Dialogue 1

Dialogue

Vol. 11, No. 3

Price and Non-OPEC Oil Supply: The Nut Behind the Wheel?

Technological Change and the Continuing Puzzles and Implica-tions for Climate Policy

69

United States Association for Energy Economics: An Affiliate of the IAEE

Middle East Oil: What’s the Alter-native? 14

November 2003

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PossibleConcurrent Sessions

Call For Papers (Submission Deadline February 3, 2004

Concurrent sessions will be developed from the papers selected for the program. The following is a non-ex-clusive list of possible topics: International energy markets, power markets, green markets, energy security, energy policy, en-ergy and the global economy, regulation vs. competition, transportation, global economic outlook, role of paper markets, new technologies in the en-ergy industry, energy environment nexus, natural gas supply, LNG, economic impacts of price volatility, role of sub-national governments, etc.

All topic ideas are welcome and anyone interested in organizing a session should propose the topic and possible speakers to: Wumi Iledare, Concurrent Session Chair (p) 225-578-4552 (f) 225-578-4541 (e) wumi@lsu.edu

Abstracts for papers should be between one to two paragraphs (no longer than one page), giving a concise overview of the topic to be covered. At least one author from an accepted paper must pay the registration fees and attend the conference to present the paper. The lead author submitting the abstract must provide complete contact details - mailing address, phone, fax, e-mail, etc. Au-thors will be notified by February 17, 2004 of their paper status. Authors whose abstracts are accepted will have until April 6, 2004, to return their papers for publication in the conference proceedings. While multiple submissions by individuals or groups of authors are welcome, the abstract selection process will seek to ensure as broad participation as possible: each speaker is to present only one paper in the conference. No author should submit more than one abstract as its single author. If multiple submissions are accepted, then a different co-author will be required to pay the reduced registration fee and present each paper. Otherwise, authors will be contacted and asked to drop one or more paper(s) for presentation. Abstracts should be submitted to:

Official Conference Website: www.usaee.org

2004“Energy, Environment andEconomics in a New Era”24th USAEE/IAEE North American Conference

July 8-10, 2004, Capital Hilton, Washington D.C.

Presented ByNCAC

National CapitalArea Chapter

IAEE

United States Associationfor Energy Economics

International Associationfor Energy Economics

Conference Objective

Plenary Session Themes

Conference Organizers

Explore commercial and policy strate-gies for an era that features energy resource challenges, higher envi-ronmental requirements, advanced technologies, renewed economic concerns and important changes in global politics.

General Conference Chair: Mine YucelProgram Co-Chairs: Louis Aboud, Alex Farrell, Kate OffringaArrangements Chair: David L. WilliamsUSAEE VP for Conferences: Shirley J. Neff

A New Era in Oil Market Management, State & Regional Ascendancy in Energy Policy, Commercial Issues: Operating in Volatile Markets, The Price of Balancing the North American Gas Market, Impact of Climate (Non) Policy on the Energy Sector, Competition in the Electricity Industry?, International LNG, Electricity Reliability.

David Williams, Executive Director USAEE.28790 Chagrin Blvd., Suite 350 Cleveland, Ohio 44122, USA. Ph) 216-464-2785 Fax) 216-464-2768 E-mail) usaee@usaee.org

USAEE will once again offer the USAEE Best Student Paper Award ($1,000 cash prize plus waiver of conference registration fees). If you are interested, please contact USAEE Headquarters for detailed applications / guidelines. Student Participants: Please inquire also about our scholarships for conference attendance.

Interested in touring Washington? Visit http://www.dcregistry.com/sights.html or http://sc94.smeslab.gov/tour/tour.html

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Contents

Features

President’s Message 3Editors Corner 4USAEE News 4Calendar 24

Articles

Price and Non-OPEC Oil Supply: The Nut Behind the Wheel?Michael C. Lynch 6

Technological Change and the Continuing Puzzles and Implications for Climate PolicyIan Sue Wing and Richard S. Eckaus 9

Middle East Oil: What’s the Alternative?Mamdouh G. Salemeh 14

DialogueVol. 11, No. 3 ($10.00)

November, 2003www.usaee.org

Dialogue

Dialogue is a tri-annual publication of the United States Association for Energy Eco-nomics. Subscriptions are dependant on membership with USAEE. Reprints are avail-able for $10 US and Canada.

Editor: Wumi Iledare

Submissions

Articles, notices, news of chapter events and relevent energy news can be sent to the editor.

Wumi IledareLSU Center for Energy StudiesEnergy Coast & Environment BuildingBaton Rouge, LA 70803-0001wumi@lsu.eduFax: (225)578-4541Tel: (225)578-4552

President’s Message

The 23rd USAEE/IAEE North American con-ference took place in Mexico City on October 19-21st. This was the first time that the North

American Conference was held in Mexico. The sell-out crowd of 300 attendees, the extraordinarily stimulating program and majestic surroundings of the ancient city of Tenochtitlan make it highly likely that there will be a repeat performance. With the enthusiastic and able assistance of the Mexican and Canadian affiliates of the IAEE, the North American conference has clearly moved to a new level of regional interest that we hope

will characterize all of our future meetings.When I arrived back in London after a month in North America, the pile of

mail confronting me included a copy of the October 25th Economist magazine. The bleak cover, that could have been a still from The Road Warrior, featured a pair of abandoned and shattered gasoline pumps and a bold title: “The end of the Oil Age.” The Economist reminded its readers that this October was the 30th anniversary of the Arab/OPEC oil embargo, and quoted US President Jimmy Carter in 1977 saying that the diagnosis of the energy crisis was quite simple. “Demand for energy is increasing while supplies of oil and natural gas are diminishing.”

A quick check of the EIA, IEA and BP statistics shows that world oil prouction was about 62 million b/d in 1977 and will reach 78 mmb/d in 2003. Global natural gas production nearly doubled over the same period, from 130 billion cf/d to 255 bcf/d. Just for the record, coal production is up over 40%, hydro generation (along with other renewables) increased by over 75%, and nuclear power more than quadrupled. Carter was right that demand for energy was increasing- but his warning that oil and gas supplies were diminishing was demonstrably wrong. Perhaps Carter’s advisors were influenced by the implications of “The Limits to Growth” report of 1972 authored by Donella Meadows and colleagues. Clearly, the perception in the mid-1970s was that demand for non-renewable resources was outstripping supply. This view is still held by many economists and policy makers.

“The Limits to Growth” was mainly concerned with the long term (100 years) and the impact of population growth and affluence on demand. It was not focused on oil and energy, but its main message resonates with many who are interested in energy economics. The adherents of “Limits” believe that with no major change in the relationships that have traditionally governed world development, society will run out of the nonrenewable resources, precipitat-ing a catastrophic failure of the economic system. The history of agricultural overshoots and collapses provides a worrisome background for those who accept this view.

My vision for the future leans more toward Herman Kahn’s 1976 re-sponse to “Limits”. Kahn did not believe in a static view of the future, and this theme was the central point of his analysis, titled “The Next 200 Years: A Scenario for America and the World.” The word “new” appeared often in Kahn’s papers- new technologies, new wealth, and new conditions of domestic life. Kahn directly addressed the world’s energy future by constructing a list of technologies that could provide affordable power if oil and gas could not. The possibilities envisioned in “The Next 200 Years” included clean coal, coal gasification, shale oil; nuclear fission and fusion, geothermal, windmills, photovoltaics, and ocean thermal power. Progress continues in many of these new technologies identified by Kahn and on others that he missed.

To the fans of “Limits” thinking, growth in energy and the economy has to inevitably end, with the only issue being whether the conditions under which this occurs will be congenial or hostile- and they seem to lean toward apocalyptic finales. To others, technological innovation and societal change hold out the potential for growth that is limited only by our ability to imagine it. To decry that renewable energy forms have made so little market share progress since the mid-1970s misses the point that oil and gas have continued to grow at the

(continued on page 4)

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price levels we’ve experienced over the last 30 years.The Economist article also lamented what it sees as the

world’s dangerous and growing reliance on OPEC and Saudi Arabia for oil. Back to the statistics again, I see that the Saudis were producing about 9.5mmb/d in 1977 and about 8.5mmb/d this year. OPEC’s output was over 31mmb/d in 1977 and is well below that currently. OPEC’s market share has slipped from over 50% in the mid-1970s to under 40% now. The world has found alternatives to OPEC oil. In the short-run, it is certainly possible that a political disturbance in Saudi Arabia could cause a disrup-tion to oil supply resulting in an oil price rise. We have seen that happen this year with troubles in Venezuela, Iraq, and Nigeria. Spare oil capacity is manly in Saudi Arabia and this could be a problem, but the oil markets seem to have muddled through it all recently without causing a significant level of harm to either the economy or consumers.

Do we really need governments to impose “radical alterna-tives” by forcing change, or can we assume that price signals and technological advances will work? Research undertaken at Oxford University by David Hendry shows that forecasts often go wrong not so much because of poor methods, bad models, or inaccurate data- but because of substantial unexpected events. Columnist Josh London has observed that when forecasts carry implications for policy, everybody has a stake in a certain outcome colored by their biases. With these remarks in mind, I’m hesitant to make my own forecast, but here it is: I seriously doubt that the end of the Oil Age is coming anytime soon. And when it does come, it will be an orderly transition to something better.

Adam Sieminski

USAEE NewsEditor’s Corner

USAEE Student Scholarship Fund: A Call for Support

USAEE is proud to continue its student scholarship fund. Funds are used to cover the cost of registration fees for students attending the annual conference of the USAEE/IAEE. Students must submit a written application and letter from their student advi-sor requesting that funds be granted. At the Mexico Conference, sixteen students qualified to have their conference registration fees waived in an effort to share our conference experience, the field of energy economics and networking opportunities with other students. Further, inviting student participation at our confer-ences is one of the best mechanisms for recruiting new members to the USAEE.

2003’s student scholarship fund has been generously provided by the support of the following organizations/individuals:

ConocoPhillips ExxonMobil CorporationLeonard Coburn Joseph Dukert

Recognizing the need for interested and qualified graduates, many funding organizations view the program as supporting edu-cation as well as recruitment. The USAEE has started its campaign for scholarship funds for the 2004 North American meeting in Washington, DC, July 8-10. Contributions have ranged from $50 to $2500. If you would like to receive information on how your or your company can become a supporter of this program, please contact Dave Williams, USAEE Executive Director at (p) 216-464-2785, (f) 216-464-2768, or usaee@usaee.org

Do You Want to Start Your Own USAEE Chapter?The requirements for starting a USAEE Chapter are

straightforward – You must have a viable group of at least 20 individuals all of whom must join the USAEE and have orga-nized to the point of adopting a set of bylaws and a group of elected officers. Sample bylaws can be requested and obtained by calling USAEE Headquarters at 216-464-2785. USAEE dues are $65.00 per person, per year for a subscription to The USAEE Dialogue, The Energy Journal and IAEE Newsletter. Student membership is $35.00. USAEE bills members directly for their membership in the Association. Chapter membership must be open to all individuals whose work or interest is in the field of energy economics. If you have any further questions regarding the establishment of a USAEE Chapter, please do not hesitate to contact David Williams at USAEE Headquarters, phone: 216-464-2785; email: usaee@usaee.org A complete Chapter start-up kit can be mailed to you.

President’s Message (continued from page 3)

In this fall edition of USAEE Dialogue, Michael C. Lynch, President, Strategic Energy and Economic Research, provides an overview of the trends in investments in the petroleum E&P industry and concludes that there seems to be no slackening in global E&P investments, particularly outside the U.S. Dr. Mam-douh G. Salameh, Director, Oil Market Consultancy Service in the U.K. reviews the emerging sources of oil supplies outside the Middle East and offers four important reasons why none of these alternative sources could, individually or collectively be substitutes for Middle East oil. Dr. Ian Sue Wing and Dr. Richard Eckaus of the MIT Joint Program on the Science and Policy of Global Change attempt to examine the implications of technologi-cal change and long-run decline in U.S. energy policy on climate policy. The authors suggest that technical progress, although a significant factor in reducing energy intensity in manufacturing sectors is not the dominant factor.

As always, we encourage submissions of articles from the membership. We welcome a policy or analytical debate on topical issues of energy concerns between two experts (for example, see USAEE Dialogue 1994 Vol. 2 (1) pp.3). We also want to publish your recent work. Send us abstracts of your most recent working papers and unpublished and published research papers. Further, we want to publish short articles on research centers (academic, government laboratories, etc) around the country working on energy economics and policy. Please send new articles, notices, news of chapter events, and relevant energy news to the edi-tor via e-mail (wumi@lsu.edu.), by fax (225-578-4541) or by regular mail (Center for Energy Studies, 1107 Energy, Coast and Environment Building, Louisiana State University, Baton Rouge, LA 70803). Members are also encouraged to let the Dialogue know of changes in their position and/or honors received. Again, remember, this is your Newsletter.

Wumi Iledare

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Dialogue DisclaimerUSAEE is a 501(c)(6) corporation and neither takes any

position on any political issue nor endorses any candidates, parties, or public policy proposals. USAEE officers, staff, and members may not represent that any policy position is supported by the USAEE nor claim to represent the USAEE in advocating any political objective. However, issues involving energy policy inherently involve questions of energy econom-ics. Economic analysis of energy topics provides critical input to energy policy decisions. USAEE encourages its members to consider and explore the policy implications of their work as a means of maximizing the value of their work. USAEE is there-fore pleased to offer its members a neutral and wholly non-partisan forum in its conferences and web-sites for its members to analyze such policy implications and to engage in dialogue about them, including advocacy by members of certain poli-cies or positions, provided that such members do so with full respect of USAEE’s need to maintain its own strict political neutrality. Any policy endorsed or advocated in any USAEE conference, document, publication, or web-site posting should therefore be understood to be the position of its individual au-thor or authors, and not that of the USAEE nor its members as a group. Authors are requested to include in an speech or writing advocating a policy position a statement that it represents the author’s own views and not necessarily those of the USAEE or any other members. Any member who willfully violates the USAEE’s political neutrality may be censured or removed from membership.

Notes from the North American MeetingThe Mexico City conference of the USAEE proved to be

a great success, both in terms of content and attendance. Not only were there 300 attendees, the highest turnout for several years, but as one panel chair remarked, “The amount of exper-tise in the audience was extraordinary." This led to some very interesting discussions and interchanges.

Two primary foci of the conference were the North Ameri-can natural gas situation and the state of the Mexican energy industry and its regulation. The former appears to be in worse shape at the moment, but quite a number of speakers were argu-ing for reform of the latter. A number of speakers addressed the recent Northeastern electricity blackout, notably Michehl Gent from NERC, who described the sequence of events as now understood.

The North American natural gas situation was dominated by concerns about domestic supply in the U.S. and Canada, as well as the need to meet higher demand from the power gen-eration. Matt Simmons, in a luncheon presentation, presented the results of the new national petroleum Council study which highlighted the changes in the market that have occurred in the last few years, leading to substantially higher prices. He noted that this was a 180 degree reversal from the results of the 1999 NPC study, which was much more optimistic about rising supply and moderate prices. Several other speakers, however, admitted to fears that a few years from now the situation might change another 180°.

In another plenary, senior executives from various Pemex divisions (planning, upstream, downstream, and petrochemi-cals and gas) reviewed their investment plans and approaches, discussing both the methods they used in assessing their goals and operations and the expected future expenditures to meet rising demand and environmental upgrades. The controversy over multi-service contracts for natural gas production was dis-cussed, partly in the context of earlier remarks by Jose de Jesus Valdez of Grupo Alpek, who thought domestic private sector investment could lead to 2 bcf/d of gas exports to the U.S. in a short time.

Conference Proceedings on CD Rom22nd North American Conference

Vancouver, BC, Canada, October 6-8, 2002The Proceedings on CD Rom from the 22nd Annual North American Conference of the USAEE/IAEE held in Vancouver, BC, Canada are now available from USAEE Headquarters. Entitled Energy Markets in Turmoil: Making Sense of it All, the price is $85.00 for members and $105.00 for nonmembers (includes postage). Payment must be made in U.S. dollars with checks drawn on U.S. banks. Please complete the form below and mail together with your check to: Order Department, USAEE Headquarters, 28790 Chagrin Blvd., Suite 350 Cleveland, OH 44122, USA.Name _______________________________________________________________________________________________ Address _____________________________________________________________________________________________City, State, Mail Code and Country _______________________________________________________________________

Please send me ____ copies @ $85.00 each (member rate) $105.00 each (nonmember rate). Total enclosed $_________ Check must be in U.S. dollars and drawn on a U.S. bank, payable to USAEE.

Some other worthy presentations included Mario Molina’s after dinner discussion of global climate change and Jean Marie Bourdaire’s summary of the upcoming World Energy Council long-term outlook, as well as Elissa Sterry’s presentation of ExxonMobil’s new forecast to 2020.

Mike Lynch

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Price and Non-OPEC Oil Supply: The Nut Behind the Wheel?

By Michael C. Lynch*Recent years have seen increasing concerns about non-

OPEC supply and particularly the impression that higher prices have not generated an adequate supply response. The number of rigs directed at oil targets outside the US remains about 10% below the level of the mid-1990s, despite prices that are 50% higher, and in the US, the number of oil rigs remains far below earlier levels. At the same time, higher gas prices in the US have resulted in higher drilling, but the supply response has so far been disappointing. To some, this suggests that price and supply are becoming disconnected and that longer-term prices will need to be higher in order to elicit the necessary supply response.

In particular, it has been said that the oil industry has not raised its upstream investments in concert with the higher prices seen over the past three years, and that this presages poor performance for non-OPEC supply, particularly outside the former Soviet Union (FSU). For example, the past three years have seen relatively weak growth outside of the Former Soviet Union, especially with the apparent peaking of the North Sea. (Figure 1)

Figure 1Change in Non-OPEC Production by Region, tb/d,

FSU excluded

At the same time, most forecasts of near-term non-OPEC supply appear to be relatively robust, anticipating increases of 1-1.5 mb/d next year. The implication is that supply behav-ior is more complex than a simple indicator like drilling rigs can demonstrate. The question at hand is the degree to which changes in investment patterns might be occurring, and the im-plications for future non-OPEC supply.

Two particular conclusions have been drawn, with very different implications. First, that the industry might be facing a lack of geological prospects, which would indicate that, it cannot maintain production growth over the longer term. But an economic constraint, that returns are insufficient in relation to other industries, also implies overinvestment—the industry

is too willing to accept excessive taxation. The former is a difficult, if not insoluble, problem, while the latter requires a change in behavior. Both imply lower non-OPEC supply in the longer term.

Problems of Interpretation

For a number of reasons, it is hard to take these concerns too seriously, especially given the many analytical difficulties involved. (See Lynch 2002) The first problem is that most of these arguments rely heavily on snapshots or anecdotal data, which can be extremely misleading. Among the factors that can make observed behavior inappropriate for determining long-term trends are:

• Changes in the ratio of oil to gas prices (primarily in N. America)

• Unfavorable borrowing climate due to external events, as in the post-Enron reluctance to lend to the energy indus-try;

• Relative changes in other industries, such as the dot-com boom, which absorbed much capital and many talented people; and

• Mergers and acquisitions, which can slow corporate opera-tions.In addition, although under basic microeconomic theory,

the industry should be seeking to maximize profits, real-world behavior diverges from this often, albeit moderately. In the late 1970s and early 1980s, for example, many oil companies focused on diversifying away from the ‘mature and unstable’ petroleum business, partly in response to limited upstream op-portunities, but also as finance theory and investors argued for diversification of revenues. Following that debacle, US compa-nies especially have tended to be more focused on profitability than other measures of success, but there have been notable exceptions, including recent pressures to improve ‘growth’ or ‘volume’ in response to arguments that over the long run, com-panies cannot be successful while shrinking in size.

An important caveat involves the poor quality of the data. In this instance, detailed, country level data might be prefer-able despite the inherent data unreliability, but only relatively aggregate data is available for many variables, reducing its utility. For example, spending surveys and cash flows are difficult to assemble on a country-by-country or company-by-company basis, but are published by some institutions on a regional or global level. Similarly, drilling rig data—which at one time was highly representative of effort—is no longer as valid because of the huge differences in rig sophistication that are hidden by data (which is usually split between onshore and offshore only). A rig is no longer a rig. Further, the availability of drilling targets (of oil and gas) is a valuable addition to data, but on a global level has been done only since 1995. And sadly, one of the most valuable public data series, Chase Manhattan’s capital expenditures survey, has been discontinued.

Actual Behavior

The next reason for optimism involves a closer look at the data. As mentioned, detailed investment data is difficult to find, and dollars invested do not translate exactly into capacity add-*Michael Lynch is President of Strategic Energy & Economic Re-

search. He has served USAEE/IAEE in various capacites including president of USAEE.

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ed. However, the argument that companies are not investing at rates commensurate with the changed market does not seem ac-curate. As Figure 2 shows, expenditures appear to be high and rising. Certainly, they do not imply a failure to recover from the 1998 oil price collapse.

Figure 2Global E&P Expenditures

Note: Some of the Salomon data are projected, not actual.

Furthermore, the estimates of the US cash recycle rate (E&P expenditures divided by cash flow) for the major compa-nies shows no significant drop over the past decade, and indeed appears to show an increase. (DOE Performance Profiles)

A Supply Model

In theory, non-OPEC supply can be predicted as a simple function of price, using short- and long-term elasticities, as some models have done in the past. However reality has proved rather confounding, as lower prices have meant higher supply, especially long-term.

This is not a case of water running uphill, but rather one of intervening variables, particularly costs and taxes, which do not remain constant as prices change. Also, the incredible volatility of oil prices has meant that the supply side cannot re-spond precisely to price changes, as capital investment involves very serious lag times which are not stable nor well measured. Additionally, costs to companies are not always transparent, as rig rates might be locked in for a period of time, allowing companies to continue drilling while costs are rising and there are other, more difficult to quantify factors involved, including lease requirements, which often necessitate drilling to avoid having the concession revert to the government.

The Independent Variable

The most preferred explanatory variable for supply fore-casting is price, partly in keeping with economic theory but also because it is by far the most accessible data. But since the upstream industry faces production taxes that are usually tied to price, industry revenue is not precisely related to the price of oil. This can be hard to demonstrate over the longer term, because of changes in volumes within the industry due to a combination of mergers and acquisitions, asset sales and purchases, and nationalization of upstream interests. However, Figure 2, using the FRS data published by DOE, compares the

annual change in oil price and net operating cash flow, and in only two years is the change in cash flow less moderate than the change in price. (The average change in price is over 20% per year, while cash flow typically changes 13% per year.)

Figure 3Relative Volatility, Oil Price and Cash Flow,

FRS Companies

A much better approach is to recognize that in today's world nearly all oil deposits that are found are economical, which goes without saying since the definition of reserves includes the constraint that they be economically viable. In the US, Canada, and to an extent in the UK, low prices (below $18 for WTI) might lead to some prospects becoming at least temporarily unviable and so price might be a good explanatory variable for investment, as Figure 4 shows.

Figure 4Oil Price and Upstream Investment, US and Canada

Source is Chase Manhattan; time series for Salomon Brothers un-available.

But outside North America, this is much less the case. Even with lower prices after the mid-1980s, companies did not reduce E&P expenditures by like amounts, and if anything ap-pear to be increasing them, although data for last year remains unavailable. (Figure 5)

Note that the US investment figure for 2000 appears anom-

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alous, reflecting an enormous expenditure on acreage acquisi-tion, which is possibly a publication error.

Figure 5Upstream Expenditures, FRS Companies

Conclusion

Although these results are preliminary, it does not appear that there has been any slackening of upstream investment in the petroleum industry, particularly outside the US. The price col-lapse of 1998 (and weakness in 2001), combined with special events like the large mergers of the past few years, would seem to have caused the appearance of a lessening effort. However, the next few years appear likely to experience a strong increase in non-OPEC production as the recent expenditures take effect. Whether prices remain high enough to make them profitable is a different matter.

Sources:Department of Energy, Performance Profiles of Major Energy

Producers, various years.Lynch, Michael C., “Forecasting Oil Supply: Theory and

Practice,” Quarterly Review of Economics and Finance, 2002.

USAEE Student Scholarships Program at the Mexico 23rd IAEE North American Conference October 19-21, 2003

USAEE continued to offer scholarships for students to attend the IAEE North American Conference in Mexico City. At this year’s conference, 16 students qualified under the guidelines for scholarship requests. With the dramatic changes in domestic and international energy markets, industry restructuring and the negotiations on global climate change protocol, energy economics coursework on university campuses is on the rise. Inviting student participation at the conferences is one of the best mechanisms for recruiting new members to IAEE/USAEE and exposure to our industry.

Students that received complimentary registration to attend the Mexico conference from funds raised by USAEE’s Student Scholarship program include:

We were able to continue the Student Scholarship program this year with contributions from ConocoPhillips, ExxonMobil Corporation, Leonard Coburn and Joseph Dukert.

Student scholarship winners and supporting organizations were invited to the annual USAEE Student Scholarship networking breakfast. This was well attended by all involved and proved to be a good event to learn what is being researched and discovered in the field of energy economics.

USAEE plans to continue the student scholarship program and earnestly seeks your company’s and/or your personal contribu-tions to this fund. Enclosed in this issue of Dialogue is additional information on how you can become involved in this program.

Congratulations again to the above students who qualified for our program and participated in the IAEE North American Con-ference in Mexico City.

Shuichi AshinaTohoku UniversityAnthony BaezaUniversity Paris DauphineVictor Bazan PerkinsUNAMNathalie Collin-SisteronUniversity Paris DauphineChristian CrowleyGeorge Washington University

Hadi HalloucheCity University LondonOscar Humberto CastroUniversity College – LondonEliska KotikovaCityPlan Ltd.Serhiy KotsanWest Virginia UniversityCarole Le HenaffUniversity Paris Dauphine

Arthur MasonUniversity of California BerkeleyJose Eduardo MendozaUniversity of SurreyMargarita PirovskaUniversity Paris DauphineDaniel RomoUNAMSteffen SacharowitzTU BerlinRodrigo TabordaUniversidad del Rosario

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Technological Change and the Continuing Puzzles and Implications for Climate Policy

By Ian Sue Wing and Richard S. Eckaus*

The past 40 years have seen a dramatic reduction in the energy intensity of the U.S. economy. This is evident from Figure 1, which plots time series of energy prices and energy intensity for the U.S. The chart’s most striking feature is the sustained reduction in the energy-GDP ratio from 1970 onward, with the steepest decline occurring in the period prior to 1986, during which energy prices first jumped due to the OPEC oil shocks and then collapsed. Concern over the problem of global warming and the potential necessity of limiting anthropogenic emissions of greenhouse gases (GHGs) from fossil fuel use has renewed interest in the driving forces behind this decline, in particular the degree to which it has been driven by energy pric-es on one hand, or improvements in technology on the other.

Technological change is perhaps the most important—and elusive—influence on the cost of mitigating global warming. Carbon dioxide (CO2), largely emitted in combustion of car-bon-rich fossil fuels, is the chief greenhouse gas thought to cause climate change. There is widespread concern that limiting CO2 emissions will precipitate drastic increases in energy prices and reductions in output and welfare. On the supply side of the economy, fossil fuels are not only the main source of energy driving economic activity, they also currently lack substitutes in the form of large-scale carbon-free sources of energy supply. On the demand side, energy is employed as an input to virtually every activity, but the ability of producers and consumers to substitute other inputs for energy is thought to be limited. How-ever, the potential for technological breakthroughs to facilitate substitution in either the supply of or the demand for energy has created intense interest in the role of innovation in reducing the intensity of energy use and carbon emissions. Attention has therefore focused on determining whether the majority of the historical decline in energy intensity has been driven by sub-stitution—price-induced shifts from relatively energy-intensive production processes toward relatively energy-efficient produc-tion processes that were already in existence but not used, or by technological change—the creation and deployment of entirely new production processes with energy-efficient characteristics.

To know whether technological change is indeed the sav-ing grace that will moderate the cost of climate-change mitiga-tion, it is crucial to further resolve technological progress into two categories: that which is autonomously driven by the secu-lar advance of basic science, and innovation induced by rela-

tive prices that are themselves influenced by policy constraints on the economy. Unsurprisingly, policy makers’ scrutiny is focused squarely on the latter, i.e., the degree to which energy-saving technological change responds to energy prices and makes possible cheap reductions in the energy demand, thereby decoupling carbon emissions and economic activity. This gen-eral phenomenon is known as “induced technological change” (ITC). ITC rests on the hypothesis that price changes affect the rate and direction of technological advance, an idea that was first enunciated in Hicks’ (1932) The Theory of Wages: “a change in the relative prices of factors of production is itself a spur to invention, and to invention of a particular kind–directed to economizing the use of a factor which has become relatively expensive” (p. 124).

Figure 1U.S. Energy Intenstiy and Energy Prices, 1958-1996

Source: BEA (2000); DOE (2002).

The ultimate goal is therefore to understand the mecha-nisms through which energy-saving innovation will be induced by the energy price increases that are likely to accompany GHG emission limits, and to quantify the potential for the resulting technological improvements to lower the cost of abatement policies. To this end, four key questions need to be answered:

1. To what extent has energy-saving technological change oc-curred?

2. How much of a reduction in the intensity of energy use has been facilitated by these technological improvements?

3. How much of this decline in energy intensity is attribut-able to technological changes that have been induced by changes in energy prices? and,

4. What do the answers to 1-3 imply for the response of tech-nology to the kinds of price changes that are forecast to result from policies to abate GHG emissions?A fundamental obstacle in this regard is the fact that the

theoretical foundations of ITC remain unsettled. The investi-gation of the sources and consequences of technical change for the relative intensities of use of the factors of production has a long and inconclusive history, with little success in put-ting theoretical or empirical flesh on the conceptual skeleton of Hicks’ intuition. Nevertheless, ITC figures prominently in many policy discussions about the potential reactions of producers to input price changes. ITC is increasingly cited as

* Ian Sue Wing works at the Center for Energy & Environmental Stud-ies and Department of Geography & Environment,Boston University and Joint Program on the Science & Policy of Global Change, Rm. 141, 675 Commonwealth Ave., Boston MA 02215. Phone: (617) 353-5741. Fax: (617) 353-5986. (617) 353-5741. Fax: (617) 353-5986. Email: isw@bu.edu. Richard S. Eckaus is a faculty member at Department of Economics and Joint Program on the Science & Policy of Global Change, MIT.

This article summarizes and interprets results presented at the 5th IAEE Session at the Allied Social Sciences Association Meetings in Washington DC in January, 2003, and that appear in the proceedings of the 23rd IAEE North American Conference.

Dialogue 10 11 Dialogue

a benefit of regulatory intervention, especially in the area of environmental policy, where advocates of environmental regu-lation claim that forcing polluters to bear the costs of reducing induces technological change that both improves productivity and mitigates abatement costs (e.g., Ashford et al 1985; Ash-ford 1994; Porter and Van der Linde 1995). The issue of the consequences for energy demand of climate policy’s influence on technology is no exception. Over the very long run it ap-pears obvious and necessary that technological progress has been biased toward reducing the intensity of energy use (e.g., Diamond 1999), but the economic forces behind such apparent bias are not well understood. This lacuna has not stifled casual attribution of the decline in U.S. energy intensity to induced energy-saving innovation in response to the OPEC energy price shocks (e.g., Brown et al, 1998: 294-295; Holdren, 2001: 45). Nor has it deterred some analysts from using the correlation among energy prices, energy efficiency in end-use technologies and aggregate energy intensity to argue that the energy price effects of limiting CO2 emissions will induce the technological change necessary to keep abatement costs low (e.g., Williams 1990; Grubb 1997).

The problem with these arguments is that they are based more on post hoc ergo propter hoc reasoning than rigorous ex-amination the historical record. Statistical analysis leads to the conclusion that both the sign and magnitude of the effects of energy prices on innovation—and the follow-on impact of tech-nological change on the intensity of energy use—remain open to doubt. This becomes clear if we consider Figure 2, which is a roadmap that summarizes the steps involved in ascertaining how much of the long-run decline in energy intensity is due to ITC. The aggregate trend in energy intensity is the result of changes in intensity within individual industries that can only be understood by (A) controlling for the changing fortunes of the different sectors in the economy, and the consequent shifts in aggregate industrial composition. Within industries, technology’s role must then be (B) disentangled from the ef-fects of the substitution of other inputs for energy, changes in the scale of production, and changes in the size and composi-tion of firms’ capital stocks in which technological progress may be embodied. Finally, it is necessary to (C) separate out the effect of autonomous technical advance from technological changes that are induced by shifts in the price of energy relative

to other inputs to production. The energy economics literature contains a number of contributions in these different areas, not all of which tell a consistent story. The challenge for research-ers, then, is to build up a coherent picture from these disparate pieces of evidence.

An important piece of the puzzle is the growing body of evidence at the micro-econometric investigations that rising en-ergy prices have been responsible for inducing energy-saving technological change (C). Energy prices and regulatory stimuli have been found to positively affect the energy-efficiency char-acteristics of consumer durables for heating and cooling (New-ell et al 1999). Similarly, the propensity to patent in energy technology fields increased markedly during the initial OPEC energy price increase, facilitated by knowledge spillovers due to prior technological breakthroughs (Popp 2002). Further, one-third of the reduction in energy intensity in manufacturing in-dustries has been attributed to the energy-saving technological knowledge embodied in the cumulative stock of these energy technology patents, with the remaining two-thirds being due to substitution of other inputs for energy (Popp 2001). But, de-spite their heartening results, these studies elucidate only part

of the story, because they focus on the household and manufacturing sectors of the economy and do not quantify the effects of technology on other economic sectors. An ad-ditional limitation is that they focus only on the energy-saving effects of energy technologies. Innovations in areas that are not explicitly energy-related may nonetheless have en-ergy-saving or -using effects when they are incorporated into firms’ production processes. The magni-tudes of these influences will need to be quantified if the impact of ITC is to be more fully characterized.

Complicating the assessment of ITC’s aggregate effect is contradictory evidence from em-pirical studies of the impacts of the energy price increases of the 1970s on the full range of industries in the economy (B) (see e.g., surveys by Berndt 1992 and Berndt and Wood 1987). Their results show that in the majority of U.S. industries there was ac-tually an energy-using bias to technical change over this period (Jorgenson and Fraumeni 1981; Jorgenson 1984). This result is at odds with the assumption of autonomous energy efficiency improvement (AEEI) that is widely employed in simulation models for forecasting CO2 emissions and abatement costs. On the basis of this evidence it has been argued that the AEEI is the wrong sign, and that forecasts of future emissions and climate policy costs should reflect a secular increase in the coefficient on energy input to production (Hogan and Jorgenson 1991).

The problem with this line of argument is that it rests on an implicit aggregation of the effects of technological change within industries that fails to take into account changes in the importance of different industries in the economy that are likely to occur over the long run. This observation is at the heart of attempts to reconcile the differences in evidence on energy

Changing AggregateEnergy Intensity

Changing Inter-Sectoral Changing Intra-Sectoral Composition of Output Energy Intensity

Accumulation and Technological Changing Scale SubstitutionChanging Composition Progress of Production Among of Capital Variable Inputs

Autonomus Induced by Price Changes

A

B

C

Figure 2 Disaggregating the Sources of Change in Energy Intensity

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intensity at the micro and macro levels, concentrating on the consequences of sectoral structural change for aggregate en-ergy use (A). Structural decomposition analyses (e.g., Rose and Chen 1991) have attributed much of the decline in aggregate energy intensity being attributed to shifts in the composition of output, and more detailed und-use analyses have identified significant in manufacturing industries (Hirst et al, 1983; Schip-per et al, 1990).

Thus, as we examine these tealeaves we continue to be confronted with four sets of facts, the majority of which seem to be consistent with the observed decline in aggregate energy intensity, but whose precise inter-relationship remains unclear:

(i) Induced energy-saving innovation at the micro level re-sulting in an energy-saving bias of technical change in key energy-intensive manufacturing industries.

(ii) Indications of the embodiment of energy-saving innova-tion in durable goods,

(iii) Evidence of structural change as a significant source of reduction in aggregate energy intensity, and,

(iv) Evidence of an energy-using bias of technical change in the majority of industries.

Figure 3 Contribution of Structural Change and Intensity Change

to Change in Aggregate Energy Intensity, 1958-1996

Source: BEA (2000); DOE (2002) and authors’ calculations.

Our own work (Sue Wing and Eckaus 2003) attempts to reconcile these pieces of evidence. Stylized facts (i)-(iii) point to intra- sectoral reductions in unit energy demand and inter-sectoral changes in being the sources of the observed historical energy-intensity decline. However, stylized fact (iv) points in the opposite direction. Consistency with the historical record requires that the effect of changes in the industrial mix would have had to mask the influence of a pervasive energy-using bias of technical change within industries. We test whether this is the case by attributing the change in aggregate energy intensity to the effects of changes in industrial composition from those of the changes in energy intensity within industries. We use data on output and energy input by industry from the DOE’s Manu-facturing Energy Consumption Survey and the KLEM dataset compiled by Dale Jorgenson and associates to decompose the observed fractional change in aggregate energy intensity into a “structural change effect” (the average of changes in industries’

contributions to aggregate energy intensity) and an “inten-sity change effect” (the average of changes in energy intensity within industries).

Figure 3 shows the results, which indicate a substantial re-duction in U.S. energy intensity predating the 1970s and 1980s. Until 1973, this phenomenon was mainly due to structural change, which is responsible for a 14 percent reduction in ag-gregate energy intensity from its 1958 level, which was largely balanced by an increase in energy intensity within industries. After the first OPEC oil shock the relative changes are reversed. Throughout the 1980s and 1990s changes in the composition of output have little persistent impact on aggregate energy inten-sity, while energy intensity within industries declines rapidly until the end of the sample period, to a point that is 25 percent below its 1958 level. The joint effect of structural change and intensity change tracks the shift in aggregate energy intensity, indicating that disparate data sources at the aggregate and sec-toral levels tell a consistent story about the character of changes in U.S. energy intensity.

The finding that the decline in the average sectoral energy intensity is responsible for the bulk of the reduction in the en-ergy-GDP ratio is also consistent with the micro-econometric evidence on ITC in stylized facts (i) and (ii), and points to the possibility that technological change may be responsible for reducing industries’ demand for energy. However, it is still contrary to Jorgenson’s econometric results, which interpret the coefficient on the time trend in energy’s value share of output by industry (controlling for the influence of the prices of energy and other inputs) as a proxy for the effect of technologi-cal change. For a secular positive trend in energy’s share to be consistent with the both stylized facts (i)-(iii) and the foregoing results, it would have to be the case that the effects of induced energy-saving technological change were being masked by the effects of substitution or scale economies within individual in-dustries. To test whether this is the case we revisit Jorgenson’s early analyses by estimating an econometric model for each in-dustry using the longer time series of the KLEM dataset (1958-1996), coupled with disaggregated data on long-run capital stocks from BEA’s Tangible Wealth Survey.

Table 1 shows the results, which indicate that, contrary to previous investigations of the link between energy and techni-cal change that employed shorter sample periods, the bias of technical change in the majority of U.S. industries is in fact energy-saving in the long run. The source of this difference is confirmed using a split-sample tests that compares the signs of the coefficients on the time trends in industries’ energy share over the period 1958-1979 with those for the long-run sample. Thus, although technical change in many industry sectors still seems to be energy-using or at least neutral with respect to en-ergy, the fact that most industries exhibit secular negative trend in energy’s share is consistent with the micro-level evidence on ITC and the macro-level results of our decomposition of the energy-GDP ratio.

These findings take us some way toward resolving the puzzles that beset explanation of the energy intensity in the U.S., Our results show that changes in the sectoral composition of the economy and energy-saving technological progress both contributed to the decline, with the latter effect precipitating a

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fall in the energy intensity of production within the majority of industries. However, we do not show how important energy-saving technological change relative to the influence of other forcess on energy intensity identified in Figure 2, in particular, input substitution due to the changes in the relative prices of energy and other inputs. These effects may well have large ef-fects on energy intensity, both within industries and at the level of the aggregate economy. In future work we intend to use the analytical framework and data base that we have developed to elucidate the influence of these factors, and to assess their im-portance relative to technology’s role.

Finally, the implications of the foregoing for climate policy are as yet uncertain. The preponderance of the evidence indi-cates that energy-saving technological change will play a role in economic adjustment to the effects of GHG emission limits on energy prices. There are indications that technology may be a significant (but not dominant) factor in reducing energy in-tensity in manufacturing sectors, but our ability to discern what this means for energy use per unit of GDP is obscured by the dearth of studies that focus on the other sectors of the economy. There is much empirical work still to be done.

Table 1 Energy-Saving or -Using Biases of Technical Change by Industry

(I)Jorgenson (1984)

(II)1950-1996

(III)1950-1979

Energy-saving

Energy-using

Energy-saving

Energy-using

Energy-saving

Energy-using

Agriculture ? ? *Metal mining ? ? * *Coal mining * * *Oil & gas extraction ? ? *Non-metallic mining * * *Construction ? ? *Food & allied * *Tobacco * *Textile mill products * *Apparel *Lumber & wood * * *Furniture & fixtures *Paper & allied * *Printing & publishing * *Chemicals ? ? * *Petroleum & coal products ? ? * *Rubber & misc. plastics * * *Leather *Stone clay & glass * *Primary metal ? ? * *Fabricated metal * * *Non-electrical machinery *Electrical machinery * * *Motor vehicles * *Trans. equip. & ordnance *Instruments *Misc. manufacturing * *Transportation * * *Communications * * *Electric utilities * * *Gas utilities * * *Trade * * *Finance, insurance & real estate * * *Services ? ? *Government enterprises * * *

The symbol “?” indicates that Jorgenson’s estimates of the biases of technical change for electric and non-electric energy are of alternate sign, implying that the bias of technical change for energy as a whole is ambiguous.

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References1.Berndt, E.R., C. Kolstad and J.K. Lee (1993). Measuring the

Energy Efficiency and Productivity Impacts of Embodied Technical Change, Energy Journal, 14: 33-56.

2.Berndt, E.R., and D.O. Wood (1987). Energy Price Shocks and Productivity Growth: A Survey, in R.L. Gordon, H.D. Jacoby and M.B. Zimmerman (eds.), Energy: Markets and Regulation, Cambridge MA: MIT Press, 305-342.

3.Brown, M.A., M.D. Levine, J.P. Romm, A.H. Rosenfeld and J.G. Koomey (1998). Engineering-Economic Studies of Energy Technologies to Reduce Greenhouse Gas Emissions: Opportunities and Challenges, Annual Review of Energy and the Environment 23: 287–385.

4.Bureau of Economic Analysis (2000). Improved Estimates of the NIPAs for 1929-99: Results of the Comprehensive Revision, Survey of Current Business 90(5): 11-17.

5.Diamond, J. (1999). Guns, Germs and Steel: The Fates of Human Societies, New York: Norton.

6.Grubb, M. (1997). Technologies, Energy Systems and the Timing of CO2 Emissions Abatement, Energy Policy 25(2): 159–172.

7.Hirst, E., R. Marlay and D. Geene (1983). Recent Changes in United States Energy Consumption: What Happened and Why, Annual Review of Energy 8: 193-245

8.Hogan, W.W. and D.W. Jorgenson (1991). Productivity Trends and the Cost of Reducing Carbon Dioxide Emissions, Energy Journal 12(1): 67-85.

9.Holdren, J.P. (2001). Searching for a National Energy Policy, Issues in Science and Technology 17(3): 43-51.

10.International Energy Agency (2001). Energy Balances of OECD Countries, Paris: OECD/IEA.

11.Jorgenson, D.W. (1984). The Role of Energy in Productivity Growth, in J.W. Kendrick (ed.), International Comparisons of Productivity and Causes of the Slowdown, Cambridge MA: Ballinger, 279-323.

12.Jorgenson, D.W. and B.M. Fraumeni (1981). Relative Prices and Technical Change, in E. Berndt and B. Field (eds.), Modeling and Measuring Natural Resource Substitution, Cambridge: MIT Press, 17-47.

13.Kolstad, C.D. and J.-K. Lee (1993). The Specification of Dynamics in Cost Function and Factor Demand Estimation, Review of Economics and Statistics 75: 721-726.

14.Newell, R.G., R.N. Stavins and A.B. Jaffe (1999). The Induced Innovation Hypothesis and Energy-Saving Technological Change, Quarterly Journal of Economics 114: 941-975.

15.Popp, D. (2001). The Effect of New Technology on Energy Consumption, Resource and Energy Economics 23: 215-239.

16.Popp, D. (2002). Induced Innovation and Energy Prices, American Economic Review 92: 160-180.

17.Rose, A.Z. and C.Y. Chen (1991). Sources of Change in the Structure of Energy Use in the U.S. Economy: A Structural Decomposition Analysis, Resource and Energy Economics 13(1):1-21.

18.Schipper, L., R.B. Howarth and H. Geller (1990). United States Energy Use from 1973 to 1987: The Impacts of Improved Efficiency, Annual Review Energy and the Environment 15: 455-504.

19.Sue Wing, I., and R.S. Eckaus (2003). The Energy Intensity of U.S. Production: Sources of Long-Run Change, Proceedings of the 23rd IAEE North American Conference, October 19-12, Mexico City.

20.U.S. Dept. of Energy: Energy Information Administration (2002). Annual Energy Review 2002, Washington D.C.

Nominations for 2004 USAEE Awards RequestedThe USAEE is now receiving recommendations for the Senior Fellow Award and Adelman-Frankel Award recipients. Below

please find a brief description of the awards and their parameters.

Adelman-Frankel Award

This award is given to an individual or organization for a unique and innovative contribution to the field of energy economics. The award may be given to someone residing outside of the U.S. Presentation is made at the annual North American Conference of the USAEE/IAEE. A plaque is given.

Senior Fellow Award

The Fellow Award is given to individuals who have exemplified distinguished service in the field of energy economics and the USAEE. Up to three recipients may receive the Fellow Award in any given year. The awards are given to the recipients at the an-nual North American Conference of the USAEE/IAEE. A small desk clock is given as well as life membership in the USAEE.

The USAEE Council welcomes recommendations from its membership for consideration in bestowing these awards. Please submit a 250-750 word recommendation of the person(s)/organization(s) you feel would be appropriate for receiving these awards to:

Arnold B. BakerChief EconomistSandia National LaboratoriesPO Box 5800, MS-0749Albuquerque, NM 87185-0749USARecommendations may also be faxed to Mr. Baker’s attention at 505-844-3296 or emailed to abbaker@sandia.gov

Dialogue 14 15 Dialogue

Middle East Oil: What’s the Alternative?By Mamdouh G. Salameh*

Introduction

In pursuit of freedom from their long standing reliance on Middle East oil, the United States and other major industrial-ized nations are combing the earth for alternative sources of oil supplies in Russia, the Caspian Basin, West Africa, North America, Latin America, North Sea and even the deep waters of the Atlantic.

The end of the Cold War has opened Russia and the for-mer Soviet Republics of Central Asia and the Caspian Basin to new deals. Advances in drilling technology are opening up fields in waters as deep as 5,000 feet, where oil lies as much as two miles beneath the ocean bed.

From the Caspian to Brazil, oil is flowing from new fields. Non-OPEC producers now pro-duce close to half of the global oil supply. Giant oil platforms are rising like steel archipelagos off West Africa, Mexico and Brazil. At $25 a barrel, many ventures are affordable - even in “ultra-deep waters” around the Atlantic rim. Can any of these oil provinces’ substitutes for Middle East Oil?

Russia

Russia is aspiring to overtake Saudi Arabia in oil produc-tion and to become the largest crude oil supplier to the United States. Russia and the United States have been discussing a strategic oil partnership, inspiring heady talk of major US in-vestment in Russian oilfields, which were left in disrepair by the Soviets. Yet it remains to be seen how big a supplier Rus-sia can be. Soviet geologists, who mapped Russian oilfields in great detail, had ignored cost considerations that are standard in Western surveys. Soviet reserve estimates offer no clue as to how much the actual proven oil reserves of Russia are or how much of these reserves can be extracted at reasonable cost. Rus-sia is currently producing at full capacity, taking advantage of the high crude oil prices. In 2002 Russia produced 7.69 million barrels a day (mbd) and exported 3.00 mbd.1 At best it can raise its production capacity to 8.5 mbd by 2008, but that necessitates multi-billion dollar investments and advanced western technol-ogy. Moreover, Russia’s export routes are reaching capacity as production rises, creating an imminent need to build several major pipelines, ports and storage terminals to break the bottle-neck.

Russia can’t become the No.1 supplier to the United States.

And it is probably impossible for any region other than the Middle East, let alone any one nation, to displace the Arab Gulf producers, particularly Saudi Arabia and Iraq, both of which sit on half of the world’s untapped reserves and even greater share of those that are easy (and affordable) to reach.2

Russian Crude Oil Proven Reserves

It is evident that oil has to be found before it can be pro-duced, meaning that production has to mirror discovery after a time lag. To know the discovery trend, however, calls for valid information on the size of the reserves, which may be under- or over-reported. In the case of the former Soviet Union (FSU) the

traditional reserves assessment is different from western prac-tice and is based on the ability to produce rather than it being economic to produce.3

Russia’s proven crude oil reserves were estimated at 60 billion barrels (bb) at the end of 2002.4 However, Russian oil officials claim that a comprehensive study undertaken in 2002 showed that proven Russian oil reserves were between 97 bb and 119 bb depending on oil price assumptions. Ultimate po-tential is estimated at 200-250 bb.5

Russia used to classify reserves in five categories: A, B, C1, C2 and D. Various attempts have been made to equate Russian classifications with western ones – none wholly sat-isfactory. One method of resolving the problem is to deflate Russian discovery trends (reserves) to establish the best fit with production trends. A good fit between the discovery and pro-duction trends is achieved by reducing the reported reserves by 45%. Such an adjustment is further justified by the fact that the FSU reserve base was strongly exaggerated due to inclusion of reserves and resources that are neither reliable nor technologi-cally or economically viable.6

In fact, reserves of the combined A, B and C1 classes in the Russian classification roughly equate with proven, probable and much of the possible reserves under the traditional western system. Only 26.4 bb (54%) of the 49.4 bb of the combined A+B+C1 reserves of five Russian companies, may qualify as proven reserves in a US sense.7

Further evidence for downgrading the reported reserves comes from decline analysis of individual fields. For example, the largest Russian oilfield – Samotlor in Western Siberia – has already produced about 19 bb, with production having fallen to no more than 400,000 barrels a day (b/d) from a peak of 3.4 mbd in 1980. The field is reported to contain 28 bb, but ex-trapolation of the present decline gives an ultimate recovery of only about 20 bb. The field was in fact overproduced from 1983 to 1986 to meet the dictates of a Soviet 5-Year Plan.8

* Mamdouh G. Salameh is an international oil economist, a con-sultant to the World Bank in Washington D.C. and a technical expert of the United Nations Industrial Development Organi-zation (UNIDO) in Vienna. Dr Salameh is Director of the Oil Market Consultancy Service in the UK and a member of both the International Institute for Strategic Studies in London and the Royal Institute of International Affairs.

See footnotes at end of text.

Table 1 Current & Projected Russian Crude Oil Production, Consumption & Export (mbd)Year 2000 2001 2002 2003 2005 2010Production 6.54 7.05 7.69 7.69 7.97 8.71Consumption 2.47 2.46 2.52 2.53 2.60 3.00Exports 2.25 2.46 3.00 3.29 3.78 5.71Sources: BP Statistical Review of World Energy, June 2003./ petroleum Intelligence Weekly / Petroleum Review, August 2003 / Author’s projections.

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Russian Crude Oil Production

In 2002 Russia produced 7.69 mbd and exported an esti-mated 3.00 mbd. The government plans to raise Russia’s pro-duction to 8.51 mbd by 2005. But this target can’t be achieved before 2008 and only with multi-billion dollar investments and western technology (see Table 1).

Russia is a major player in the global oil market as it is the world’s largest producer and exporter after Saudi Arabia and holds 5.7% of the world’s proven reserves. Energy exports rep-resent more than 20% of Russia’s GDP and roughly 50-60% of its total currency earnings.9

Russia’s resumption of its leading role as a major oil-pro-ducing power has coincided with the political and strategic changes that followed the 9/11 terrorist attacks on the US. De-velopments since September 2001 have deepened the United States’ sense of vulnerability to imported oil supplies, particu-larly from the Middle East. Within this context, an energy part-nership between the world’s largest oil consumer (US) and the world’s second largest producer and exporter (Russia) is slowly taking shape.10

But despite this growing enthusiasm to forge an energy partnership between Moscow and Washington, the prospect of massive volumes of Russian oil flooding the US market is not a realistic one. In 2002, the Arab Gulf supplied the US with 2.59 mbd, or 23% of its oil imports, while Russia’s oil exports to the US were insignificant amounting to only 90,000 b/d.11 And despite fundamental changes in and expansion of Russia’s energy sector, its oil production and exports are still restrained by economic, political, and geographical obstacles. These in-clude hesitant reform, lack of foreign investment, inadequate transportation infrastructure, and relative shortage of proven reserves (in comparison with the Middle East). Russia’s oil industry has yet to overcome these significant economic, politi-cal, and logistical obstacles.

Securing Russian Access to Export Markets

Russia’s export routes are reaching capacity as production rises, creating an imminent need to build several major pipe-lines, ports and storage terminals to break the bottleneck.

With so much revenue at stake – money to rebuild the Rus-sian economy and the oil and gas industry, Russia must secure its access to energy export markets. The vulnerability of Rus-sia’s energy-export corridors is a formidable concern. Whereas all of its export routes used to go through Soviet or Warsaw Pact territory, most exports must now cross NATO or prospec-tive NATO countries. All Black Sea oil must clear the narrow Bosphorus Strait, which, although considered an international passageway, is ultimately policed by NATO member Turkey.12 The remainder exits Russia via the Druzhba pipeline system that crosses Ukraine before entering Slovakia and Hungary with connections to Poland, Germany and the Czech Republic, and also through the newly opened Russian oil-loading facility at Primorsk on the Gulf of Finland.

Russia needs port capacity of 240 million tons a year (4.82 mbd). But existing facilities can manage only two-thirds of that amount, and Russia has little alternative but to ship through the Baltic ports or, to a lesser extent, through Ukraine and the Black Sea. Eventually some 29 million tons of crude oil (582,000 b/d)

from Timan Pechora Basin in Russia’s far north, is expected to pass through Primorsk, bypassing the main current outlet for oil from northern Russia, the terminal at the Latvian port of Ventspils on the Baltic Sea.13

The Caspian Basin

The Caspian Sea oil potential is vastly overrated. Early estimates compared ultimate Caspian oil reserves to those of the Arab Gulf, but have since fallen to less than one tenth of the original size. Apart from the limited size of the reserves, Caspian oil is very costly to find, develop, produce and trans-port to world markets.14 A simple examination of the ratios of estimated undiscovered reserves to identified reserves will show that this ratio is much greater for the Caspian Basin than for any other part of the world.15

Caspian Oil Reserves

The proven oil reserves of the Caspian region (Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan) amount to 17.1 bb making the Caspian an oil province comparable to the North Sea.

Estimates of 40-60 bb as the ultimate reserve base of the Caspian region are judged to be reasonable by most geologists familiar with the region. However, these estimates assume that drilling will take place. Drilling requires huge investments and the transportation of huge rigs over excruciatingly difficult routes.16

From this reserve analysis one can safely predict that by 2010 the Caspian should be producing 2-3 mbd. However, Continued Caspian energy investment would still depend on three factors: first, a global price in excess of $20/barrel (in real terms); second, the absence of major political dislocations; and, third, the need to address, with some urgency, the serious defi-ciencies of the Caspian energy support infrastructure.

With a long-term production potential that would contrib-ute roughly 3% to future global oil supply by 2010, the Caspian will never be a strategic alternative to the Arab Gulf. It is des-tined to play a supporting, rather than deciding, role in supply-ing global oil markets in the future.17

Production & Export Potential

In 2002, total Caspian oil production reached 1.65 mbd with net exports amounting to 855, b/d. However, a 1998 In-ternational Energy Agency (IEA) study on Caspian oil and gas presented two scenarios for oil production, domestic consump-tion, and export potential of Kazakhstan, Azerbaijan, Turkmen-istan and Uzbekistan over 2000-2020 (see Table 2).

Caspian Sea Oil & World Oil Prices

The future of the Caspian Sea and its impact on Gulf oil will depend crucially on oil prices and on the investment policies of the major producers of the Gulf region itself. At low price levels of $13-$14/b, Caspian oil will have little chance of expanding. Low prices squeeze investors’ profits so much that there will be no economic incentive to invest in new projects. By contrast, prices of $20/b and above would expand Caspian oil production to an extent similar to the North Sea. Nominal fixed and variable costs per barrel in the Caspian Basin are on average four times those of the Gulf.18

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More important perhaps are the geopolitical problems and high costs of transporting crude oil from the Caspian through the world market. At present, the transportation cost to the Black Sea is more than $4.5/b plus the cost of freight to Euro-pean destinations.

Today the fully built-up cost for a barrel of Caspian oil is

roughly $12 - $15. This compares well with the North Sea but is still three to four times more than the equivalent barrel in the Arab Gulf. Future Caspian built-up costs should fall to $10/b.19 With a price, say $17/b, and with the share of profits being 80% in favour of the host governments and 20% of the oil com-panies, the profit margin of investment would be under $1/b, which will never justify the investment economically.

While higher oil prices will undoubtedly encourage in-vestment in high-cost regions like the Caspian Basin, price is not the only major factor influencing the speedy develop-ment of Caspian oil resources. Rather, a host of complicated economic, logistical, and geopolitical obstacles block the region’s ability to become a major oil-producing province of the magnitude of the Arab Gulf or even the North Sea or Latin America. Such logical obstacles mean that while its oil resources may be geologically equivalent to the North Sea, the region’s output is unlikely to reach that potential. North Sea production has risen from roughly 2 mbd in 1980 to 5.79 mbd today, or 8% of the current world demand. By contrast, after two decades of development and an investment of $13 bn, Caspian oil production currently amounts to 2% of the world demand.20

West Africa

Another promising oil province is West Africa (mainly Ni-

geria & Angola). In 2002, West Africa exported 2.95 mbd. By 2010 West Afri-can oil exports are projected to reach 3.5 mbd, roughly 4% of global oil supplies. West Africa’s proven reserves are cur-rently estimated at 33.8 bb with Nigeria accounting for 24 bb of the total and Angola for 5.4 bb (see Table 4).

West Africa has emerged as a major diversification source for the Asia-Pacific economies since the 1990s because most of West African crude oil is low-sulphur and also because many refineries in the Asia-Pacific region are

designed to process locally produced low-sulphur crude. As a result, crude oil imports by Asia-Pacific countries from West Africa have soared from a mere 42,000 b/d in 1990 to 1.04 mbd in 2002.21 As the West African producers expand production

capacity in the coming years, so would their crude oil exports to the Asia-Pacific region. In 2002, the United States imported 1.12 mbd of West African oil. By 2010, the United States could be importing 1.8 mbd of oil from West Africa.

However, the extent of the diversification process could be constrained by the production and export ca-pacities of West African producers. West Africa has a limited potential for increasing production and export capacities beyond 4.87 mbd and 3.50 mbd respectively by 2010. Nevertheless, it will probably remain an im-portant diversification source of the United States and Japan’s oil imports for many years to come.22

North America

In June 2002, the United States negotiated a “North American Energy Initiative” with Canada and Mexico aimed at creating a more effectively integrated North American energy market, which in recent years has already amounted to more than $50 bn a year.23 Indeed, both countries have been major suppliers of oil to the United States for the last several years. In 2002, Mexico exported 1.53 mbd of crude to the Unit-ed States with Canada exporting another 1.94 mbd of crude oil and products.

Proven Oil Reserves

The combined proven reserves of the United States, Mexi-co and Canada stood at 49.9 bb at the end of 2002.

To this could also be added an estimated 308 bb of Canadi-an oil sand reserves, considered recoverable with today’s tech-

Table 2 Oil Production, Domestic Consumption & Net Exports (mbd) 2000 2005 2010 2020High CaseProduction 1.35 2.45 3.89 6.18Consumption 0.53 1.26 1.55 2.61Net exports 0.66 1.19 2.34 3.57

Low CaseProduction 1.35 1.93 2.77 4.84Consumption 0.53 1.06 1.26 1.86Net exports 0.66 0.87 1.51 2.98Sources: IEA’s 1998 Caspian Oil & Gas Study / BP Statistical Review of World Energy, June, 2003.

Table 3 World Oil Exports: 2002-2020 (mbd)Country / Region 2002 2020North Sea 3.91 2.50Russia 5.17 6.00 Other non-OPEC 7.00 3.80OPEC of which Arab Gulf 19.66 41.80 North Africa 2.61 2.70 West Africa 2.95 4.00 South America 2.06 4.30Caspian Sea 0.86 3.28Sources: IEA’s 1998 Oil & Gas Study / BP Statistical Review, June 2003.

Table 4 West Africa’s Current & Projected Production, Consumption, Net Exports & Reserves (2002-2010) 2002 2010Production (mbd) 3.84 4.87Consumption (mbd) 0.89 1.37Net Exports (mbd) 2.95 3.50Proven Reserves (bb) 33.80 34.24Sources: BP Statistical Review of World Energy, June 2003 / Petroleum Review, May 2003 / Author’s Projections.

Dialogue 16 17 Dialogue

nology and economics. In 2002, Sand oil production reached 740,000 b/d, with about 60% being exported to the United States. With more than US$20 bn in new projects announced for the next few years, oil production from Canada’s oil sands is projected to rise to 1.6 mbd by 2015.24

The technology for extracting oil from tar sands exists but extraction costs are high, currently around $9-$13/b. However, the real problem is the slow extraction rate. Despite a $20 bn-investment in Canada’s tar sand production, only 740,000 b/d of sand oil was produced in Canada in 2002. Tar sand oil is three times as labour-to-energy intensive and ten times as capi-tal-to-energy intensive as conventional crude oil.

The North American Energy Trade

The energy interdependence between the three North American countries is even stronger in natural gas than in oil. In 2002, Canada supplied 16% of the US gas needs. In addition, Canada exports as much as two-thirds of its crude oil produc-tion (more than 1.4 mbd) as well as 500,000 b/d of refined products to the United States annually.25

The energy trade between the US and Mexico has substan-tially expanded in the last several years. In 2002, the US sup-plied Mexico with 18% of its gas needs and 14% of its petro-leum products and imported in return 8% of its crude oil needs. At this rate Mexico could be importing half of its gas needs by 2010. For the foreseeable future the country is likely to remain a net gas importer.26

Mexico needs to invest billions of dollars to upgrade and modernize its oil and gas infrastructure. The State-run Petroleos Mexicanos (Pemex) has neither the capital nor the technology to extract the amount of gas Mexico desperately needs. Accord-ing to Pemex, Mexican oil output will decline by 33% within the next five years unless investments of $33 bn are made in oil and gas exploration. Therefore, there is no substitute to opening the door to private and foreign investments. This means that the Mexican constitution must be amended to allow foreign partici-pation in energy production.

Mexico’s future as an oil exporter depends on the success of the ongoing remedial work on its offshore Gulf of Mexico Cantarell fields, which contain the country’s largest known oil reserves and which traditionally have provided some 75% of total national oil production. In 1996, well productivity plum-meted, in some cases to one-fourth of previous levels, signal-ling a dramatic decline in reservoir pressure. Now after more than two years of nitrogen injection, the Cantarell pressure has stabilized according to Pemex. Pamex hopes to raise its offshore production from the current 2.7 mbd and 1.5 bn cf/d to 3.2 mbd and 2.5 bn cf/d by 2006.27

In summary, Canada and Mexico have limited oil pro-duction and export capacities and can’t, therefore, satisfy US growing oil needs in the long-term, let alone global needs. The combined oil export capacity of both countries could, at best, be increased by from the current 3.4 mbd to 4.0 mbd by 2010. However, some experts have considerable doubts about Mexico’s ability to maintain its oil exports even at current lev-els because of stagnating production and accelerating domestic consumption. Similarly, many of the claims dealing with Cana-da’s Alberta tar sands are designed to attract investment dollars to the region. The unvarnished truth is that neither the tar sands

of Alberta, nor the tar sands of anywhere else have lived up to their grandiose publicity.

And despite the North American Energy Initiative, con-tinental oil independence is certainly not realistic within the next two to three decades. In fact, if the projected shortfalls between oil production and consumption for all three countries are combined, the total rises from 9.32 mbd in 2002 to 13.88 mbd by 2010.

Latin America

With a total of 98.6 bb of proven oil reserves, Latin Amer-ica is a major oil province. In 2002, Latin American countries produced 7 mbd but only exported 2.0 mbd, the bulk of which came from Venezuela. By 2010 Latin America could be export-ing 3.0 mbd, mostly from Venezuela and Colombia, possibly rising to 4.30 mbd by 2020.

Venezuela

Venezuela is by far Latin America’s biggest crude oil pro-ducer and exporter accounting for 49% of total production and 77% of exports. Venezuela boasts of 77.8 bb of proven conven-tional oil reserves and additional 272 bb of recoverable heavy and extra heavy reserves. Extra heavy oil production is project-ed to reach 600,000 b/d by 2005. An estimated 262,000 b/d of 8 to 8.5 API of extra-heavy oil is currently being produced. This crude oil is diluted and upgraded into a higher-quality crude with a very low-sulphur content for export.28

Venezuela’s current oil production capacity is estimated at 3 mbd allowing it to export some 2.4 mbd. However, Venezuela’s state-owned company, PDVSA, has an ambitious 5-year plan to raise capacity to 5.5 mbd by 2006. It involves expenditure of up to $43.3 bn by PDVSA and foreign inves-tors. However, Venezuela does not have that size of funds. And given current political circumstances in the country, the foreign investors would not be that keen to invest either. Venezuela’s plan to expand capacity to 5.5 mbd is, therefore, unrealistic. At best, Venezuela could raise capacity to 4 mbd by 2010.29

Brazil

Brazil’s National Oil Company “ Petrobas” is going ahead with $12 bn worth of development projects in the Campos Ba-sin over the next four years, which it hopes, should make Brazil self-sufficient in oil by 2005. Brazil currently produces 1.5 mbd with the Campos Basin accounting for about 80% of total pro-duction. With current consumption running at 1.85 mbd, Brazil has to import more than 400,000 b/d of oil.

Colombia & Ecuador

Oil production in Colombia has dropped about 9% over the past 12 months to an average of 601,000 b/d from 627,000 b/d in 2001. New field developments are sparse, as foreign opera-tors have quit the country because of the escalating violence. Current Colombian oil exports amount to only 385,000 b/d. The other important producer in Latin America is Ecuador. It produced an average of 410,000 b/d in 2002 and exported 279,000 b/d.

In summary, Latin America’s crude oil exports could, at best, be projected to rise from 2.06 mbd currently to 4 mbd by 2010 (mainly from Venezuela), rising to 4.30 mbd by 2020.

Dialogue 18 19 Dialogue

The Asia-Pacific Region

The Asia-Pacific region is the world’s largest importer of crude oil. In 2002, the Asia-Pacific region imported 13.41 mbd, or 72% of its oil needs, 70% of which came from the Middle East. By 2010, the region could be importing an estimated 23 mbd, or 79% of its needs, some 95% of which will also come from the Middle East (see Table 5).

An economic and strategic watershed was reached in 1993

when China, then the world’s sixth largest oil producer, became a net oil importer, leading many analysts to ponder on the im-plications of this development.

China Oil Factor

China’s spectacular economic growth has led to a growing dependence on oil imports, which in 2002 amounted to 2.04 mbd, or 38% of its oil needs, 39% of which came from the Mid-dle East. With China’s annual economic growth rate projected to stay at or near its current level of 7% per annum, this trend is set to continue into the future. By 2005 China will need to import 3.17 mbd, or 50% of its oil needs, rising by 2010 to 6.35 mbd, or 74% of its needs. By then China would have overtaken Japan to become the world’s second largest oil importer after the United States (see Table 6).

The rapid growth in crude oil imports has significantly altered China’s position in the world oil market. China now

accounts for 7% of global oil consumption compared to 3.6% in 1991, whilst its share of world production only amounts to 4.6%.

Asia-Pacific Middle East Energy Connection

The dominant trend in the Asia-Pacific region is one of growing oil dependence on the Middle East. This lends urgency to the question of how the various Asian countries would han-dle their respective reliance on energy imports. Where would 29.5 mbd that the Asia-Pacific region is projected to need by 2010 come from, and how would such demand affect world oil markets, energy security and, not least, the price of oil?

In the current transparent and increasingly globalise oil markets, oil commerce has come to be shaped by transport costs rather than political relationships. As a result, a two-forked global oil market has emerged: oil supplies from the Middle East gravitating to the Asia-Pacific region, while supplies from the Western Hemisphere (Mexico, Venezuela, Canada and Co-lombia) and the Atlantic Basin (the North Sea and West Africa) heading towards the US market. Indeed, the Asia-Pacific region is likely to take 95% of its total oil imports from the Middle

East by 2010.30

The implications for the Middle East /Asia-Pacific oil connection are evident. Asians are investing in upstream oil and gas sectors in the Middle East, while Middle East exporters are investing in downstream Asian activities. As the oil and gas relationship with the Asia-Pacific region expands over the coming decade, there will be an enormous volume of capi-

tal flows into the Middle East producers by 2010, estimated by some accounts at $165 bn annually and growing. This is based on imports of some 22.6 mbd from the Middle East by 2010 at $20/b.31

The North Sea

The North Sea is one of the world’s key energy reservoirs. Proven reserves stood at 15 bb at the end of 2002. In 2002, the North Sea produced 5.8 mbd and exported 3.9 mbd.

The continuing development of hydrocarbon resources from the North Sea can be attributed to two factors: first, the re-gion provides an attractive investment climate for international oil companies; second, impressive improvements in technol-ogy have led to reduced costs of production, discovery of new fields, and delay in the maturity of existing ones. Furthermore, drilling technology has allowed access to those hydrocarbon reservoirs in the North Sea that were earlier considered uneco-

nomic to develop.32

Given the attractive investment cli-mate and the benefits of advanced tech-nology, oil and gas production the North Sea has risen steadily in the early 2000s. Indeed, in 2000, oil production exceeded 6 mbd for the first time before falling back to 5.8 mbd in 2002.

Still, advanced technology can’t make up for the lack of resources. The declines in mature fields are predicted to outweigh

the gains from newer, smaller fields from 2003 onwards, indi-cating a long-run decline in production from the North Sea.

Discussion & Conclusions

In the aftermath of the first oil crisis in 1973, the United States and other major oil consuming countries have encour-aged exploration for oil in areas outside the Middle East. Thus since then, exploration and development operations have accel-erated all over the world including the North Sea, West Africa, Latin America and lately the Caspian Basin.

But despite the increasing supplies from the North Sea, Russia, Latin America, North America, West Africa and the

Table 6 China’s Production, Consumption & Net Oil Imports, 2000-2010 (mbd) % of Change 2000 2001 2002 2003 2005 2010 2000-2010Production 3.25 3.31 3.39 3.30 3.23 2.21 - 32Consumption 4.99 5.03 5.37 5.69 6.40 8.56 + 72Net Imports 1.74 1.72 1.98 2.39 3.17 6.35 + 265Sources: BP Statistical Review, June 2003 / IEA / East-West Center, Honolulu, USA / Author’s Projections.

Table 6 China’s Production, Consumption & Net Oil Imports, 2000-2010 (mbd) % of Change 2000 2001 2002 2003 2005 2010 2000-2010Production 3.25 3.31 3.39 3.30 3.23 2.21 - 32Consumption 4.99 5.03 5.37 5.69 6.40 8.56 + 72Net Imports 1.74 1.72 1.98 2.39 3.17 6.35 + 265Sources: BP Statistical Review, June 2003 / IEA / East-West Center, Honolulu, USA / Author’s Projections.

Dialogue 18 19 Dialogue

Caspian Basin, none of the these oil provinces could, individu-ally or collectively, provide an alternative to Middle East oil for four important reasons.

1- The Middle East region holds more hydrocarbon resources than any other region. In 2002, the Middle East produced 32% of the world’s oil while holding 69% of the world’s oil reserves.

2- Oil extraction costs in the Middle East are the cheapest in the world. The marginal costs of production are usually just a fraction of current prices. This means that it is more profitable to produce oil in the Middle East than anywhere else in the world.

3- Oilfields in the Middle East are located close to interna-tional markets and connected by well-developed transpor-tation routes.

4- Most of the world’s spare oil production capacity is located in the Middle East. The region has at present 75%, or 4 mbd, of the global spare capacity. This can be seen as an in-surance policy against temporary shortages in the world’s oil supplies.However, within the Middle East itself, Iraq is the wild

card. Iraq is potentially the most important new player in the global oil market. It is the only country capable of flooding the world with cheap oil on the scale of Saudi Arabia. The amount of oil that Iraq eventually brings to market will affect every-thing from the Russian economy to the price Americans pay for gasoline, from the stability of Saudi Arabia to Iran’s future.

Given the above advantages, there is a growing global reliance on Middle East oil. As a result, the Middle East will continue to be the centre of gravity as far as the oil market is concerned. For the foreseeable future, any new American ven-tures will reshape the oil market only at the margin. Even the sole superpower can’t change that.

However, in spite of these promising prospects, several challenges have emerged in the past few years that threaten the Middle East’s prominent standing in the global oil market. These include the inability of the national oil companies within the Middle East to provide the necessary financial resources, managerial expertise, and modern technology to bring the new streams into production and the competition from other oil-producing regions, particularly the North Sea, Russia and the Caspian Basin. The Opening up of the Middle East oil industry to foreign participation and investments could be the first step towards revitalizing that industry and maintaining the oil su-premacy of the Middle East in the 21st century.

Footnotes:1 BP Statistical Review of World Energy, June 2003, p. 6 & 18.2 Mamdouh G. Salameh, Iraq: The Last Great Oil Prize: An

Oil Industry Perspective (a paper presented at the 26th Annual IAEE Energy Conference, June 4-7, 2003, Prague, Czech Republic), p. 11.

3 Jean H. Laherrere, Is FSU Oil Growth Sustainable?, Petroleum Review, April 2002, p. 29.

4 BP Statistical Review of World Energy, June 2003, p.4.5 Petroleum Review, April 2003, p. 18.6 Jean H Laherrere, Is FSU Oil Growth Sustainable? p. 29.7 Jean H, Laherrere, Forecasting Future Production with Past

Discoveries (a paper presented at OPEC seminar: “ OPEC and the Global Energy Balance: Towards a sustainable Energy Future”,

Vienna, 28-29 Sept., 2001.8 Jean H. Laherrere, Is FSU Oil Growth Sustainable, p. 30.9 Amy Myers Jaffe & Robert Manning, “Russia, Energy and the

West”, Survival, Vol. 43, no. 2, Summer 2001, p. 134.10 Gawdat Bahgat, Oil in the Middle East: Prospects &

Challenges, Pacific & Asian Journal of Energy, Tata Energy Research Institute, June 2002, p. 57.

11 BP Statistical Review of World Energy, June 2003, p. 18.12 Amy Myers Jaffe & Robert Manning, Russia, Energy & the

West, pp. 134-135.13 International Herald Tribune, 3 January 2002, p. 15.14 Fadhil J Chalabi, Gulf Oil Versus the Oil of the Caspian (a

paper published by the Emirates Center for Strategic Studies & Research (ECSSR), Abu Dhabi, UAE, 2000), p. 155.

15 Ferdinand E. Banks, The World Oil Market: From Myth to Meaning ( invited Lecture for a public hearing of the oil supply, Christiansborg, Denmark), October, 30, 2002.

16 Terry Adams, Caspian Oil Realities, Briefing paper No 23 published by the Royal Institute of International Affairs, London, September 2001, pp. 1-2.

17 Mamdouh G. Salameh, Can Caspian Oil Challenge the Supremacy of Arab Gulf Oil, Pacific & Asian Journal of Energy (PAJE) 12 (1), p. 40.

18 Ibid., pp. 42-43.19 Terry Adams, Caspian Oil Realities, p. 1.20 Mamdouh G. Salameh, Can Caspian Oil Challenge the

Supremacy of Arab Gulf Oil, pp.43- 44.21 BP Statistical Reviews of World Energy, June 2003, p. 18. 22 Mamdouh G. Salameh, Quest for Middle East Oil: The US

versus the Asia-Pacific Region, Elsevier:Energy Policy 31 (2003), p. 1089.

23 Joseph M. Dukert, New Initiatives in North American Energy Cooperation, IAEE Newsletter, Second Quarter 2003, p.4.

24 Petroleum Review, April 2003, p. 26.25 Joseph M. Dukert, New Initiatives in North American Energy

Cooperation. P.5.26 Maria Kielmas, Waiting for a New Dawn, Petroleum Review,

March 2003, pp. 16-17.27 Simon Tegel, The World Eyes Mexico’s Success, Petroleum

Review, August 2002, p. 21.28 Petroleum Review, June 2003, pp. 3-429 Priscilla Ross, Venezuelan Wake-up Call, Petroleum Review,

June 2002, p. 20.30 Robert A. Manning, The Asian Energy Predicament, Survival,

Vol. 42, No. 3, Spring 2000, pp. 79-80.31 Mamdouh G. Salameh, Quest for Middle East Oil: The US

versus the Asia-Pacific Region, pp. 1087-1088.32 Gawdat Baghat, Oil in the Middle East: Prospects &

Challenges, p. 56.

Dialogue 20

Scenes from the North American Meeting

21 Dialogue

USAEE BEST STUDENT PAPER AWARD GUIDELINESUSAEE is pleased to once again offer an award for the Best Student Paper on energy economics. The award will consist of a

$1000.00 cash prize plus waiver of conference registration fees at the 24th USAEE/IAEE North American Conference, July 8-10, 2004. To be considered for the USAEE Best Student Paper Award please follow the below guidelines.

• Student must be a member of USAEE or IAEE in good standing.• Electronically Submit COMPLETE paper by March 29, 2004 to USAEE Headquarters.• Paper MUST be original work by the student (at least 50% of work completed by the student seeking award).• Submit a letter stating that you are a full-time student and are not employed full-time. The letter should briefly describe

your energy interests and tell what you hope to accomplish by attending the conference. The letter should also provide the name and contact information of your main faculty supervisor or your department chair. Also, include a copy of your student identifica-tion card.

• Submit a brief letter from a faculty member, preferably your main faculty supervisor, indicating your research interests, the nature of your academic program, and your academic progress. The faculty member should state whether he or she recommends that you be awarded the scholarship funds.

Complete applications should be submitted to the USAEE Headquarters office no later than March 29, 2004 for consideration. Please submit all above materials electronically to usaee@usaee.org

NOTE: The recipient of the $1000.00 cash prize will receive notification of this award and be presented the award at the Washington USAEE/IAEE North American Conference. This individual will also receive a complimentary registration to attend the meeting. Please note that all travel (ground/air, etc.) and hotel accommodations, meal costs in addition to conference-provided meals, etc., will be the responsibility of the award recipient.

For further questions regarding USAEE’s Best Paper Award, please do not hesitate to contact David Williams at 216-464-2785 or via e-mail at: usaee@usaee.org

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

24th USAEE/IAEE NORTH AMERICAN CONFERENCESTUDENT SCHOLARSHIPS AVAILABLE

USAEE is offering a limited number of student scholarships to the 24th USAEE/IAEE North American Conference. Any stu-dent applying to receive scholarship funds should:

1) Submit a letter stating that you are a full-time student and are not employed full-time. The letter should briefly describe your energy interests and tell what you hope to accomplish by attending the conference. The letter should also provide the name and contact information for your main faculty supervisor or your department chair, and should include a copy of your student identification card.

2) Submit a brief letter from a faculty member, preferably your main faculty supervisor, indicating your research interests, the na-ture of your academic program, and your academic progress. The faculty member should state whether he or she recommends that you be awarded the scholarship funds.

USAEE scholarship funds will be used only to cover conference registration fees for the 24th USAEE/IAEE North American Conference. All travel (air/ground, etc.) and hotel accommodations, meal costs in addition to conference-provided meals, etc. will be the responsibility of each individual recipient of scholarship funds.

Completed applications should be submitted electronically to USAEE Headquarters office no later than June 21, 2004. Email to usaee@usaee.org

Students who do not wish to apply for scholarship funds may also attend the conference at the reduced student registration fee. Please respond to item #1 above to qualify for this special reduced registration rate. Please note that USAEE reserves the right to verify student status in accepting reduced registration fees.

If you have any further questions regarding USAEE’s scholarship program, please do not hesitate to contact David Williams, USAEE Executive Director at 216-464-2785 or via e-mail at: usaee@usaee.org

Dialogue 22

23 Dialogue

PJ AndersonPacifiCorp

Ashutosh Ashish

George BakerBaker & Associates

Jeffrey BarronPlatts

Christophe BelorgeotEmbassy of France

Daniel BettsUniversity of Florida

John D. CarrPacifiCorp

Joseph CavicchiLexecon

Yong ChangPPM Energy Inc.

Yihsu ChenJohns Hopkins University

Larry ChornColorado School of Mines

G. Alan ComnesDynegy Power Corp.

Christian CrowleyGeorge Washington University

Steven CuretEmbassy of France

David DupreSean FallmerSempra Energy Solutions

Elizabeth A. FosterUniversity of Oklahoma

Rafael FriedmannFriedmann & Associates

William FroehlichFederal Energy Regulatory Comm.

Anna GarciaGlobal Envir. & Technology Foundation

Robert B. GraberEnergyPath Corporation

Howard GruenspechtU.S. Energy Information Administration

Paul HibbardAnalysis Group

Kenneth JamesOL International

Ronald J. KapavikWood Mackenzie Inc.

Durga P. KarColorado School of Mines

John Brian KickReliant Energy Solutions

Steven L. KleespieRio Tinto

Serhiy KotsanWest Virginia University

Marcel A. Lamoureux

Stephen MakowkaLexecon Inc.

Terry MatlickPacifiCorp

Michael MatthewsU.S. Department of State

James McFarland

Jennifer MichaelU.S. Senate

Jun MizutoriMassachusetts Institute of Technology

Gregory F. NemetUC Berkeley

Melissa O’BrienU.S. Department of State

Jason K. Pietrzak

John RuetherU.S. Department of Energy

Scott SchmidtBP

Barbara ShookEnergy Intelligence

Ramteen SioshansiUniversity of California Berkeley

Terry SmithUBS Global Asset Management

Luis A. SosaColorado School Mines

Katherine SpectorDeutsche Bank

Thomas StenvollJohns Hopkins University

Keith SteppIronWalk Inc

Gary SternSouthern California Edison

Elissa P. SterryExxonMobil Corporation

Marjorie L. TatroSandia National Laboratories

Nathan ToyamaSacramento Municipal Util. District

Marie-Cecile Vermelle

David G. VictorStanford University

Rahul S. Walawalkar

New Members of USAEE Welcome!! The following individuals joined USAEE from 7/1/03 – 10/31/03. Welcome !!

Conference Proceedings on CD Rom23rd North American Conference

Mexico City, Mexico October 19-21, 2003The Proceedings on CD Rom from the 23rd Annual North American Conference of the USAEE/IAEE held in Mexico City, Mexicoa are now available from USAEE Headquarters. Entitled Integrating the Energy Markets in North America: Issues & Problems, Terms & Conditions, the price is $100.00 for members and $150.00 for nonmembers (includes postage). Payment must be made in U.S. dollars with checks drawn on U.S. banks. Please complete the form below and mail together with your check to: Order Department, USAEE Headquarters, 28790 Chagrin Blvd., Suite 350 Cleveland, OH 44122, USA.Name _______________________________________________________________________________________________ Address _____________________________________________________________________________________________City, State, Mail Code and Country _______________________________________________________________________

Please send me ____ copies @ $100.00 each (member rate) $150.00 each (nonmember rate). Total enclosed $_________ Check must be in U.S. dollars and drawn on a U.S. bank, payable to USAEE.

Dialogue 24

Calendar9-11 December 2003, Power Gen

International at Las Vegas, NV. Contact: Katherine Snead, Event Manager, Power-Gen Intl 2003, Registration Dept, PO Box 2493, Tulsa,

OK, 74101, USA. Phone: 1-918-832-9286. Fax: 1-918-831-9161 Email: powergen@pennwell.com URL: www.power-gen.com

12-23 January 2004, PURC/World Bank 15th International Training Program on Utility Regulation and Strategy at Gainesville, Florida, USA. Contact: Virginia Hessels, Program Manager, Public Utility Research Center, University of Florida, PO Box 117142, Matherly Hall, University of Florida, Gainesville, Florida, 32611, USA. Phone: +1-352-392-3655. Fax: +1-352-392-5090 Email: purcecon@cba.ufl.edu URL: http://bear.cba.ufl.edu/centers/purc/international/fifteen.htm

20-21 January 2004, Distributed Energy Resources at San Diego, CA. Contact: Frank Kester, Conference Coordinator, Energy West. Phone: 949-492-1340 Email: energywestnews@cs.com

20-22 January 2004, Distributech at Orlando, FL. Contact: Jennifer Lindsey, Conference Manager, PennWell Global Energy Group, 1421 S. Sheridan Rd, Tulsa, OK, 74112, USA. Phone: 918-832-9313 Email: dtechconference@pennwell.com URL: www.distributech.com

18-19 February 2004, Wind Energy and Rural Development in North Dakota V Conference at Fargo, ND. Contact: Derek Walters, Communications Director, EERC, Univ of North Dakota, PO Box 9018, Grand Forks, ND, 58202, USA. Phone: 701-777-5000. Fax: 701-777-5181 Email: dwalters@undeerc.org URL: www.undeerc.org

20-22 February 2004, Eastern Economic Association 2004 Annual Conference at Washington, DC. Contact: Dr. Mary Lesser, EEA, c/o Iona College, 715 North Avenue, New Rochelle, NY, 10801, USA. Phone: 914-633-2088. Fax: 914-633-2549

1-3 March 2004, The IASTED International Conference on Alternate Energy Sources and Technology - AEST 2004 at Marina del Rey, CA, USA. Contact: IASTED Secretariat - AEST 2004, IASTED, #80, 4500 16th Ave. NW, Calgary, AB, T1V 1N3, Canada. Phone: 403 288 1195. Fax: 403 247 6851 Email: calgary@iasted.org URL: http://www.iasted.com/conferences/2004/marina/aest.htm

11-12 March 2004, Marine Construction Amsterdam 2004 at Marriott Amsterdam Hotel. Contact: Sandra Gregory, Conference Coordinator, Quest Offshore Resources, Inc., 10701 Corporate Dr, Suite 188, Stafford (Houston), TX, 77477, USA. Phone: 1 281-491-5900. Fax: 1 281-491-5902 Email: sandra.gregory@questoffshore.com URL: www.MCAmsterdam.com

March 31, 2004 - April 1, 2004, National Energy Marketers Association Annual Meeting and National Energy Restructuring Conference at Washington, DC. Contact: Conference Coordinator, National Energy Marketers Association, 3333 K St, NW Ste 110, Washington, DC, 20007, USA URL: www.energymarketers.com

10-11 May 2004, Energy Risk Management: Assessment & Mitigation at Houston. Contact: Jeff Kaminski, Marketing Manager, Euromoney Training- Americas, 225 Park Avenue South, New York, NY, 10003, United States. Phone: 212-843-5225. Fax: 212-361-3499 Email: jkaminski@euromoneyny.com URL: http://www.euromoneytraining.com/databasedriven/coursedetail.asp?busareaid=3&CourseID=700

1-3 June 2004, Subsea Rio 2004 at Sheraton Rio Hotel. Contact: Sandra Gregory, Conference Coordinator, Quest Offshore Resources, Inc., 10701 Corporate Dr, Suite 188, Stafford (Houston), TX, 77477, USA. Phone: 1 281-491-5900. Fax: 1 281-491-5902 Email: sandra.gregory@questoffshore.com URL: www.SubseaRio.com

7-11 June 2004, Export & International Project Finance in the Energy Sectors at New York City. Contact: Jeff Kaminski, Marketing Manager, Euromoney Training- Americas, 225 Park Avenue South, New York, NY, 10003, United States. Phone: 212-843-5225. Fax: 212-361-3499 Email: jkaminski@euromoneyny.com URL: http://www.euromoneytraining.com/databasedriven/coursedetail.asp?busareaid=3&CourseID=160

July 7, 2004 - September 7, 2004, 17th International Conference on Efficiency, Costs, Optimization, Simulation and Environmental Impact of Energy and Process Syst at Hotel Real de Minas, Guanajuato, México. Contact: Prof. Ricardo Rivero, Conference Chairman, Instituto mexicano del Petróleo, Eje Central Lázaro Cárdenas N° 152, Mexico City, 07730, MEXICO. Phone: +52(55) 30-03-84-27. Fax: +52(55) 30-03-69-35 Email: ecos2004@imp.mx URL: http://ecos2004.imp.mx

22-27 August 2004, 2004 ACEEE Summer Study on Energy Efficiency in Buildings at Pacific Grove, CA. Contact: American Council for an Energy-Efficient Economy, ACEE, 1001 Connecticut Ave NW Ste 801, Washington, DC, 20036, USA. Phone: 302-292-3966. Fax: 302-292-3965 Email: rlunetta@comcast.net URL: www.aceee.org

5-9 September 2004, 19th World Energy Congress and Exhibition at Sydney, Australia. Contact: Michelle Duggan, Conference Coordinator, Tour Hosts Pty Limited, Australia Email: mduggan@tourhosts.com.au URL: www.tourhosts.com.au

USAEE Dialogue United States Association for Energy Economics28790 Chagrin Boulevard, Suite 350Cleveland, OH 44122 USA

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PAIDRichfield, OHPermit No. 82