Developments in World Energy Markets

Mine YücelFederal Reserve Bank of Dallas

May 29, 2006

Overview

• World energy consumption/production• Vulnerability to oil price shocks• Similar vulnerability to natural gas price

shocks?– Security of gas supply– Feasibility of a gas cartel

World Total Energy Consumption by Fuel

Oil, 39%

Natural Gas, 23%

Coal, 24%

Nuclear, 7%

Other, 8%

World Energy Consumption by Fuel Type, 1970-2025

0

50

100

150

200

250

300

1970 1980 1990 2002 2015 2025

Quadrillion Btu

Oil

Natural Gas

Coal

Renewables

Nuclear

Western Europe: Energy Consumption by Fuel

Oil

Natural Gas

Coal

Nuclear

Other

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 2001 2002 2010 2015 2020 2025

Transitional Economies: Energy Consumption by Fuel

Oil

Natural Gas

Coal

NuclearOther

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 2001 2002 2010 2015 2020 2025

OPEC Dominates World Oil Production

ChinaUnited Kingdom

United States

OPEC

Russia

NorwayMexico

Rest of the World

0

10

20

30

40

50

60

70

80

90

100

73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

Percent

World Oil Reserves Concentrated in the Middle East

NorthAmerica

Centraland

South America

WesternEurope

Africa

Middle East

FormerSoviet Union

Far East/Oceania

58%

6%1%

3%

8%8%

16%

Source: EIA, International Energy Outlook 2005

Natural Gas Consumption Rising

0

10

20

30

40

50

60

70

1980 1990 2002 2010 2015 2020 2025

Mature Market EconomiesTransitional EconomiesEmerging Economies

Trillion Cubic Feet

Source: EIA, International Energy Outlook 2005

Increases in Natural Gas Consumption by Region and Country Group, 2002-2025

0 2 4 6 8 10 12 14 16

Mature Market Asia

Africa

Central and South America

Western Europe

Middle East

North America

Emerging Asia

EE/FSU

Trillion Cubic Feet

Gas Production Geographically Diverse

0

10

20

30

40

50

60

70

80

90

100

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Rest of the World

Middle East

Eastern Europe & FSU

Western EuropeCentral & South America

North America

Percent

Gas Reserves Geographically Diverse

NorthAmerica

Centraland

South America

WesternEurope

Africa

Middle East

FormerSoviet Union

Far East/Oceania

42%32%

3%

6%

8%4%

4%

Energy Issues

• Energy prices and the economy: How important are energy price shocks? – Oil price studies

• Natural Gas Supply – Secure supply– A gas production cartel

Oil Price Shocks and U.S. Recessions

0

50

100

150

200

250

300

51 56 61 66 71 76 81 86 91 96 01 06

Index, '82-84=100

Classic supply shock

Capital OutputProductionProcess

Energy

Labor

An unfavorablesupply shock

Input Scarcity (Higher Energy Prices)

GDP Growth Slows & Productivity Growth Slows

Wage Growth Slows

Unemployment Rate Rises

Price Level Rises

Interest Rate Rises

GDP and Inflation Effectsof Oil-Price Shocks

• U.S.– 100% oil price hike: 4% to 6% GDP loss

• Euro Area – 100% oil price hike: 1% to 4% GDP loss

• Price level rises by as much as GDP falls

Natural Gas Supply

• Secure supply?– Natural gas reserves– Natural gas exports

• A gas production cartel?– Conditions for a strong gas cartel

Source: Baker Institute ‘Geopolitics of Natural Gas’ Working Paper Series; Cedigaz

World Gas Trade on the Rise

0

100

200

300

400

500

600

700

800

1970 1975 1985 1985 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003

Billion Cubic Meters

LNG

by Pipeline

Total World Cross-border Trade

Natural Gas ReservesDistribution by Region

Russia27.6%

Iran15.5%

Qatar15.0%Saudi Arabia

3.8%

UAE3.5%

US3.1%

Algeria2.6%

Nigeria2.6%

Venezuela2.4%

Other22.1%

Iraq1.8%

Natural Gas ExportsDistribution by Region

Russia28.0%

Canada15.0%

Norway8.0%

Algeria8.0%

Netherlands7.0%

Other 34.0%

Security of Supply

• Natural gas reserves and exports:

– Higher concentration among fewer countries– Geographically diversified

A Gas Cartel

• For a successful cartel:– Small number of producers with large market

share– Establish and enforce quotas– Control capacity expansions

A Gas Cartel

• Cartel stronger if:– Demand inelastic– Fringe supply inelastic– Market share large

Is a Gas Cartel Feasible?

• Unlikely cartel partners: Canada, Norway, Netherlands

• Many substitutes for gas • Potential for increased fringe supply• Enforcement expensive

Future for the Gas Market

• Russia pivotal in global gas market• Competing supply will come on line as

prices increase• May be harder for gas market to become

as fluid as oil market

Conclusion

• Oil-demand growth not abating• Middle East will dominate oil trade• Gas-demand growth fastest among fuels• Gas cartel unlikely in the short run• Growth in LNG trade will facilitate a global

gas market• Interdependence among world economies

means greater stability

Developments in Energy Markets

Mine YücelFederal Reserve Bank of Dallas

www.dallasfed.org