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The Economics of an Integrated World Oil Market: Open-Economy Energy Policy

The Economics of an Integrated World Oil Market: Open-Economy Energy Policy. William D. Nordhaus Yale University International Energy Workshop Venice, Italy June 17-19, 2009. Major Themes of This Presentation. The Bathtub model of the Oil Market Implications for Oil Policy.

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The Economics of an Integrated World Oil Market: Open-Economy Energy Policy

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  1. The Economics of an Integrated World Oil Market: Open-Economy Energy Policy William D. Nordhaus Yale University International Energy Workshop Venice, Italy June 17-19, 2009

  2. Major Themes of This Presentation • The Bathtub model of the Oil Market • Implications for Oil Policy

  3. This is not a bathtub.

  4. Prices of Crude Oil in 31 Regional Markets Worldwide Source: EIA primarily from Platts.

  5. Comparison of U.S. and European Benchmark Crude Prices Source: EIA primarily from Platts.

  6. Correlations of weekly oil prices, 1991-2009 Source: EIA primarily from Platts.

  7. The oil price equation

  8. Sulfur Premium over time Source: Estimates from rolling five-year regressions centered on the indicated year.

  9. API Premium in Crude Oil Prices Source: Estimates from rolling five-year regressions centered on the indicated year.

  10. A Not-So-Unified Market: Prices of #2 Douglas Fir Logs in Six Regions of the Pacific Northwest Source: Log Lines, various dates.

  11. Issues Raised by the Integrated World Oil Market Economic Implications of the Integrated View 1. The folly of limiting imports to “secure” sources 2. The peril of oil disruptions is a function of world production and world inventories 3. The “oil premium” depends upon the world market not on imports 4. The balance of payments connection is misunderstood: - comparative advantage - modern theories of trade and financial deficits

  12. Petroleum Imports as a Share of Total Imports, United States Source: U.S. Bureau of Economic Analysis data.

  13. National Security Concerns 1. Grabbing oil is primarily a wealth transfer and not a pricing issue. 2. The cost of protecting trade routes or going to war over oil is misguided and wasteful. 3. The value of sanctions and embargoes is nil. 4. The competition for access to resources is a misguided worry.

  14. Appropriate Policies for Oil in the Integrated World Market Objectives: • Oil prices should be low, stable, and sustainable. • Oil policy can only be rational if the price of carbon is appropriately set. Policies (assuming 2 is met): • Encourage production everywhere (no domestic subsidies) • Discourage consumption everywhere (not just at home), particularly with respect to subsidies.

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