Security concerns in the Middle East for oil supply: Problems and solutions

Comprising 65–70% of the world's oil reserves, the Gulf States (Saudi Arabia, Iran, Iraq, Kuwait, UAE and Qatar) are key countries for the solutions to the energy supply matters of the world. Free flow of oil to the world markets from Gulf region is an indispensable part of the major security issues. The Middle East has had mainly security related problems such as Arab–Israeli wars and conflicts, Arab–Iranian war and conflicts, Arab–Arab war and conflicts, US–Gulf wars and conflicts and more recently radicalism and terrorist attacks. Energy supply security requires the enhancement of the peace and cooperation between countries instead of competition. Preventive policy approaches are more suitable to address energy supply matters. Preventive strategy might be possible with the active participation of NATO within the “out of area” type operations to the Middle East and quite possibly indirectly to the Asia-Pacific regions. Religious and ethnic radicalism and terrorist attacks has also direct effects over oil supply security matters.     

Is oil supply choked by financial market pressures?

Since the late 1990s, financial analysts have focused strongly on short-term profitability for benchmarking and valuation of international oil and gas companies. The increasing pressure for strict capital discipline among oil and gas companies may have reduced their willingness to invest for future reserves and production growth. The current high oil price is partly due to low exploration activity in the oil industry the last decade. We present and discuss the background for this development—based on previous academic research, industry trends and current valuation practices. An estimated econometric model of stock market valuation among oil and gas companies suggests that analysts and companies have put exaggerate weight on short-term earnings and accounting profitability. We therefore expect that the attention will shift back to long-term reserve and production growth.     

Global oil depletion: A review of the evidence

Within the polarised and contentious debate over future oil supply a growing number of commentators are forecasting a near term peak and subsequent decline in production. But although liquid fuels form the foundation of modern industrial economies, the growing debate on ‘peak oil’ has relatively little influence on energy and climate policy. With this in mind, the UK Energy Research Centre (UKERC) has conducted an independent, thorough and systematic review of the evidence, with the aim of establishing the current state of knowledge, identifying key uncertainties and improving consensus. The study focuses upon the physical depletion of conventional oil in the period to 2030 and includes an in-depth literature review, analysis of industry databases and a detailed comparison of global supply forecasts. This Communication summarises the main findings of the UKERC study. A key conclusion is that a peak of conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020.     

Russian gas price reform and the EU–Russia gas relationship: Incentives,consequences and European security of supply

In order to provide a comprehensive picture on the relationship between Russia and the EU, the focus should be on both the external energy relationship as well as Russia's internal organization. This paper sets out to do this by combining both strands of research in order to arrive at recommendations for Europe on the way to adjust its energy policy towards Russia. The emphasis is on whether or not Russia should impose unified gas pricing. Main conclusions are that the perceived advantages of unified Russian gas pricing to Russia as well as Europe are in fact overstated and that EU security of supply might worsen under unified gas prices. Three policy recommendations are that EU policy should (1) more explicitly acknowledge the interdependence between Russia and Europe; (2) not push Russia towards unified gas pricing; and (3) not take for granted any increase in Russian exports flowing to Europe.     

Resources and future supply of oil

This paper examines global oil resources and the future global oil supply/demand balance. The paper builds upon several comprehensive databases designed during the work and considerable efforts have been made to review what must be considered the most reliable data. Global oil resources have been investigated on three levels; country, company and field levels.     

Horizontal and vertical transmissions in the US oil supply chain

Oil prices, inventory levels, and utilization rates are influenced by changes that are transmitted horizontally and/or vertically through the energy supply chain. We define horizontal transmissions as changes that are generated by linkages among fuels at a similar stage of processing while vertical transmissions are changes that are generated by upstream/downstream linkages in the oil supply chain. Here, we investigate vertical and horizontal transmissions by estimating vector error correction models (VECMs) that represent relationships among the price of crude oil, US refinery utilization rates, US stocks of crude oil, US stocks of motor gasoline, the US price of motor gasoline, and the US price of a substitute fuel, natural gas. Causal relationships estimated from both weekly and quarterly observations indicate that the price of crude oil is an important gateway for disturbances to the oil supply chain. Impulse response functions indicate that disturbances to crude oil prices ripple down the oil supply chain and affect inventory behaviors, refinery utilization rates, and the price of motor gasoline, and are transmitted laterally to the natural gas market.     

Effects of oil on output growth and inflation in developing countries: The case of Thailand from January 1966 to January 1991

The paper reports the results of a simple cointegration analysis applied to bivariate causality models and quarterly data on crude oil consumption, GDP and inflation in Thailand to investigate the long-term relationships in the sense of Granger between oil and these two major macroeconomic aggregates. For the period from January 1966 to January 1991, the empirical evidence indicates that oil consumption, output growth and inflation rate, as formulated in our models, are not random walks. In addition, oil consumption is significantly cointegrated with economic growth and, unfortunately, inflation rate.     

Hybrid solution and pump-storage optimization in water supply system efficiency: A case study

Environmental targets and saving energy have become ones of the world main concerns over the last years and it will increase and become more important in a near future. The world population growth rate is the major factor contributing for the increase in global pollution and energy and water consumption. In 2005, the world population was approximately 6.5 billion and this number is expected to reach 9 billion by 2050 [United Nations, 2008. www.un.org, accessed on July]. Water supply systems use energy for pumping water, so new strategies must be developed and implemented in order to reduce this consumption. In addition, if there is excess of hydraulic energy in a water system, some type of water power generation can be implemented.     

OPEC and Venezuelan oil production: Evidence against a cartel hypothesis

This study revisits the OPEC cartel hypothesis using a case study. A test is conducted to see if Venezuela has its production Granger cause its OPEC quota or whether the OPEC quota for Venezuela Granger causes Venezuelan production. The results show both occur at different times. In the short run, OPEC’s oil production quota for Venezuela Granger causes Venezuelan production. However, shortly after cuts, Venezuela cheats on agreements, suggesting a tit-for-tat oligopoly game, which is not anti-competitive. In the long run, we show that Venezuelan oil production Granger causes OPEC’s quota for Venezuela, but not vice versa. Having Venezuelan oil production Granger cause OPEC quotas for Venezuela in the long run suggests OPEC does not coordinate outputs as much as it reacts to them. The evidence suggests Venezuela is not a part of an OPEC anti-competitive syndicate even though we show that Venezuelan oil production is low. An alternative explanation for why Venezuela and possibly other OPEC members have low oil production outputs is that institutions and risk aversion, not cartel participation, is the cause. A vector error correction model shows that there is no tendency for Venezuelan oil production to converge to OPEC’s quota for Venezuela.     

A panel data analysis of the determinants of oil consumption: The case of Australia

The goal of this paper is to examine the determinants of oil consumption for a panel consisting of six Australian States and one territory, namely Queensland, New South Wales, Victoria, Tasmania, South Australia, Western Australia, and the Northern territory, for the period 1985–2006. We find that oil consumption, oil prices and income are panel cointegrated. We estimate long-run elasticities and find that oil prices have had a statistically insignificant impact on oil consumption, while income has had a statistically significant positive effect on oil consumption.     

Oil price,biofuels and food supply

The price of oil could play a significant role in influencing the expansion of biofuels, but this issue has yet to be fully investigated in the literature. Using a global computable general equilibrium (CGE) model, this study analyzes the impact of oil price on biofuel expansion, and subsequently, on food supply. The study shows that a 65% increase in oil price in 2020 from the 2009 level would increase the global biofuel penetration to 5.4% in 2020 from 2.4% in 2009. If oil prices rise 150% from their 2009 levels by 2020, the resulting penetration of biofuels would be 9%, which is higher than that would be caused by current mandates and targets introduced in more than forty countries around the world. The study also shows that aggregate agricultural output drops due to an oil price increase, but the drop is small in major biofuel producing countries as the expansion of biofuels would partially offset the negative impacts of the oil price increase on agricultural outputs. An increase in oil price would reduce global food supply through direct impacts as well as through the diversion of food commodities and cropland towards the production of biofuels.     

Nuclear power in Northern Russia: A case study on future energy security in the Murmansk region

The economy of the Murmansk region in Russia is based on energy intensive industry, mainly metallurgies, and consequently, the region is highly dependant on the ageing Kola nuclear power plant. This interdependence together with other weaknesses in the regional energy system creates threats to the energy supply security of the region. This paper analyses the internal and external threats influencing the region and presents potential solutions. Scenarios further illustrate possible future paths these potential solutions could deliver by the year 2025.     

Hydropower potential of municipal water supply dams in Turkey: A case study in Ulutan Dam

This paper aims to analyze the hydropower potential of municipal water supply dams in Turkey. The facility is in favor with the energy policy of Turkish Government and European Union. In the study, the design head of the power plant was selected as the average water level of the reservoir and the discharge was calculated from the annual water supply of the dam. It has been estimated that the existing 45 municipal water supply dams of Turkey have an electric energy potential of 173 GWh/year, corresponding to about 24,000,000 Euro/year economic benefit. The financing of these facilities can be provided from international funding institutions. For a case study, Zonguldak Ulutan Dam and its water treatment plant have been investigated in detail. The current electricity consumption of the water treatment plant is 4,500,000 kWh/year and the facility provides 35,000 m³/day water to 6 settlements. The installation of a hydropower plant on the mentioned water treatment plant will cut the electric consumption by 24%. The proposed project has a payback period of 1.4 years and it can produce clean and feasible energy.     

Price and prospects for oil : Carrying the burden of excess capacity in the 1980s and beyond

The continuing decline in world oil prices will not be halted in the short term, and prospects for the long run are not encouraging. There is a problem of unprecedented gravity in the surplus capacity of the oil industry. A glut of 10 million bbl/day of crude oil remains unsold, the cohesion of the OPEC cartel is becoming more strained, and a sizeable proportion of refinery plant has been taken off-stream. The basic difficulty is that high interest rates have curbed international capital formation and depressed demand. Upward pressures on the US dollar have been created by the deficit on US domestic and external accounts, and have retarded the recovery of the global economy. Today the cost of money exceeds the factor price of oil, and the market is highly unstable. The devastating costs of carrying surplus capacity are likely to survive through the 1980s.     

Assessing the date of the global oil peak: The need to use 2P reserves

Combining geological knowledge with proved plus probable (‘2P’) oil discovery data indicates that over 60 countries are now past their resource-limited peak of conventional oil production. The data show that the global peak of conventional oil production is close.

Many analysts who rely only on proved (‘1P’) oil reserves data draw a very different conclusion. But proved oil reserves contain no information about the true size of discoveries, being variously under-reported, over-reported and not reported. Reliance on 1P data has led to a number of misconceptions, including the notion that past oil forecasts were incorrect, that oil reserves grow very significantly due to technology gain, and that the global supply of oil is ensured provided sufficient investment is forthcoming to ‘turn resources into reserves’. These misconceptions have been widely held, including within academia, governments, some oil companies, and organisations such as the IEA.

In addition to conventional oil, the world contains large quantities of non-conventional oil. Most current detailed models show that past the conventional oil peak the non-conventional oils are unlikely to come on-stream fast enough to offset conventional's decline. To determine the extent of future oil supply constraints calculations are required to determine fundamental rate limits for the production of non-conventional oils, as well as oil from gas, coal and biomass, and of oil substitution. Such assessments will need to examine technological readiness and lead-times, as well as rate constraints on investment, pollution, and net-energy return.     

Review of mathematical models of future oil supply: Historical overview and synthesizing critique

This review paper assesses oil supply modeling techniques and critically evaluates their usefulness in projecting future oil production. It reviews models that project future rates of oil production, but does not address estimation of oil resources. The following types of models are reviewed: the Hubbert method; other curve-fitting methods such as exponential and Gaussian models; simulation models of resource discovery and extraction; and data-rich “bottom-up” models. Economic models are reviewed more briefly. Forty-five mathematical models of oil depletion of the last century are classified along four dimensions of variability: emphasis on physical or economic aspects of oil production; model scale; hypothetical or mechanistic orientation; and complexity. Models based on quite disparate assumptions (e.g., physical simulation vs. economic optimal depletion) have produced approximately bell-shaped production profiles, but data do not support assertions that any one model type is most useful for forecasting future oil production. In fact, evidence suggests that existing models have fared poorly in predicting global oil production. The greatest promise for future developments in oil depletion modeling lies in simulation models that combine both physical and economic aspects of oil production.     

Global oil peaking: Responding to the case for ‘abundant supplies of oil’

This paper examines aspects of the case against global oil peaking, and in particular sets out to answer a viewpoint that the world can have abundant supplies of oil “for years to come”. Arguments supporting the latter view include: past forecasts of oil shortage have proved incorrect, so current predictions should also be discounted; many modellers depend on Hubbert's analysis but this contained fundamental flaws; new oil supply will result from reserves growth and from the wider deployment of advanced extraction technology; and that the world contains large resources of unconventional oil that can come on-stream if the production of conventional oil declines. These arguments are examined in turn and shown to be incorrect, or to need setting into a broader context. The paper concludes therefore that such arguments cannot be used to rule out calculations that the resource-limited peak in the world's production of conventional oil will occur in the near term. Moreover, peaking of conventional oil is likely to impact the world's total availability of oil where the latter includes non-conventional oil and oil substitutes.     

Growth and oil price: A study of causal relationships in small Pacific Island countries

This paper investigates the nexus between economic growth and oil price in small Pacific Island countries (PICs). Except Papua New Guinea, none of the 14 PICs has fossil any fuel resources. Consequently, the other 13 PICs are totally dependent on oil imports for their economic activities. Since PICs have limited foreign exchange earning capacities, as they have a very narrow range of exports and are highly dependent on foreign aid, high oil prices in recent months have seriously tested their economic resilience. This paper applies the ARDL bounds testing methodology to four selected PICs, Samoa, Solomon Islands, Tonga and Vanuatu, which have consistent and reliable time series of data, with a view to assess the impact of oil price on economic growth. The findings are that oil price, gross domestic product and international reserve are cointegrated in all the four PICs. Further, both in the long and short runs, we observe that there is a uni-directional relationship as causality linkage runs only from oil price and international reserves to economic growth. The paper makes some policy recommendations.     

Production-sharing contracts and decision-making in oil production : The case of Indonesia

In Indonesia, a foreign oil-producing firm must follow a production-sharing contract with the government. The purpose of this paper is to incorporate sharing contract arrangements into a decision-making model of oil production in Indonesia. The model is constructed to determine the expected monetary value of the project. We then evaluate the possible values of the parameters in the model. Three different cases are set up. The first two are either optimistic or pessimistic about the profitability of the project. In the third case, we specify a probability distribution for some of the crucial parameters in the model. Lastly, we demonstrate that the complex production model can be implemented easily on an electronic spreadsheet software program. We also calculate Indonesia's share of economic rent from petroleum production. Some concluding remarks are given at the end of the paper.     

Future oil supply: The changing stance of the International Energy Agency

The IEA was established in 1974 with a mandate to promote energy security amongst its members, namely the states of the OECD, and to advise those members on sound energy policy. Its recent forecasts of the medium and long term prospects for oil supply, however, have wavered, alternating from optimistic to pessimistic and back again. For policy-makers, such inconsistency is difficult to deal with. Firstly we examine whether the changing outlooks seen in IEA forecasts made between 2007 and 2010 truly reflect a demonstrable, underlying change in the known facts, and we can find no such factual changes reported by the IEA. Secondly we examine whether the serious criticisms of the IEA's (2008) forecast made by other analysts have yet been addressed, and we conclude that they have not. Thirdly we consider the possible effects of the current economic downturn upon the IEA's assumptions and upon future oil supply. We conclude that all the forecasts made by the IEA appear to be too optimistic throughout this period.