FEEM Seminars Milan, 2 March 2009 Extraction and Trade of Oil under Climate Policy: An Assessment Using the WITCH Model

Transcription

1 FEEM Seminars Milan, 2 March 29 Extraction and Trade of Oil under Climate Policy: An Assessment Using the WITCH Model Emanuele Massetti and Fabio Sferra

2 Outline of the Presentation Motivation Oil facts Modelling approaches The Oil Sector in the WITCH model Calibration Results: BaU and Stabilization Policy at 55e 2

3 Motivation Strong impact of stabilization policies on fossil fuel and on the oil sector in particular Oil and gas produced by few countries in the world Without a description of regional trade and investment of oil & gas sector, regional stabilization cost might be biased For now: focus on oil sector because international trade of gas is fragmented and hard to model 3

4 Oil Facts 4

5 Oil Facts 1 Oil Demand and Supply: A Regional Perspective 2, 15, 1, 5, -5, -1, -15, -15, LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU -2, -2, NEWEURO OLDEURO USA Net import Net import Net Export Oil Oil Consumption Extraction Production Production for Domestic for Domestic Consumption Consumption 5 Source:Enerdata kbl\day

6 Oil Facts 2 Oil reserves in Oil resources LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO World: 1,125,56 Mbl World: 3,571,63 Mbl OLDEURO USA Oil Reserves: Estimated quantities of crude oil that are claimed to be recovered under existing and operating conditions Oil Resources: Oil reserves + Cumulative production + Reserve Growth + Undiscovered Source: Enerdata, BP, USGS 6

7 Oil Facts 3 9, 1% 8, 9% Crude oil, n.g.l production LACA EASIA kbl\day 7, 8% 7% 6, 6% 5, 5% 4, 4% 3, 3% 2, 2% 1, 1% % CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA Source:Enerdata 7

8 Oil Facts 4 Crude oil, n.g.l. imports kbl\day 5, 1% 45, 9% 4, 8% 35, 7% 3, 6% 25, 5% 2, 4% 15, 3% 1, 2% 5, 1% % LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA Source:Enerdata 8

9 Oil Facts 5 5, 1% 45, 9% 4, 8% Crude oil, n.g.l exports LACA EASIA CHINA kbl\day 35, 7% 3, 6% 25, 5% 2, 4% 15, 3% 1, 2% 5, 1% % SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA Source:Enerdata 9

10 Oil Facts 6 Oil extraction sector and the OIL GDP Oil Exporting Countries have ecomomies dominated by the oil sector 1

11 Modeling Approaches 11

12 Modelling Approaches Cost function approach: A reduced-cost function for oil extraction is calibrated to deliver explicitly cost per barrel of oil Remind Imaclim Merge (?) Old WITCH Investment cost approach: Investments for exploration, development and maintenance in the oil sector are modeled and oil cost per barrel is derived implicitly: EPPA (?) New WITCH 12

13 The Oil Sector in WITCH 13

14 The Structure of the Model Y Y_NON_OIL ES 1/2 KL 1 Y_OIL HE.4 K L EN OIL PRODUCTION (MBL/DAY) 1/2 NEL OIL EXTRACTION CAPACITY (MBL/DAY) ELHYDRO EL EL2 2 TradBiom COALnel OILnel OGB 1/2 GASnel Biofuel ELPC ELCOAL ELIGCC ELFF 2 ELOIL ELGAS ELNUKE Knuke- URANIUM- O&Mnuke ELW&S Kren- O&Mren Trad Biofuel Advanced Biofuel Kpc- COALpcel- O&Mpc Koil-OILel- O&Moil Kigcc- COALigccel- O&Migcc Kgas- GASel- O&Mgas 14

15 The Model OIL _ CAP( n, t + 1) = OIL _ CAP( n, t)(1 δ ) + ADD _ OIL _ CAP( n, t) (1) OIL _ PROD( n, t + 1) OIL _ CAP( n, t) (2) Y OIL ( n, t) = OIL _ PROD( n, t) P _ OIL( n, t) (3) Oil cost = Cost of additional oil extraction Oi_cap = Oil extraction capacity Oil_prod = Oil production Add_oil_cap= Additional oil extraction capacity Oil_res = Oil resources 15

16 The Model OIL _ INV ( n, t) = ADD _ OIL _ CAP( n, t) OIL _ COST ( n, t) (4) (, t) ( n, ) ( ) ( ) α β γ t = ADD _ OIL _ CAP n, t OIL _ PROD s s + + ( ) = 1 OIL _ COST n, t OIL _ CAP n, t OIL _ RES t φ (5) OIL _ RES ( n, t) = OIL _ RES ( n, t 1) (1 + μ) (6) 16

17 Calibration 17

18 Calibration Oil extraction function derived from Hansen, L., D. Epple and W. Roberds (1985) OIL _ COST( n, t) ADD_ OIL _ CAP( n, t) = α + β OIL _ CAP( n, t) + γ t s= 1 OIL _ PROD( s, t) OIL _ RES( n, t) 3 (7) 2% 8% 2% 18

19 Calibration Cost of additional oil extraction capacity (Source: WEO) LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 19 $ \ barrels

20 The International Oil Market The oil market is modeled as the market for the exchange of carbon permits The international price of oil is iteratively adjusted to yield equilibrium between supply and demand 2

21 Oil Rents Oil markets are dominated by oligopolistic behavior that establishes a wedge between marginal extraction cost and the iternational price of oil In order to have a well functioning international market, and reasonable patterns of oil extraction, we used inflated oil extraction capacity costs (about 5 times bigger than in WEO) Otherwise we have over-extraction in early periods 21

22 Business as Usual 22

23 International Price of Oil Price of Crude Oil 3 25 BaU 2 $ / Barrel Unfortunately, we had problems in calibrating the international price of oil on a realistic pattern Mainly due to an insufficient growth of resources which leaves a very thin market at the end of the century Major results are not affected and the model reproduces realistic dynamics both in BaU and in Stabilization scenarios 23

24 Oil Market - Imports - BaU Oil Market - BaU LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 24 Millions Barrels per Day

25 Oil Market - Exports - BaU Oil Market - BaU LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 25 Millions Barrels per Day

26 Oil Market - BaU Oil Market - Imports - BaU 1% LACA 8% EASIA CHINA Share 6% 4% SASIA SSA MENA TE CAJAZ 2% KOSAU NEWEURO % OLDEURO USA 26

27 Oil Market - BaU Oil Market - Exports - BaU 1% 9% LACA Share 8% 7% 6% 5% 4% EASIA CHINA SASIA SSA MENA TE 3% CAJAZ 2% 1% % KOSAU NEWEURO OLDEURO USA 27

28 Oil Extraction Capacity Oil Extraction Capacity - BaU LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 28 Million Barrels per Day

29 Oil Extraction Capacity Oil Extraction Capacity - BaU 1% LACA Million Barrels per Day 8% 6% 4% 2% EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU % NEWEURO OLDEURO USA 29

30 Investments in the Oil Sector Investments in the Oil Sector - BaU LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 3 Billions USD

31 Stabilization Scenario 31

32 Stabilization scenario at 55ppmv all GHG Cap&Trade with world carbon market No R&D in backstop technologies 32

33 Price of Carbon Price of Carbon World CO2 Emissions (GtC) $/tco2e 1 8 GtC e BaU 55e The price of carbon permits follows the usual dynamics It is lower than in the standard 55e case in the second half of the century due to lower emissions in our provisionary baseline (high oil price) 33

34 International Price of Oil Price of Crude Oil Price of Crude Oil 3 25 BaU 55e e $ / Barrel $ / Barrel Dramatic decline of oil price wrt BaU Decline in the short-medium term due to lower short-term pressure, and growing reserves Price rises again due to scarcity at the end of the century 34

35 Investments in the Oil Sector Cost of Additional Oil Extraction Capacity 6 $ / Barrel Day Capacity BaU 55e The dramatic increase in the price of oil is not due to growing costs of additional oil capacity: scarcity rents are now over-estimated Under climate policy extraction capacity costs are generally lower than in the BaU due to both lower market frictions and to slower exhaustion of resources 35

36 Oil Market - Imports - 55e Oil Market 55e LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 36 Millions Barrels per Day

37 Oil Market - Exports - 55e Oil Market 55e LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 37 Millions Barrels per Day

38 Oil Market 55e Oil Market - Imports - 55e 1% 9% LACA Millions Barrels per Day 8% 7% 6% 5% 4% 3% 2% 1% % EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 38

39 1% 8% 6% 4% 2% % Oil Market - Exports - 55e Oil Market 55e LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 39 Millions Barrels per Day

40 International Trade of Oil: BaU and 55e Oil Traded Internationally 1 9 Millions Barrels per Day BaU 55e Peak of oil traded in and then rapid decline Overall oil extraction (and consumption) is 7% lower Consider that we start from a baseline with low consumption of oil 4

41 Extraction Capacity Oil Extraction Capacity - 55e LACA EASIA CHINA SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA 41 Share

42 Extraction Capacity Oil Extraction Capacity - 55e 1% LACA 8% EASIA CHINA Share 6% 4% SASIA SSA MENA TE 2% CAJAZ KOSAU % NEWEURO OLDEURO USA 42

43 Investments in the Oil Sector Investments in the Oil Sector - 55e 6 LACA 5 EASIA CHINA Billions USD SASIA SSA MENA TE CAJAZ KOSAU NEWEURO OLDEURO USA Investment patterns and extraction capacity patterns are not the same due to different regional dynamics of extraction costs 43

44 Investments in the Oil Sector Million Barrels per Day Additional Oil Extraction Capacity (Flow) BaU 55e Climate policy induces early oil extraction In line with many theoretical contributions 44

45 Investments in the Oil Sector Investments: Oil Sector 7 6 US$ Billions BaU 55e Investments dynamics respond to dynamics of extraction capacity costs and to additional capacity requirements Climate policy induces a spike in investments in the short term due to stronger demand of extraction capacity In the long term investments are lower; over the century total investments in the oil sector decline by 4% 45

46 Oil Price and Extraction Capacity Costs Index of Oil Price and Oil Exraction Capacity Cost BaU Index of Oil Price and Oil Exraction Capacity Cost 55e $ / Barrel Day Capacity Extraction Capacity Cost Oil Price $ / Barrel Day Capacity Extraction Capacity Cost Oil Price In the BaU the dynamics of oil extraction capacity costs and of international price of oil are totally independent: demand determines the price of oil; oil rents for oil exporting countries In the stabilization scenario, the dynamics of oil extraction capacity costs and of oil price are much closer: supply determines the price of oil; oil rents disappear 46

47 The Energy Sector Investments: Oil Power Generation Investments: Gas Power Generation US$ Billions BaU 55e US$ Billions BaU 55e Higher cheap oil supply affects dynamics in oil demand, which increases also in stabilization scenario 47

48 Oil GDP in OPEC Oil-GDP to Non-Oil GDP in OPEC 35% 3% 25% Share 2% 15% 1% 5% % Strong contraction of Oil-GDP in OPEC countries 48

49 Oil GDP in OPEC and Non-OPEC OPEC Oil Gross Product (Trillions) World Oil Gross Product (Trillions) BaU 55e US$ Trillions Non-OPEC Oil Gross Product (Trillions) BaU 55e BaU 55e 2 49 US$ Trillions US$ Trillions Under the stabilization policy Oil- GDP disappears

50 GDP in OPEC OPEC Non-Oil Gross Product (Trillions) OPEC Gross Product (Trillions) US$ Trillions BaU 55e BaU 55e US$ Trillions Investments are directed to the non-oil sector However, GDP decline sharply 5

51 Stabilization Policy Costs Discounted Stabilization Policy Costs (3% declining) 5% WORLD OPEC NON-OPEC 2.8% % -.9% -5% -1% -15% -2% -16.7% Stabilization costs (as GDP losses) are in line with previous estimates OPEC countries are strong loosers (also accounting for Sub- Saharan Africa which earns a lot with carbon trading) Non-OPEC countries gain 51

52 Stabilization Policy Costs Discounted Stabilization Policy Costs (3% declining) 5% 4% 3% 2% 1% % -1% -2% -3% -4% -5% USA OLDEURO NEWEURO KOSAU TE CAJAZ MENA 38.2% 17.3% 15.4%.% 1.4% -.5%.5%.7% -2.% -8.3% -27.2% -44.9% SSA SASIA CHINA EASIA LACA 52

53 Conclusions The approach used to model trade of fuels and the oil extraction sector delivers results in line with theoretical predictions Oil-exporting countries are severely hit by a climate policy Need to calibrate growth of oil resources to deliver a lower price of oil More careful review of regional patterns 53