16010 AB 10/09/05 SAND2005-6121C

A Global Perspective onEnergy Markets and Economic Integration

Presented to the:Association for University Businessand Economic Research (AUBER)

“59th Annual AUBER Fall Conference: Energizing the Economy”October 9, 2005

Presented by:Dr. Arnold B. Baker

President, International Association for Energy EconomicsChief Economist, Sandia National LaboratoriesPhone: 505-284-4462 Fax: 505-844-3296

Email: abbaker@sandia.govSandia is a multiprogram laboratory operated by Sandia Corporation, a Lockheed Martin Company,

for the United States Department of Energy under contract DE-AC04-94AL85000.

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Economic Prosperity and Stability Require Access to Reliable and Affordable Energy

Source: Royal Dutch Shell, “Exploring the Future – Energy Needs, Choices and Possibilities”

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Oil Prices (1890 - 2004)

0

10

20

30

40

50

60

70

80

90

100

1861

1881

1901

1921

1941

1961

1981

2001

Do

llars

per

barr

el

($2004

)

Real Oil Prices Have Varied Considerably and Affect Economic Well Being

Source: BP Statistical Review of World Energy June 2005

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Future Oil Price Expectations are Driven by Recent History

$2002 US/Barrel

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While Oil’s Share of GDP Declined Since1973 It May Becoming More Important (US)

Paul Sarkey, A Scratched Record: Oil Price Upgrade, DeutscheBank, July 11, 2005

Real Oil Prices and Oil’s Share of US GDP

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Over the Near to Medium Term, Oil and Gas Markets Face Many Uncertainties

What will be the effect of

• Iraqi Domestic instability on Iraqi oil production

• Negotiations surrounding Iranian nuclear technology on Iranian oil supplies

• Saudi commitment to expanded oil production

• President Putin’s policies on Russian oil and natural gas supplies

• President Chavez’s policies on Venezuelan oil supplies

• Higher oil prices on world economic growth

– Effect of economic growth on oil demand in China, India, U.S., etc.

• Higher oil prices on non-OPEC oil supplies

• Katrina’s impact on crude and refined products

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Over the Longer Term, World Energy Demand and Carbon Emissions

will Grow Over 40 Percent

Energy DemandEnergy Demand Carbon Dioxide Carbon Dioxide EmissionsEmissions

and Developing Countries will Account for 70 % of the Increase

Source: USDOE EIA IEO 2004 Reference Case

Oil

Natural Gas

Coal

NuclearOther

0

100

200

300

400

500

600

700

2005 2010 2015 2020 2025

Qua

drill

ion

BTU

s

Developed

Developing

0

5

10

15

20

25

30

35

40

2005 2010 2015 2020 2025

Bill

ion

Met

ric

Tons

Car

bon

Dio

xide

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The Climate ChangePolicy Problem is Enormous

• The theoretical climate change relationship is between

atmospheric concentrations of GHG and climate change, not

annual emissions

• According to the Intergovernmental Panel on Climate

Change, stabilizing atmospheric concentration of GHG at

current levels would require permanent emissions reductions

of 60% or more below current levels– Kyoto Protocols: Industrialized countries agreed to reduce

emissions, on average, 5.2% from 1990 levels by 2008-2012

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Current Fossil Alternatives areHydro/Renewables and Nuclear,

with Carbon Sequestration being Explored

Source: USDOE EIA IEO 2004 Reference Case

World Energy Demand

0

100

200

300

400

500

600

700

2005 2025

QU

AD

S

Hydro/Renewables

Fossil

Nuclear

Fossil

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Carbon Sequestration Technologies will Add Costs to Fossil Fuels

0

10

20

30

40

50

60

70

80

Integrated GasificationCombined Cycle

Pulverized Coal

$ /

ton

CO

2 A

void

ed

21 20

12

5

22

-20

-10

0

10

20

30

40

50

Enhanced OilRecovery

EnhancedCoalbedMethaneRecovery

DepletedGas

ReservoirBase

Depleted OilReservoir

Base

Deep SalineAquifer

Disposal Method

$/ t

CO

2 A

void

ed

Transport & DisposalCaptureTotal

Using Integrated GasificationCombined Cycle

Capture Cost Ranges

Source: David, 2000

Sources: Heddle et al., 2003.

$25/Ton CO2 = About $13/bbl Oil

CO2 Seq. < $3/Ton CO2 (2015) USDOE Program Target

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Over the Longer Term, Electricity Demand will Grow Almost 60%

and Developing Countries will Account for 2/3 of the Increase

Source: USDOE EIA IEO 2004 Reference Case

0

5

10

15

20

25

2005 2025

Tri

llio

n k

Wh

US

OtherInd

EE/FSU

Other Developing

China

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Current Renewable Electricityis Largely Hydro

02468

101214161820

2000

Pe

rce

nt

of

Wo

rld

Ele

ctr

icit

y

Pro

du

cti

on

(2

00

0)

Hydro

Combustible & Waste

Other

1%

17%

1%

Solar

Wind

Geothermal

Etc.

Source: Renewable Information 2002, IEA

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Nuclear Contributes toElectric Power in Many Countries

0

10

20

30

40

50

60

70

80

90

100

Arg

entin

aA

rmen

iaB

elgi

umB

razi

lB

ulga

riaC

anad

aC

hina

Tai

wan

Cze

ch R

epF

inla

ndF

ranc

eG

erm

any

Hun

gary

Indi

aJa

pan

Kaz

akhs

taK

orea

, S

Lith

uani

aM

exic

oN

ethe

rland

Pak

ista

nR

oman

iaR

ussi

aS

lova

kia

Slo

veni

aS

outh

Af.

Spa

inS

wed

enS

witz

erla

nd UK

Ukr

aine

US

A

(Source: WNA, 2004)

Percent Share 2003

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New Nuclear Electricity Plants are Cost Competitive in US,

Depending on Capital Cost and Perceived Risk

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Dependence on Oil and Gas Tradewill Grow Considerably

0

1 000

2 000

3 000

4 000

5 000

6 000

Mto

e

2002 2030 2002 2030 2002 2030

Domestic consumption Traded between regions

Oil CoalGas

14%

15%46%

63%

15%

26%

Trade as % of world demand

0

1 000

2 000

3 000

4 000

5 000

6 000

Mto

e

2002 2030 2002 2030 2002 2030

Domestic consumption Traded between regions

Oil CoalGas

14%

15%46%

63%

15%

26%

Trade as % of world demand

Source: World Energy Outlook 2004, IEA

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0

5

10

15

20

25

2005 2010 2015 2020 2025

US Oil Production will Stabilize,While Net Imports will Grow 60%

Petroleum Production

Petroleum Product Imports

Crude Oil Imports

Source: DOE/EIA AEO2005

MM

B/D

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0.0

5.0

10.0

15.0

20.0

25.0

2005 2010 2015 2020 2025

US Natural Gas Production will Grow 13% Imports will Grow 157%

Other Imports

Production

Source: DOE/EIA AEO2005

TC

F

LNG Imports

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0

20

40

60

80

100

120

140

Qu

ad

rilli

on

BT

Us

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

US Energy Use Will Grow 31% by 2025

Fuel share 2005 2025Oil 40% 41%Natural Gas 22% 24%Coal 23% 23%Nuclear Power 8% 7%Renewables / Hydro 6% 6%

Source: DOE/EIA AEO2005

Oil

Renewables /HydroNuclear

Coal

Natural Gas

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0

1000

2000

3000

4000

5000

6000

20

05

20

07

20

09

20

11

20

13

20

15

20

17

20

19

20

21

20

23

20

25

US Electricity Generation will Grow By 42%

Coal

Nuclear

Natural Gas

Renewables

Source: DOE/EIA AEO2005

Oil

Bil

lio

n k

Wh

Fuel share 2005 2025Coal 54% 54%Oil 3% 2%Natural Gas 12% 20%Nuclear 21% 16%Renewables 10% 8%

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World Conventional Proved Fossil Fuel Reserves are Geographically Concentrated

100100100Total

382621ROW

9**India

2532U.S.

1212China

*25Venezuela

16286Russia

0152Qatar

036UAE

0110Kuwait

*1510Iran

0211Iraq

0425Saudi

*4064Key P.G.

CoalGasOilRegion

Sou

rce:

EIA

200

3. E

xclu

des

Oil

San

ds. *

Les

s th

an 0

.4 %

(Percent Share)

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A Wide Range of Prospects for Alternative Liquid Fuels, But will Take Time to Develop

0

10

20

30

40

50

60

70

80

Wor

ld O

il Pric

e

Saudi O

il

U.S. O

il

Canadian

Tar San

ds

Qat

ar G

TL

China

CTL

S. Afri

ca C

TL

Brazilia

n Eth

anol

Oil S

hale

$/b

bl

Illustrative Oil Production Costs

Illustrative Alternative Fuel Production Costs

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National Economies are BecomingIncreasingly Intertwined

0

10

20

30

40

50

60

World LowIncome

MiddleIncome

Low &middleincome

HighIncome

Per

cen

t

1990

2002

Source: The World Bank, 2004.

0

5

10

15

20

25

World LowIncome

MiddleIncome

Low &middleincome

HighIncome

Per

cen

t 1990

2002

Trade in Goods (% of GDP)

Gross Private Capital Flows(% of GDP)

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So are Manufacturing Processes

Source: Wall Street Journal, June 9, 2005, p. B1

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And Even Universities

Source: Wall Street Journal, July 12, 2005, p. B1

Study Abroad - Singapore has courted top-tier schools:• 1998: French business school INSEAD

– Offers MBA, executive education

• 2000: University of Chicago– Graduate School of Business opens a Singapore campus

• 2003: Johns Hopkins Singapore– Operates as a full division of the university

• 2003: Duke– Medical school agrees to open a school at the National University

of Singapore

• 2005: MIT– Grants engineering master’s degrees in a joint venture with two

Singaporean universities

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And this Trend Toward Interdependency will Accelerate

• The Internet and silicon revolution will continue to break

down communication and economic barriers

– Greater numbers of countries will participate in the world

economy and financial markets

– Integrated supply chain logistics of service & manufacturing

industries will seamlessly cross national borders

• As will distance education and technology transfer

• Both global economic competition and global economic

cooperation will intensify

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And this Trend Toward Interdependency will Accelerate (continued)

• Scope for national public policies with major economic

impact will become more limited

– Can’t afford to have costs out of line with competitor countries

– Growing need to send domestic energy consumers and

producers consistent market signals, and to integrate domestic

energy security, environmental and economic objectives and

polices

– Driven toward greater policy and regulatory harmonization

(lowest common denominator?)

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And this Trend Toward Interdependency will Accelerate (continued)

• Supply and demand shocks will be transmitted more

rapidly

Country Global Market Country

• Science and technology developments will accelerate

and transcend high tech national borders

– But they are unlikely to “solve” energy and environmental

problems any time soon

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Some Governments and Car Companies are Aiming for a Hydrogen Economy

• Hydrogen may solve many problems:

– Lowered, or even zero, carbon emissions– Energy security– Limited fossil fuels and uneven distribution

Source: Fuelcell.org

Source: GM

• Many hurdles to overcome:

– Lifetime of fuel cell– Economic hydrogen production– Lack of hydrogen infrastructure– Sequestration of carbon if

hydrogen derived from fossil

fuels– Unlikely to be cost competitive

until at least mid 2020s

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Over Several Decades, Advanced Energy Technologies

could “Disrupt” the Current System

• Nanotechnology has the potential to fundamentally change energy supply and demand

Lauren Rowher, SNL

• Examples:

– Solid State Lighting Using “Quantum Dots” could cut power for lighting use by 50%

– Ultra-high strength lightweight nanophase materials could improve car, airplane efficiency

– Nanoparticles and Nanoarchitectures for Energy Conversion and Storage may offer solutions to low cost fuel cells and batteries

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Conclusions

• Over the nearer term– Many uncertainties in oil and natural gas markets remain

• Over the longer term– The world economy and its energy markets will become

increasingly integrated and interdependent

– Energy use and carbon emissions will grow substantially, driven by the developing world, and mostly fueled by fossil energy

– The potential for oil and natural gas supply shocks will grow, as will the economic transmission of those shocks

– Oil and natural gas price instability will increase

– Major new energy technology platforms that transform economies and energy could emerge

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Conclusions (continued)

• At the same time

– Both economic competition and cooperation will intensify

– Scope for national public policies with major economic impact

will become increasingly limited

– Need for clear domestic consumer-producer energy price signals

and consistent energy security, environmental and economic

objectives and policies will grow

– Pressure for policy and regulatory harmonization will increase,

as will requirements for decision-making speed, and the cost of

mistakes will grow

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Conclusions (continued)

• International flexibility, cooperation and partnering on

many fronts, including public policy and science &

technology investment, will be critical to

– Avoid bumps in the road

– Support national political economic security

– Improve the health and well being of the developing world

– Provide a foundation for global and regional prosperity and

environmental sustainability