Yucel GIC May 2806

Developments in World Energy Markets Mine Y端cel Federal Reserve Bank of Dallas May 29, 2006

Overview • World energy consumption/production • Vulnerability to oil price shocks • Similar vulnerability to natural gas price shocks?

– Security of gas supply – Feasibility of a gas cartel

World Total Energy Consumption by Fuel Other, 8% Nuclear, 7%

Oil, 39%

Coal, 24%

Natural Gas, 23%

World Energy Consumption by Fuel Type, 1970-2025 Quadrillion Btu 300

Oil

250

200

Natural Gas 150

Coal

100

Renewables 50

Nuclear 0 1970

1980

1990

2002

2015

2025

Western Europe: Energy Consumption by Fuel 100% Other 90% Nuclear 80% Coal

70% 60%

Natural Gas 50% 40% 30% Oil

20% 10% 0% 1990

2001

2002

2010

2015

2020

2025

Transitional Economies: Energy Consumption by Fuel 100%

Other

90%

Nuclear

80%

Coal

70% 60% 50% Natural Gas 40% 30% 20% Oil

10% 0% 1990

2001

2002

2010

2015

2020

2025

OPEC Dominates World Oil Production Percent 100 90

Rest of the World

80

Mexico Norway

70

Russia

60 50 40

OPEC

30 20 United States 10 United Kingdom China

0 73

75

77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

World Oil Reserves Concentrated in the Middle East 58%

16%

Western Europe

6% Former Soviet Union

1%

Middle East North America 8%

8% Central and South America

Africa

3% Far East/ Oceania

Natural Gas Consumption Rising Trillion Cubic Feet 70

60

Mature Market Economies Transitional Economies Emerging Economies

50

40

30

20

10

0 1980

1990

2002

Source: EIA, International Energy Outlook 2005

2010

2015

2020

2025

Increases in Natural Gas Consumption

by Region and Country Group, 2002-2025 EE/FSU

Emerging Asia

North America

Middle East

Western Europe

Central and South America

Africa

Mature Market Asia

Trillion Cubic Feet 0

2

Source: EIA, International Energy Outlook 2005

4

6

8

10

12

14

16

Gas Production Geographically Diverse Percent 100 Rest of the World 90 Middle East 80 70 Eastern Europe & FSU

60 50

Western Europe

40

Central & South America

30

North America

20 10 0 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Gas Reserves Geographically Diverse

42% 32% Former Soviet Union

3%

4%

Western Europe

Middle East

North America

8%

4% Central and South America

Africa

6% Far East/ Oceania

Energy Issues • Energy prices and the economy: How important are energy price shocks?

– Oil price studies

• Natural Gas Supply – Secure supply – A gas production cartel

Oil Price Shocks and U.S. Recessions Index, '82-84=100 300

250

200

150

100

50

0 51

56

61

66

71

76

81

86

91

96

01

06

Classic supply shock Labor Capital Energy

Production Process

Output

An unfavorable supply shock Input Scarcity (Higher Energy Prices) GDP Growth Slows & Productivity Growth Slows

Price Level Rises

Interest Rate Rises

Wage Growth Slows

Unemployment Rate Rises

GDP and Inflation Effects of Oil-Price Shocks • U.S. – 100% oil price hike: 4% to 6% GDP loss

• Euro Area – 100% oil price hike: 1% to 4% GDP loss

• Price level rises by as much as GDP falls

Natural Gas Supply • Secure supply?

– Natural gas reserves – Natural gas exports

• A gas production cartel?

– Conditions for a strong gas cartel

World Gas Trade on the Rise Billion Cubic Meters 800 700 600 Total World Cross-border Trade

500

LNG

400 300

by Pipeline

200 100 0 1970

1975

1985

1985

1990

1995

1996

1997

1998

1999

Source: Baker Institute ‘Geopolitics of Natural Gas’ Working Paper Series; Cedigaz

2000

2001

2002

2003

Natural Gas Reserves Distribution by Region Other 22.1%

Russia 27.6%

Iraq 1.8% Venezuela 2.4% Nigeria 2.6% Algeria 2.6% Iran 15.5%

US 3.1% UAE 3.5% Saudi Arabia 3.8%

Qatar 15.0%

Natural Gas Exports Distribution by Region

Russia 28.0% Other 34.0%

Canada 15.0%

Netherlands 7.0% Algeria 8.0%

Norway 8.0%

Security of Supply • Natural gas reserves and exports: – Higher concentration among fewer countries – Geographically diversified

A Gas Cartel • For a successful cartel: – Small number of producers with large market share – Establish and enforce quotas – Control capacity expansions

A Gas Cartel • Cartel stronger if: – Demand inelastic – Fringe supply inelastic – Market share large

Is a Gas Cartel Feasible?

• Unlikely cartel partners: Canada, Norway, Netherlands • Many substitutes for gas • Potential for increased fringe supply • Enforcement expensive

Future for the Gas Market • Russia pivotal in global gas market • Competing supply will come on line as prices increase • May be harder for gas market to become as fluid as oil market

Conclusion • • • • •

Oil-demand growth not abating Middle East will dominate oil trade Gas-demand growth fastest among fuels Gas cartel unlikely in the short run Growth in LNG trade will facilitate a global gas market • Interdependence among world economies means greater stability

Developments in Energy Markets Mine Y端cel Federal Reserve Bank of Dallas www.dallasfed.org