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Slide 1“America is addicted to oil”U.S Oil Consumption (2005)Slide 4Oil Supply – global reservesOil Supply – top US sourcesSupply Disruptions“Hubbert’s Peak”Are we “post peak”?Slide 10PricesSlide 12GAS: $3.33/gallonImplicationsPredictionsPredictions?AlternativesAlternatives, continuedSupply-side optionsDemand-side optionsSlide 21Slide 22Slide 23AGEC/FNR 406 LECTURE 24“America is addicted to oil”- President George Bush(2006 State of the Union Address)Three reasons for concern:1. Volatile & upward swings in oil prices2. Political instability in oil-exporting regions3. Global warming due to fossil fuel useU.S Oil Consumption (2005)22 billion barrels/dayhttp://tonto.eia.doe.gov/FTPROOT/other/perspectives04.pdfUS Domestic Petroleum OverviewOil Supply – global reserves-Middle East = 60%-Canada = 14%-Africa = 10%-Venezuela = 6%-Russia = 5%-US = 2%Oil Supply – top US sources-????-Saudi Arabia-?????-Venezuela -Nigeria-Angola-Iraq-Algeria-Canada (16.5%)- 14.5%-Mexico (13.4%)- 11.3%Supply Disruptions-Iraq-Iran-Nigeria-VenezuelaWorld production is at 98% of capacity……a disruption anywhere leads to price increases everywhere!“Hubbert’s Peak” “Peak Oil” is the idea that oil production (from an area) follows a bell-shaped curve, based on the fact that oil supplies are finite. It provides a method for predicting maximum production in advance, based on discovery and productivity of fields. The theory is named after geophysicist M. K. Hubbert, who correctly predicted (in 1956) that US production of oil would peak in the US in the late 1960s.Are we “post peak”?Almost all “easy” reserves are known.Some evidence suggests several large oil fields (in Mexico, Kuwait, and Saudi Arabia) have already peaked in production and are declining.Finding new reserves, methods for extraction, and alternatives is difficult and costly (e.g. Tar Sands, Heavy Oil, coal-to-liquid oil synthetics)40% of all energy used in the US comes from oil.How does it get used?2/3 for transportPricesSince 2002 crude oil prices have tripledgasoline prices have doubledFor each $10/barrel increase in the crude oil price,gasoline prices rise about $0.25Most of the recent increase in gasoline prices is due to increases in crude oil prices. Shortages of refining capacity play a secondary role.Oil prices vs. Gasoline prices, US 1975-2005GAS: $3.33/gallonDistribution/Marketing/Profits $ 0.10 Crude Oil Cost $ 2.22 Refinery Cost and Profits $ 0.38 Underground Tank Fee $ 0.01 State and Local Sales Tax $ 0.25 State Excise Tax $ 0.18 Federal Excise Tax $ 0.18 source: http://www.energy.ca.gov/gasoline/margins/index.htmlImplicationsMost oil price spikes have led to inflation and (ultimately) a recessionUS wealth sent to oil producing countries- $240 billion in oil imports in 2005But…oil intensity of US economy (oil consumption/GDP) has been decliningPredictionsCurrent forecasts are for crude oil prices to range from $35-$55/barrel over next 20 yearsMore demand from developing worldEconomic theory suggests that as prices rise…demand falls…alternatives become attractivePredictions?http://www.nytimes.com/interactive/2008/02/19/business/20080220_CENTURY_GRAPHIC.htmlAlternativesAlberta Tar Sandsrequires water and natural gasEthanol (from corn in US, sugar cane in Brazil)2000: 106K barrels/day2006: 250K barrels/day2010: 500K barrels/day(assuming current $0.51/gal federal subsidy)Alternatives, continuedGas-to-liquidCoal-to-liquidused in South Africa for 2 decadesnew Chinese plants under constructionCellulosic ethanolmade from grasses, biomassnot currently profitable, more R&D required2005 Energy Policy Act – requires some useSupply-side optionsIncreased drilling for domestic oilSubsidies for alternatives- won’t influence world prices unless the supply shift is enormousDemand-side optionsDirectly or indirectly raise fuel costs(reduce demand, and therefore price)- tax on gasoline- carbon tax- cap and trade Raise vehicle fuel economy- Corporate Average Fuel Economy (CAFÉ) standardsAverage fuel economy of US light-duty vehiclesGreat source of unbiased information:http://www.gravmag.com/Source material for this lecture includes:Newell, R. G. “What’s the Big Deal about Oil?” Resources 163:6-10, Fall 2006Pizer, W. A. “The Economics of Improving Fuel Economy” Resources 163:21-25, Fall 2006“Oil Change” OECD Observer, December 2006US Energy Information Agency, Annual Reports (various


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Purdue AGEC 40600 - Lecture notes

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