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