International energy markets : understanding pricing, policies, and profits

683 Pages·2015·11.03 MB·english

by  Dahl

INTERNATIONAL
ENERGY MARKETS
UNDERSTANDING PRICING, POLICIES, AND PROFITS
2ND EDITION
CAROL A. DAHL
Disclaimer
The recommendations, advice, descriptions, and the methods in this book are
presented solely for educational purposes. The author and publisher assume no
liability whatsoever for any loss or damage that results from the use of any of the
material in this book. Use of the material in this book is solely at the risk of the user.
Copyright© 2015 by
PennWell Corporation
1421 South Sheridan Road
Tulsa, Oklahoma 74112-6600 USA
800.752.9764
+1.918.831.9421
[email protected]
www.pennwellbooks.com
www.pennwell.com
Marketing Manager: Sarah De Vos
National Account Executive: Barbara McGee
Director: Mary McGee
Managing Editor: Stephen Hill
Production Manager: Sheila Brock
Production Editor: Tony Quinn
Book Designer: Susan E. Ormston
Cover Designer: Elizabeth Wollmershauser
Library of Congress Cataloging-in-Publication Data
Dahl, Carol A. (Carol Ann), 1947-
International energy markets : understanding pricing, policies, and profits / Carol A.
Dahl. -- 2nd edition.
pages cm
Includes bibliographical references and index.
ISBN 978-1-59370-291-5
1. Energy industries. 2. International economic relations. I. Title.
HD9502.A2D335 2014
333.79--dc23
2014029321
All rights reserved. No part of this book may be reproduced, stored in a retrieval
system, or transcribed in any form or by any means, electronic or mechanical, including
photocopying and recording, without the prior written permission of the publisher.
Printed in the United States of America
1 2 3 4 5 19 18 17 16 15
With love to Jim for his patience, forbearance,
and unfailing love and support.
Figures
Fig. 2–1. Conventional and unconventional natural gas reserves by major
country................................................................20
Fig. 2–2. World primary energy substitution ................................27
Fig. 2–3. Successive median forecasts by International Energy Workshop
polls...................................................................31
Fig. 3–1. World historical coal production by major country..................44
Fig. 3–2. Percent of world coal production by major producer in 2013 .........45
Fig. 3–3. US historical coal prices adjusted for inflation ......................46
Fig. 3–4. Supply and demand..............................................58
Fig. 3–5. Increase in demand ..............................................59
Fig. 3–6. Decrease in supply...............................................60
Fig. 3–7. Representative business cycle .....................................64
Fig. 3–8. Global gross national product with selected countries, 1913–2012....65
Fig. 4–1. Consumer plus producer surplus..................................72
Fig. 4–2. Supply equals marginal cost in a competitive market ................73
Fig. 4–3. Government price controls .......................................75
Fig. 4–4. A maximum price in a competitive market .........................77
Fig. 4–5. Government share per barrel of oil, 1998–2007 .....................83
Fig. 4–6. Supply and demand in an energy market ...........................86
Fig. 4–7. Supply and demand with a unit tax ................................87
Fig. 4–8. Supply and demand with tax on the consumer......................88
Fig. 4–9. Incidence of a unit tax under different demand elasticities ...........89
Fig. 4–10. Deadweight loss from an energy tax ..............................90
Fig. 5–1. US and world electricity consumption .............................93
Fig. 5–2. Electricity energy balance in the United States, 2013.................95
Fig. 5–3. Electricity consumption and population by major world regions,
2011...................................................................96
Fig. 5–4. World (a) and US (b) electricity production by fuel type, 2011........97
Fig. 5–5. Various cost structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100
Fig. 5–6. Typical daily electric load curves for Israel, Jordan, and Egypt .......104
Fig. 5–7. US and Canadian electricity end use by month.....................105
Fig. 5–8. Inverse demand and cost curves in a decreasing cost industry . . . . . . .107
Fig. 5–9. Monopoly production, price, and profit...........................109
Fig. 5–10. Peak load model...............................................121
Fig. 6–1. Double-sided bidding market ....................................135
xxi
xxii International Energy Markets
Fig. 6–2. Peak load demand and supply....................................145
Fig. 6–3. Electricity restructuring in the US electricity sector, 2010 . . . . . . . . . . .148
Fig. 7–1. Social welfare in a competitive market ............................154
Fig. 7–2. Monopoly producer.............................................156
Fig. 7–3. Numerical examples of monopoly ................................158
Fig. 7–4. Competitive supply in a constant cost industry ....................159
Fig. 7–5. Social losses from monopoly.....................................160
Fig. 7–6. Monopoly and price controls ....................................161
Fig. 7–7. Real US oil prices to refineries, 1861–2014 and March 2015
(in 2014$).............................................................165
Fig. 7–8. OPEC’s share of world crude oil production 1960–2012 ............167
Fig. 7–9. OPEC monthly production and quotas, 1982–2012 ................168
Fig. 7–10. Monthly nominal prices, three marker crudes,
January 1988–April 2015 ...............................................170
Fig. 7–11. Marginal cost for a two-country OPEC ..........................171
Fig. 7–12. Dominant firm numerical example..............................173
Fig. 7–13. Developing demand for OPEC’s oil..............................174
Fig. 7–14. Dominant firm model..........................................175
Fig. 7–15. Dominant firm numerical example..............................178
Fig. 7–16. Marginal social efficiency of investment .........................180
Fig. 7–17. Target revenues and price increases for high (a) and low
(b) absorber country ...................................................181
Fig. 7–18. Target revenue and price increase for high-absorber countries .....182
Fig. 8–1. Natural gas world consumption and production by major region,
2012..................................................................186
Fig. 8–2. Global natural gas use by sector, 1971–2011.......................191
Fig. 8–3. Historical natural gas consumption in the United States by major
sector, 1930–2013 .....................................................203
Fig. 8–4. Monthly US natural gas consumption and Henry Hub spot prices ...205
Fig. 8–5. Price and quantity changes under fixed price and fixed quantity
regimes...............................................................207
Fig. 8–6. Historical natural gas price at the wellhead, 1922–2012.............207
Fig. 8–7. Real US natural gas prices by sector, 1967–2013 ...................210
Fig. 8–8. Natural gas net withdrawals (withdrawals [+] minus additions [–])
to storage and spot price ...............................................211
Fig. 8–9. Major North American natural gas hubs and market flows, 2009 ....212
Fig. 9–1. Monopsony purchases of LNG for constant marginal product up
to generating capacity..................................................228
Figures xxiii
Fig. 9–2. Monopsony purchases of LNG with downward sloping MRP .......228
L
Fig. 9–3. Perfectly price-discriminating monopsonist .......................230
Fig. 9–4. OLEC as monopoly seller of LNG ................................231
Fig. 9–5. Bilateral monopoly in the Asia-Pacific LNG market ................232
Fig. 9–6. Reservation prices in a bilateral monopoly.........................233
Fig. 10–1. Coal and oil consumption and production, 1950–2012 (bcm) ......241
Fig. 10–2. Energy consumption and production for natural gas and primary
electricity in Eastern Europe, Western Europe, and the
former Soviet Union ...................................................247
Fig. 10–3. Regional non-hydro electricity generation by source, 2011.........258
Fig. 10–4. Reaction functions for a duopoly................................266
Fig. 10–5. Competitive market with two suppliers ..........................268
Fig. 10–6. Two gas producers acting as a monopolist........................269
Fig. 10–7. Limit pricing model............................................271
Fig. 11–1. Supply and demand in a market with negative externalities ........278
Fig. 11–2. Costs and benefits of pollution emissions into water ..............279
Fig. 11–3. Varying marginal costs by area..................................282
Fig. 11–4. Marginal abatement costs for two firms..........................285
Fig. 11–5. SO emissions for 249 regulated generating units, 1985 and 2000...287
2
Fig. 12–1. Coastal and inland demand for CO abatement ...................293
2
Fig. 12–2. Social optimum for CO abatement..............................294
2
Fig. 12–3. Social losses for private market production of public goods ........294
Fig. 12–4. Social optimum for a public good ...............................295
Fig. 12–5. Permits issued under different abatement cost scenarios...........308
Fig. 13–1. Significant oil disruptions ......................................319
Fig. 13–2. Oil and product world chokepoints..............................320
Fig. 13–3. Share of global electricity consumption by fuel ...................324
Fig. 13–4. OPEC spare capacity in millions of barrels a day ..................325
Fig. 13–5. Petroleum stocks in IEA countries (millions of barrels) . . . . . . . . . . . .326
Fig. 13–6. IEA countries’ investment in energy efficiency....................327
Fig. 13–7. Optimal spending on safety precaution (X*)......................329
Fig. 13–8. Nuclear power with (S) and without (S') government support,
case 1 ................................................................331
Fig. 13–9. Nuclear power with (S) and without (S') government support,
case 2 ................................................................332
Fig. 13–10. Optimal nuclear safety precaution with and without the
Price-Anderson Act ...................................................333
Fig. 14–1. Reserves/production ratios for the United States..................338
xxiv International Energy Markets
Fig. 14–2. Demand in the current period ..................................341
Fig. 14–3. Demand for oil now and in the next period.......................342
Fig. 14–4. Optimal allocation of a resource in a two-period model ...........343
Fig. 14–5. Consumer surplus in a two-period model........................345
Fig. 14–6. Dynamic competitive solution maximizes NPV of social welfare ...345
Fig. 14–7. Change in resource allocation over time with income growth ......346
Fig. 14–8. Change in resource allocation over time with lower interest
rate (r') ...............................................................347
Fig. 14–9. Two-sector model with reserves of 500 ..........................348
Fig. 14–10. Allocation in a two-period dynamic model with constant
marginal cost..........................................................351
Fig. 14–11. Two-period model with a backstop fuel of $70 ..................353
Fig. 14–12. A monopoly producer in a two-period model ...................356
Fig. 15–1. Gross world primary energy consumption .......................369
Fig. 15–2. Hydroelectric power from a dam................................376
Fig. 15–3. Geothermal power plants ......................................382
Fig. 15–4. Hubbert curve for oil and gas reserves . . . . . . . . . . . . . . . . . . . . . . . . . . .391
Fig. 16–1. World energy use by industry, 2010..............................405
Fig. 16–2. World energy consumption by type of transportation, 2010........407
Fig. 16–3. Total US residential energy use by service, 2012...................407
Fig. 16–4. US commercial energy use by service, 2012 ......................408
Fig. 16–5. Budget constraint: N = Y/P – (P /P )E for Y = 160 and Y = 320....419
N E N
Fig. 16–6. Budget constraint when only energy price doubles ................420
Fig. 16–7. Indifference curve representing the consumer’s preferences........421
Fig. 16–8. Highest utility on the budget constraint..........................422
Fig. 16–9. Consumption changes with changing energy price................424
Fig. 16–10. Tracing out a consumer’s expansion path and Engel curves .......425
Fig. 16–11. Comparing a subsidy with an equal cost cash payment ...........426
Fig. 16–12. Marginal revenue product for a producer .......................428
Fig. 17–1. Consumption and production of oil products by world region,
2010 (1,000 bbl/d) .....................................................438
Fig. 17–2. Oklahoma sweet distillation curve...............................443
Fig. 17–3. Isoquants for the Leontief production function
X = 2.5 min(u, u/2) ..................................................447
1 1 2
Fig. 17–4. Diagram for gasoline blending problem..........................448
Fig. 17–5. Transport of fossil fuels worldwide in 2011.......................456
Fig. 17–6. Illustrative gas and oil transportation costs, 2011 .................460
Figures xxv
Fig. 18–1. Daily WTI crude oil and Henry Hub natural gas prices ............467
Fig. 18–2. Future prices today (t = 0) by maturity date.......................477
Fig. 18–3. One- and four-month future contract prices......................478
Fig. 18–4. Three-month convenience yield for US light sweet crude oil,
January 1986 to June 24, 2014, and US stocks of crude oil..................480
Fig. 18–5. How higher futures prices might influence the spot market ........485
Fig. 18–6. Petroleum stocks by month.....................................486
Fig. 18–7. Real WTI price and OPEC crude capacity, production, and spare
capacity ..............................................................488
Fig. 19–1. Payoff of European long call at expiration ........................494
Fig. 19–2. Payoff of European long put at expiration ........................495
Fig. 19–3. Valuing a call from an underlying asset ..........................497
Fig. 19–4. Value of one-half of an asset (a) and a bond (b) in one period.......497
Fig. 19–5. Value of an underlying asset in a binomial lattice..................500
Fig. 19–6. Value of a put option in a binomial lattice ........................500
Fig. 19–7. Lattice with the underlying asset value (S), put value (P), and
i i
probability at each node (p) ............................................502
i
Fig. 19–8. Net value of a European long straddle at expiration ...............506
Fig. 20–1. Energy ladder for household energy use..........................512
Fig. 20–2. World consumption of energy by source, 1850–2013..............512
Fig. 20–3. Sample Lorenz curves..........................................524
Fig. 20–4. Gini coefficient equals A/(A + B )................................524
Fig. 20–5. Allocating labor on private (L ) and common property (L )........528
Pv C
Fig. 20–6. Effect on society’s welfare in two examples of the commons........529
Fig. 20–7. Volume of biomass from a long-growing tree.....................533
Fig. 21–1. Energy consumption and GDP per capita for FR countries.........548
Fig. 21–2. World primary electricity production by source, 2011.............552
Fig. 21–3. CO sources and pipelines......................................556
2
Fig. 21–4. Production possibility frontiers for Sandy and Dland at their own
and each other’s terms of trade..........................................559
Fig. 21–5. Potential for gains from trade with comparative advantage.........561
Fig. 21–6. Dollar market .................................................562
Fig. 21–7. Increasing resource exports appreciate the FR country’s currency ..563
Fig. 22–1. Cultural preferences for individualism ...........................579
Fig. 22–2. Vertical structure and orientation for four corporate structures ....595
xxvi International Energy Markets
Tables
Table 2–1. Cosmological and geologic milestones in energy ...............14–15
Table 2–2. The world’s largest oil fields .....................................18
Table 2–3. Largest accumulations of estimated unconventional oil reserves ....21
Table 2–4. Categories of heavy unconventional oils..........................22
Table 2–5. Major eras of coal formation ....................................23
Table 2–6. A few oil and natural gas milestones in recent human history....24–26
Table 3–1. Ten largest coal companies in China in 2010......................50
Table 3–2. Ten largest US coal producers, 2010 .............................50
Table 3–3. Ten additional large world coal producers ........................51
Table 3–4. Energy content by coal type.....................................52
Table 3–5. World coal production, consumption, and reserves, 2010 .......52–53
Table 3–6. Global coal use by major sector, 2011 (ktoe) ......................54
Table 3–7. Revenues related to elasticities ..................................63
Table 4–1. Sample feed-in tariffs for electricity renewables, 2011..............76
Table 4–2. Some representative severance tax rates for large fossil fuel–
producing states, 2011 ...............................................80–81
Table 4–3. World survey of selected petroleum product prices, 2012 ..........84
Table 5–1. Share of electricity and heat generation by fuel and total
generation, 2011 .......................................................98
Table 5–2. Financing for a representative utility ............................113
Table 5–3. US average electricity prices and consumption by customer class,
2012..................................................................119
Table 6–1. Electricity prices and taxes, $/kWh, 2013........................130
Table 7–1. Sample of oil company mergers, acquisitions, and restructuring,
1910–2012............................................................163
Table 7–2. OPEC petroleum, income, and population statistics for 2012 ......182
Table 8–1. World dry natural gas consumption, production, and heat
content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187–188
Table 8–2. Rents and quasi-rents .........................................194
Table 8–3. Likely governance structure matrix .............................197
Table 8–4. Top North American natural gas marketers, 2011 ................201
Table 8–5. Top United States natural gas producers, 2012 ...................202
Table 8–6. Top ten interstate pipeline companies by mileage, 2001 and 2011...204
Table 9–1. What your banker wants to know.......................... 219–220
Table 9–2. Natural gas: trade movements by LNG 2013 (billion cubic
meters) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .222
Tables xxvii
Table 9–3. Data on global liquefaction capacity in 2013 .....................223
Table 9–4. Developing marginal factor cost for LNG supply function.........226
Table 10–1. Population and energy consumption across time, region, and
source (Eastern Europe, Western Europe, and the former Soviet Union).....240
Table 10–2. Primary energy production and relative share by energy source in
Europe and Eurasia ....................................................243
Table 10–3. Outlet capacity of export pipelines at the FSU border (bcm/year)...252
Table 10–4. Natural gas imports into Europe and Eurasia (LNG and pipeline),
2013 (bcm)............................................................254
Table 10–5. Gas storage capacity in the European Union, 2012 ..............260
Table 10–6. Major gas companies in Europe .......................... 261–262
Table 11–1. Milestones in US and European Union vehicle emissions
restrictions............................................................284
Table 12–1. Carbon dioxide, GDP, and population for regions ...............299
Table 13–1. OPEC flows of crude oil, 2012 (1,000 bbl/d) ....................323
Table 14–1. Typical lifetime of energy-using plant, equipment, and
appliances ............................................................336
Table 14–2. Conventional coal, oil, and gas proven reserves for selected
countries .............................................................337
Table 14–3. Companies with significant oil or gas production or refinery
capacity, 2011..................................................... 358–359
Table 15–1. Example conversions of one kilowatt hour primary electricity
to Btu energy..........................................................368
Table 15–2. Known recoverable resources and mined production of uranium
(tonnes) ..............................................................372
Table 15–3. Largest uranium producers in the world, 2012 ..................372
Table 15–4. Nuclear power reactors operating and under construction for
selected countries......................................................374
Table 15–5. Sample of the world’s largest hydro capacity dams...............376
Table 15–6. Estimated levelized cost of new generation resources, 2017 ......383
Table 15–7. Oil, natural gas, and NGL reserves and resources, 2012..........392
Table 16–1. World energy balances, 2011 (mtoe) ...................... 400–401
Table 16–2. Coal and peat use in the world in 2011 (solids in
megatonnes (Mt), gases in petajoules (PJ))........................... 410–411
Table 16–3. World petroleum statistics, 2011 (million metric tonnes).... 412–413
Table 16–4. World natural gas statistics, 2011 (pJ)..........................415
Table 16–5. World electricity and heat statistics, 2011 ......................416
Table 17–1. Boiling ranges for petroleum products .........................440
Table 17–2. Sample crude API gravities and prices, April, 2014 ..............441