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Economics, Demography & Oil

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Economics, Demography & Oil What s Going On? * 10/14/04 www. ecomentary. com www. ecomentary. com * * * * * * * * * * * * * * * * * * * * * * Does 9-11 explain ... – PowerPoint PPT presentation

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Title: Economics, Demography & Oil


1
Economics, Demography Oil
  • Whats Going On?

10/14/04
2
Oil and the Middle EastFour Possible Questions
  • Does 9-11 explain recent oil market moves?
  • Do the current problems in Iraq explain the oil
    market?
  • Is the world going to be more dependent upon
    Middle Eastern oil?
  • What will this mean for U.S. Middle East
    Policies?

3
1999 Year of Change
4
A Closer Look Weekly 2002-2004
5
Moving into the 40s
6
Oil is different because it is Strategic
  • Modern economies require oil
  • Modern military power requires oil
  • States intervene when dealing with oil because
    price volatility creates distrust of markets and
    politicians like to claim solutions

7
Historical Notes
  • Churchill and Admiral Fisherdont depend on coal
    and the politics of coaling stations
  • GB Invests in the DArcy ConcessionAnglo Persian
    Oil (now BP) is formed
  • Lawrence overturns the Mid East in WWI and oil
    becomes the currency of Middle East Geopolitics

8
Oil and the Cold WarThe Dark Side of Cheap Oil
  • U.S. begins from a position of independence,
    but gradually becomes a significant importer of
    oil (after 1971)
  • The Soviet Unions interests in the Middle East
    during the Cold War become the context for
    resource nationalism. (Libya) US loses its
    absolute control over Middle East Oil, but not
    its interest in a stable oil supply
  • OPEC tries to regulate oil prices but the cartel
    is unstable in the face of burgeoning non-OPEC
    supplies. Saudi Arabia then imposes
    discipline, and oil falls below 10/barrel in
    1986 undermining longer term reserve development
  • The Soviet oil industry collapses under the price
    pressure and revenue losses hasten the collapse
    of the entire Soviet state
  • Energy Independence in the U.S. falls by the
    wayside but lingers as a continuing political
    theme

9
The Post Cold War Oil Market
  • From the end of the first Iraq War until 1996,
    crude oil rises from about 20 to over 25 with a
    pit stop at 15 in 1993
  • The US economic boom begins after the Mexican
    Crisis (1994) and oil moves above 25
  • With the Asian Crisis of 1997, falling world
    aggregate demand conditions push oil downward
    toward 12/barrel, again undermining new capacity
    expansion.
  • After the Russian default (September 1998), oil
    essentially triples to an unsustainable
    37/barrel during the Tech Boom
  • In the Bust of 2001, oil collapses once again,
    climaxing with the 9-11 attack driving down
    consumption, but the US recovery in 2002 moves
    oil up again, this time over 50

10
Government or Markets?Understanding Recurrent
Themes
  • Oil demand is price inelastic and for fast
    growing economies, highly income elastic
  • Over time, new sources of oil become harder to
    find and more costly to develop
  • If oil were strictly a market commodity, oil
    supply would be far more responsive to expanded
    demand conditions, but oil is a strategic
    resource
  • Sources of cheap reserves are under government
    control, making it virtually impossible for
    private companies to ignore governmental policies
    regarding oil supply development
  • The SPR undermines private incentives to hold
    private inventories (the law of unintended
    consequences) creating conditions for even more
    price volatility

11
Crude Oil isnt the Only Thingpetroleum products
are the inflammables
  • Crisis not only about crude supply but about
    the supply of refined products. Can have
    adequate crude and inadequate product supply, but
    high product prices invite bad policy
  • Refined product supply very affected by NIMBY
    sentiment
  • Balkanization of gasoline supply reflects our
    Federal system
  • The US has insufficient cracking capacity to
    use cheaper heavy, sour barrels. Why is refining
    an area of underinvestment?
  • US energy policy is political parochialism in
    extremis. Supply expansion or demand
    restriction? Which party wins in November?
  • Only a crisis will stimulate political
    cooperation but usually the wrong policies are
    chosen

12
Demographics of New Oil Demand
  • New Sources of oil demand growth include China
    and India
  • See next slide
  • China is responsible for some 40-50 of
    additional demand
  • Other Asian Demand is also rising (India, Korea,
    etc)
  • Oil demands include transportation fuels and
    space heating (or power generation). Oil demand
    in the emerging markets is highly income elastic
    and petroleum products are used less efficiently
    than in the developed countries
  • These sources of new demand are likely to
    continue rising
  • Oil price instability leads these governments to
    adopt State-run oil reserve holding (adding to
    demand) but undermining a market based solution

13
New Demands
14
Why Cant the Market do the Job?Vicious Circles!
  • Private Inventory Holding and the SPR
  • New Government strategic reserves
  • The financialization of oil markets
  • Risk sharing and uncertainty
  • Government can create uncertainty and undermine
    markets by state reserve-holding
  • Financialization plus insufficient excess
    capacity produces additional price volatility
  • Price volatility produces more political
    intervention

15
Why Are Prices More Volatile This Time?
  • economists no spare capacity
  • prices have upside volatility when excess
    capacity drops below a critical value (3mb/d).
    See slides 16-17-18.
  • financialization futures are heavily influenced
    by traders and the marginal barrel is priced this
    way
  • Financial optics attract bad politics

16
Excess Capacity Problem
17
Spare Capacity and Pricing
18
DESPITE DEBATES PROBLEMS WILL REMAIN
19
New Oil Supply is a long run proposition subject
to politics(all politics are local)
  • Alaskan North Slope
  • Gulf of Mexico
  • Territories of the Former Soviet Union
  • West Africa
  • Venezuela
  • Brazil
  • Libya
  • PG countries including Iraq, Iran and Saudi
    Arabia
  • Global Warming and the Green Movement

20
Oil and the Middle EastFour Possible Answers
  • 9-11 heightened fears of terrorism, creating
    uncertainty but not fundamental
  • Only superficially. Key is expanding capacity
  • Yes, because it is the cheapest barrel and the
    reserves are known
  • Inevitably, the geopolitics of energy cannot be
    avoided
  • Does 9-11 explain recent oil market moves?
  • Do the current problems in Iraq explain the oil
    market?
  • Is the world going to be more dependent upon
    Middle Eastern oil?
  • What will this mean for U.S. Middle East
    Policies?

21
oil is a greasy businessCalouste Gulbenkian as
quoted in The Seven Sisters
  • Calouste Gulbenkian Mr. Five Percent, long ago
    discovered a basic truth about oil. Oil
    generates a great deal of money. The pen may be
    mightier than the sword, but money trumps the
    pen!
  • Jessups Law politicians cant handle the truth
    because they fear their electorates. The result
    is almost always an inferior solution to an
    energy dilemma
  • The CRICcycle (courtesy of Robert Feldman)
    applies to Energy Policy in the US
  • Crisis
  • Response
  • Improvement
  • Complacency
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