Energy where are we heading? Morningstar Investment Conference Nordic Oslo, Oct. 9, 2013 Øystein Noreng Professor Emeritus BI Norwegian Business School
The Setting the World Economy Imbalances slow growth Debtors versus creditors Debtors: Underaccumulation, underinvestment and overconsumption; deficits unsustainable Creditors: Overaccummulation, overinvestment and underconsumption; surpluses unsustainable Structural problems Demographic change Outlook for lower world economic growth
Oil the Mother of all Energy Prices Due to its versatility, oil competes against all other forms of energy Consequently, oil prices directly or indirectly influence all other energy prices Oil prices determine the return on energy investment and oil price anticipations are the key to energy investment decisions Oil supplies generally have a high initial capital cost, followed by low variable costs, as is the case with natural gas and nuclear
The Energy Market Responses High capital costs and long lead times make the supply response slow, but definite; sunk cost is fairly immune to declining prices Oil demand has a high income elasticity and a low price elasticity, at least in the short run, so that income is more important than price The necessity of oil for transportation and other purposes means that oil price increases and taxes act as a socially regressive tax, hitting low-income groups more harshly than highincome groups
1914 1916 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Oil Prices Nominal and Real 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Nominell pris Realpris
Lessons from History In real terms, oil prices were exceptionally high during the period 1974 1985 The high prices were followed by lower and declining real oil prices during 1986 1998 Since 1999 real oil prices are again rising, reaching the historical peak In the oil market everything is dynamic: technology, costs, demand, competition, trading, etc. There is no equilibrium price in the oil market, as prices are not driven by costs
9.0 % Paying for oil The world s oil bill in per cent of GDP 120.00 8.0 % 7.0 % 100.00 6.0 % 80.00 5.0 % 4.0 % 60.00 3.0 % 40.00 2.0 % 1.0 % 20.00 0.0 % 0.00 World oil bill/world GDP Oil price $/bl.
Lessons for the Economy There are limits to the ability and willingness to pay for oil The oil price increases of the 1970s triggered stagflation and the early 1980s recession The low oil prices 1986 1999 contributed to economic growth and stability The present high oil prices contribute to economic stagnation and instability Currently, lower oil prices would be helpful to the world economy
The Shale Revolution The development of shale gas and shale oil is changing fundamental conditions in the international energy markets, primarily in the U.S., but with ripple effects throughout the world «Peak Oil» is deferred, there is plenty The cost pattern consists of low initial investment and high variable cost Shale oil is set to be the new swing factor The cost of shale oil,$40-70/bl., may be the new oil price floor North America becomes self-sufficient
The Oil Market Outlook At present prices, slow demand growth, 0.5-0.8 per cent year Heavy investment in conventional and shale oil leading to large volumes reaching the market Prospects for oil supplies rising more quickly than oil demand OPEC trying to stabilise, for some time Prospects for a surplus of oil and energy Lower oil prices needed to clear the market
The Outlook for Renewable Energy Energy transitions take decades and require extensive investment In 2012, renewable energy, i.e. biomass, solar and wind power, accounted for ca. 2 per cent of the world s energy consumption The cost pattern is heavy initial investment followed by low variable costs, but for solar and wind power the problem is the rate of utilisation, requiring back-up capacity Renewable energy is heavily subsidised and protected, with a high social cost In strained budgets, support for renewable energy is under threat
The Outlook for Natural Gas Natural gas is likely to be a winner as the closest alternative to oil, coal and renewables. It is cleaner and more efficient than coal or oil, it is much cheaper than renewables Natural gas is available in abundance in conventional deposits as in shale, in many places To the extent breakthroughs are made in the technology and costs of converting gas into liquid fuel, the boundary between the gas market and oil market would weaken In that case large proven reserves of natural gas and shale gas would affect the price of crude oil
The US Energy Market Shale oil contributes to US self-sufficiency Import needs can be covered by Canada and Mexico The largest source of imports demand backs off from the world market With shale gas, the United States is set to become a net exporter Low-cost US natural gas puts a downward pressure on prices around the world, and enhances US industrial competitiveness Improving trade balance boost to US economy
The European Energy Market Economic stagnation leading to falling energy demand Heavy investment in renewable energy, with subsidies and protection cause high energy costs and loss of industrial competitiveness Misconceived EU energy policies backfire, with more use of coal and higher CO 2 emissions Potential for shale oil and gas, but politically controversial Natural gas a likely winner, in the long run
The Salience of the Middle East With the largest proven reserves and lowest costs, the Middle East has a key part in the world oil market The Gulf States have an idle capacity of about 4 mbd, in addition to outages of 2 mbd Iran and Iraq have a large potential to raise volumes Saudi-Arabia has the potential to considerably increase capacity Competition between US, European, Chinese and other Asian oil companies The region has a conflict potential to reduce oil supplies and raise prices, for some time
New Trading Patterns With US imports falling, Asia is becoming the chief import source of demand China is replacing the US as the world s major oil importer China is already the major buyer of oil from Iran, Iraq and Saudi Arabia Europe s oil sources are Africa, Norway and Russia Question of China paying for oil in yuan and for the yuan to replace the USD in oil trading
Turbulence Ahead Oil trading is linked to world power relations The UK was the first oil power The US has been the second oil power, with the oil trading in USD a key aspect of the empire, seconded by military means China is emerging as the new oil power pursuing a mercantilist strategy promoting the use of yuan and its own oil companies China s position in the Middle East and Africa likely to affect oil trading and power relations