted (in 1956) that US production of oil would peak in the US in the late 1960s.

Are we “post peak”?

Almost all “easy” reserves are known.

Some evidence suggests several large oil fields (in Mexico, Kuwait, and Saudi Arabia) have already peaked in production and are declining.

Finding new reserves, methods for extraction, and alternatives is difficult and costly (e.g. Tar Sands, Heavy Oil, coal-to-liquid oil synthetics)

40% of all energy used in the US comes from oil.

How does it get used?

2/3 for transport

PricesSince 2002

crude oil prices have tripled

gasoline prices have doubled

For each $10/barrel increase in the crude oil price,

gasoline prices rise about $0.25

Most of the recent increase in gasoline prices is due to increases in crude oil prices. Shortages of refining capacity play a secondary role.

Oil prices vs. Gasoline prices, US 1975-2005

GAS: $3.33/gallon

Distribution/Marketing/Profits $ 0.10

Crude Oil Cost $ 2.22

Refinery Cost and Profits $ 0.38

Underground Tank Fee $ 0.01

State and Local Sales Tax $ 0.25

State Excise Tax $ 0.18

Federal Excise Tax $ 0.18

source: http://www.energy.ca.gov/gasoline/margins/index.html

Implications

Most oil price spikes have led to inflation and (ultimately) a recession

US wealth sent to oil producing countries- $240 billion in oil imports in 2005

But…

oil intensity of US economy (oil consumption/GDP) has been declining

Predictions

Current forecasts are for crude oil prices to range from $35-$55/barrel over next 20 years

More demand from developing world

Economic theory suggests that as prices rise

…demand falls

…alternatives become attractive

Predictions?http://www.nytimes.com/interactive/2008/02/19/business/20080220_CENTURY_GRAPHIC.html

Alternatives

Alberta Tar Sands

requires water and natural gas

Ethanol (from corn in US, sugar cane in Brazil)

2000: 106K barrels/day

2006: 250K barrels/day

2010: 500K barrels/day

(assuming current $0.51/gal federal subsidy)

Alternatives, continued

Gas-to-liquid

Coal-to-liquid

used in South Africa for 2 decades

new Chinese plants under construction

Cellulosic ethanol

made from grasses, biomass

not currently profitable, more R&D required2005 Energy Policy Act – requires some use

Supply-side options

Increased drilling for domestic oil

Subsidies for alternatives

- won’t influence world prices unless the supply shift is enormous

Demand-side options

Directly or indirectly raise fuel costs

(reduce demand, and therefore price)

- tax on gasoline

- carbon tax

- cap and trade

Raise vehicle fuel economy

- Corporate Average Fuel Economy (CAFÉ) standards

Average fuel economy of US light-duty vehicles

Great source of unbiased information:

http://www.gravmag.com/

Source material for this lecture includes:

Newell, R. G. “What’s the Big Deal about Oil?” Resources 163:6-10, Fall 2006

Pizer, W. A. “The Economics of Improving Fuel Economy” Resources 163:21-25, Fall 2006

“Oil Change” OECD Observer, December 2006

US Energy Information Agency, Annual Reports (various years)