Oxford Institute for Energy Studies » Publications

Energy Subsidies in the Arab World

Bassam Fattouh — Tue, 21 Feb 2012 10:11:01 +0000

This paper, authored by Bassam Fattouh and Laura El-Katiri and published by the United Nations Development Programme, explores the issue of energy subsidies in the Arab World. The authors argue that while energy subsidies may be seen as achieving social objectives (such as expanding energy access and protecting poor households’ incomes); economic objectives (such as fostering industrial growth and smoothing domestic consumption); and political objectives (such as distributing the oil and natural gas rents to the population), they are a costly and inefficient way of doing so. Energy subsidies distort price signals, with serious implications on efficiency and the optimal allocation of resources. Energy subsidies also tend to be regressive, with high-income households and industries benefiting proportionately most from low energy prices. However, despite such adverse effects, energy subsidies constitute an important social safety net for the poor in many parts of the Arab world, and any attempts to reduce or eliminate them in the absence of compensatory programmes would lead to a decline in households’ welfare and erode the competitiveness of certain industries. Therefore, a critical factor for successful reforms will be the ability of governments to compensate their populations for the reduction or removal of subsidies through carefully designed mitigation measures. It is argued that reform of energy pricing mechanisms in the Arab world may be seen as beneficial from more than one perspective. Nevertheless, this paper recognises that the current political climate in the region will render the reform of domestic energy prices difficult in practice, such that reform may indeed be a medium- to long-term endeavour.

Please follow the link to access the paper.

On Oil Embargos and the Myth of the Iranian Oil Weapon

Laura El-Katiri — Fri, 10 Feb 2012 10:02:25 +0000

The exchange of threats between Iran and the West vis-à-vis Iranian oil exports to European and other consumer countries has received wide attention among policy makers and analysts; IMF officials predict that crude oil prices could increase by as much as 30 percent in case of a halt of Iran’s exports to OECD countries, and if other sources don’t offset the loss of Iranian crude oil. Others claim that all the elements are set for ‘the $200 a barrel scenario’. However, this commentary offers a less pessimistic view, and argues that the potential impacts of such threats on oil market dynamics are often exaggerated. Oil embargos against individual producing countries are in reality difficult to implement, for they require a concerted effort by a large number of buyers to prevent oil producers from diverting crude oil from one market to another. Where they result in a tightening of oil markets and rising prices for consumer nations, they can be relaxed or amended. As for the use of an Iranian oil weapon, the fact remains that despite continuous threats, Iran has never used the oil weapon; the oil weapon remains an indiscriminate policy measure that all producers, including Iran, are reluctant to use; and if ever employed, it is likely to be ineffective and counterproductive from a producer’s point of view. Nevertheless, fears that governments may pursue policies to restrict the flow of energy supplies rattle markets and place a premium on the oil price and contribute to increased price volatility.

Natural Gas Price Volatility in the UK and North America

Sofya Alterman — Thu, 02 Feb 2012 10:18:17 +0000

Lacking a commonly held definition, volatility is an often over-generalised term with different meanings to different constituencies. This does not detract from the importance of the subject. To traders volatility is a source of revenue, to energy intensive industrial end-users it is often perceived as a threat. Midstream utilities actively work to risk-manage volatility in order to deliver a ‘dampened’ price offer to end-user customers.

In this working paper Sofya Alterman summarises the findings from an analysis of natural gas, crude oil and oil products price time series to answer the questions ‘are natural gas prices inherently more volatile than those of oil ?’ and the more interesting question ‘can episodes of markedly different gas price volatility be explained by underlying market fundamentals ?’ Sofya’s research involved a painstaking analysis of 14 years-worth of daily price data along with the investigation of the likely drivers of the volatility patterns uncovered. Her results both confirm the relevance of obvious drivers but also show how these can be blunted or offset by other compensating effects, some of which are less widely acknowledged.

This paper provides important insights into this key aspect of natural gas traded markets, and is especially relevant in today’s environment as trading hub development continues apace in Continental Europe.

Issue 86, November 2011

OIES — Tue, 31 Jan 2012 11:14:25 +0000

Technological Challenges and Developments by Ivan Sandrea, David Bamford, Petrobras and Boston Consulting Group, Michelle Michot Foss, Trisha Curtis, Samer Ashgar, Robert G. Skinner, Franz B. Ehrhardt, Tara Shirvani and Oliver R. Inderwildi.

Rosneft – On the Road to Global NOC Status?

James Henderson — Thu, 19 Jan 2012 10:24:54 +0000

Since the election of Vladimir Putin as president of Russia in 2000 Rosneft has become one of the cornerstones of the strategy for the Russian state to retake control over the ‘commanding heights’ of the economy, and in particular the energy sector. However, having now established itself as a global-scale oil company, Rosneft faces a number of significant challenges. In common with many NOCs, its global significance is based entirely on its domestic asset base, and despite the size of Russia’s resources Rosneft does face the problem that its existing assets in the core areas of West Siberia and European Russia are going into gradual decline. This decline can be offset by the development of new areas such as East Siberia, the Arctic, and offshore fields, but these regions are remote and their exploitation will require advanced and expensive new technology. In parallel with this issue Rosneft is also facing pressure from its majority owner, the Russian government, to act as a catalyst for establishing a greater role for Russia in the global economy, using its energy resources as an important tool. The company is therefore looking to increase the diversity of its asset base by investing overseas at a time when the competition for global oil reserves is high and when Rosneft itself has limited experience of dealing in the international asset market.

This paper explores how Rosneft may be attempting to meet these twin challenges, using the example of two peer NOCs that have experienced similar problems. Petrobras and Statoil are partially privatized, upstream focused NOCs who have established international businesses both as a way of supplementing and diversifying their domestic resource bases and also as a means of acquiring and exploiting technological and operating experience that could be applied across their asset portfolios. Both companies also have a much longer history as corporate entities than Rosneft, and gained listings on an international stock exchange (in New York) in 2000-2001, five to six years before Rosneft’s own privatization. As a result, they can provide a clear analogy for the strategy and tactics that Rosneft may use in the development of its own business model, and indeed it appears that in 2011 Russia’s NOC is already taking a similar path to its ‘Partial NOC’ peers.

The Impact of a Globalising Market on Future European Gas Supply and Pricing: the Importance of Asian Demand and North American Supply

Howard Rogers — Mon, 09 Jan 2012 09:57:35 +0000

In contrast to the majority of European gas analysis which has tended to concentrate on security issues narrowly defined as dependence on Russian gas supplies, this study shows how changes in North American gas supply and Asian gas demand over the next 15 years can create fundamentally different outcomes for European supply, demand and pricing. Using scenario analysis and a global gas model, Howard Rogers demonstrates that Europeans need to pay as much attention to what is happening in gas markets elsewhere in the world, as they do their own supply/demand dynamics. The study also examines the impact of different scenario outcomes in North America and Asia on Russian gas supply and pricing to Europe, showing that Gazprom also may need to make uncomfortable choices between European export volumes and prices over the next decade.

The Outlook for U.S. Gas Prices in 2020: Henry Hub at $3 or $10?

Michelle Michot Foss — Wed, 21 Dec 2011 10:02:20 +0000

In this paper Michelle Foss concludes that Henry Hub gas prices could credibly be as low as $3/MMbtu, or as high as $10/MMbtu in 2020 but that the balance of likelihoods is for a price late this decade which is significantly higher than the current $3-4/MMbtu levels of 2011. Michelle Foss’ study looks at the past five years of supply, demand and pricing which have been strongly impacted by the unconventional gas – and particularly shale gas – revolution and how different views of its evolution will impact future pricing. The study is a forensic analysis of the huge uncertainties surrounding US natural gas supply and demand which illustrates why both commentators and stakeholders have continuously failed to foresee even the approximate direction of prices, leading to the building of numerous LNG import terminals many of which now seem likely to be converted into export terminals.

Back to the Future: Electricity Market Reform Update

Malcolm Keay — Tue, 20 Dec 2011 10:57:58 +0000

The Government has published what is called a “technical update” to its electricity market reform White Paper. This Comment by Malcolm Keay analyses the new proposals and their implications. Many important questions about the new system remain unanswered, but the overall direction is clear – towards a planned electricity system whose function is to deliver the Government’s policy objectives. Having been a pioneer of liberalisation in electricity, the UK will now be a pioneer of post-liberalisation, with radical consequences for consumers and investors and for the governance of the industry.

Peering into the future fog of CO2 – how road maps can help

David Buchan — Tue, 20 Dec 2011 10:48:47 +0000

The term ‘road map’ is proliferating in energy and climate policy to denote any policy or aspiration projected into the future. Connie Hedegaard, Europe’s environment commissioner, hailed the Durban conference agreement as a ‘road map’ to an eventual global climate deal. This contrasts with the far more detailed road maps that she and her European Commission colleagues have been publishing on how Europe can reach its 2050 emission targets. This OIES comment looks at the uses and abuses of road maps. It shows they can be a substitute for action, but also argues they can also be a precursor to action, or at least useful in giving policy-makers and investors a sense of direction for the low carbon economy. And the Durban road map might just reinforce the sense – already evident in some parts of the fossil industry – that global carbon pricing is inevitable one day.

Energy Efficiency – Should We Take It Seriously?

Malcolm Keay — Mon, 19 Dec 2011 15:58:19 +0000

In this Paper, Malcolm Keay looks at governments’ uncritical reliance on energy efficiency to achieve multiple energy policy objectives. He concludes that most existing programmes are ill-directed, badly monitored and probably ineffective in reducing energy demand and emissions – indeed they may be diverting attention from more effective measures. A more targeted approach is needed under which efficiency programmes are properly designed and monitored and integrated more effectively into low carbon strategies.