Energy paper
luisro22
EnergyNotesOutline-1.docxAEB 2451: Lecture 15
Non-Renewable Energy: Oil
Source: U.S. Energy Information Adminstration, http://www.eia.gov/totalenergy/data/monthly/pdf/flow/total_energy.pdf
Oil energy sources suffer from all forms of market failure:
1. Imperfect competition: these take the form of oil cartels, publicly run monopolies, etc.
2. Externalities: burning oil emits greenhouse gases
3. Imperfect information: are you able to adjust consumption based on the composition of renewables versus non-renewables?
4. Imperfect property rights: the public good of a subsistence level of energy for cooking/heating and oil is a common pool resource and very few seek to protect fish from deep water oil drilling
Market failure #1 imperfect competition
OPEC (Organization of Petroleum Exporting Countries) : an organization made up of oil producing nations which determines prices and production of oil.
Founders: Iran, Iraq, Kuwait, Saudi Arabia and Venezuela; later joined by Qatar, Indonesia, Libya, the United Arab Emirates, Algeria, Nigeria, Gabon and Angola
http://www.opec.org/opec_web/en/about_us/23.htm “In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”
Substitution away from this depletable resource happens later than it would otherwise because quantity produced is lower than it would be in an efficient market. In this way, monopolists are conservations.
“A monopolist can extract more scarcity rent from a depletable resource base than competitive suppliers can, simply by restricting supply” (T&L 145).
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A monopolist faces a demand curve (exogenous) instead of a set price and can therefore set prices.
Set quantity where marginal revenue equals marginal cost (supply) Charge prices at the demand curve (determine the quantity produced and plug back into demand curve to determine price |
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Society is worse off compared to before with a dead-loss triangle equal to the blue area.
Area of a triangle:
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So why is there a cartel?
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Price elasticity of oil demand is inelastic: People will not be very responsive to changes in prices due to a lack of substitutes.
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In the short-run: In the long-run: https://www.thoughtco.com/price-elasticity-of-demand-for-gasoline-1147841 |
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Price elasticity of oil supply is inelastic: “The new oil reserves we’re now exploiting are not only more expensive to develop, but they also take much longer between the time the first well is drilled and when the first oil is produced.” https://www.forbes.com/sites/tomkonrad/2012/01/26/the-end-of-elastic-oil/#76d1ae2136d6 |
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Income elasticity of demand shows how sensitive oil demand is to growth in the world economy. Increasing income is associated with increasing oil demand. Why? People begin buying cars and producing things that require more energy!
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Non-OPEC Suppliers are prevented from entering the market because no one country (except maybe Mexico) has enough oil reserves to really make an impact on the market.
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Members have no incentive to deviate! Everyone in the cartel is better off keeping prices high. Bigger producing nations (Saudi Arabia) can exert a great amount of influence whereas smaller reserve nations (Nigeria) don’t want to deplete all of their resources in the short term. |
Oil Peak (Hubbert): Because supplies of oil are finite and there is a great deal of production, we will have a downturn in the global annual oil production
Actual oil production in the lower 48 states:
This model ignores prices. Remember that if prices aren’t high enough, we might not transition as easily to other energy sources unless these become less expensive. Hubbert got lucky because prices and government decisions followed a bell curve. Oil production will stabilize instead of continuing to decline in the future (Kaufman and Cleveland 2001).
It also ignores cheaper means of getting oil. Proven reserves have increased since 1980!
Non-renewables: Natural gas
Gas rich shale : the source rock for many natural gas resources but, until now, has not been a focus for production. Horizontal drilling and hydraulic fracturing have made shale gas an economically viable alternative to conventional gas resources.
Conventional gas accumulations occur when gas migrates from gas-rich shale into an overlying sandstone formation, and then becomes trapped by an overlying impermeable formation, called the seal. Associated gas accumulates in conjunction with oil, while non-associated gas does not accumulate with oil.
Tight sand gas accumulations occur in a variety of geologic settings where gas migrates from a source rock into a sandstone formation, but is limited in its ability to migrate upward due to reduced permeability in the sandstone.
Coalbed methane does not migrate from shale, but is generated during the transformation of organic material to coal.
Hydraulic fracturing (fracking) : the method used to extract oil and natural gas where hydraulic fracturing fluid (composed of water, sand and chemicals) is pumped into the ground creating pressure which then releases the natural gas.
Shale Gas Basins in the US
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Is the reduction in Carbon emissions from natural gas and the associated benefits with that reduction greater than the more local (and maybe temporary) environmental costs associated with fracking? · Water pollution/ land cover change · Earthquakes · Social/Community dynamics (rural communities) · NIMBY · Biodiversity impacts |
Pounds of CO2 Emitted per million Btu’s of Energy for Various Fuels
Source: https://www.eia.gov/tools/faqs/faq.php?id=73&t=11 |
Non-Renewable Energy: Coal
Source: https://www.eia.gov/energyexplained/index.cfm/index.cfm?page=coal_home
4 Types of Coal:
Anthracite : 86-97% carbon and has the highest heating value of all coal. Accounts for less than 1% of coal produced in the US in 2014 and is mainly used in the metals industry. Highest polluting! (see table on previous page)
Bituminous : 45-86% carbon; accounts for most coal produced in the US (48%) and is used for making iron and steel. Mines exist in WV, KY, PN, IL, & IN.
Subbituminous : 35-45% carbon; really old and mostly found in Wyoming (~90%)
Lignite : 25-35% carbon; lowest energy content; mostly young deposits located in TX and ND.
International Energy Statistics: https://goo.gl/OjtpQ9
Market failures inherent in Coal:
1) Externalities: Carbon emissions from burning it (climate change)
2) Externalities/Imperfect property rights: Mountaintop removal and valley fill mining impacts ecosystems in Appalachia. Explosions are loud and dust is prevalent!
3) Imperfect information: risk of death is understated and some feel they have no alternative; risks include accidents as well as air quality health impacts
Source: https://www.aei.org/publication/chart-of-the-day-coal-mining-deaths-in-the-us-1900-2013/
Source: https://www.iea.org/newsroom/news/2016/december/medium-term-coal-market-report-2016.html
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