World Energy Markets and the World Economy Mark LeClair, Fairfield University September 30, 2014 Beth El, Stamford.

World Energy Markets and the World Economy

Mark LeClair, Fairfield University

September 30, 2014Beth El, Stamford

Why Talk About Energy Markets?

• Major determinant of world economic growth• Energy markets now dominate world

commodity trade• Transition to a post-carbon energy mix has

been slow and is not likely to accelerate in the near future.

• Controversies over the impact of carbon emissions make energy transformation a hot topic

Most Importantly

• Traditional sources of petroleum imports are unstable:– Middle East– Venezuela– Now, Russia– Unhooking from parts of world energy markets a

dominant strategy if instability is the norm– We do, of course, get oil from Canada, Mexico and

will eventually be importing from Brazil – much more stable suppliers.

Publications in this Area

• International Commodity Markets and the Role of Cartels, 2000, M.E. Sharpe

• “Achieving Gasoline Price Stability in the U.S.: A Modest Proposal,” The Energy Journal, 27, (2006)

World Current and Projected Use of Various Forms of Energy (EIA)

U.S. Non-Hydropower Renewables (EIA)

U.S. Energy Markets

• “Pain at the Pump”– Long-run U.S. Gasoline and Diesel Prices have

risen sharply and will likely remain high– Positive Impact on fuel composition• Negative impact on economic growth

– Funny unintended consequence: Federal tax revenue raised from gasoline has plummeted – Feds are now short of funds to fix the roads.

The Big Picture – Transitions in Global Energy Markets

• Center of the Universe for petroleum production moving away from Middle East

• Saudi Arabia, Kuwait and others are still major producers but, by 2011, Russia had largest daily output– Saudi Arabia was 2nd, Iran 4th, Iraq 7th, UAE 8th.– U.S. now in 3rd spot, with China in 5th place and Canada

in 6th.– Mexican production in 2011 was greater than Kuwait’s

Key Producers (2011)

1 Russia 10,100,000 13.28%

2 Saudi Arabia 9,800,000 12.65%

3 United States 8,100,000 9.97%

4 Iran 4,231,000 4.77%

5 China 4,073,000 4.56%

6 Canada 3,592,000 3.90%

7 Iraq 3,400,000 3.75%

8 United Arab Emirates 3,087,000 3.32% .

9 Venezuela 3,023,000 3.56%

10 Mexico 2,934,000 3.56%

11 Kuwait 2,682,000 2.96%

World Reserves 2010 2011 2012 2013 2014

•

•Brazil 12.802 12.857 13.987 13.154 13.219•Canada 175.214 175.214 173.625 173.105 173.200•China 20.350 20.350 20.350 23.717 24.376•Mexico 10.404 10.420 10.359 10.264 10.073•Russia 60.00 60.00 60.00 80.00 80.00•Saudi Arabia 262.400 262.600 267.020 267.910 268.350•United States 20.682 23.267 26.544 30.529 NA•Venezuela 99.377 211.170 211.170 297.570 297.740

Billions of Barrels – Energy Information Administration

But, Not all Oil is the Same!

• Venezuela might have largest reserves, but oil is hard to extract and hard to refine– Partly the reason for the poor performance of

industry

• U.S. oil tends to be “light (sweet)” variety– Low-sulphur, easy to refine

U.S. Light Crude

Venezuelan Oil

Where Does U.S. get its Oil?

• Country Monthly ImportsKuwait 14.7 million barrelsSaudi Arabia 45.3 million bbl.Venezuela 21.3 million bbl.Canada 106.5 million bbl.Mexico 31.9 million bbl.Russia 6.3 million bbl.

Canadian Oil

• Although a major supplier, most of the nation’s reserves are locked up in tar sands

• Expensive, dirty process to extract• A drop in the price of oil would make this

resource unexploitable

Tar Sands Operation

What Role for Renewables?

• Don’t commonly address this, but renewables pose significant difficulties in terms of source and transportation, particularly internationally– U.K. beginning major Tidal Power initiative, but

generated power likely to stay in U.K.– Transportation of generated electricity common

between contiguous countries (U.S. and Canada) • Much less likely intercontinentally

Will Slow Development Further

• Nations unable to exploit a comparative advantage in particular renewables (e.g. biomass, geothermal) and become world suppliers.

• Unlike petroleum and natural gas, transportation of renewables not practical

Article: Wood, Elisa, “US Plans for Green ExportsFor the first time the US is attempting to build an export market for renewable energy. Will it succeed?” RenewableEnergyWorld.com

Electricity Dominates U.S. Plans to Export Green Power

The BIG public Issue

• Global Warming/Global Climate Change/Climate Disruption

• Use of fossil fuels increases CO2 emissions and (in the laboratory) this increases temperatures

• Physical evidence of the link on a planetary is weak and involves a form of scientific testing that runs counter to usual scientific practice

Latest IPCC Report

• Notes that the impact on the climate has been much less than predicted

• Therefor the “doomsday” forecasts are unlikely to occur– Remember that the Artic was supposed to be

entirely ice-free by this year.

Why the Science is so Hard to do Right

• Usual method – form a hypothesis – one that assumes NO findings

• Stack the statistical experiment GREATLY against rejecting that hypothesis

• Collect extensive data on the relationship you are testing (CO2 versus temperatures)

• Apply to our old friend the Bell Curve

The Bell Curve

• Only if observations are way out in the tail (usually in the 2.5% range at the end of the tail) do we conclude that we have found something– Problem with climate science: There are no

consistent observations that support global warming• Models are entirely predictive – the planet will be X

degrees warmer in 100 years.• Economists who do this kind of predictive work are nearly

always wrong! Not sure why climate scientists would avoid the same trap.

Graph of Global Temperatures – U.K. Met Office

• Thus despite a 10% rise in the level of CO2 in the atmosphere, no change in global temperatures– Points to the complexity of the global climate

system – We are years away from understanding how other

factors (e.g. solar activity affect temperature)

Leaves us all in a bit of a Quandary

• Abandoning fossil fuels is enormously expensive, although getting somewhat less so

• New technologies may make the entire problem a non-issue long before the catastrophic part of global climate change is supposed to occur.

• So, what is the appropriate approach? A question I surely will not be answering this morning .

The Ultimate Solution!

Questions

• Entire talk is available on my website at:www.faculty.fairfield.edu/mleclair