Non-Renewable Energy Resources

Lecture 15

eDMP: 14.43 / 15.031 / 21A.341/ 11.161 1

Non-Renewable Resources: 92% of US Primary Energy

2

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Also 92% of World Marketed Primary Energy

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission.

3

World consumptionMillion tonnes oil equivalent

010 11090807060504030201009998979695949392919089888786

13000

12000

11000

10000

9000

8000

7000

6000

5000

4000

3000

2000

1000

Coal

HydroelectricityNuclear energyNatural gasOil

Renewables

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 1969.

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: (Pt – 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? (Pt – MC)/(1 + R)t = (P0 – 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

• Under those assumptions, when should you produce your oil? Doesn’t matter

• 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

(a) (b)

Pri

ce

Pri

ce

Time Quantity

PT

P0

C

PT

P0

C

T

P - c

Demand

Marginal ExtractionCost

Q0

Image by MIT OpenCourseWare.

But Prices of Non-Renewables Don’t Rise Smoothly!

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission. 8

1861-1944 US average.1945-1983 Arabian Light posted at Ras Tanura.1984-2011 Brent dated.

$ 2011

$ money of the day

East Texas fielddiscovered

1861-69 1870-79 1880-89 1890-99 1900-09 1910-19 1920-29 1930-39 1940-49 1950-59 1960-69 1970-79 1980-89 1990-99 2000-09 0

10

20

30

40

50

60

70

80

90

100

110

120

2010-19

Discovery of Spindletop, Texas

Post-war reconstruction

Suez crisis

Iranian revolution

Iraq invaded Kuwait

Growth of Venezuelanproduction

Loss of Iranian supplies

Netback pricingintroduced

Asian financial crisis

Yom Kippur war

Russian oil exports began

Sumatra production began

Fears of shortage in US

Pennsylvanianoil boom

Invasion of Iraq

‘Arab Spring’

Crude oil prices 1861-2011US dollars per barrelWorld events

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 10.26 B bbl.; production? Production during that period was 78.45 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 1973-74 embargo

10

International Oil Trade: 65% of Production

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission.11

Major trade movements 2011Trade fl ows worldwide (million tonnes)

57.6

18.4

298.222

95.5

68.3

26.0121212 5 1175.15.1

111313373137.813711

61.1

110.0.70.28.4 22.1

34.3

226.6 61.5

48.629.5

59.8

111.2

42.2

29.5

27.1

49.54949 55

13333.8133333135.5

41.1

27.1

15.6

0 26...0.0

28.444228.428.42828

23.7

USCanadaMexicoS. & Cent. AmericaEurope & EurasiaMiddle EastAfrica Asia Pacifi c

Middle East: 30% of World Production

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission.12

Production by regionMillion barrels daily

0

100

90

70

80

20

50

40

30

60

10

Asia Pacific Africa Middle East Europe & Eurasia S. & Cent. America North America

86 9691 0601 11

Middle East: Over Half of Proved Reserves

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission. 13

Distribution of proved reserves in 1991, 2001 and 2011Percentage

7.0

38.43.6

5.2

37.8

8.0

33.7

4.64.2 42.1

7.7

2011Total 208.4trillion cubic

metres2001Total 168.5trillion cubic

metres1991

Total 131.2trillion cubic

metres

7.1

32.64.0

7.2

41.8

7.8

7.2

Middle EastEurope & EurasiaAsia Pacifi cAfricaNorth AmericaS. & Cent. America

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, 2008.

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 48.3 13.3

United States 14.8 27.6

Australia 6.3 8.9

India 5.8 7.0

Russia 4.0 18.2

Total 79.2 75.0

17

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 8.6

18

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

1990 43.48 31.59 60.54 50.81

1991 42.80 29.01 60.45 50.30

1992 38.53 28.53 57.82 48.45

1993 33.68 29.85 55.26 45.71

1994 37.18 31.72 51.77 43.66

1995 44.50 27.01 54.47 47.58

1996 41.25 29.86 56.68 49.54

1997 38.92 29.76 55.51 45.53

1998 32.00 31.00 50.76 40.51

1999 28.79 31.29 42.83 35.74

2000 35.99 29.90 39.69 34.58

2001 39.03 50.15 41.33 37.96

2002 31.65 33.20 42.01 36.90

2003 43.60 38.52 41.57 34.74

2004 72.08 64.90 60.96 51.34

2005 60.54 70.12 89.33 62.91

2006 64.11 62.96 93.46 63.04

2007 88.79 51.16 88.24 69.86

2008 147.67 118.79 179.03 122.81

2009 70.66 68.08 167.82 110.11

2010 92.50 71.63 158.95 105.19

*Source: McCloskey Coal Information Service. Prices fo 1990-2000 are the average of the monthly marker, 2001-2010 the average of weekly prices. **Source: Platts. Prices are for CAPP 12,500Btu, 1.2 SO2 coal, fob. Prices for 1990-2000 are by coal price publication date, 2001-2010 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 2011. 19

Large Increase in Chinese Coal Use

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission.20

Consumption by regionMillion tonnes oil equivalent

0

4000

3500

2500

3000

1500

1000

500

2000

86 91 96 01 06 11

Asia Pacific Africa Middle East Europe & Eurasia S. & Cent. America North America

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; Long-term 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 U3O8 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: 92.823

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 & CO2 impacts, but also serious environmental issues.

24

Gas Trade: 31% of Use (69% via pipelines)

88.026.6

14.1

9.7

10.2

23.5

66.4

117.1

35.2

8.6

6.7

3.8

3.916.8

4.415.744.1

29.1

19.8

13.5

17.3

14.3 19.0

41.3

5.0

17.47.1

Pipeline gas

LNG

32.0

12.1

6.3

9.8

3.07.6

Major trade movements 2011Trade fl ows worldwide (billion cubic metres)

USCanadaMexicoS. & Cent. AmericaEurope & EurasiaMiddle EastAfrica Asia Pacifi c

Source: Includes data from Cedigaz, CISStat, GIIGNL, Poten, Waterborne.

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission. 25

Output: Russia 15%, Middle East 14%

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission.26

Production by regionBillion cubic metres

0

3500

2500

3000

500

1500

1000

2000

Rest of World Asia Pacific Europe & Eurasia North America

86 9691 0601 11 86

Proved Reserves: Russia 24%, Middle East 40%, US 5%

This picture will change…

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission.27

Distribution of proved reserves in 1991, 2001 and 2011Percentage

7.0

38.43.6

5.2

37.8

8.0

33.7

4.64.2 42.1

7.7

2011Total 208.4trillion cubic

metres2001Total 168.5trillion cubic

metres1991

Total 131.2trillion cubic

metres

7.1

32.64.0

7.2

41.8

7.8

7.2

Middle EastEurope & EurasiaAsia Pacifi cAfricaNorth AmericaS. & Cent. America

The US Natural Gas Pipeline Network

The “Henry Hub” is in south-central Louisiana; a junction of 13 pipelines; the pricing point for futures contracts. 28

Three Regional Markets, For Now…?

Courtesy of BP Statistical Review of World Energy June 2012. Used with permission. 29

Prices$/Mmbtu

0

2

4

6

8

10

12

16

US Henry Hub Average German Import Price cif UK NBP Japan LNG cif

11 1009080794 9897 95 96 00 0199 02 04 0503 06

14

US Prices Historically Volatile

Source: EIA. Weekly averages shown; most recent years omitted.

Source: U.S. Energy Information Administration. http://www.eia.gov/dnav/ng/hist/rngwhhdd.htm30

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15.031J / 14.43J / 21A.341J / 11.161J Energy Decisions, Markets, and PoliciesSpring 2012 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms.