World Energy Markets

NS4053Wk 5.1

World energy use to 2035

US EIA Outlook (2010)

Source: BP Statistical Review of World Energy 2012

World energy markets

• Oil is the center of gravity of international trade in energy.

• Jaffe et al: Proven reserves a misleading indicator.– Proportional to economic feasibility and

technological feasibility.• Argument: higher world oil prices change

economic feasibility and technology availability

Conventional and unconventional fuels

• Today: underinvestment in conventional oil production and new investment in unconventional fuel sources.– NOCs underinvest in new production and in

exploration as revenue diverted to consumption.– Social mobilization against FDI (e.g. Bolivia).– Insurgency (e.g. Nigeria).– OPEC prefers higher prices over higher production.– High prices prompt shift to unconventional fuels.

Possible responses

• Policies to mitigate risk associated with uncertain politics in some states with large conventional oil reserves.

• Greater investment in unconventional fuel production located in stable developed states.

• Greater investment in energy efficiency in developed states.

• Notice: not IOCs go out and find more resources.

Possible changes in energy consumption patterns

• Electrical markets relatively insensitive to price shocks due to diversification.– Coal, nuclear, solar, wind, geothermal, tidal, etc.– Driven by mix of domestic or regional level factors.

• Transportation market highly sensitive to international price shocks re: oil.– Expected results?

US Energy sources and uses

Politics of energy foreign directinvestment (FDI)

• Obsolescing bargain model– IOCs have leverage over states when negotiating

initial bargain.• Have capital and technology which can be invested

many places, states have resource that it is unable to develop initially.

– States gain bargaining advantage as IOCs develop larger and larger fixed asset base.• Now capital cannot move and is vulnerable to state.

Explaining conflict over energy FDI

• International price of energy drives renegotiation of obsolescing bargains.– Low price = lack of rents = privatization– High price = high rents = renegotiation

• Competition among IOC and NOCs– Low competition = low conflict

• Alternative sites to invest– States have less bargaining power when IOCs can

go elsewhere.

Contemporary politics of international energy

• High prices during 2000s• Petro-political cycle predicts market politicization• Resurgent National Oil Companies (NOCs)– Control large proportion of proven reserves (70-90%).– Have grand ambitions, deep pockets.– Make investment decisions based on politics and

economics.• Uncertainty over climate change mitigation policy.– Major prescription is decarbonization of economies.

Alternative esponses to international energy market politicization

• IOC sector shake out.– Either consolidation or atomization.

• IOCs shift towards domestic sources of production, new technologies, and efficiency in developed countries.

• Developed countries pursue increasingly ‘hybrid’ approach to energy security.– Developed countries more aggressively backing

IOCs.