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Tullow Oil and African Development

Wednesday, April 25, 2012

Yesterday I spent a fascinating evening in the company of Aidan Heavey, Founder and CEO of Tullow Oil plc, Africa’s leading independent oil exploration business and the top performer among FTSE-100 listed businesses on the UK stock exchange. It has approximately 100 production and exploration licenses in 22 countries.

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Unit 1 Micro: Breaking Down the Cost of Gas

Sunday, March 04, 2012

High gas prices impact on millions of households whose energy bills have soared in recent years and have led to a steep increase in fuel poverty among lower-income families. Studying the market for gas is interesting from a micro-economic perspective and a recent article in the Times (covered by a paywall) provided an overview of the breakdown of the cost structure of a typical energy bill from suppliers such as British Gas

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Unit 2 Macro: Might Oil Prices Bring another Recession?

The international price of crude oil has been rising strongly in recent weeks and threatens to be an external factor driving an already weak Euro Zone and UK economy back into recession.

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Unit 2 Macro: The Dash for Gas in Mozambique

Friday, February 17, 2012

In the last twelve months two huge discoveries of natural gas have been made in the East African country of Mozambique. The latest - a deepwater discovery - is said to hold over 210 billion cubic metres of natural gas and investment in exploiting the field could be the major cataylst for a rapid phase of growth and development for one of the world’s poorest countries. The country has large untapped oil, coal and titanium reserves in addition to the gas. According to the UK Trade and Investment body, within 15 years Mozambique could be Africa’s second largest coal producer (after South Africa) and one of the largest coal exporters in the world.

Can it benefit in a sustainable way from exporting these resources or will they prove to be a curse on development?

For many years Mozambique has been afflicted by a brutal civil war which ended in 1992 and then a series of natural disasters including floods in 2001 and 2001 which destroyed much of its infrastructure.Floods were replaced by a calamitous drought in 2002 but more recently the economy has achieved strong growth and progress in lifting people out of absolute poverty. That said, 50% of Mozambicans living on less than $1 a day, foreign aid accounts for nearly half of government spending and there remain severe doubts about whether the dividends of an export-boom in natural resources will feed through the the majority of the population.

The Mozambique government has a 10% stake in the newly-discovered gas fields, it sold a licence to the Italian company Eni to explore for new gas reserves and Eni has committed to building a multibillion-dollar liquefied natural gas terminal in the country as a distribution platform to export mainly to fast-growing Asian economies.

Other transnational companies are investing in Mozambique. Vale, a Brazilian multinational is spending over $3 billion to rebuild and extend the 425 mile Nacala railway and connect it to a deep water port so that Mozambiquan coal can be exported.

Putting the infrastructure in place will take several years and gas production on a huge scale may not start before 2016. Although new industries brings risks as well as opportunities, the potential for a step change in development in the country is enormous.

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Externalities Cartoon

Sunday, January 22, 2012

KAL, The Economist’s cartoonist, has produced an excellent cartoon in the latest issue perfect for a discussion of a very topical externalities issue in North America. And one that has also been ‘causing tremors’ in the news over here too!

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Unit 4 Macro: Russia Joins the WTO

I am using Russia’s entry to the World Trade Organisation in my teaching on international trade and development this term. It appear to be a significant moment for the global economy. Russia is the last member of the Group of 20 major economies to join, after China gained membership in 2001. Progress towards membership has been delayed by numerous geo-political issues not least the disputes with neighbouring Georgia.

Joining the WTO involves making a commitment to the rules of the international trade system - for Russia as with other new members, this will mean reduced import tariffs, the staged elimination of industrial domestic and export subsidies, and better greater access to foreign companies. Russia will also have to improve adherence to international accounting standards.

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AS Micro: What´s really behind the oil price rise?

Tuesday, May 10, 2011

The price of oil continues to rise ($114.61 per barrel) and there a number of reasons put forward why this is so, none perhaps more pertinent than the reason explained in this WSJ article.

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Externalities of Oil Pollution

Friday, April 22, 2011

The Boston Globe’s Big Picture has just published a set of remarkable photos. Collectively they are a stunning set of images that reminds one of the economic and social costs of the disaster and the nature of externalities - and colleagues may want to return to this resource to stimulate discussion and support visual learners. Here is the link.

AS Micro: The volatile price of crude oil

Saturday, April 09, 2011

Few commodity prices are watched as closely as the international price of crude oil. Brent crude is currently trading at over $122 a barrel - the highest price for over two years. Our Timetric chart is constantly updated and will always show the latest price. We have included below links to many of our recent blogs on the economics of oil prices and some of their micro and macro economic effects.

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OPEC oil revenues set to surge above $1 trillion in 2011

Wednesday, March 30, 2011

A combination of higher prices and higher oil production means that Opec’s oil revenues may exceed $1 trillion in 2011 for the first time. The International Energy Agency has published some new data on Opec production - the revenue forecast includes exports of natural gas liquids and is not adjusted for the effects of inflation. But if you are a Finance Minister of an oil exporting country the price of crude trading at $115 is welcome news especially given the stimulus spending that some countries have introduced as a response to social and political unrest. On some estimates, Saudi Arabia (the world’s largest oil producer and exporter) needs oil to be priced at $83 for its national budget to balance.

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Accessible UK Budget resource

Friday, March 25, 2011

image

It’s not always easy to navigate your way through the budget, with its mass of technical detail and complexity.  Not all of it is terribly interesting either (nor the manner of presentation).

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Timetric: UK Balance of Trade in Oil

Sunday, March 06, 2011

The UK economy is now a net importer of oil - a change from the many years of trade surpluses in oil seen from the late 1970s onwards as north sea production and exporting gained scale and momentum. The Timetric chart below tracks the monthly trade balance in oil and the one below it tracks the monthly value of oil exports and imports.

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Ghana becomes a producer of crude oil

Wednesday, December 15, 2010

Could the extraction of crude oil in Ghana be enough on its own to double their growth rate and provide a funding platform for enormous infrastructure spending? That is the optimistic hope of the government on the day that oil started to flow from an oil field that may have upwards of two billion barrels available.

Oil has the potential to provide new riches for a country that has won plaudits for improved governance and macroeconomic stability. The state plans to allocate some of the revenue from the oil to fund extra spending in education, health care, industry, and infrastructure. But there are many risks too - economic, environment, social and political. Especially if the new wealth from black gold in their oceans flows only to a small minority.

Nigeria and Angola are Africa’s largest oil producers - see this background article from Reuters

Here is a selection of news articles on the arrival of Ghana as an oil producer. Oil is an opportunity and a challenge.

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Tacit collusion between oil producers and consumers?

Sunday, December 12, 2010

Are crude oil prices set to rise above $100 a barrel and stay there as we head into 2011? As our chart shows, there has been a steady increase in world oil prices over the last two years and a barrel of oil is now comfortably above $90. World economic growth is picking up - the main driver is strong activity in fast-growing emerging nations - and the oil producer cartel OPEC has announced that it sees no need to increase their output quotas in a way to stabilise the price below $90.

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Energy Oligopoly - Price Investigation is Launched

Friday, November 26, 2010

The industry regulator Ofgem has announced a fresh investigation into the pricing policies of the oligopolistic electricity and gas market - for consumer lobbying groups the wait has been too long but many analysts point to data that shows that many gas supply businesses for example have been operating at a loss for much of the last decade. And that net profit margins are pretty thin compared to the total fuel bill for household customers. More details here Everyone gets hot under the collar about energy prices but the reality is that gas and electricity is no longer cheap and too little progress has been made in ways to reduce our energy consumption.

Tea with the Economist - Stephen King

Wednesday, October 13, 2010

Stephen King, Chief Global Economist of HSBC is a good friend of Tutor2u having appeared at several of our recent teacher conferences. He has a terrific grasp and feel for some of the salient global shifts in economic power and influence and he speaks in this video to The Economist about the growing demand for scarce resources from fast growing emerging markets and the challenges this poses for the West.

Broker spends $520m in a drunken stupor and moves the global oil price

Saturday, July 03, 2010

Not an example you would find in a standard textbook - but a fun one to use nonetheless!

AS Economics Revision - Oil and Petrol Prices

Saturday, May 22, 2010

This week we have heard news that the price of petrol and diesel at the pumps has reached a record high.

The data chart above provides another opportunity for students to familiarise themselves with changes in price information over time and perhaps try this question

“Using the extract, identify two points of comparison between UK diesel and petrol prices and the world price of crude oil over the period shown by the data” (8 marks)

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Revision Presentation - The World Oil Market

Monday, January 11, 2010

The forces of supply and demand in the global oil market feature frequently in economics exams.  So here is a revision update on what has happened to the world oil market in the last 12 months. It was a year when crude oil prices recovered quite strongly from their lows at the start of 2009. As we head into 2010, the price of a barrel of crude is rising above $80 and strong economic growth in emerging market countries together with the lagged effects of reduced investment in oil exploration and drilling may take prices closer to $100 in the year ahead.

Launch revision presentation on World Oil Market in 2009

Download revision slide handouts

Tories plan break up of energy oligopoly

Friday, December 04, 2009

We have been studying oligopoly in our A2 micro and the issue of electricity and gas prices has been headline news for some time. Last week the Conservatives announced plans to break up the highly concentrated domestic energy supply market and inject fresh competition. This is reported here in the Guardian. There is a super paragraph that explains the oligopolistic nature of the industry:

“The industry has since consolidated into EDF, E.ON, RWE npower, Centrica, Scottish Power (owned by Iberdrola) and Scottish and Southern Energy, which control the production and supply of electricity and gas to almost all UK households and businesses. Only a handful of small independent power plant operators and tiny suppliers survive. Energy analysts say the market dominance by the Big Six makes it impossible for anyone else to gain a foothold.”

Market dominance is reinforced by the highly vertically integrated nature of these energy giants.

“they own power plants and source the gas themselves to supply their own customers. This means they will always be profitable at a group level because their retail businesses subsidise their power plant arms when generating costs are high and vice-versa”

The energy companies have been accused of engaging in implicit price collusion - tor the main product they most actively sell - direct debit for dual fuel, gas and electricity - the price difference between the cheapest and most expensive is £30 a year or around 60 pence per week. The consumer watchdog EnergyWatch has complained that British consumers are being ripped off by a “comfortable oligopoly” of bloated electricity and gas supply companies.

 

 

TED Talk: Edward Burtynsky photographs the landscape of oil

Sunday, November 15, 2009

Edward Burtynsky photographs the landscape of oil from extraction to refinement and to the end of oil - cars, tyres, planes, and the environmental impact.  His manufactured landscapes DVD is a tremendous resource.

Fast growing developing countries may mean end of era of cheap oil

Wednesday, November 11, 2009

A good video to use here when teaching the economics of the oil market/

Peak oil theory and economic implications

Sunday, October 25, 2009

There is a highly relevant article on the depletion of global oil reserves and how this might affect UK energy policy in the Telegraph. The article links to concepts such as the marginal cost of extraction of different oil fields and the viability of exploring for oil at different prices.

“The timing of the global peak remains uncertain but the window is rapidly narrowing. Since 1993, the world has produced half as much oil as was produced in the preceding century and now uses as much oil as the UK has ever produced in only 10 months. On current estimates, we have used between 28pc and 56pc of recoverable conventional oil – with much of what remains being located in smaller fields in less accessible locations, or requiring “enhanced recovery” techniques to extract.”

The rest of the article can be found here

The Big Question looks at peak oil theory

Monday, September 07, 2009

The Big Question feature in the Independent asks whether the recent discovery of a giant new oil field by BP undermines peak oil theory? There is a nifty oil supply and demand graphic focusing on known oil reserves. The article also places emphasis on the importance of current and expected oil prices in driving oil exploration and extraction.

“We simply do not know how much oil is left on the planet. What we do know is that the ratio of reserves to production has remained relatively constant for many years. This isn’t because of new discoveries; rather it is because as prices rise it becomes easier to extract more oil from existing fields; as companies drill, they realise there is more there than they thought. So yields in-crease. Raising recovery rates from 35 per cent to 50 per cent would double world reserves to more than 2,400 billion barrels.”

Here is the article

Falling oil prices hit oil exporting nations

Monday, August 10, 2009

The sharp drop in the world price of crude oil last year was good news for motorists although it takes some time for lower oil prices to feed through to the retail price of diesel and petrol. But for countries highly dependent on oil exports, the decline in world crude prices is having a significant effect on their balance of payments, GDP growth and fiscal balances.

As this excellent BBC article points out, oil accounts for more than 90% of Saudi Arabia’s exports, and nearly 75% of the government’s revenues. Taken as a whole, oil exporting nations could face a 53% fall in revenues this year as oil prices remain low. Little wonder that finance ministers of oil exporters are hoping that crude prices head higher in 2010 on the back of a broader global economic recovery.

More here on price volatility in the world oil market

Economics Snapshot - Hedging the Fuel Price

Tuesday, July 28, 2009

Hedging is a way of reducing uncertainty over the future path of volatile commodity prices such as the cost of fuel. One the most important decisions that an airline can take is the extent to which it uses hedging to lock in the price of a barrel of kerosene for a period of six or twelve months.

Ryanair provides a good example of how this can have a decisive effect on profitability. Late in 2008 Ryanair was hedged into paying the equivalent of $125 a barrel for kerosene just as the world price price of oil was collapsing to below $40 a barrel - the result was higher operating costs and a Euro 150 million hit on profits. For 2009 around four-fifths of Ryanair’s fuel requirements are locked in at $62 a barrel which with oil prices nudging up towards $70 a barrel will give the airline much needed breathing space as the recession affects demand for seats and forces many airlines to cut prices still further to maintain a profitable level of load-factor (the percentage of seats on each flight that are filled).

*Ryanair is now Europe’s largest airline having overtaken Lufthansa and British Airways
*In the last twelve months nearly 60 million passengers have flown with the airline
*With a market capitalisation of £4.6 billion, Ryanair is larger than the German flag carrier and easily more than twice the size of BA.
*Ryanair has a 28% stake in rival Irish airline Aer Lingus and has tried several times to take it over - so far without success!

OPEC compliance dips with the oil price

Sunday, July 26, 2009

Weak oil prices test the resolve of the eleven members of the oil cartel OPEC whose output is bound by quota agreements. The International Energy Agency reported that in June the compliance rate for OPEC members fell to 68% after reaching 80% earlier on in the years - in a nutshell, a number of OPEC countries are pumping more oil out of the ground than allowed by their quotas.

OPEC has 36% of current world crude oil production - it expects this to edge towards 40% over the next twenty years. Global oil-demand forecasts are heavily dependent in the short term on the strength of any anticipated rebound in world trade and output. In the medium term demand will be affected by the scale of a substitution towards renewables such as bio-fuels, wind and solar energy supplies. Lower oil prices makes these alternatives less profitable in the near term.

Can Russian Supply Meet EU Demand for Gas?

Friday, June 12, 2009

A cracking short video from the BBC examines the issues facing Russian gas producer Gazprom…

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Economics of energy - over a barrel

Monday, December 22, 2008

“The plunging oil price is like a dangerously addictive painkiller: short-term relief is being provided at a cost of serious long-term harm”

If you are interested in the economics of energy then the Financial Times today is well worth buying from the news stand. Ed Crooks provides a superb analysis of the effects that oil and gas price volatility is having on the economic viability of different segments of the energy industry - ranging from conventional oil to unconventional oil (including oil shale, coal to liquid and the oil sands projects) and also the impact of changing prices on demand for and the likely returns from biofuels, nuclear, coal and renewable supplies of energy. There is a superb graphic on page 11 that will grace any classroom wall and make a tremendous teaching handout for students who want to understand more about the demand outlook for different fuels.

Here is the link to Ed’s article. But best to buy your own copy of the FT today for the graphic alone!

OPEC’s biggest cut

Wednesday, December 17, 2008

The oil export cartel OPEC has announced the biggest ever cut in planned production in a bid to rebalance supply and demand in a market where crude oil prices have fallen by over two-thirds (> $100) within the space of a few months.

OPEC is reducing output by 2.2 million barrels per day – on top of the 2 million contraction in supply announced earlier on this autumn. The total cut in production is equivalent to lowering global oil production by around 15 per cent. OPEC – which accounts for forty per cent of world oil production – has a supply target of 24.845 million barrels per day

It was significant that Russia – the world’s biggest oil producer outside of OPEC was invited to attend the meeting. But in the immediate aftermath of the announcement they said that they will not join the attempts to restrict supply and that they do not wish to consider joining OPEC at this stage. The first reaction of international commodity markets to the OPEC supply cut was to reduce prices still further!

Demand and supply forces

OPEC’s attempts at stabilising the price through lowering output quotas will only have a marginal impact on the world price. Demand-side factors have taken over as the dominant driver of the price of crude oil in the short term and with the global economy set to suffer a recession in 2009 there is precious little that OPEC can do for the moment.

Price and marginal cost – the value of extracting oil from the ground

This short quote from the Saudi oil minister reveals some important microeconomics:

“You need every producer to produce and marginal producers cannot produce at $40 a barrel.”

Extreme price volatility in the markets for primary commodities such as oil, gas and iron ore creates headaches for producers who must commit huge and expensive resources to exploring, drilling, extracting and then refining their basic output

Marginal cost is the change in total cost resulting from supplying one extra unit to the market – in our example, the marginal cost is the expense of extracting an extra barrel of crude oil from below the ground. It is a widely held belief among economists who specialize in commodity prices that the long-run market price of something is determined fundamentally by the marginal cost of production. The resources that can be tapped at lowest cost are often done so first, and then as it becomes progressively harder to unearth such resources the market price must rise to provide an economic incentive to do so.

One immediate problem is that, because oil is a non-renewable resource lying in geological structures that vary enormously in location, weather, depth and many other variables, the cost of extracting new supplies is hard to determine. Many OPEC countries – especially Saudi Arabia – have access to relatively cheap and elastic supplies of oil. But the same cannot be said of crude oil producers in Canada’s tar sands and oil companies who have sunk huge amounts of money into exploiting the oil available in deep-water facilities off the west coast of Africa or in Brazil.

The fact is that for many oil-exporting countries, the price for each barrel of crude oil extracted needs to be higher than the marginal cost of production for national governments to generate sufficient income to pay for ambitious public spending projects.

So whereas the Saudi government can expect to balance its budget when world oil prices are hovering at around $55 per barrel, prices need to be closer to $70 a barrel for the Russian government to earn enough oil revenues to pay for their state spending. And that figure rises to more than $95 a barrel for countries such as Iran and Venezuela.

If prices fall below the marginal cost of production will we see a sharp contraction in supply?  Economic theory would suggest yes for, if crude oil prices slump to below $60 or $50 a barrel, petroleum companies with above-average production costs may decide that the price has fallen below the short run shut-down point and opt instead to mothball oil wells, because pumping oil out of the ground has become a licence to lose money.

Indeed the fall in production may be much larger than this – because exploration and development is an expensive business. Oil companies need to know that the price they can command in the market will be persistently above the marginal extraction cost in order to cover the fixed costs of production and the expected rate of profit demanded by shareholders.

It looks like OPEC is targeting a price of $75 a barrel as a ‘fair price’ for oil producers. Given the weakness of the world economy, that might take some time to happen.

Suggestions for further reading:

The Times: OPEC makes largest ever cut to oil production

BBC: OPEC agrees record oil output cut

Crude oil prices and rig counts

Friday, December 12, 2008

Each week Baker Hughes releases a count of the number of active drilling rigs in the international oil and gas industry. Their data has been available for over sixty years and is regarded as a barometer for the oil services industry in particular as a lead indicator of demand for the capital equipment used in drilling, producing and processing hydrocarbons.

Why look at rig counts?

Partly because the number of active rigs might reflect a market-driven response to changes in oil and gas prices and also expectations of future price movements. When crude oil carries a high price in world markets, the profitability of drilling for oil from known reservoirs ought to improve and we might expect to see an expansion in the number of active rigs.

That said there are many factors that affect how many rigs are in operation – it is not simply a question of rigs changing in response to market demand for oil.

Technological change affects the number or rigs needed to develop a reservoir and also allows new known reserves to be exploited – for example the deepwater areas off the west coast of Africa.

Climatic conditions can affect the logistics of drilling schedules including the ability of oil producers to move rigs and establish new drilling sites.

Some reservoirs are only available for exploitation on time-limited leases – and as these leases come to an end, so more rigs might be brought into use.

Our chart shows that in recent years there has been a substantial rise in the world total of active oil rigs – indeed since 2002 the number has grown from around 2,000 to over 3,500 with the number of US-based rigs more than doubling although this figure is still less than half of the peak at the end of 1981.

I have added to the chart an index of global crude oil prices using the Goldman Sachs Commodity Index data series. To what extent do you think that the oil rig count reflects movements in global crude oil prices? Is the volume of active rigs a useful measure of the supply-side response to the recent boom in prices? And what impact might the sudden and dramatic fall in prices have on the number of rigs in operation as we head into 2009? The Times reports today that world crude oil demand will fall in 2009 for the first time since 1983.

A great example of how to get fingers burned trading in oil

Thursday, October 23, 2008

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From the excellent BBC Magazine comes this super 3 minute clip showing how a BBC reporter took a gamble investing in oil.

Launch video page

Chasing the petrol-pound - the supermarket price war

Monday, October 20, 2008

Under the threat of scrutiny from the Office of Fair Trading and conscious that in a recession, consumers are prepared to travel further in search of value for money - the price war at the pumps between the leading supermarkets shows few signs of ebbing. Asda and WM Morrisons set the latest ball rolling this week and Tesco and Sainsbury have fallen into line in quick order. It is difficult to work out who - if anyone - is assuming the mantle of price leader in this battle for fuel sales.

Crude oil prices are back where they were this time last year and fuel prices are pretty close to the levels seen in the Fall of 2007. For all of the talk of petrol and diesel prices taking weeks to change in response to the fluctuating price of crude, this market seems to be adjusting pretty swiftly. This can not be said for electricity and gas prices - Robert Peston picks up on this in his blog today.

Where will oil be at the end of the year?

Tuesday, October 07, 2008

As the world economy slows, so prices for crude oil continue to slide. How far will OPEC allow the price to slip? Can they create a floor for the price of oil?

The Changing Pattern of Output

Tuesday, September 23, 2008

I have attached the chart in a PowerPoint file in case it might be of use as a teaching handout for student annotations and calculations. More detailed statistics on UK national output can be found from the Statistics Commission.

PowerPoint Chart

UK_GDP_by_Output.ppt

David Smith

The Party is over for Shrinking Financial Sector (Sunday Times)

Crude oil heads below $100 a barrel

Tuesday, September 09, 2008

When the rise in the price of a commodity is described as unsustainable it is probably because it cannot be sustained! The price of crude oil has continued its steep descent in recent days and some futures prices for oil have now dipped below $100 a barrel, presumably a psychologically important moment for the market.

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Investing the proceeds of the oil bonanza

This BBC article focuses on the ways in which the Brazilian government is seeking to use the revenue from oil exports to boost the economy’s long run economic growth potential and reducing poverty. There is a neat line in here about the importance of value added - from moving away from dependence on exporting crude oil to selling derivatives of oil that carry a higher value in world markets. Yet another country looks poised to establish a sovereign wealth fund to manage some of the assets that come from selling black gold to the rest of the world.

 

Economic cost of fuel subsidies

Monday, August 18, 2008

The Economic Naturalist Robert Frank - writing in the New York Times - criticises the use of explicit fuel subsidies (common in many emerging market countries) and also takes a stab at the hidden subsidies that occur when a government does not tax products that create pollution sufficiently highly to reflect the external costs. Many countries are now reining back on such subsidies - a recent example was Vietnam - where the subsidy cut prompted a spike in oil prices for consumers. It is a well written piece and one that could be used when discussing government intervention, allocative efficiency and possible government failure.

“By one estimate, countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year. Without this artificial demand stimulus, world oil prices would have been significantly lower. Earlier this summer, for example, world oil prices fell by $4 a barrel on news that reduced subsidies would increase Chinese domestic fuel prices by about 17 percent.”

The rest of his article can be found here

How Fuel Subsidies Drag Down a Nation

Some Good Radio Programmes

Last week’s Analysis was on sport and considered whether we should invest so much in sport. Our success in the Olympics suggests that the investment has paid off in one way at least. But is investment in the 2012 London Olympics worthwhile? Listen by clicking on this link

On the same evening, Investigation looked at the reasons for high oil prices. Listen to this here

Our Food, Our Future is a short series looking at food production and prices. Some of the recent programmes can be found on the website and there is a useful slide show here:

BBC radio 4 analysis has an archive of past programmes.

 

Oil - a coming supply crunch?

Friday, August 08, 2008

A new report by Paul Stevens for Chatham House the international affairs think-tank argues that unless there is a collapse in global oil demand within the next five to ten years (presumably the result of a severa global slowdown or sizeable shift to oil substitutes) there will be a serious oil ‘supply crunch’ because of inadequate investment by international oil companies (IOCs) and national oil companies (NOCs). An oil supply crunch is where excess crude producing capacity falls to low levels and is followed by a crude ‘outage’ leading to a price spike. If this happens then the resulting price spike will carry serious policy implications with long-lasting effects on the global energy picture. The Stevens report can be downloaded in pdf format from this link.. Paul Stevens is Senior Research Fellow for Energy at Chatham House and Emeritus Professor at Dundee University.

 

Price stickiness on the forecourt

Thursday, August 07, 2008

The AA isn’t happy. Standing up for hard pressed motorists is part of its daily remit and their latest salvo is directed at the petrol retailers for failing to pass on reductions in the price of crude oil on world markets to drivers who have been getting used to spending over £75 to fill up their tanks. Oil prices are indeed on the slide - how much further can the declines go? Will speculative activity accelerate the decline towards $110 or lower? But the AA claims that the major petrol retailers have been slower to reduce prices than they were to raise them when the cost of crude was heading northwards. Edmund King is reported in the Telegraph as saying “We calculate that retailers should be cutting a penny a litre off diesel and petrol with each two dollar fall in oil prices. The AA calculates that this should have meant petrol falling from 119.7p to 106.2p a litre and diesel dropping from 133.35p to 119.75p. Instead the latest pump price for petrol is about 115.25p, while motorists are still paying 128.42p for diesel.”

Inevitably there are time lags between changes in crude prices on global markets and the price we pay for petrol. Expect the supermarkets to move things along in the next couple of weeks with another bout of vigorous price competition. Profit margins for retailers of petrol and diesel are actually wafer thin - most of the money is made at earlier stages of the supply chain from oil exploration and refining.

Chart
Petrol_Diesel_Prices.ppt

Light at the end of the pipeline?

Wednesday, July 16, 2008

It is not supply that will drive the world price of oil down in the near term - it is demand. Oil prices dropped by the biggest amount in three-and-a-half years yesterday as commodity dealers sold on fears that the world’s leading economies are facing a sustained economic downturn. A firmer dollar and weaker prospects for economic growth should - in the absence of supply shocks to crude production and refining output - bring prices down further providing some relief to motorists, the aviation industry and countless others.

Prices are incredibly volatile at the moment - and the huge number of options contracts tends to increase volatility, with computers programmed to automatically sell once prices reach certain thresholds.

The Guardian: “Fears of recession drive shares and oil prices down”

Cross elasticity: Demand for new aircraft

Monday, July 14, 2008

Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times.

 

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Global oil industry in figures

Saturday, July 12, 2008

An excellent resource on the global oil industry from the BBC - packed full of useful charts and background when teaching this market

Oil sands - an enviromental catastrophe?

Friday, July 11, 2008

“The Caterpillar 797B heavy hauler is the world’s biggest truck. It’s taller than a four-storey house, as wide as a tennis court and it removes nearly 35,000 tonnes of oily sand a day from a deep open cast mine in northern Alberta in western Canada.”

John Vidal heads to Canada to ask some tough questions of the oil industry and its intentions in northern Alberta in this Guardian video report. This video is backed up by this report. Some of the photos of the plant and equipment being used are truly stunning - I will certainly be using this when I teach about economies of scale next autumn. The size of the oil sands exploration is astounding and the economic boom hitting this northern wilderness in places such as Fort McMurray beggars belief. But so too are the environmental consequences of this black gold rush

“The downside is ecological devastation and soaring greenhouse gas emissions on a scale that is beginning to alarm Canadians and other western countries trying to reduce the intensity of their carbon economies to counter climate change. Canada, alone, of developed countries, is expecting to increase emissions for 30 years and ignore its commitments to Kyoto.”

Peter Day looked at this issue a couple of years ago and his In Business report is still available on the BBC web site

Image from creative commons licence on Flickr.com

Gasoline prices and taxation

The OPEC website carries a very clear chart which helps to explain variations in the price of gasoline in different countries. In the UK for example over 60 per cent of the cost of a litre of fuel is due to indirect taxation applied by thr British Government. In a sense, high taxes have helped to insulate motorists from some of the dramatic increases in world oil prices - but the contrast with the USA is remarkable. Here is the chart  and also the related publication: Who gets what from imported oil?

Oil at $500 a barrel - not a flight of fancy

Thursday, July 10, 2008

The maverick economist Willem Buiter argues that $500 for a barrel of oil is not out of the realms of possibility.

“Once global growth returns to its underlying trend, however, say three or four years from now, I expect the relentless upward march of commodity prices, including oil, gas and agricultural commodities, to continue. The reason is simple. Global demand growth is heavily biased towards energy-intensive production and consumption in emerging markets.”

Such price spikes necessarily bring about huge shifts in the balance of economic power at least in the short term towards energy producing countries and would entail most (but not all) of the rich developed world adjusting to a sharp fall in real income. But by the time prices reach such levels, the incentives for conservation and investment in energy efficiency will have become over-powering.

The fact that we are at least considering prices for oil of almost unbelievable heights is indicative of how the world is changing before our eyes.

The rest of his article is here

In Business Week, Steve Levine questions whether the Saudi’s have the capacity to boost their sustainable supply to anything close to 12.5 million barrels a day

Oil dependency and market failure

Thursday, July 03, 2008

Chancellor Alastair Darling offered us these brave words

““If we we don’t reduce our dependence on oil ... we will continue to expose ourselves to the uncertainty of the oil market…..It is important that we reduce our dependency far more quickly than perhaps people thought was necessary.”

It is a shame that the government has wasted over eleven years in producing a credible and coherent energy policy. I was chatting to a guy on the train down to London this morning. He had over twenty-five years experience in the energy industry, much of the latter part of his career was within the nuclear sector working as a senior engineer. He made a rather pertinent point that, once we realise that moving decisively to nuclear is inevitable, we will run into major shortages of the skilled personnel needed to construct the new nuclear power stations. Most of those required have long since retired from the industry and we will be dependent on nuclear engineers from the USA and far east Asia.

Anatole Kaletsky was on good form in the Times today writing about three market failures in the oil industry

1/ The huge gap between the marginal cost of producing oil and the marginal cost of supplying oil substitutes
2/ Monopoly power in the oil business - controlling the supply of oil - “there is nothing efficient about the level of prices set by the market”
3/ The ramping up of oil prices by institutional investors and the incentives to invest in oil exploration rather than much needed investment in non-oil new technologies

The rest of Anatole’s article can be found here

Expectations and oil prices

Wednesday, July 02, 2008

The debate rages about who is responsible for the 100% increase in the price of a barrel of crude oil over the last year - speculators? fundamental supply and demand factors? Or a combination of influences on the market. Martin Feldstein’s article in the Wall Street Journal today is excellent in linking price volatility to the low price elasticity of demand and supply in the market in the short run.

read more...»

Adjusting to oil price super spikes

Wednesday, June 11, 2008

The Independent carries a typically robust and vivid front page today reporting the view of a Gazprom executive who claimed that world oil prices could double from their current level to a peak in excess of $260 a barrel.

read more...»

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