Global Crude and Gas Prices: Analysis of Current Situation and Trends

Transcription

1 Global Crude and Gas Prices: Analysis of Current Situation and Trends Wyoming Infrastructure Authority June 12, 2015 Ed Hirs University of Houston & Hillhouse Resources, LLC

2 Topics World Crude Oil Market & Prices Structure, Price behavior, concerns World Gas Market & Prices Structure, Price behavior, concerns U.S. Energy Security William Nordhaus

3 Why Worry About Crude Oil? 82% of crude reserves are held by sovereign nations, not the U.S. RAND estimates the probability of a significant, negative supply shock of at least 8% over the next decade.

4 U.S. Policy The government of the United States under the present administration has withdrawn oil lands from entry in order to conserve this asset. The Economics of Exhaustible Resources, by Harold Hotelling 1931

5 World Market William Nordhaus

6 World Market is a Network William Nordhaus

7 World Market

8 Crude Oil Prices The price of crude has decreased for two reasons: 1) USD has strengthened against all currencies as the Federal Reserve Bank ended Quantitative Easing 2) World Supplies have increased more than World Demand

9 Trade-weighted value of USD

10 What are the Benefits? Since 2008, Imported Crude is oil is down 4.9 million bbls per day +$178.9 Billion Annual Current Account +Tens of Thousands of Jobs +Billions in Tax Revenues

11 Price Elasticity of Demand The Price Elasticity of Demand is defined as the ratio of the percentage change in Quantity Demanded to the percentage change in Price.

12 Prices with 10 mmbopd Shock With oil at $100/bbl and 90 mmbopd current world consumption YGESG s elasticity of demand = Shock Price = $378/bbl Nordhaus elasticity of demand = Shock Price = $841/bbl Longer term elasticity of demand = Price indicated = $201/bbl

13 6 Month Disruption Price $/bbl $400 $ Time Months

14 Suppose Supply Increases At $100/bbl price, an increase in the supply of oil by just 1.0 million bopd

15 Suppose Supply Increases Starting from $100/bbl Nordhaus elasticity of demand = Shock Price = $16.67/bbl YGESG s elasticity of demand = Shock Price = $68.75/bbl Long term elasticity of demand = Price indicated = $88.64bbl

16 Supply has increased According to IEA, world crude oil supplies increased by 910,000 bbls per day from August to September 2014 on a world market of ~93 million bbls per day According OPEC members, the world crude supply is 2 million bbls per day more than optimal

17 Marginal Cost of Shale Crude According to Morgan Stanley, the average marginal cost per barrel of production: Niobrara Shale: $51/bbl Mississippi Lime: $52/bbl Bakken: Permian: Eagle Ford: $64/bbl $63/bbl $66/bbl

18 Marginal Cost of Shale Crude

19 Shale Play Profitability

20 Oil Marginal Cost Analysis

21 Oil Long Run Cost Analysis

22 Hillhouse Resources Discovery

23 How is Price of Oil Set? OPEC follows Nash-Cournot Theorem and sets price for profit maximization. OPEC estimates what the rest of the world will produce and then OPEC works backward to set Price

24 World Gas Market

25 How is Price of Gas Set? Generally, natural gas trades worldwide at its heat equivalent value of oil. Therefore, with Brent is at $60/bbl, natural gas will be priced at $10/mmBtu in general. Why? Natural gas is used as a substitute for crude oil in many economies but NOT in the U.S.

26 Shale Gas in the U.S. Shale gas in the U.S. dates from the 19 th Century when town gas was used for lighting. George Mitchell s pioneering work in hydraulic fracturing made vertical shale wells economic in 1999.

27 The Arithmetic of Shale Gas

28 Shale Gas Consumers Surplus Consumers surplus is ΔP X Q Price in 2008: $7.97/mcf Price in 2011: $3.95/mcf 2008 Gas Consumed: 25.6 tcf Consumers Surplus = $102.9 billion

29 Shale Gas Consumers Surplus

30 What are economic substitutes? Focus on new liquids or substitutes that can be: Priced at the pump to be competitive with crude oil based products Delivered seamlessly to Consumer Cannot be subsidized by the federal government Commercial by 20??

31 U.S. Energy Security President Eisenhower to Great Britain and France, 1956: Let them boil in their own oil

32 U.S. Energy Security Alan Greenspan, The Age of Turbulence I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil page 463

33 What is the Cost of War? Nordhaus, 2002: Stiglitz & Bilmes, 2011: Crawford, 2014: $1.6 Trillion $3.4 Trillion $4.4 Trillion

34 What is the Cost of War? Or, about $50/bbl for every bbl consumed by the U.S. since Or, about $1.19/gallon at the pump

35

36 U.S. Energy Security In 1959 by Executive Order, President Eisenhower imposed the oil import quota limiting imports to no more than 12% of domestic production OPEC formed in response

37 U.S. Energy Security

38 Resources Aguilera, Roberto F., Roderick G. Eggert, Gustavo Lagos C.C., and John E. Tilton, Depletion and the Future Availability of Petroleum Resources, IAEE Journal, 2009 Volume 30, Number 1 Coase, Ronald H., The Problem of Social Cost, The Journal of Law & Economics, Oct 1960 Congressional Research Service, Canadian Oil Sands: Life-Cycle Assessments of Greenhouse Gas Emissions, Richard K. Lattanzio, 2013 Congressional Research Service, The Crude Oil Windfall Profit Tax of the 1980s: Implications for Current Energy Policy, Salvatore Lazzari, 2006 Paul W. MacAvoy, Contradictions between Economics 10 and the New Energy Policy Paul W. MacAvoy, The Natural Gas Market, Yale Press, 2001 Paul W. MacAvoy, The Unsustainable Costs of Partial Deregulation, Yale Press, 2007 William Nordhaus, Economics of an Integrated World Oil Market, 2009 RAND, Imported Oil and U.S. National Security, 2009 Yale Graduates Energy Study Group, Crude Oil Imports and National Security, ssrn.com, 2010

39 Global Crude and Gas Prices: Analysis of Current Situation and Trends Wyoming Infrastructure Authority June 12, 2015 Ed Hirs University of Houston & Hillhouse Resources, LLC