upcoming challenges for economics and politics · 14 dawud ansari | 9 / 1 / 2017 energy markets...
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Energy markets today and tomorrow Upcoming challenges for economics and politics
Department Energy, Transport, Environment
Dawud Ansari
Berlin, 1st Sep 2017
1 The Oil Price Drop of 2014 – 2016
2 The Resource Curse
3 Asset Stranding and the New Economics of Oil
4 The Energy System towards 2050
Overview
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Energy markets today and tomorrow: Upcoming challenges for economics and politics
Dawud Ansari | 9 / 1 / 2017
Energy markets today and tomorrow: Upcoming challenges for economics and politics
The Price Drop of 2014 – 2016:
What was the role of OPEC?
1
3
Background
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WTI quarterly
price. Data:
Thomson Reuters
Price drop
Nov. 2016
Production cut
agreed (incl.
Russia, Iran)
Nov 2014
Vienna talks:
No OPEC cuts
Jun 2016
OPEC deal talks failPrice collapse
Feb 2016
Russia signals
interest in cuts
The Shale Revolution
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Source: Azreki et al. (2017), Rystad energy
• US shale is typically seen as the main driver of low oil prices
• Shale oil (informally): Conventional oil extracted using hydraulic fracking or
horizontal drilling
Crude oil
production capacities
Data: IEA, own calculations
Model-based evidence: Business-as-usual developments?
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Bathtub market
• Homogeneous crude
• Pool model: Unified, global demand function
• Relaxation: quality adjustment
Present profit maximisation
• No dynamic strategic behaviour
• Full information and certainty
Golombek production costs
Linear demand
• From actual demand and fixed elasticity
Perfect Competiton
Lower-end benchmark
Cournot
Equal market power
Stackelberg:
KSA / United OPEC vsCournot / Fringe
Asymmetric market power
max𝑞𝑖𝑡
𝑝𝑡 ∙ 𝑞𝑖𝑡 − 𝐶𝑖𝑡 𝑞𝑖𝑡 | 𝑞−𝑖𝑡𝑠 ∀𝑖, 𝑡
𝑡: 2011 Q4 – 2015 Q4, quarterly
An extension of Huppmann (2013)
Model-based evidence: Results
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1Actual and computed price trajectories
ARME in % KSA-FR PC KSA-CO Cournot UNI-CO
Overall 23 27 35 52 120
First period 25 31 24 43 121
Second period 18 18 63 75 119
Goodness of fit
Saudi calculus: Revenues or market-shares?
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• Trade-off between revenue maximisation and market-shares
• Prolonged low oil prices can result in economic and political havoc
• Geopolitical impact ambiguous, Saudi Arabia advances in refining, Vision 2030
Fiscal breakeven prices in USD / bbl in 2013 – 2015. Data: IMF
Shale Performance under Pressure
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Month-to-month and quarter-to-quarter changes in US rigs (left) and quarter-to-quarter and year-to-year changes
in US daily crude oil production (right). Data: EIA
• Shale economics: Different cooperative, financial, and cost structure
• Severe overvaluation of shale breakeven before the drop
• Potential misunderstanding of the breakeven concept itself (Kleinberg et al., 2016)
• Significant decrease in production, although far below OPEC hopes (OPEC, 2016)
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Energy markets today and tomorrow: Upcoming challenges for economics and politics
The Resource Curse
2
Resources and wealth
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Imagine, you had a
treasure in your garden.
2
You would suppose that this
treasure brings you benefit.
But what if the treasure
is actually a danger to you?
Resources and wealth (cont’d)
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• The “resource curse” puzzle is known for long.
• Economic channels: Dutch disease and price volatility
• Modern view: “The curse is real but not destiny.” (Elbadawi & Gelb, 2010, p.iii)
• Main driver: Institutional failure
• Suitable indicator: Adjusted net savings rates (ANSR)
2from Van der Ploeg, F. (2011)𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
𝐹𝑢𝑒𝑙, 𝑜𝑟𝑒, 𝑎𝑛𝑑 𝑚𝑒𝑡𝑎𝑙𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑖𝑛 % 𝑜𝑓
𝑚𝑒𝑟𝑐ℎ𝑖𝑛𝑑𝑠𝑒 𝑒𝑥𝑝𝑜𝑟𝑡𝑠(1970−2002)
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NR Boom / Capital Inflow
Concentration in the NR sector
Higher wages in NR and services
sectors
Real / nominal overvaluation
Lower productivity or missing
economies of scale
National products not competitive
Deindustrialisation
Absorptive constraints or weak
institutions
Suboptimal reinvestment
patterns
More on the next slides
The Dutch Disease
The Dutch Disease (cont’d)
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• Reinvestment:As a rule of thumb, NR rents should be transformed into renewable capital (e.g. industry).
Deindustrialisation / sectoral trap
Suboptimal reinvestment
patterns
Neglect of education
Brain-drainNo high-skilled-
labour-demanding sector
Post-boom collapse
Any shock on NR demand
or supply can sincerely
damage the entire
economy!
This is where
“good” policy
would
intervene!
Elements of Institutional Failure
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• Bad governance is the necessary condition for an RC
• All other symptoms could be mitigated by adequate policies!
• Embezzlement of rents itself, corruption
• Rent seeking (bottom-up)
• e.g. bribery for the (inefficient) provisioan of public goods
• Military conflict Infrastructure damages, institutional worsening,
uncertainty for investors
• Resources are used to stay in power (top-down)
• Buying of political dissidents / Authoritarian bargains
• Design of infeasible but popular fiscal policies or public investments in
white elephants
• Dutch disease patterns are willingly created
• Institutional failure and corruption cause each other mutually
• The RC becomes a vicious circle.
2
Empirical Example: Yemen
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Developments in the Yemen Arab Republic during the remittances boom phase 1973 - 1983. (A) Trajectories of remittances,
imports and the oil price and (B) changes in the sectoral composition (main industry sectors). Data: El Mallakh (2014), World
Bank (1979), British Petroleum (2013), and Looney (1990). Note: Remittances before 1976 are proxied by overall capital
inflows.
from Ansari (2016)
Empirical Example: Yemen (cont’d)
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from Ansari (2016)
Real GDP per capita growth, the adjusted national saving rate and
the Human Development Index in reunited Yemen 1990 - 2012.
Data: Alkeldar (2013), Central Bank of Yemen (2013), Human
Development Report Office (2013), World Bank (2015), (2010),
Republic of Yemen (2014), (2009, 2006), United Nations Statistical
Commission (2015), own calculations.
Oil dependency in Yemen and selected Gulf Co-operation Council
countries (average 1997 - 2000. Data: IMF (2012), World Bank
(2015), Mottu and Ahmad (2002).
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Energy markets today and tomorrow: Upcoming challenges for economics and politics
Asset Stranding and
the New Economics of Oil
3
The New Economics of Oil
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Peak demand
Eastward oil flows
Higher elasticities
No ultimate swing role
New logistics,
new players,
new geopolitics?
Market conditions change over time,
New pressure on fossil
fuel producers
Is OPEC dead?
Definitely not!
But it has many challenges.
Asset stranding
Green paradox
Instability
Potential
consequences
based on
Dale (2016)
Oil is not
priced
as an
exhaustible
resource!
Oil reserves
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Source: BP
Oil reserves (cont’d)
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Source: BP
Trade flows
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Source: BP
Production & Consumption
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Source: BP
Asset Stranding
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• Changing market conditions endanger certain assets to become
stranded
• Stranded asset: An asset, which has rendered useless, hence
worthless
• Might become a central theme of tomorrow’s energy markets
• How will producers behave if they anticipate asset stranding?
• Major oil producers have announced to diversify their
economies, but…
• … how fast will this happen, and
• … how serious are these commitments?
3
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Energy markets today and tomorrow: Upcoming challenges for economics and politics
The Energy System towards 2050
3
Intro: SET-Nav at a Glance
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▪ Title: Navigating the Roadmap for
Clean, Secure and Efficient Energy
Innovation
▪ Support: Horizon 2020 programme
of the European Commission
▪ Coordinator: Technische
Universität Wien, Energy
Economics Group (TU WIEN)
▪ Aim: Supporting strategic decision
making in Europe’s energy sector
▪ April 2016 – March 2019
SET-Nav expertise:
16 partners across Europe
Intro: Modelling in SET-Nav
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• Single models cannot adequately capture all relevant interdependencies
➢ Systematic model interlinkage for the economy-energy-innovation nexus.
➢ Over the first 1.5 years, the SET-Nav consortium developed…
o Model integration methodology across aggregation levels & sectors.o Definitions of interfaces between participating models.o Technical infrastructure (database, website, programming interface)o Preliminary case study resultso Establishment of the SET-Nav Modelling Forum
FORECASTenergy demand
(multiple sectors)
GGMnatural gas model for
investment + dispatch, import
into Europe
Green-XRES policy
and investment model
INVERTbuilding sector energy demand
model
CCTSMODcarbon capture, transport and
storage, focus on infrastructure
TEPESdetailed
electricity power flow model
Enertilepower sector dispatch and
investment model
MultiModglobal energy
system energy balance by
country
EMPIRE / RAMONA
electricity and natural gas
investment + dispatch
NEMESISinteraction between economy, prices, energy demand
REMESinteraction between
economy, prices, demand, trade between regions
Wider economy models:
Global resourcemarkets:
Sectormodels
WP4: global scenarios to 2050
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• Objectives:
❖ Look out for critical uncertainties and ‘black swans’
• Scope:
❖ Global, from today to 2050, all energy sources (focus: fossil fuels)
• Constraints:
❖ Limitations of quantitative foresight models
❖ Low impact of purely qualitative models
• Aim:
❖ Bridging qualitative and quantitative scenario development
techniques for long-run pathways with interdisciplinary variables,
special scales for a communicable, plausible, and robust
❖ How we plan to do this:
❖ Combinind participatory and model-based approaches, by processing
the information developed during an expert-based workshop to enrich
MULTIMOD with new quantitative assumptions and data.
WP4: global scenarios to 2050 (cont‘d)
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Business as usual
Survival of the fittest
Green Democracy
ClimateTech
Workshop
“From ‘Known Unknowns’ to ‘Unknown Unknowns’: Uncovering Critical
Uncertainties for the World Energy Future” @ DIW Berlin, 29th Nov 2016
Led by a workshop facilitator
About 30 participants experts from academia, industry, and press
From qualitativescenarios…
Ex-ante research
WP4: global scenarios to 2050 (cont‘d)
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4…to quantitative
scenarios!•Multimod
• A cutting-edge, DIW-maintained energy systems model, featuring…
A global focus
Imperfect competition
Multiple fuels and value-chain steps
Semi-automatic calibration
Endogenous investment
Model results due in September 2017.Discussion paper expected in October 2017.
WP4 / WP9: From Scenarios to Pathways
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• SET-Nav aim: Develop a set of pathways for the European energy system to 2050
❖ Taking into account potential technology developments and innovation results
❖ Taking into account interaction with global energy markets and climate policy
WP4 results are the
basis for these
pathways.
Thanks for attending!
DIW Berlin — Deutsches Institut
für Wirtschaftsforschung e.V.
Mohrenstraße 58, 10117 Berlin
www.diw.de
RedaktionDawud Ansari
References
• Ansari, D. (2016). Resource curse contagion in the case of Yemen. Resources
Policy, 49, 444-454.
• Ansari, D. (2017). OPEC, Saudi Arabia, and the Shale Revolution: Insights from
Equilibrium Modelling and Oil Politics.
• Arezki, R., Laxton, D., Matsumoto, A., & Nurbekyan, A. (2017). Oil prices and
the global economy.
• Dale, S., 2016. New Economics of Oil. Oil and Gas, Natural Resources, and
Energy Journal 1, 3.
• Elbadawi, I., & Gelb, A. (2010, December). Oil, economic diversification and
development in the Arab World. In Economic Research Forum Policy Research
Report (Vol. 35).
• Huppmann, D., 2013. Endogenous Shifts in OPEC Market Power: A Stackelberg
Oligopoly with Fringe.
• Van der Ploeg, Frederick. "Natural resources: Curse or blessing?." Journal of
Economic Literature 49.2 (2011): 366-420.
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