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Energy Economics > Class 5: oil markets > Flashcards

Class 5: oil markets Flashcards

1
Q

What do the density and sulfur content of oil say about its quality?

A

lower density and sulfur content mean higher quality

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2
Q

Which regions of the world have the best vs worst oil?

A

South American oil bad, North African great

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3
Q

What is conventional vs unconventional oil, which is more expensive?

A

Conventional: extracted by drilling down (crude oil, natural gas liquids)
Unconventional: extracted differently, like fracking
Unconventional more expensive for now, until conventional supplies get too low

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4
Q

Who has the highest oil reserves?

A

Middle East, South & North America

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5
Q

Repeat question: difference between reserves and resources? When do reserves grow?

A

Resources: everything in the whole world
Reserves: economically and technologically extractable
reserves grow when demand/prices rise, new tech is invented

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6
Q

Which regions are exporters/importers of oil? How/why has the dynamic in North America changed?

A

Middle East, CIS export a lot, Africa exports a little
Americas are balanced
Asia, Europe import
NA used to import, more balanced since fracking, unconventional methods were invented

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7
Q

What are some factors that make certain countries demand more oil?

A

Cold weather/ heating needs, higher supply/ availability, industrialized countries

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8
Q

Where does Switzerland import oil from/ use it for?

A

imports mostly from EU, Africa, US
75% for transport, rest for heat

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9
Q

Where does Germany import oil from/ use it for?

A

imports a lot from CIS, some from EU
less for transport/ heating, more for industry than CH

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10
Q

How has war affected Russia’s oil industry?

A

Affected but still profiting, producing less oil because focus is on war, reallocating exports to Asia because of European embargo

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11
Q

How is demand for oil for transport expected to change in next 10 years?

A

Decrease due to EV usage

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12
Q

What does the value added chain for oil look like?

A

Extraction, transport/trade, conversion (refineries), distribution, consumption

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13
Q

What are the two differentiations of oil extraction methods?

A

onshore vs offshore (ocean)
vertical vs horizontal drilling

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14
Q

What are tight sand and shale?

A

Tight sand: layer of earth with gas in it (fracking)
Shale: layer of hard rock with gas or oil in it (fracking)

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15
Q

What do refineries do? What is an example of a final product made in a refinery?

A

they take lower quality oil, remove certain chemicals, make it higher quality = lighter, less dense
e.g. kerosene and fuel

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16
Q

Upstream vs downstream refineries

A

upstream: closer to extraction point, allow firms to arbitrage on world market
downstream: closer to end consumption/demand centers, cheaper transportation due to economies of scale

17
Q

Why is refinery investment a barrier to exit for firms?

A

Once they invest in refining the oil, they want to sell it, otherwise it’s a sunk cost
They’ll stay in business until they get rid of refined oil even if costs > prices because losses are lower

18
Q

Are oil firms quick to leave the market?

A

No, high fixed costs and often prices/costs turn around and business becomes profitable again, makes more sense to stick it out

19
Q

Are there more downstream of upstream refineries globally?

A

A mix, but more upstream

obviously in exporting areas more upstream, in demand centers more downstream refineries

20
Q

What are refinery margins and how do they vary over time?

A

difference between price of crude oil and price refined oil is sold for, vary a lot

21
Q

What are the main kinds of refined oils?

A

fuel, gasoline, diesel, kerosene (airplane fuel), heating oils

22
Q

Which kinds of refined oil are most common in CH?

A

Diesel, then gasoline (both for cars), then kerosene (drop during covid), then heating (declining because of better insulated buildings and natural gas substitute)

23
Q

Where do the three oil pipelines leading into Germany come from?

A

North Europe, Russia and Mediterranean

24
Q

How is oil brought to end consumers?

A

Large consumers have direct pipeline connections, smaller ones by truck

25
Q

fuel taxes in Europe vs US

A

US almost none, European taxes almost as high as entire cost per unit in US

26
Q

What are some factors that make oil an imperfect market globally?

A

cartel (OPEC), political tensions/ import bans/ contracts, small number of extractors and refineries

27
Q

What causes volatile prices?

A

mostly politics/ general economy, war in middle east

28
Q

What drives global demand and supply changes?

A

Demand: changes in economic activity, like a recession decreasing manufacturing/trade, taxes, consumption changes (EVs)
Supply: new tech (fracking), investments, wars and other unexpected events

29
Q

How do supply and demand elasticity affect prices?

A

Both very inflexible, shock (like pipeline going out) causes strong price changes

30
Q

How could nationalization affect prices?

A

Theory (controversial) that countries own resources -> discount rates rise -> less production -> higher prices (maybe what happened in oil crises)

31
Q

What is OPEC? When was it founded?

A

Organization of Petroleum Exporting Countries, cartel
founded in 1960s

32
Q

How could the target revenue of firms affect prices?

A

Firms may not have simple goal of maximizing profit, but of reaching output given by investment of country (?)

33
Q

Oil market from WW2 until today

A

WWII: most oil produced by western monopolists
60s: OPEC formed by Middle Eastern/ South American countries to compete with monopolists
1970s: Middle Eastern countries nationalize oil, causes oil crises
80s: decreased demand due to efficiency, more non-OPEC producers enter market
2008: price skydives, SA and RU start coordinating to keep prices stable

34
Q

Where is equilibrium in perf. comp.? How do monopolists choose price/ quantity?

A

Perf. comp.: where supply and demand meet
Monopoly: quantity where marginal revenue and supply meet, P at demand curve for that quantity
marginal revenue: demand with twice the slope

35
Q

Where can consumer and producer surplus be seen?

A

Consumer: everything above price, below demand curve
Producer: everything above supply, below price

36
Q

What does the simple theory about cartels assume and predict? (cartel model)

A

Cartel collectively behaves as monopolist, sellers have similar MC and MR curves, the more firms the more likely for one to cheat

37
Q

What does the dominant firm price leadership model assume and predict? How would it apply within OPEC or globally?

A

firm with biggest market share chooses price and quantity based on residual MR curve, other firms do too, P and Q fall between monopoly/perf comp levels
within OPEC, SA is dominant
globally, OPEC is dominant

38
Q
A

Energy Economics (8 decks)

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