World Energy Markets
NS4053
Wk 5.1
World energy use to 2035
US EIA Outlook (2010)
Source: BP Statistical Review of World Energy 2012
World energy markets
• Oil is the center of gravity of international
trade in energy.
• Jaffe et al: Proven reserves a misleading
indicator.
– Proportional to economic feasibility and
technological feasibility.
• Argument: higher world oil prices change
economic feasibility and technology
availability
Conventional and unconventional fuels
• Today: underinvestment in conventional oil
production and new investment in
unconventional fuel sources.
– NOCs underinvest in new production and in
exploration as revenue diverted to consumption.
– Social mobilization against FDI (e.g. Bolivia).
– Insurgency (e.g. Nigeria).
– OPEC prefers higher prices over higher
production.
– High prices prompt shift to unconventional fuels.
Possible responses
• Policies to mitigate risk associated with
uncertain politics in some states with large
conventional oil reserves.
• Greater investment in unconventional fuel
production located in stable developed states.
• Greater investment in energy efficiency in
developed states.
• Notice: not IOCs go out and find more
resources.
Possible changes in energy
consumption patterns
• Electrical markets relatively insensitive to
price shocks due to diversification.
– Coal, nuclear, solar, wind, geothermal, tidal, etc.
– Driven by mix of domestic or regional level factors.
• Transportation market highly sensitive to
international price shocks re: oil.
– Expected results?
US Energy sources and uses
Politics of
energy foreign direct
investment (FDI)
• Obsolescing bargain model
– IOCs have leverage over states when negotiating
initial bargain.
• Have capital and technology which can be invested
many places, states have resource that it is unable to
develop initially.
– States gain bargaining advantage as IOCs develop
larger and larger fixed asset base.
• Now capital cannot move and is vulnerable to state.
Explaining conflict over energy FDI
• International price of energy drives
renegotiation of obsolescing bargains.
– Low price = lack of rents = privatization
– High price = high rents = renegotiation
• Competition among IOC and NOCs
– Low competition = low conflict
• Alternative sites to invest
– States have less bargaining power when IOCs can
go elsewhere.
Contemporary politics of international
energy
• High prices during 2000s
• Petro-political cycle predicts market politicization
• Resurgent National Oil Companies (NOCs)
– Control large proportion of proven reserves (70-90%).
– Have grand ambitions, deep pockets.
– Make investment decisions based on politics and
economics.
• Uncertainty over climate change mitigation
policy.
– Major prescription is decarbonization of economies.
Alternative esponses to international
energy market politicization
• IOC sector shake out.
– Either consolidation or atomization.
• IOCs shift towards domestic sources of
production, new technologies, and efficiency
in developed countries.
• Developed countries pursue increasingly
‘hybrid’ approach to energy security.
– Developed countries more aggressively backing
IOCs.