oil and the american way of life: don’t ask, don’t tell robert k. kaufmann boston university...
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Oil and the American Way of Life:Oil and the American Way of Life:DonDon’’t Ask, Dont Ask, Don’’t Tellt Tell
Robert K. Kaufmann
Boston University
August 4, 2011
http://www.bu.edu/cees/people/faculty/kaufmann/index.html
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Basic Facts of the Oil Market 2008Basic Facts of the Oil Market 2008
World oil demand 85.5 million barrels per day
OPEC produced 44 percent of the world market
US consumed 20.6 million barrels per day
US imported 57 percent of its consumption
10 Billion Barrrels10 Billion Barrrels
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One Big World Oil Market?One Big World Oil Market?
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Reducing US Dependence on Reducing US Dependence on Imported Oil is a Imported Oil is a ““Good ThingGood Thing””
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The Costs of Increasing US ProductionThe Costs of Increasing US Production
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996
Fra
ctio
n
Kaufmann, R.K. and C.J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and Kaufmann, R.K. and C.J. Cleveland. 1991. Policies to increase US oil production: Likely to fail, damage the economy, and damage the environment. damage the environment. Annual Review of Energy and the EnvironmentAnnual Review of Energy and the Environment 1616:379-400:379-400..
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A Competitive MarketA Competitive Market Prices Oil EfficientlyPrices Oil Efficiently
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-60
-40
-20
0
20
40
60
80
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Annual Change in Real Oil PricesAnnual Change in Real Oil Prices
Competitive MarketCompetitive Market
Texas RailroadTexas Railroad CommissionCommission
OPEC
Kaufmann, R.K. 1995. A model of the world oil market for Project LINK Economic Modelling 12:165-178
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OPEC ControlOPEC Control
0
0.1
0.2
0.3
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0.5
0.6
0.7
0.8
0.9
1
1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003
Fra
cti
on
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The Impact of Higher Oil PricesThe Impact of Higher Oil Prices
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We Spend More Money on Energy…We Spend More Money on Energy…
4
5
6
7
8
9
10
1959-I 1964-I 1969-I 1974-I 1979-I 1984-I 1989-I 1994-I 1999-I 2004-I
Perc
en
tag
e
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And Less on Other Goods and And Less on Other Goods and ServicesServices
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Household Energy Expenditures & Household Energy Expenditures & Mortgage DelinquencyMortgage Delinquency
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Prices: Speculation or Fundamentals?Prices: Speculation or Fundamentals?
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Market FundamentalsMarket Fundamentals
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OPEC Capacity UtilizationOPEC Capacity Utilization
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The Determinants of World Oil PricesThe Determinants of World Oil PricesOPEC Capacity Utilization OPEC production
divided by OPEC Capacity
Futures Market Contango vs Backwardation
OECD Stocks Days of forward consumption
Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.
Temporary Disruptions: Hurricane Season
Refinery Utilization Percentage
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Changes in Market Fundamentals?Changes in Market Fundamentals?
Kaufmann et al. 2008 Oil prices: The role of refinery utilization, futures markets, and non-linearities Energy Economics 30(4):2609-2622.
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US Oil InventoriesUS Oil Inventories
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WTI_Far_MonthWTI_Far_Month Brent_Far_Month
WTI_Near_Month Brent_Near_Month
Dubai_Near_Month
WTI_Spot Brent_Spot
Bonny_Spot
Maya_Month Dubai_SpotDubai_Spot
Price DiscoveryPrice Discovery
Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures Kaufmann, RK. And B. Ullman, 2009, Oil prices, speculation, and fundamentals, interpreting causal relations among spot and futures prices, prices, Energy EconomicsEnergy Economics. 31:550-558. . 31:550-558.
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The Dubai-WTI Far Month SpreadThe Dubai-WTI Far Month Spread
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The Role of TradersThe Role of Traders
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Speculative Effects?Speculative Effects?
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Speculative Bubble?Speculative Bubble?
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Is the World Running Out of Oil?Is the World Running Out of Oil?
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0
20
40
60
80
100
120
140
160
180
1900 1920 1940 1960 1980 2000 2020 2040
This Will Never This Will Never Happen….ButHappen….But
1 trillion barrels
2.5 trillion barrels
Mil
lion
bar
rels
per
Day
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HubbertHubbert’’s Forecast for a Global Peaks Forecast for a Global Peak
0
20
40
60
80
100
120
1899 1919 1939 1959 1979 1999 2019 2039 2059 2079 2099
Mil
lion
bar
rels
per
Day
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When Will Global Production When Will Global Production Peak?Peak?
0
20
40
60
80
100
120
140
160
180
1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100
2014 0.8 trillion
2021 1.5 trillion
2026 2 trillion2026 2 trillion
2032 2.9 trillion
Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, production of alternatives, Ecological Economics.Ecological Economics.67:405-411.67:405-411.
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Growth and Decline RatesGrowth and Decline Rates
0
20
40
60
80
100
120
140
160
1900 1925 1950 1975 2000 2025 2050 2075 2100
Mil
lion
Barr
els
per
Day
2023
2025
2017
2036
Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, production of alternatives, Ecological Economics.Ecological Economics.67:405-411.67:405-411.
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The Need for AlternativesThe Need for Alternatives
Current Production by Saudi Arabia
0
5
10
15
20
25
30
35
40
45
50
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years after the Peak
Mil
lion
s of
Bar
rels
of
Oil
Per
Day
0.8 trillion
2.9 trillion2.9 trillion
Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the Kaufmann, RK and LD. Shiers, 2008, The effect of resource uncertainty on the peak in global oil production and the production of alternatives, production of alternatives, Ecological Economics.Ecological Economics.67:405-411.67:405-411.
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Do Gasoline Prices RiseDo Gasoline Prices RiseFaster Than They Fall?Faster Than They Fall?
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Do Gasoline Prices RiseDo Gasoline Prices RiseFaster Than They Fall?Faster Than They Fall?
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Rising Crude Oil & Motor Gasoline Rising Crude Oil & Motor Gasoline PricesPrices
10
15
20
25
30
35
40
45
50
55
1 6 11 16 21 26 31
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Falling Crude Oil & Motor Gasoline Falling Crude Oil & Motor Gasoline PricesPrices
0
10
20
30
40
50
60
1 6 11 16 21 26 31
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Gasoline price rise faster than they fall in: Texas, Michigan, Pennsylvania, Florida, Illinois, Minnesota, Ohio, Louisiana, Idaho
Yes…ButYes…But
Effect caused by stocks and refinery utilization
As demand declines, producers slow refining and sell from stocks, which slows the price drop
As demand rises, refinery capacity limits supply responseKaufmann, R.K and C Laskowski, 2004, Causes for an asymmetric relation between the price of crude oil and refined petroleum products, Energy Policy
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Demand is Forecast to RiseDemand is Forecast to Rise
0
20
40
60
80
100
120
140
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
OECD
Global
Non-OECD
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Changes in OECD DemandChanges in OECD Demand
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
Electricity
Refineries
Industry
Transport
Agriculture
Com
mercial
Residential
Non-energy
Mill
ion
barr
els
per
day
1985 - 1978
20
30
40
50
60
70
80
90
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Mill
ion
Barr
els
per
Day
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Squeeze Blood From a Stone?Squeeze Blood From a Stone?
1973 2004
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HubbertHubbert’’s Predictions Prediction
0
1
2
3
4
5
6
7
8
9
10
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Mil
lion
Barr
els
per
Day
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Hybrid ModelHybrid ModelM
illi
on B
arre
ls p
er D
ayM
illi
on B
arre
ls p
er D
ay
After: Kaufmann (1991)After: Kaufmann (1991)
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Geological Maturity Outside OPECGeological Maturity Outside OPEC
0
2
4
6
8
10
12
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Mil
lion
bar
rels
per
day
Lower 48 States
North Sea
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Will Opening ANWR Or Large Will Opening ANWR Or Large Discoveries Solve US Supply Discoveries Solve US Supply
Constraints?Constraints?
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USGS Projections For ANWRUSGS Projections For ANWR
United States Geological Survey, 1999. The oil and gas resource potential of the Arctic National Wildlife Refuge 1002 Area, Alaska, Open File Report 98-34.
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The Story Behind the HeadlinesThe Story Behind the Headlines
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Remaining Supplies of OilRemaining Supplies of Oil
Figure From The End of Cheap Oil National Geographic 2004Figure From The End of Cheap Oil National Geographic 2004
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15
20
25
30
35
40
45
50
55
60
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Mil
lion
bar
rels
per
day
Will OPEC Increase Production to Will OPEC Increase Production to Facilitate Demand?Facilitate Demand?
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Should OPEC Increase Capacity?Should OPEC Increase Capacity?
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0 1 2 3 4 5 6 7 8 9 10 11 12
Per
cent
age
-20
-10
0
10
20
30
40
50
60
70
Per
cent
age
Source: Dees, S, P. Karadeloglou,. R.K. Kaufmann, and M. Sanchez, 2007, Modeling the world oil market: assessment of a quarterly econometric model, Energy Policy
Change in priceChange in price
Change in OPEC ProductionChange in OPEC Production
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Before and After the PeakBefore and After the Peak
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Being On-Time Matters!Being On-Time Matters!
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Environmental Regulations, Demand, Environmental Regulations, Demand, and US Refinery Capacityand US Refinery Capacity
5000
8000
11000
14000
17000
20000
1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
Th
ou
san
d B
arr
els
per
Day
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Non-US Refinery Capacity & DemandNon-US Refinery Capacity & Demand
Refinery CapacityRefinery Capacity
DemandDemand
0
10
20
30
40
50
60
70
1970 1975 1980 1985 1990 1995 2000
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Bringing Energy Into the Bringing Energy Into the ClassroomClassroom
- Understanding energy- Touch measures of energy efficiency- A home energy audit- How much energy do I use directly
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What is Energy?What is Energy?
Anything that has the ability to do work
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Measuring Energy Measuring Energy
Calorie The heat required to raise the temperature of one gram of water one degree Celsius
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Reading Food LabelsReading Food Labels
Ask students to bring in their favorite food
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Human Body Temperature
‘Normal’ body temperature 37oCActive Range 36oC - 38oCStability Range 34oC - 41oCCritical thermal maximum 43oCCritical thermal minimum 28oC
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So LetSo Let’’s Do a Simple Calculations Do a Simple Calculation
How much do you weigh? ________(kilograms)What is normal room temperature? ____ (degrees Celsius)What percentage of your body is water ______ (percentage 60M 55F)How many calories are needed to maintain each gram of your body __?How many calories do you need to eat ____?
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Touch Measure of Energy Touch Measure of Energy EfficiencyEfficiency
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Law of Conservation
Matter is neither created nor destroyed in a physical or chemical transformation
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Second Law of Thermodynamics
In all energy conversion processes, energy loses its ability to do work and is degraded in quality
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Energy In Equals Energy OutEnergy In Equals Energy Out
Energy In Work out
Waste Energy (Heat)
Machine
Efficiency = Work out/Energy in
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Energy Flows in Light BulbsEnergy Flows in Light Bulbs
Electricity In Light
Waste Energy (Heat)
Light Bulb
Efficiency = Work out/Energy in
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LightbulbsLightbulbs
Incadescent bulbIncadescent bulb
Compact FlourescentCompact Flourescent
Halogen bulbHalogen bulb
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Light Bulb EfficiencyLight Bulb Efficiency
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What Kind of Bulb to Buy?What Kind of Bulb to Buy?
How much does the bulb cost?How much does electricity cost?How long does the bulb last?How often is the bulb on?What is the interest rate?
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A Calculation?A Calculation?
dollars/megalumen-hour=( initial-dollars+watts-consumed*dollars-per-kilowatt-hour*thousand-hours-lifetime) ( average-lumens * thousand-hours-lifetime / 1000 )
60-watt incandescent bulb, 800 lumens, 1,000 hours lifetime, $1.00 initial cost:
( $1.00 + 60 * $0.10 * 1 ) / ( 800 * 1 / 1000 ) = ( $1.00 + $6.00 ) / 0.8 = $8.75 / megalumen-hour
15-watt CFL bulb, 800 lumens (680 average), 6,000 hours lifetime, $5.00 initial cost:
( $5.00 + 15 * $0.10 * 6 ) / ( 680 * 6 / 1000 ) = ( $5.00 + $9.00 ) / 4.08 = $3.43 / megalumen-hour
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Home Energy AuditHome Energy Audit
- How much energy do you use to move around?- How much energy do you use to heat your house ?- How much energy do you use to cool your house?
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Energy Used to MoveEnergy Used to Move
Track how far you go each week by type of vehicle
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Home Energy AuditHome Energy Audit
Obtain Information- Electric Company (monthly bills)- Gas Company (monthly bills)- Oil Company (monthly bills)- - Weather Data (daily temperature)- Size of home (square meters)
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Weather DataWeather Data
Heating Degree Days = 65oF – Outside TemperatureCooling Degree Days = Outside Temperature – 65oF
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Measuring Energy UseMeasuring Energy Use
Heating Degree Days or Cooling Degree Days per MonthHeating Degree Days or Cooling Degree Days per Month
Ene
rgy
Use
per
Mon
thE
nerg
y U
se p
er M
onth
Slope = Slope = Energy UseEnergy Use HDDHDD
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ComparisonsComparisons
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Oil Prices & Exchange RatesOil Prices & Exchange Rates
Chicken vs EggChicken vs Egg
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
2000:01:07 2002:01:04 2004:01:02 2005:12:30 2007:12:28
Do
lla
rs p
er
Eu
ro
15
35
55
75
95
115
135
155
Do
lla
rs p
er
Ba
rre
l
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The Bubble Bursts….The Bubble Bursts….
18
18.5
19
19.5
20
20.5
21
21.5
Jan
Feb
March
April
May
June
July
August
Septe
mber
Octo
ber
Novem
ber
Dece
mber
Million
Barr
els
per
Day
2008
2007