Petro Economics: - World Oil & Gas Economic
- Enlist the comparison between the growth in production activities of private and public sector companies in India. Which sector is performing better? Give reasons to support your answer.
- Analyse the deregulation of oil and gas industries and its implications on general public. Categorize it into major metropolitan cities and study the effects.
- List down the Refining Capacity Additions during Eleventh Plan. Analyze how it becomes helpful for an economy?
- Analyze the growth trends of LPG Marketing in India. How far it has been advanced?
- Analyse the trends towards growth in refining capacity of crude oil in the world. Evaluate its exploration and development stages.
- Research the key initiatives taken by the Government of India to promote the trading of oil and natural gas in the global market. How far it stands successful?
- Critically examine the issue for payment of outstanding oil debt between India and Iran. How it has been resolved? What steps have been undertaken?
- Assess the difference in customs duty applicable for crude and on refined products. Examine the gap in between them. How this mitigation be removed?
Drilling Concerns of Alaska´s Arctic National Wildlife Refuge (ANWR)
The dramatic fluctuations in crude oil prices over the past two years have sparked renewed interest in U.S. oil exploration and development. Some politicians and commentators argue that an increase in exploration could have a marked impact on oil prices. Others say the price impact would be small.
The policy debate currently focuses on allowing drilling in a small part of Alaska´s Arctic National Wildlife Refuge (ANWR). Drilling has been banned in ANWR due to various environmental concerns.
The ANWR is a national wildlife refuge in north-eastern Alaska, United States. It consists of 19,286,722 acres (78,050.59 km2) in the Alaska North Slope region. The coastal plain in the ANWR (often referred to as the "1002" area) is jointly owned by the federal government, the State of Alaska and Native American corporations (Energy Information Administration (EIA), 2008a). This region is thought to contain a relatively large amount of oil that would be relatively cheap to develop. Environmentalists and others have opposed drilling in this area because it is a pristine (but inhabited) area that they believe is ecologically unique. In particular, they are concerned that a spill or pipeline leak would endanger a key wildlife habitat.
History The Trans-Alaska pipeline system got virtually completed in 1977. The Alaska National Interest Lands Conservation Act, signed by President Jimmy Carter in December 1980, created more than 104,000,000 acres (420,000 km2) of national parks and wilderness areas from federal holdings in that state and also allowed drilling in ANWR but not without prior approval from Congress. Section 1002 of the act allowed the evaluation of potential petroleum reserves in the 1002 area from surface geological studies and seismic exploration surveys. However, no exploratory drilling was allowed.
In November 1986, a draft report by the United States Fish and Wildlife Service recommended that oil and gas development be allowed in all of the “1002 Area” of ANWR. The report argued that the oil and gas potentials of the coastal plain were needed for the country´s economy and national security. Conservatives, however, expressed concerns that oil operations would harm the ecological systems that support wildlife.
No major developments took place within the next decade. In 1996 the Republican-majority House and Senate voted in favour of allowing drilling in ANWR, but this legislation was vetoed and turned down by President Bill Clinton.
In 2000, President George W. Bush pushed to perform exploratory drilling for crude oil and natural gas in and around the refuge after the USGS estimation of reserves in 1997. The House of Representatives voted in mid-2000 to allow drilling. In April 2002 the Senate rejected it.
On June 18, 2008 President George W. Bush forced Congress to reverse the ban on offshore drilling in the ANWR in addition to approving the extraction of oil from shale on federal lands. President Bush cited the growing energy crisis as a major factor for reversing the presidential executive order issued by President George H. W. Bush in 1990, which banned coastal oil exploration and oil and gas leasing on most of the outer continental shelf.
Estimated Oil Reserves
Technically recoverable oil within the ANWR 1002 area (excluding State and Native areas), as estimated but the United States Geological Survey in 1998, lies between 4.3 and 11.8 billion barrel of oil (BBO) (95% and 5% certainties respectively), with a mean value of 7.7 BBO.
As estimated by USGS, this quantity of technically recoverable oil is not distributed uniformly. The un-deformed area is estimated to contain between 3.4 and 10.2 BBO (95% and 5% certainties respectively), with a mean of 6.4 BBO. The deformed is estimated to contain between 0 and 3.2 BBO (95% and 5% certainties respectively), with a mean of 1.2 BBO. The oil is expected to occur in a number of accumulations rather than a single large accumulation.
Commercial viability of a discovery depends on factors like oil price, accumulation size, recovery technology, and proximity to existing infrastructure (pipelines, markets etc.).
Economic analysis of oil reserves of the “1002 area” includes the costs of finding, developing, producing, and transporting oil to market (lower 48 West Coast) based on a 12 percent after-tax return on investment, all calculated in constant 1996 dollars. Estimates of economically recoverable oil, expressed by probability curves, shows a directly proportionate relation between quantity of oil and its price. It was found that at a market price of $24/barrel, there is a 95% probability of at least 2.0 BB of economically recoverable oil and a 5% probability of at least 9.4 BB with a mean or expected value of 5.2 BB. At prices less than $13/barrel, no commercial oil is estimated, but at a price of $30/barrel, between 3 and 10.4 BB are estimated.
It is interesting to note that the best estimate of 7.7 BBO in ANWR is very close to domestic consumption in 2005 in the U.S. But still the recovery of the first barrel of crude oil would take many years. In 2025, it is forecasted that 0.9 million barrels of oil per day (MBD) would be recovered and the domestic production is forecasted to be 4.6 MBD (EIA 2004). Thus, at its high, ANWR is forecasted to account for 20% of domestic production. Finally, total supply in 2025, including imports, is forecasted to be 28.3 MBD, so ANWR at its peak is predicted to account for approximately 3.2 percent of domestic oil consumption.
Benefits of Drilling
According to Hahn and Passell (2010), net benefits are estimated for a price scenario of $50/barrel. It is estimated that at $50/barrel, 7 billion barrels are economically recoverable. The benefits include the revenue generated, price-reduction benefit and the reduced-disruption-cost benefit.
The per barrel price-reduction benefit is generated by reduced world demand for imported oil. It is calculated as the reduction in the import bill divided by the decline in the number of barrels of oil imported by the U.S. Leiby (2007) estimated it to be $10/barrel. The reduced-disruption-cost associated with reducing oil imports is estimated to be $5/barrel.
These values are applied to the net decrease in total U.S. imports, which is equal to the increase in U.S. oil production less the increase in U.S. oil consumption caused by the lower price.
7 categories of costs are considered. These are:
- Direct costs that producers incur in extracting the oil and bringing it to the market. Estimated average direct costs: $19/barrel.
- Cost of not being able to use the affected resource for other purposes if drilling occurred or „Use Value?. Kotchen and Burger (2007) estimate it to be 0/barrel.
- Cost of valuing a resource but never intending to use it or „Non-use Value?. It is estimated roughly to be $11 billion (Carson et al. 2003).
- Global air pollution or greenhouse gas damage. It is assigned a value 0 as share of ANWR drillings to the global air pollution is negligible.
- Local air pollution. It is estimated to be $22 billion (Parry 2005).
- Traffic congestion. It is estimated to be $18 billion (Parry 2005).
- Traffic accidents. It is estimated to be $23 billion (Parry 2005).
Thus, Total Benefit= $455 billion.
Total Costs= $203 billion.
Net Benefit= $252 billion.
Under the current tax policy, this would generate social benefits as industry rents of $90 billion, state of Alaska tax revenues of $36 billion, and federal tax revenues of $125 billion.
Challenges to Drilling
Drilling in ANWR would lead to several environmental concerns. Potential adverse effects on the environment would result from two principal sources: transportation as part of seismic analyses, and infrastructure for extracting and transporting oil. The US Fish and Wildlife Service (2001) reports that drilling in ANWR will have “major effects” on Porcupine caribou herd and musk oxen as well as “moderate effects” on wolves, polar bears, seabirds and coastal fish. Aside from direct effects on animal populations, oil spills are a serious concern.
Finally, another environmental concern that is usually debated is that ANWR oil will promote air-pollution and greenhouse-gas emissions. The argument is that oil consumption will increase, causing increased emissions with adverse effects on environmental quality, human health, and climate change.
To allow drilling in ANWR, the most common technique is contingent valuation, which asks people willingness to pay (WTP) or willingness to accept (WTA) for a proposed policy or change in environmental quality. While it is natural to think about economic value in terms of WTP, the conceptually correct measure for the question of drilling in ANWR is WTA.
In order to calculate the minimum amount that the individuals will be willing to accept to allow drilling, i.e. breakeven WTA, the relevant population of the US aged 18 or older in 2005 is considered, which the US Census estimates as 220,377,406 people. Dividing our best estimate of the oil benefits as calculated above, $252 billion, by this population yields an average WTA of $1,141/person. These estimates represent a one-time payment. We can, however, pay this WTA annually for 30 years, which is the duration over which ANWR oil is expected to flow. This would yield a present value WTA of $38 per year.
With the best estimate we can make the following statement: If the average WTA for a onetime payment to permit drilling and development in ANWR is $1,141 (or $38 per year for 30 years), then the social costs will exactly equal the estimated benefits. If the true WTA falls short of this estimate, then economic efficiency recommends drilling. Alternatively, if the true WTA exceeds the estimate, then economic efficiency does not recommend drilling. The question, then, is whether the estimate falls within the reasonable expectation of what US citizens would be willing to accept in order to allow drilling in ANWR.
- Present your views on whether drilling be allowed or not in the ANWR elaborately.
- Illuminate various environmental concerns due to which drilling has been banned in ANWR.
- Analyse the case by using SWOT analysis and write down the case facts.
Question No: 1
Prices of Crude are generally quoted _________ at their loading port.
- Free Alongside Ship(FAS)
- Free on Board(FOB)
- Cost and Freight(CFR)
- Cost, Insurance and Freight(CIF)
Question No: 2
It was an empirical fact that in the 50s and 60s the inflation rate ________ when the unemployment rate _________. Today the relationship between those to variable can be described as _______
- falls; rises; strongly negative correlated
- rises; rises; strongly negatively correlated
- falls; rises; unstable
- rises; rises; unstable
Question No: 3
The ___________ lag for fiscal policy is generally ______ than it is for monetary policy.
- recognition; shorter
- recognition; longer
- implementation; shorter
- implementation; longer
Question No: 4
During periods of negative demand shocks, deficit target reductions such as those mandated in the Gramm-Rudman-Hollings Act would tend to:
- stimulate the economy and increase employment
- Result in additional recessionary declines in employment and income.
- stimulate defense spending
- Have an automatic stabilizing impact upon the economy.
Question No: 5
________of EU oil imports originate from the Middle East.
Question No: 6
________makes gasoline components by combining some of the gaseous byproducts of cracking.
- Sulphuric acid
Question No: 7
The countries of the Organisation for Economic Cooperation and Development (OECD), account for almost _______of worldwide oil consumption.
Question No: 8
Before World War I, the world oil market was dominated by which major international oil companies?
- Standard Oil
- Nobel and Rothschild
- All of the above
Question No: 9
Which are the three markets for oil products?
- Spot Sales
- Term Contracts
- Wholesale transactions
- All of the above
Question No: 10
If the aggregate supply curve is vertical in the long-run, _______ has (have) an effect on the aggregate output in the long run
- sometimes monetary and/or fiscal policy (i.e. it depends)
- monetary policy does but fiscal policy does not
- monetary policy does not but fiscal policy does
- neither monetary policy nor fiscal policy
Question No: 11
In which cases would the deficit of a government be considered problematic by the majority of the economists?
- when the deficit was the result of mainly capital spending (eg infrastructure)
- when the deficit was brought about by a stabilization program during a probably temporary recession
- when the deficit adds to an existing budget surplus
- when the private and public lenders (i.e. IOU holders) loose faith in the capacity of the government to pay back its debts
Question No: 12
Keynes, the father of macro-economic policy stressed that:
- as the economy was operating at full capacity (in his time), expansionary fiscal policy would only have an inflatory effect
- the enormous importance of regulating the money supply in the economy at a rate which equals the rate of real growth
- the importance of expansionary fiscal and monetary policies during the 1930s aiming at shifting the AD curve out
- as firms use rational expectation models to determine their investment level, the government will in essence not be able to influence the economy
Question No: 13
A large increase in oil prices, such as the ones occurring in 1973 and 1979, will cause_______
- inflation and expansion
- recession and disinflation
- inflation and recession
- expansion and deflation
Question No: 14
_________set a price for Saudi Arabia light and let member governments set their own prices for the different crudes reflecting the different locational, physical and chemical characteristic of each crude.
- Standard Oil
- Nobel and Rothschild
Question No: 15
________ has more uses than just heating and air conditioning although natural gas is primarily used as a fuel to generate heat; there are also more obscure uses.
- Coal and Power
- Natural Gas
Question No: 16
The transportation share of total liquid fuel consumption increases, accounting for about _____ per cent of the overall increase in liquid consumption in all sectors over the projection period.
Question No: 17
Employment tends to _______ when aggregate output ______
- rise, falls
- rise; rises
- falls; rises
- not change; falls
Question No: 18
The market price of bonds can fluctuate depending on________
- how many bonds were sold
- who bought the bonds
- the amount of the coupon
- the interest rate
Question No: 19
Refineries are normally located near population centres, often in processing clusters that include __________.
- Biogas plants
- Petrochemical plants
- Vascular plants
- Power plants
Question No: 20
Operating which kind of store requires an entirely different set of capabilities from petroleum retailing?
Question No: 21
_______ will have the opportunity to set up and offer communication business centres at attractive rates to customers at Indian Oil petrol stations.
Question No: 22
Which market is considered to be a mixture of crude oil market and financial market?
- Paper Market
- Physical Market
- LIBOR Market
- Commodities Market
Question No: 23
OPEC operates its policy through which of the following instruments?
- output variation
- destination control
- declaration of official selling price
- All of the above
Question No: 24
Which markets are limited by the inflexibility and expense of gas versus liquid transportation?
- Physical Market
- Paper Market
- Natural gas market
- Cash Market
Question No: 25
A bond is________
- a promise to pay back a loan over an unspecified period
- allows the firm to access funds with no liabilities
- the only way a firm can raise funds
- a document that promises to pay back a loan under specified terms over a specified period of time
Question No: 26
An increase in oil prices, such as the oil shocks in the 70s, lead to _______ thereby causing ________
- a movement along the AS curve; cost-push inflation
- a leftward shift in the AS curve; demand-pull inflation
- a rightward shift in the AS curve; cost-push inflation
- a leftward shift in the AS curve; cost-push inflation
Question No: 27
In the 1930s, when Keynes was alive, a expansionary fiscal policy, taking everything else constant, would have led (in the short-run) to________
- a relative large increase in Y, a smaller increase in P
- a relative large increase in P, a smaller increase in Y
- both Y and P increasing with an percentage
- only Y increased
Question No: 28
In which three sectors petroleum products are primarily used?
- All of the above
Question No: 29
Transportation of petroleum products, crude oil and gas through _________ is considered as the cheapest, safest and environment friendly mode of transportation.
- Bullock carts
Question No: 30
Keynes suggested that _______ income households consume a ________ proportion of their income than ________ income households
- low; smaller; high
- low; larger; high
- high; larger; low
- low; smaller; middle
Question No: 31
At any given level of the interest rate, expectations are likely to be ________ optimistic and planned investment is likely to be _______ when _____ is growing rapidly than when it is growing slowly or falling.
- less; higher; output
- more; higher; output
- less; lower; unplanned investment
- more; lower; unplanned investment
Question No: 32
The Lucas-supply function assumes that_______
- people and firms are generalists in production and specialists in consumption
- price surprises are irrelevant
- most companies tend to produce a large scope of products using only few inputs
- people and firms are specialists in production but generalists in consumption
Question No: 33
The process of liberalisation of the downstream sector in India began in February 1993, with the decanalising of imports of which oil products?
- Superior Kerosene Oil (SKO)
- Liquefied Petroleum Gas (LPG)
- Furnace Oil (FO)
- All of the above
Question No: 34
Demand for gas, in terms of consumption, is _________to changes in price than the supply is.
- less sensitive
- more sensitive
- high sensitive
Question No: 35
___________is refined through a process of distillation and blended to form mixtures of various refined streams.
- Crude Oil
- Natural Gas
- Fuel Oil
Question No: 36
A ____is the final buyer in the physical market, who buys crude for processing and pays the price, which he cannot pass on to any other buyer of crude.
Question No: 37
Which country has the only capability to further increase its capacity significantly in short period, say 30 days?
- Saudi Arabia
Question No: 38
Which form of fuels remain an important energy source for transportation and industrial sector processes?
- Liquid Fuels
- Biogas fuels
- Crude Oil fuels
- solid fuels
Question No: 39
According to the supply-side model, a reduction in the tax rate:
- could reduce the size of any budget deficit
- would have no effect on output
- would have no effect on consumption
- none of the above
Question No: 40
Which basin has tremendous potential, offering the possibility of production increases from 1.6 million barrels/day (b/d) in 2001 to 5.0 million b/d in 2010?
- The Caspian Basin
- Tropical Cyclone Basin
- River Basin
- Drainage Basin
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