Energy

This image is having trouble loading!FSI researchers examine the role of energy sources from regulatory, economic and societal angles. The Program on Energy and Sustainable Development (PESD) investigates how the production and consumption of energy affect human welfare and environmental quality. Professors assess natural gas and coal markets, as well as the smart energy grid and how to create effective climate policy in an imperfect world. This includes how state-owned enterprises – like oil companies – affect energy markets around the world. Regulatory barriers are examined for understanding obstacles to lowering carbon in energy services. Realistic cap and trade policies in California are studied, as is the creation of a giant coal market in China.

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David G. Victor
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David G. Victor is a professor at Stanford Law School and directs the Freeman Spogli Institute's Program on Energy & Sustainable Development; he is also adjunct senior fellow at the Council on Foreign Relations.

Democrats voting in Ohio and Texas may well decide the shape of the U.S. presidential election. Regardless of who they choose to run against Sen. John McCain, the all but certain Republican candidate, it is likely that energy issues will figure more prominently in the election than at any time in the last generation. High prices are sapping economic growth, the No. 1 concern across most of the country. Gasoline is now approaching $4 a gallon; natural gas and electricity are also more costly than a few years ago. Global warming has become a bipartisan worry, and solving that problem will require radical new energy technologies as well. All this is good news in the rest of the world, which is hoping that a new regime in Washington will put the United States on a more sustainable energy path.

It may be a vain hope. It is extremely unlikely that Washington will ever supply a coherent energy policy, regardless of who takes the White House in November. That's because serious policies to change energy patterns require a broad effort across many disconnected government agencies and political groups. Higher energy efficiency for buildings and appliances, a major energy use area, requires new federal and state standards. Higher efficiency for vehicles requires federal mandates that always meet stiff opposition in Detroit. A more aggressive program to replace oil with biofuels requires policy decisions that affect farmers and crop patterns-yet another part of Washington's policymaking apparatus, with its own political geometry. New power plants that generate electricity without high emissions of warming gases require reliable subsidies from both federal and state governments, because such plants are much more costly than conventional power sources. Approvals for these new plants require favorable decisions by state regulators, most of whom are not yet focused on the task. Expanded use of nuclear power requires support from still another constellation of administrators and political interests. And so on.

Whenever the public seizes on energy issues, the cabal of Washington energy experts imagines that these problems can be solved with a new comprehensive energy strategy, backed by a grand new political coalition. Security hawks would welcome reduced dependence on volatile oil suppliers, especially in the Persian Gulf. Greens would favor a lighter tread on the planet, and labor would seize on the possibility for "green-collar" jobs in the new energy industries. Farmers would win because they could serve the energy markets. The energy experts dream of a coalition so powerful that it could rewire government and align policy incentives.

This coalition, alas, never lasts long enough to accomplish much. For an energy policy to be effective, it must send credible signals to encourage investment in new equipment not just for the few months needed to craft legislation but for at least two decades-enough time for industry to build and install a new generation of cars, appliances and power plants, and make back the investment. The coalition, though, is politically too diverse to survive the kumbaya moment.

Just two weeks ago the feds canceled "FutureGen," a government-industry project to develop technologies for burning coal without emitting copious greenhouse gases, demonstrating that the government is incapable of making a credible promise to help industry develop these badly needed technologies over the long haul. (The project had severe design flaws, but what matters most is that the federal government was able to pretend to support the venture for as long as it did and then abruptly back off.) Similarly, legislation late last year to increase the fuel economy of U.S. automobiles will have such a small effect on the vehicle fleet that it will barely change the country's dependence on imported oil and will have almost no impact on carbon emissions. Democrats and Republicans alike claim they want to end the country's dependence on foreign oil, but neither party actually does much about it.

The only policies that survive in this political vacuum are those that target narrower political interests with more staying power. Thus America has a highly credible policy to promote corn-based ethanol, because that policy really has nothing to do with energy; it is a chameleon that takes on whatever colors are needed to survive. It is a farm program that masquerades as energy policy; at times, it has been a farm program that masquerades as rural development. As an energy policy it is a very costly and ineffective way to cut dependence on oil. As a global warming policy it is even less cost effective, since large-scale ethanol doesn't help much in cutting CO2 and other warming gases. Similarly, the United States has a stiff subsidy for renewable electricity-mainly wind and solar plants-because environmentalists are well organized in their support for it. The coal industry periodically gets money for its favored technologies, as in FutureGen, but even that powerful lobby has a hard time getting the government to stay the course.

Europe is in danger of contracting the same affliction. To be sure, most European countries long ago started taxing energy as a convenient way to raise revenues, which fortuitously also makes energy more costly and creates a strong incentive for efficiency. That approach did not originate as an energy policy, but it has emerged as a keystone of Europe's more successful efforts to tame energy consumption. And Europe is in the midst of shifting policymaking from the individual countries to Brussels, which may create a more coherent approach. But despite these advantages, Europe is notable for its inability to be strategic. For example, Brussels is touting a new pipeline called Nabucco that would help Europe cut its dependence on Russia for its natural gas. So far, Brussels is good at talking about the Nabucco dream but can't agree on a route, financing, or even on where to get the gas that would replace Russia's.

The rising powers in Asia are also finding that they, like America, have a hard time developing and applying strategic energy policies. China develops energy policy through its economic planning system, with mixed results. The country doesn't even have an energy ministry, and efforts to create one are being stymied by the bureaucracy and companies that fear they will lose influence. India has four energy ministries and no real central strategy. Like America, India is very good at declaring visions for strategic energy policy but dreadful at putting them into practice. The Japanese public is just as fickle, but the government bureaucracy is entrenched and far-sighted enough to keep its focus long after public interest has waned.

All this means that the underlying forces that are causing high demand for energy (and high prices) and emitting greenhouse gases will be hard to alter. The effort to solve global warming might change this pessimistic iron rule of energy policy, because the environmental community that is the core of the coalition in support of global warming policy is becoming much stronger and has shown staying power. For the moment, however, that is a hypothesis to be proved.

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This paper develops empirical models for average oil production costs that represent the structural field-level and country-level determinants most characteristic for the new era beyond easy oil. These models lend themselves as a tool for forecasting the floor of structural cost trends related to the shift into more cost intensive fields that are increasingly producing heavy and extra-heavy crudes and that are located offshore and in countries fraught with high levels of political and environmental risks. Given the extremely limited availability of reliable, non-proprietary cost data, this model deliberately relies on high level factors for which data is publicly available for hundreds of fields from all oil producing states. This model specification offers the important advantage of enabling us to lever insights gained from this study in powerful out-of-sample estimations for the dominant scenario where data is available on field characteristics but not on costs.

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Program on Energy and Sustainable Development Working Paper #72
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South Africa's power grid is in crisis. Leading South African gold and platinum mines stopped production in late January, and blackouts are endemic. No end is in sight, and the shortages have spilled over to the neighboring countries Botswana and Namibia. Check out a thorough preview of the crisis in an early essay by PESD collaborator, Anton Eberhard, former electricity regulator and an expert on power at the University of Cape Town, Political Economy of Power Sector Reform in South Africa. Professor Eberhard was also recently quoted in a detailed commentary at the New York Times.
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David G. Victor
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David G. Victor: Although oil prices will eventually drop as new sources come online and biofuels and other alternatives take hold, crude price are likely to remain high and volatile for a while.
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Russia's Gazprom is among the largest companies in the world, and by far the world's largest producer of natural gas, with close to a 20% share. Driven by its political masters, it continues to consolidate control over Russia's vast oil and (especially) gas resources, and many Western observers are worried by its international expansion into downstream assets. In a new study of the energy giant, Nadejda Victor details the ways in which Gazprom's actions are distorted by political demands and by the inefficiency of the Russian economy, suggesting that it is headed for a production crisis if business and investment considerations don't start to take a higher priority.
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This study, which is part of a larger research project on state-controlled hydrocarbon resources, looks at the strategy, evolution and performance of Gazprom, Russia's largest state company. It explores the critical role that Gazprom plays in the Russian economy, as well as its growing and evolving role as an instrument of state.

Section 1 provides an overview of the Russian oil and gas sectors, with special attention to the history of gas as a Soviet ministry's the period when nearly all of Gazprom's legacy assets in gas fields and pipelines were developed.

Section II focuses on Gazprom as an organization, including its structure, revenues, and its activities within Russia, Western Europe and overseas. As the study makes clear, Gazprom is far more than the world's largest gas company. It is a monopoly controlled by the Kremlin, serving both economic and political agendas, as well as a multidimensional investment enterprise seeking a larger role on the world stage.

Section III looks at the "yin and yang" of Gazprom and the state, and the reasons for early privatization efforts following the demise of the Soviet Union, as well as the current "re-nationalization" of the oil and gas sectors as world prices have risen.

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Program on Energy and Sustainable Development Working Paper #71
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Nadejda M. Victor
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The developing LNG trade does not have symmetric participants. LNG buyers in continental European and Japan tend to be monopoly gas and electricity companies with incentive and financial ability to sign long-term contracts. In contrast, prospective LNG buyers in the US and the UK participate in competitive wholesale markets and regulatory oversight with disincentives for volume commitments. As a result, integrated LNG sellers use US and UK as "markets of last resort" with implications for variability in actual LNG deliveries and for the division of rents in the growing LNG trade.

This text is a working paper version of Chapter 5 in Mark Hayes' doctoral dissertation to be published in 2007 by Stanford University Press.

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Stanford
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Mark H. Hayes
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Growing LNG imports will impact the value of gas storage and regional price spreads. In this chapter the author describes a model that incorporates seasonal gas demand, and relevant supply chain costs that will drive month-scale LNG flows. This text is a working paper version of Chapter 3 in Mark Hayes' doctoral dissertation to be published in 2007 by Stanford University Press.

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Mark H. Hayes
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Random (stochastic) variability in gas demand and prices creates significant option value for LNG suppliers with destination flexibility. In this chapter the author describes an analytical model to value the option of cargo diversion and to draw insights about the potential for future regional price convergence. This text is a working paper version of Chapter 4 in Mark Hayes' doctoral dissertation to be published in 2007 by Stanford University Press.

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Mark H. Hayes
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