Replacing traditional stoves with advanced alternatives that burn more cleanly has the potential to ameliorate major health problems associated with indoor air pollution in developing countries. With a few exceptions, large government and charitable programs to distribute advanced stoves have not had the desired impact. Commercially-based distributions that seek cost recovery and even profits might plausibly do better, both because they encourage distributors to supply and promote products that people want and because they are based around properly-incentivized supply chains that could be more scalable, sustainable, and replicable. The sale in India of over 400,000 “Oorja” stoves to households from 2006 onwards represents the largest commercially-based distribution of a gasification-type advanced biomass stove. BP's Emerging Consumer Markets (ECM) division and then successor company First Energy sold this stove and the pelletized biomass fuel on which it operates. We assess the success of this effort and the role its commercial aspect played in outcomes using a survey of 998 households in areas of Maharashtra and Karnataka where the stove was sold as well as detailed interviews with BP and First Energy staff. Statistical models based on this data indicate that Oorja purchase rates were significantly influenced by the intensity of Oorja marketing in a region as well as by pre-existing stove mix among households. The highest rate of adoption came from LPG-using households for which Oorja's pelletized biomass fuel reduced costs. Smoke- and health-related messages from Oorja marketing did not significantly influence the purchase decision, although they did appear to affect household perceptions about smoke. By the time of our survey, only 9% of households that purchased Oorja were still using the stove, the result in large part of difficulties First Energy encountered in developing a viable supply chain around lowcost procurement of “agricultural waste” to make pellets. The business orientation of First Energy allowed the company to pivot rapidly to commercial customers when the household market encountered difficulties. The business background of managers also facilitated the initial marketing and distribution efforts that allowed the stove distribution to reach scale.

This paper summarizes the lessons learned from implementing a realistic, game-based simulation of California’s electricity market with a cap-and-trade market for greenhouse gas (GHG) emissions and fixed-price forward financial contracts for energy. Sophisticated market participants competed to maximize their returns under stressed (high carbon price) market conditions. Our simulation exhibited volatile carbon prices that could be influenced by strategic behavior of market participants. General uncertainty around carbon price as well as the deployment of strategies that were privately profitable but adversely affected overall market efficiency resulted in total costs of electricity supply that were significantly higher than would have been observed in perfectly competitive allowance and electricity markets. 

We observed several striking phenomena in our game. First, all teams in our game found themselves in a position to prefer higher carbon prices, even those holding high-emitting power plants. This occurred both because electricity price rose faster with carbon price than the average variable cost of producing output for most teams and because the initial allowance allocations functioned as “free money” with a face value that could be increased through the unilateral actions of market participants. Second, teams exercised unilateral market power on both selling and buying sides of the carbon allowance market, with the net effect being a carbon price far above that which would have been expected based on allowance supply and demand in a perfectly competitive market. Third, disagreement among teams over the appropriate price of carbon allowances combined with the exercise of unilateral market power in both electricity and allowance markets dramatically increased electricity prices and often resulted in the use of a more expensive set of generation units to produce the electricity demanded.  Numerous authors have pointed out that electricity markets are extremely susceptible to the exercise of market power, and emissions allowance markets can exacerbate this problem, as demonstrated in Kolstad and Wolak (2008). Fourth, there was very little liquidity in the secondary market for carbon allowances until right before the final emissions “true-up,” with a flurry of trading at the last minute, which resulted in inefficient market outcomes as several trades failed to be completed before the deadline.

These findings have several important policy implications. First, policy measures that increase the transparency and liquidity of the carbon allowance market would make both the allowance market and the electricity market work better. In our simulation, all market participants showed a strong unilateral desire to limit the amount of information publicly available about conditions in the carbon market, much to the detriment of market performance. Second, guardrails that constrain market outcomes, such as price floors and ceilings, can play a valuable role by limiting carbon price volatility.  Third, position and holding limits can reduce the ability and incentive of market participants to attempt strategies that, while privately profitable, have a negative impact on overall market efficiency.

Abstract

Over the past century peak oil forecasts have had a profound influence on US national security policy.  Unquestioned acceptance of a variety of oil scarcity forecasts, all of which proved wrong, repeatedly led policymakers to assume that rival powers sought to seize dwindling supplies.  Perennial expectation of resource conflict gradually elevated the perceived importance of Middle East (ME) oil, which was thought to be the last left on earth.  In response, increasingly aggressive US policies were adopted to secure a US share of ME oil.  Belief in a scarcity imperative for aggressive policy is here called “oil scarcity ideology.” Over the course of three iterations of the scarcity syndrome from 1909 to 1980, pre-emptive action to avert scarcity became a national security norm. 

During the 1970s Cold War scarcity ideology became particularly complex and dangerous.  Widespread belief in a new generation of peak oil forecasts engendered fear that an Arab oil weapon could cripple the US economy.  Even more ominously, the CIA forecast an impending Soviet production collapse.  From these two forecasts security experts inferred that an oil-starved USSR would try to seize Iranian oil production by force.  If the Soviets were not deterred by President Carter’s verbal warning against such action, some security experts urged that the US must launch its own invasion, occupying Iran’s oilfields to preempt the Soviets from seizing them.  If conventional force failed to halt the Red Army, the US must resort to nuclear war. In conjuring this oil-marauding USSR from scarcity ideology, security policymakers actively disregarded a great deal of market information indicating that global production would not soon peak and that Soviet production would not soon collapse.  The non-apocalyptic outlook was shared by a large cohort of market analysts, academics and government agencies.  Nonetheless, the National Security Council (NSC) was able to persuade the President to proclaim that the US would use unlimited force to protect Persian Gulf oil supply.  Carter’s threat, now known as the Carter Doctrine, has rationalized Persian Gulf force projection ever since.

The essay plan is as follows.  I first describe early iterations of the scarcity syndrome that recurred around the 20^th century World Wars.  In both iterations, scientists and high officials of the Department of the Interior convinced national security policymakers that (i) US oil would soon run out, (ii) that Western Hemisphere supply could not meet the shortfall, therefore (iii) aggressive policies were required to wrest a share of ME oil from rival powers.  I then describe how peak oil theories advanced during WW2 formed the basis of Cold War scarcity ideology, in which the Soviet Union played the rival’s role. Finally, I consider implications of this historical record for international security theory.  My research utilizes two sources not widely available, (i) recently declassified documents from the Jimmy Carter Presidential Library and (ii) the historic petroleum trade journal collection of The University of Tulsa’s McFarlin Library. 

Abstract

Mark C. Thurber, David R. Hults

National oil companies (NOCs) often behave in strikingly different ways from one another and from private, international oil companies (IOCs). Given that NOCs control about three-quarters of world oil reserves by equity share, their variation in corporate strategy has important implications for the world oil market. The recently released book Oil and Governance: State-owned Enterprises and the World Energy Supply, which we co-edited (along with our colleague, David Victor) and contributed to, explores the variation among NOCs through 15 detailed case studies and several cross-cutting pieces. Building off the research in that book, our aim in this essay is to discuss the differences among NOCs in their approach to risk. 

As described by Nolan and Thurber in Chapter 4 of our book, the notion of risk encapsulates both the likelihood of a negative outcome (e.g., of drilling a dry hole) and the loss that such an outcome would entail (e.g., the investment in an exploration well). Risks are pervasive in the oil industry because of the enormous sums of money on the line and the significant uncertainty around whether investments will prove successful. In this article we suggest that the goals of the state and its tools of governance may cause an NOC to tend towards one of three types of behavior: risk avoidance, risk taking, or risk management. Each of these three approaches to risk, we find, can be useful or counterproductive for the state depending on the context.

It can be useful for an NOC to avoid risk, as Sonangol has done, if its government is highly dependent on oil revenue, but this approach usually means that it must allow IOCs to shoulder risks if the oil sector is to thrive. Intelligent risk taking by the NOC, on the other hand, can help build domestic technological capability and may be a reasonable approach if the government has less need to maximize hydrocarbon revenue in the short term. Finally, commercial risk management by the NOC may be an appropriate model where the NOC has developed some competitive advantages and its government has few remaining expectations for the NOC apart from revenue generation. There is no “right” or “wrong” approach to risk for NOCs in a general sense. The goal of each government and its NOC should be to make sure that the way the NOC takes, avoids, or manages risk is of benefit to both the country and the NOC itself.

Link to article (free trial subscription available) => http://www.worldoil.com/June-2012-Risk-attitudes-shape-national-oil-company-strategies.html

National oil companies (NOCs) produce most of the world’s oil and natural gas and bankroll governments across the globe. Although NOCs superficially resemble private-sector companies, they often behave in very different ways. To understand these pivotal state-owned enterprises and the long shadow they cast on world energy markets, the Program on Energy and Sustainable Development (PESD) at Stanford University commissioned Oil and Governance: State-owned Enterprises and the World Energy Supply. The 1000-page volume, edited by David Victor, David Hults, and Mark Thurber, explains the variation in the performance and strategy of NOCs, and provides fresh insights into the future of the oil industry as well as the politics of the oil-rich countries where NOCs dominate. It comprises fifteen case studies, each following a common research design, of NOCs based in the Middle East, Africa, Asia, Latin America, and Europe. The book also includes cross-cutting pieces on the industrial structure of the oil industry and the politics and administration of NOCs.

NOCs are distinguished from private companies by their need to respond to state goals beyond profit maximization. Governments seeking to retain their hold on power use NOCs to deliver benefits to influential elites (“private goods”) or to the broader population (“social goods”). Oil and Governance finds a strong correlation between such non-hydrocarbon burdens on the NOC—which include providing employment, subsidizing fuel, or handing out plum jobs to the politically connected—and deficiencies in oil and gas performance. The highest-performing NOCs, like Norway’s Statoil and Brazil’s Petrobras, face relatively circumscribed non-oil demands from their governments.

How governments administer their oil sectors also proves to be a crucial determinant of NOC performance. Democracies (e.g., Norway, Brazil) and autocracies (e.g., Saudi Arabia, Angola) alike are capable of grooming successful NOCs. What matters most for outcomes is not regime type per se but rather that governance systems provide unified signals to the NOC. (By contrast, regime type is observed to be an important driver of whether governments nationalize their oil sectors in the first place, or privatize existing NOCs.) Fragmented governance, in which multiple government actors assert their interests but no one assumes strategic responsibility, appears uniformly fatal to NOC performance. Nascent democracies like Mexico’s can be particularly vulnerable to oil sector dysfunction stemming from fragmentation. Governance systems must also be matched to a country’s institutional and political realities. Nigeria has arguably set back its progress in oil through attempts to slavishly imitate Norway’s forms of oil organization in the absence of Norway’s mature political and civil service institutions.

The close ties between the NOC and its government can have a detrimental effect on the ability of the NOC to manage the risks that are so characteristic of the oil and gas industry. Whereas private companies are forced to hone their geological knowledge and skills through global competition for capital and hydrocarbon licenses, NOCs for the most part are comfortably sheltered from competitive threats at home. They therefore fail to develop the global reach that helps private players (the international oil companies, or IOCs) manage risk by means of a diversified global portfolio and the ability to link resources to customers around the world. (Some NOCs have begun to internationalize in recent years, but it is striking that none of the NOCs studied in Oil and Governance went down this path until forced to by domestic resource scarcity, or at least of the perception of future scarcity.) The soft budget constraint faced by the NOC also discourages the cost efficiencies that help mitigate risk.

This gulf in risk management capabilities between IOCs and most NOCs suggests that the resource dominance of NOCs does not pose an existential threat to private oil companies. Private players will continue to play a key role in the frontiers of oil and gas development—frontiers like shale gas, oil sands, and the remote Arctic. NOCs will continue to control low-cost oil around the world, while a select few of the most focused and unencumbered among them start to build up their own risk management skills through partnerships with IOCs.

NOC control over resources has important implications for the world oil price. The NOCs studied in the book produce their reserves at half the rate of the major IOCs—whether due to lower performance or a deliberate attempt to preserve resources for the future. Moreover, governments tend to rely most heavily on the risk management skills of IOCs when prices are low and then swing back towards NOCs in high price periods when they can afford to focus on delivering benefits to favored constituencies. The result of this dynamic, which is observed in the case studies of Oil and Governance, can be “backward bending supply curves” that exaggerate price volatility in the world oil market.

This effect of NOCs on global oil supply and price appears to be much more important than any geopolitical fallout from NOC primacy around the world. Oil and Governance finds very little evidence that NOCs act as effective foreign policy weapons on behalf of their host states. Even where politicians may desire to employ NOCs in this way, the incentives of the NOC itself are usually strongly opposed to such an exercise of power. As one example, Europe’s Gazprom depends overwhelmingly on revenues from gas exports to Europe because gas is so heavily subsidized in Russia. When NOCs do venture abroad, as in the case of China’s CNPC, they are often motivated to do so precisely by the desire to achieve more autonomy from their political masters at home.