Oil and Gas Prices: Analysis of Current Situations and Trends - ADA University December 2, 2014
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Oil and Gas Prices:
Analysis of Current Situations and Trends
ADA University
December 2, 2014
Ed Hirs
University of Houston &
Hillhouse Resources, LLC
713-968-9855
ed@hillhouseresources.com
Topics
• World Crude Oil Market & Prices
– Structure, Price behavior, concerns
• World Gas Market & Prices
– Structure, Price behavior, concerns
• Economic substitutes
– Synfuels, Renewables, Nuclear
William Nordhaus
World Market
William Nordhaus
World Market is a Network
William Nordhaus
World Market
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.
The value of the USD
Crude Oil
US Crude Oil Imports:
2008: 11.1 million bopd
2013: 7.4 million bopd
2014: 6.2 million bopdSupply increase 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
Why do economics matter? RAND estimates the probability of a significant, negative supply shock of at least 8% each year over the next decade.
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.
Prices with 10 mmbopd Shock
With oil at $100/bbl and 90 mmbopd current
world consumption—
YGESG’s elasticity of demand = -0.04
Shock Price = $378/bbl
Nordhaus’ elasticity of demand = -0.015
Shock Price = $841/bbl
Longer term elasticity of demand = -0.11
Price indicated = $201/bbl6 Month Disruption
Price
$/bbl
$400
$80
Time
Months
1 2 3 4 5 6Suppose Supply Increases At $100/bbl price, an increase in the supply of oil by just 1.0 million bopd……
Suppose Supply Increases
Starting from $100/bbl
• Nordhaus’ elasticity of demand = -0.015
Shock Price = $16.67/bbl
• YGESG’s elasticity of demand = -0.04
Shock Price = $68.75/bbl
• Long term elasticity of demand = -0.11
Price indicated = $88.64bblMarginal 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: $64/bbl
• Permian: $63/bbl
• Eagle Ford: $66/bblShale Play Profitability
Oil—Marginal Cost Analysis
Oil—Long Run Cost Analysis
How is Price of Oil Set? OPEC follows Nash-Cournot Theorem and sets price for profit maximization. OPEC determines what OECD and non- OPEC producers will supply, and then OPEC works backward to set Price
How is Price of Oil Set? George Littell of Groppe Long & Littell estimates OPEC’s pricing function as OPEC Volume = OECD Volume – 0.09 X Price Where -0.09 is the Price Elasticity of Demand
World Gas Market
How is Price of Gas Set? Generally, natural gas trades worldwide at its heat equivalent value of oil. Therefore, 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.
Shale Gas in the U.S. Shale gas in the U.S. dates from the 19th Century when “town” gas was used for lighting. George Mitchell’s pioneering work in hydraulic fracturing made vertical shale wells economic in 1999.
Diagram One
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
Shale Gas Consumers Surplus
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??
Coal to Liquids Does it pass the requirements? • At $86/bbl CTL is economically competitive with crude oil price (at a ~$100K/bbl capital cost) • CO2 sequestration costs are ~$2.94/bbl • 1 plant in the USA today (legacy plant of the US Synfuels Corp) and 20 proposed CTL plants (4 of which are in design phase)
CTL around the world China is the only country that’s built gasifier plants, for making all three: fuels (gasoline and diesel oil), chemicals (principally ammonia and methanol), and synthesis gas (synthetic natural gas). Currently, there are 300 gasifier plants in various stages of development in China. GE, one of the principal suppliers, has 50 installations in China.
Gas to Liquids (“GTL”) Countries with stranded gas supplies are moving forward with GTL plants. Two large plants are in Qatar. One is under construction in the Louisiana. Other outlets for stranded gas include new energy intensive manufacturing
Renewable Energy Solar for electricity— • Not economic when compared to electricity produced from hydro, nuclear, coal, crude oil and natural gas • Requires feed-in tariffs or direct subsidies • Problems are storage and intermittency
Renewable Energy Wind for electricity— • Not economic when compared to electricity produced from hydro, nuclear, coal, crude oil and natural gas • Requires feed-in tariffs or direct subsidies • Problems are storage and intermittency
Nuclear Power Nuclear power for electricity generation— • Disasters across the world have turned the public against nuclear power • Problem of retiring old nuclear plants and waste storage • Nonproliferation concerns • Problem of requiring very large capital investment over long lead time
Nuclear Power Nuclear power for electricity generation— • Third generation Thorium reactors hold promise to solve most fuel concerns— bowling ball reactors—but prototype has not been built • Fusion power is “20 years off”
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, 2009Oil and Gas Prices:
Analysis of Current Situations and Trends
ADA University
December 2, 2014
Ed Hirs
University of Houston &
Hillhouse Resources, LLC
713-968-9855
ed@hillhouseresources.comYou can also read
