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BL Oil & Gas History, Economics and Geopolitics OENA8433
Topic 4, Lecture 1: Fundamentals of Oil & Gas Economics
Dr. Karin Oerlemans
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Unit Overview
Topic 1: Introduction – The Founders
Topic 2: The Global Struggle
Topic 3: War and Strategy
Topic 4: Oil and Gas Economics
Lecture 1: Fundamentals of Oil and Gas Economics
Lecture 2: Oil Pricing
Lecture 3: Natural Gas Markets & LNG pricing
Lecture 4: Government Revenues and taxation
Lecture 5: OPEC - Oligopoly & Oil Shocks
Topic 5: Oil and Gas Technology in context
Topic 6: The Energy Industry Today
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Lecture Outcomes
Upon successful completion of this lecture you should be able
to:
Gain a basic understanding of the fundamentals of economics
Explain the basics economic concepts affecting the oil and gas
industry
Gain an understanding of the markets in the energy industry
Begin to consider the sustainability of future energy resources
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Recommended Reading
Any text on Economics would be suitable:
Gwartney, J. D., Stroup, R. L. & Stobel, R. S. (2000). Economics:
Private and public choice. Fort Worth, Tx: Dryden Press.
Sloman, J. (2006). Economics (6th edn.) Pearson Education.
Hannesson, R. (1998). Petroleum Economics. Westport,
Connecticut: Quorum Books.
http://www.turtletrader.com/beginners_report.pdf
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What is Economics?
Introduction
Descriptive
Positive economics
Normative
Forecasting
Efficiency as major component of economic analysis
Allocative
Technical
Dynamic
Sustainability
Depletion
Transferring through investment
Reducing
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Fundamental Economic Concepts
Factors of production
Supply and Demand curves
Price elasticity of demand
Price fluctuations
Marginal revenue
Game theory
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Fundamental Economic Concepts
Factors of production
Resources employed to produce goods and services
Land
Labour
Technology
Raw Materials
Capital goods
Oil industry –
Down stream
Mid stream
Up stream
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Fundamental Economic Concepts
Demand Curves
Elasticity of Demand
PEoD = (% Change in
Quantity Demanded)/(%
Change in Price)
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Fundamental Economic Concepts
Supply Curve Equilibrium price
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Fundamental Economic Concepts
Fluctuation in prices and effects
Price too high Price too low
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Fundamental Economic Concepts
Revenue
Amount of money a firm receives
TR = P * Q
Marginal Revenue
Extra revenue obtained from each additional unit sold
MR = Change in TR / Change in Q
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Fundamental Economic Concepts
Game theory
Mathematics to predict economic behaviour
Assumption: each person/firm will always work to maximise their
wins/profits
Applications
Find equilibrium
Understanding the market behaviour of firms and oligopolies
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Macro Economics of the Oil and Gas Industry
Impacts on national economies of energy supplies and prices
Energy markets
International trade impacts
Balance of payments
Exchange rates
Environmental impacts
Emissions
Physical environment
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Micro Economics of the Oil and Gas Industry
International oil companies
Vertical integration
Industry integration
Tendencies to collusion
State owned oil and gas companies
Natural monopoly elements
Privatisation
Operation of cartels
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Fundamental Concepts in Oil & Gas Economics
Risk and Constraints on the industry
Economic Rent
Taxation
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Fundamental Concepts in Oil & Gas Economics
Risks and Constraints on the Industry
Industry risk
Product risk
Exploration
Reserves
Production
Production cost risk
Construction costs
Interest rates
Exchange rates
Market risk
Selling output at right price
Sovereign risk
Governments changing the rules
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Fundamental Concepts in Oil & Gas Economics
Government regulation risk
Price control
Wholesale and retail
Trade controls on imports and exports
Environmental controls
Exploration
Emissions
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Fundamental Concepts in Oil & Gas Economics
Economic Rent as the Driver
Rent is the difference between cost and revenue
Cost includes NORMAL PROFITS
Rent is the result of scarcity
Types of rent
Differential rent
Hotelling rent
Monopoly rent
Texas Middle East
Sale price $2.50 $2.50
Cost of production 2.40 0.75
Normal Profit 0.10 0.10
Rent 0.00 $1.65
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Fundamental Concepts in Oil & Gas Economics
Subject to Special Taxation Regimes
Exploration incentives
Petroleum resource rent tax
Well-head royalties
Fuel excises
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Fundamental Concepts in Oil & Gas Economics
Property rights
Negative and positive externalities
Common property resources
Market failure
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Markets for Energy
BP Statistical Review of World Energy 2008
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Markets for Energy
BP Statistical Review of World Energy 2008
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Markets for Energy
Production of oil by region
Consumption of oil by region
BP Statistical Review of World Energy 2008
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Markets for Energy
Production of Gas by region
Consumption of Gas by region
BP Statistical Review of World Energy 2008
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Markets for Energy
BP Statistical Review of World Energy 2008
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Energy and Sustainability
Energy and Climate Change, WEC, 2007
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Energy and Sustainability
Road Map to a Low Carbon Future
Renewables - wind power, hydro-electric power, tidal power, and of course solar
power, facilitated by intelligent electricity delivery technology
Green house gas emissions reduction technology
ever-cleaner energy resources
Long-term carbon tax credits
Schemes for low carbon power generation alternatives
Broad commercial introduction of advanced clean coal technology
Energy and Climate Change, WEC, 2007
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In Summary
Fundamentals of Economics
Petroleum Economics
Macro and Micro markets
Energy Markets
Sustainability
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Lecture Conclusion
This is the end of lecture 1 topic 4
You may now progress to Lecture 2, Topic 4
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