upcoming challenges for economics and politics · 14 dawud ansari | 9 / 1 / 2017 energy markets...

Energy markets today and tomorrow Upcoming challenges for economics and politics

Department Energy, Transport, Environment

Dawud Ansari

Berlin, 1st Sep 2017

1 The Oil Price Drop of 2014 – 2016

2 The Resource Curse

3 Asset Stranding and the New Economics of Oil

4 The Energy System towards 2050

Overview

Dawud Ansari | 9 / 1 / 20172

Energy markets today and tomorrow: Upcoming challenges for economics and politics

Dawud Ansari | 9 / 1 / 2017


The Price Drop of 2014 – 2016:

What was the role of OPEC?

1

3

Background

Dawud Ansari | 9 / 1 / 20174Energy markets today and tomorrow: Upcoming challenges for economics and politics

1

WTI quarterly

price. Data:

Thomson Reuters

Price drop

Nov. 2016

Production cut

agreed (incl.

Russia, Iran)

Nov 2014

Vienna talks:

No OPEC cuts

Jun 2016

OPEC deal talks failPrice collapse

Feb 2016

Russia signals

interest in cuts

The Shale Revolution


1

Source: Azreki et al. (2017), Rystad energy

• US shale is typically seen as the main driver of low oil prices

• Shale oil (informally): Conventional oil extracted using hydraulic fracking or

horizontal drilling

Crude oil

production capacities

Data: IEA, own calculations

Model-based evidence: Business-as-usual developments?


1

Bathtub market

• Homogeneous crude

• Pool model: Unified, global demand function

• Relaxation: quality adjustment

Present profit maximisation

• No dynamic strategic behaviour

• Full information and certainty

Golombek production costs

Linear demand

• From actual demand and fixed elasticity

Perfect Competiton

Lower-end benchmark

Cournot

Equal market power

Stackelberg:

KSA / United OPEC vsCournot / Fringe

Asymmetric market power

max𝑞𝑖𝑡

𝑝𝑡 ∙ 𝑞𝑖𝑡 − 𝐶𝑖𝑡 𝑞𝑖𝑡 | 𝑞−𝑖𝑡𝑠 ∀𝑖, 𝑡

𝑡: 2011 Q4 – 2015 Q4, quarterly

An extension of Huppmann (2013)

Model-based evidence: Results


1Actual and computed price trajectories

ARME in % KSA-FR PC KSA-CO Cournot UNI-CO

Overall 23 27 35 52 120

First period 25 31 24 43 121

Second period 18 18 63 75 119

Goodness of fit

Saudi calculus: Revenues or market-shares?


1

• Trade-off between revenue maximisation and market-shares

• Prolonged low oil prices can result in economic and political havoc

• Geopolitical impact ambiguous, Saudi Arabia advances in refining, Vision 2030

Fiscal breakeven prices in USD / bbl in 2013 – 2015. Data: IMF

Shale Performance under Pressure


1

Month-to-month and quarter-to-quarter changes in US rigs (left) and quarter-to-quarter and year-to-year changes

in US daily crude oil production (right). Data: EIA

• Shale economics: Different cooperative, financial, and cost structure

• Severe overvaluation of shale breakeven before the drop

• Potential misunderstanding of the breakeven concept itself (Kleinberg et al., 2016)

• Significant decrease in production, although far below OPEC hopes (OPEC, 2016)

Dawud Ansari | 9 / 1 / 201710


The Resource Curse

2

Resources and wealth


Imagine, you had a

treasure in your garden.

2

You would suppose that this

treasure brings you benefit.

But what if the treasure

is actually a danger to you?

Resources and wealth (cont’d)


• The “resource curse” puzzle is known for long.

• Economic channels: Dutch disease and price volatility

• Modern view: “The curse is real but not destiny.” (Elbadawi & Gelb, 2010, p.iii)

• Main driver: Institutional failure

• Suitable indicator: Adjusted net savings rates (ANSR)

2from Van der Ploeg, F. (2011)𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒

𝐹𝑢𝑒𝑙, 𝑜𝑟𝑒, 𝑎𝑛𝑑 𝑚𝑒𝑡𝑎𝑙𝑒𝑥𝑝𝑜𝑟𝑡𝑠 𝑖𝑛 % 𝑜𝑓

𝑚𝑒𝑟𝑐ℎ𝑖𝑛𝑑𝑠𝑒 𝑒𝑥𝑝𝑜𝑟𝑡𝑠(1970−2002)


2

NR Boom / Capital Inflow

Concentration in the NR sector

Higher wages in NR and services

sectors

Real / nominal overvaluation

Lower productivity or missing

economies of scale

National products not competitive

Deindustrialisation

Absorptive constraints or weak

institutions

Suboptimal reinvestment

patterns

More on the next slides

The Dutch Disease

The Dutch Disease (cont’d)


2

• Reinvestment:As a rule of thumb, NR rents should be transformed into renewable capital (e.g. industry).

Deindustrialisation / sectoral trap

Suboptimal reinvestment

patterns

Neglect of education

Brain-drainNo high-skilled-

labour-demanding sector

Post-boom collapse

Any shock on NR demand

or supply can sincerely

damage the entire

economy!

This is where

“good” policy

would

intervene!

Elements of Institutional Failure


• Bad governance is the necessary condition for an RC

• All other symptoms could be mitigated by adequate policies!

• Embezzlement of rents itself, corruption

• Rent seeking (bottom-up)

• e.g. bribery for the (inefficient) provisioan of public goods

• Military conflict Infrastructure damages, institutional worsening,

uncertainty for investors

• Resources are used to stay in power (top-down)

• Buying of political dissidents / Authoritarian bargains

• Design of infeasible but popular fiscal policies or public investments in

white elephants

• Dutch disease patterns are willingly created

• Institutional failure and corruption cause each other mutually

• The RC becomes a vicious circle.

2

Empirical Example: Yemen


2

Developments in the Yemen Arab Republic during the remittances boom phase 1973 - 1983. (A) Trajectories of remittances,

imports and the oil price and (B) changes in the sectoral composition (main industry sectors). Data: El Mallakh (2014), World

Bank (1979), British Petroleum (2013), and Looney (1990). Note: Remittances before 1976 are proxied by overall capital

inflows.

from Ansari (2016)

Empirical Example: Yemen (cont’d)


2

from Ansari (2016)

Real GDP per capita growth, the adjusted national saving rate and

the Human Development Index in reunited Yemen 1990 - 2012.

Data: Alkeldar (2013), Central Bank of Yemen (2013), Human

Development Report Office (2013), World Bank (2015), (2010),

Republic of Yemen (2014), (2009, 2006), United Nations Statistical

Commission (2015), own calculations.

Oil dependency in Yemen and selected Gulf Co-operation Council

countries (average 1997 - 2000. Data: IMF (2012), World Bank

(2015), Mottu and Ahmad (2002).

Dawud Ansari | 9 / 1 / 201718


Asset Stranding and

the New Economics of Oil

3

The New Economics of Oil


3

Peak demand

Eastward oil flows

Higher elasticities

No ultimate swing role

New logistics,

new players,

new geopolitics?

Market conditions change over time,

New pressure on fossil

fuel producers

Is OPEC dead?

Definitely not!

But it has many challenges.

Asset stranding

Green paradox

Instability

Potential

consequences

based on

Dale (2016)

Oil is not

priced

as an

exhaustible

resource!

Oil reserves


3

Source: BP

Oil reserves (cont’d)


3

Source: BP

Trade flows


3

Source: BP

Production & Consumption


3

Source: BP

Asset Stranding


• Changing market conditions endanger certain assets to become

stranded

• Stranded asset: An asset, which has rendered useless, hence

worthless

• Might become a central theme of tomorrow’s energy markets

• How will producers behave if they anticipate asset stranding?

• Major oil producers have announced to diversify their

economies, but…

• … how fast will this happen, and

• … how serious are these commitments?

3

Dawud Ansari | 9 / 1 / 201725


The Energy System towards 2050

3

Intro: SET-Nav at a Glance


4

▪ Title: Navigating the Roadmap for

Clean, Secure and Efficient Energy

Innovation

▪ Support: Horizon 2020 programme

of the European Commission

▪ Coordinator: Technische

Universität Wien, Energy

Economics Group (TU WIEN)

▪ Aim: Supporting strategic decision

making in Europe’s energy sector

▪ April 2016 – March 2019

SET-Nav expertise:

16 partners across Europe

Intro: Modelling in SET-Nav


4

• Single models cannot adequately capture all relevant interdependencies

➢ Systematic model interlinkage for the economy-energy-innovation nexus.

➢ Over the first 1.5 years, the SET-Nav consortium developed…

o Model integration methodology across aggregation levels & sectors.o Definitions of interfaces between participating models.o Technical infrastructure (database, website, programming interface)o Preliminary case study resultso Establishment of the SET-Nav Modelling Forum

FORECASTenergy demand

(multiple sectors)

GGMnatural gas model for

investment + dispatch, import

into Europe

Green-XRES policy

and investment model

INVERTbuilding sector energy demand

model

CCTSMODcarbon capture, transport and

storage, focus on infrastructure

TEPESdetailed

electricity power flow model

Enertilepower sector dispatch and

investment model

MultiModglobal energy

system energy balance by

country

EMPIRE / RAMONA

electricity and natural gas

investment + dispatch

NEMESISinteraction between economy, prices, energy demand

REMESinteraction between

economy, prices, demand, trade between regions

Wider economy models:

Global resourcemarkets:

Sectormodels

WP4: global scenarios to 2050


4

• Objectives:

❖ Look out for critical uncertainties and ‘black swans’

• Scope:

❖ Global, from today to 2050, all energy sources (focus: fossil fuels)

• Constraints:

❖ Limitations of quantitative foresight models

❖ Low impact of purely qualitative models

• Aim:

❖ Bridging qualitative and quantitative scenario development

techniques for long-run pathways with interdisciplinary variables,

special scales for a communicable, plausible, and robust

❖ How we plan to do this:

❖ Combinind participatory and model-based approaches, by processing

the information developed during an expert-based workshop to enrich

MULTIMOD with new quantitative assumptions and data.

WP4: global scenarios to 2050 (cont‘d)


4

Business as usual

Survival of the fittest

Green Democracy

ClimateTech

Workshop

“From ‘Known Unknowns’ to ‘Unknown Unknowns’: Uncovering Critical

Uncertainties for the World Energy Future” @ DIW Berlin, 29th Nov 2016

Led by a workshop facilitator

About 30 participants experts from academia, industry, and press

From qualitativescenarios…

Ex-ante research

WP4: global scenarios to 2050 (cont‘d)


4…to quantitative

scenarios!•Multimod

• A cutting-edge, DIW-maintained energy systems model, featuring…

A global focus

Imperfect competition

Multiple fuels and value-chain steps

Semi-automatic calibration

Endogenous investment

Model results due in September 2017.Discussion paper expected in October 2017.

WP4 / WP9: From Scenarios to Pathways


4

• SET-Nav aim: Develop a set of pathways for the European energy system to 2050

❖ Taking into account potential technology developments and innovation results

❖ Taking into account interaction with global energy markets and climate policy

WP4 results are the

basis for these

pathways.

Thanks for attending!

DIW Berlin — Deutsches Institut

für Wirtschaftsforschung e.V.

Mohrenstraße 58, 10117 Berlin

www.diw.de

RedaktionDawud Ansari

References

• Ansari, D. (2016). Resource curse contagion in the case of Yemen. Resources

Policy, 49, 444-454.

• Ansari, D. (2017). OPEC, Saudi Arabia, and the Shale Revolution: Insights from

Equilibrium Modelling and Oil Politics.

• Arezki, R., Laxton, D., Matsumoto, A., & Nurbekyan, A. (2017). Oil prices and

the global economy.

• Dale, S., 2016. New Economics of Oil. Oil and Gas, Natural Resources, and

Energy Journal 1, 3.

• Elbadawi, I., & Gelb, A. (2010, December). Oil, economic diversification and

development in the Arab World. In Economic Research Forum Policy Research

Report (Vol. 35).

• Huppmann, D., 2013. Endogenous Shifts in OPEC Market Power: A Stackelberg

Oligopoly with Fringe.

• Van der Ploeg, Frederick. "Natural resources: Curse or blessing?." Journal of

Economic Literature 49.2 (2011): 366-420.


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upcoming challenges for economics and politics · 14 dawud ansari | 9 / 1 / 2017 energy markets...

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