Petroleum Economics and Management

Prof. Anwesha Aditya

Humanities and Social Sciences, IIT KHARAGPUR

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Module 01: Introduction

Lecture 01 : Relevance and Syllabus
 Why do we need a course on
Petroleum Economics and Management ???
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• In the early 2010s, the annual production value of oil was between $3500 and $4000 billion.

• World oil exports were in the range P T

of $2200 and $2800 billion. N
 Importance of Oil in World
Economy
• In 1970-1972, oil alone represented an export value equal to the aggregate of the next nine largest
commodities.

• Oil is the world’s most vital commercial energy source and will remain so in the 21st century (OPEC,
2004).*
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• According to World Bank, fuel exports as a percentage of global merchandise exports were 12 per
cent in 2018.
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• Refined petroleum is one of the most traded item globally.**

• Value of oil production in 2013 was 4.8% of global GDP.

Notes: *OPEC Speeches, 2004; **Forbes

Table 1: Exports by Principal Commodities (US dollars in millions)
# COMMODITY 2001 2007 2013 2020 2021
1 Petroleum Products 474298 1704751 2705766 1186043 1882422
2 Natural gas* 71949 193261 380325 132262 362432
3 Coal, coke and briquettes 23598 61560 122041 89836 142534
4 Coal** 20653 52739 111986 80124 126079
5 Iron ore and concentrates 9169 41312
E L 139991 145234 230959
6 Wheat*** 14627
P
30732T 49933 45178 60832
7
8
Copper
Cotton
29976
7411
N 124530
12730
132510
22210
124852
16265
182035
20793
Notes: *whether or not liquefied, **whether or not pulverized, not agglomerated, *** (including spelt) and meslin, unmilled

Source: UNCTAD
Table 2: Production of Principal Commodities (‘000 Metric Tonnes)

Commodity 2011 2014 2017 2020 2021

Coal 7218020 7419808 6986940 7023071 _
Oil 3637812 3831314 3979276 3783778 3829591
Iron Ore 3270000 3820000
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3940000
700610E
3990000 4200000
Wheat 632216 661118
P T 690300 _
Copper
Cotton
51700
25869
59400
26259
N23378 26134
62900 45900 47000
24303

Sources: EIA, USGS, FAO, Statistical Review of World Energy, ICAC

 Indispensable Nature of Oil

• In the near future it is hard to replace oil.

• In power generation since mid 1980s oil has been successfully replaced by expanded usage of
coal, gas, nuclear and renewables.

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• The dominant market segment for oil - as a fuel for transport on roads, in the air and across
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the seas - continues to prevail despite the price changes.

• This makes the global economy highly vulnerable to oil supply disruptions.
 Nature of oil price changes

• The almost ten times real price increase between the early 1970s and the most recent
years has been unparallel.

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• Metals and minerals in aggregate, which are also exhaustible and were sold in
unchanged qualities over time, less thanPdoubled in constant money prices over the
period. N
And then came Covid-19

Negative oil price??? Is it???

E L
• The price of US benchmark for oil, West Texas Intermediate (WTI) crude oil futures contract
became negative during the 3rd week of April, 2020.

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 Russia-Ukraine war again raising oil price

• Since the beginning of the war, Brent crude oil prices reached a 10-year-high of $130

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per barrel at the beginning of March as the UK and US banned Russian oil imports;
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however, prices later fell to close to $110 per barrel.
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Course Outline
• Module I

Introduction: Relevance, course objective; Use of Oil: advantage of oil as

carrier of energy; how the oil industry evolved; Issue of Sustainability

• Module II
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Equilibrium
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Basics of Microeconomics, Analysis of Demand, Supply, Concept of elasticity,

• Module III
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Government Intervention (Tax, Quota), Black market, Welfare Analysis:
Consumer and producer surplus, Petroleum Rents
• Module IV
Evolution of petroleum prices: Observations and Implications, Major pricing
events, impact of Covid and lockdown measures

• Module V

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Behaviour of OPEC: Whether it can explain oil’s price? Is OPEC a cartel? Role of
Saudi Arabia
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• Module VI
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Petroleum as a depleting resource; Can depletion and rising costs explain price
development? Cost performance of global oil industry
• Module VII
Petroleum discoveries and structural changes: Resource Curse; Dutch Disease and
capacity destruction

• Module VIII

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Fundamentals of petroleum business – strategic issues (price and non-price
competition), OPEC as price leader, Application of Game Theory: Prisoner’s
Dilemma
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• Module IX
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Price leadership dominant firm model, conditions of success of cartel
• Module X
Theories of price formation of Petroleum: Intertemporally Optimal Prices; Market Structure –
perfect competition versus monopoly

• Module XI

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The management of petroleum wealth: Uncertainty and optimum rate of extraction

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• Module XII
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Implications of fiscal and trade policies (with special attention to exchange rate policies, BOP
crisis and Indian economy)
1. Petroleum Economics: Issues and Strategies of Oil and Natural Gas Production
by Rognvaldur Hannesson, Praeger, 1998.

2. Price of Oil by Roberto M. Aguilera and Marian Radetzki, Cambridge University

Press, 2015.

2017.
E L
3. Microeconomics by Robert Pindyck and Dainel Rubinfeld, Pearson, 8th Edition,

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4. Microeconomics by Jeffrey Perloff, Pearson Education; Seventh edition, 2019.

5. The Oxford Handbook of the Indian Economy edited by Chetan Ghate, 2015,
Oxford University Press.
• Relevance of having a course on Petroleum Economics and
Management

• Overview of the course

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• Syllabus
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 E L
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 Petroleum Economics and Management
Prof. Anwesha Aditya
Humanities and Social Sciences, IIT KHARAGPUR

E L
P T
N

Module 01: Introduction

Lecture 02 : Role of Oil
• Use of oil and its advantages

• How the oil industry evolved

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• Role of oil in world politics
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Oil: Its Vital Role

• Just like blood flows in human body, oil flows through pipelines carrying energy
required for functioning of modern civilization.

• It allows wheels in machines and transportation equipment to move and makes our
dwellings more comfortable in extreme weather.
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• Disruption in oil supply led to immediate inconveniences and spiraling effects across
different spheres of daily life.
Advantage of oil as carrier of energy
i. Its high content of energy per unit of weight minimizes transportation costs as compared to
other sources of energy.

ii. The high energy-to-weight ratio makes it easy to carry sufficient energy supplies in vehicles for
travel long distances across continents.

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iii.
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Being fluid in nature, its storage cost is less and can be handled easily.

iv.
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Fluidity of oil can ensure uninterrupted supply of fuel.
 How the Oil Industry evolved: Background
• Use of oil can be traced back to ancient civilizations.

• 2000 years back, in China, oil and natural gas were used for combustion and lighting purpose. It was
also found in Roman and Brazilian civilization.

E L
• In Mesopotamia, the region between the Euphrates and Tigris rivers, that is, modern-day Iraq, liquid
petroleum was described by the Greek-Latin word naptha, which is the origin of the word
naphthalene.
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• Edwin Drake drilled America’s first contemporary oil well in Titusville, Pennsylvania, in 1859 – which
can be considered as the beginning of the modern oil industry (Jones, 1988).
Oil and World Politics
• The world's crude oil reserves are not evenly distributed. It is preserved in the Middle East in
huge share. Hence, since the early 20th century, this region has attracted both global powers
and global money.

• Controlling oil supply became important in military strategy after steam engines in warships

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were replaced with diesel ones, which was crucial in the outcome of World War II.
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P T
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• Oil garnered enormous media attention once coal's hegemony began to decline in the middle
of the 1950s and its significance to contemporary economies expanded significantly, playing a
significant role in various energy crises.
The Oil Wars
• First Oil Crisis: Arab oil embargo (October, 1973) – enacted by OPEC, oil-producing
Arab nations temporarily suspended oil supply from the Middle East to the United
States, the Netherlands, Portugal, Rhodesia, and South Africa in retribution for their
assistance of Israel during the Yom Kippur War.

E L
• Second Oil Crisis: 1979 Oil Shock (January 1979 to July 1980) – an energy emergency

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brought on by a decline in oil production caused due to Iranian Revolution. Even though

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the world's oil supply only fell by about 4%, the oil markets' response drove up the price
of crude oil dramatically during the following year.
• 1990 oil price shock: Iraqi invasion of Kuwait on August 2, 1990 led to the 1990 oil crisis.

• Gulf War: The 1990–1991 armed conflict in reaction to Iraq's invasion of Kuwait.

• Persian Gulf oil spill or Gulf War oil spill (1991): One of the biggest oil leaks in history – Iraqi

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soldiers allegedly started dumping oil into the Persian Gulf in January 1991 in order to thwart
E
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the U.S. army.

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• The price increase, which lasted only nine months, was less severe and shorter-lived than the
earlier oil crises of 1973–1974 and 1979–1980, but it nonetheless had an impact on the early
1990s recession.
 Oil and World Politics: Current Scenarios
• Pandemic led lockdown: Double blow of COVID-19 induced lockdown and the oil price shock
hit the producers hard when the oil and petroleum industry was already facing a structural
decline. For the brief time period, the benchmark price for the US crude oil went negative.

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• Russia-Ukraine War: Oil prices increased sharply and crossed $100 per barrel. European
E
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nations looked for alternatives after US, EU and UK imposed sanctions on Russia.

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On the other hand, Russia found new buyers and sold the production by offering discounts.
Oil and World Politics: Current Scenarios
• Climate Targets: The goal is to limit global warming to 1.5 degrees Celsius (well below 2)
compared to pre-industrial levels (Paris Agreement, 2021).

• 193 parties agreed to reduce their emissions and work together on mitigation and adaptation
strategies.

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• Due to recent discussions on climate change issues, uncertainties arise on both the sides of

for energy needs and finance.

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fossil fuels market (demand and supply). Many nations are primarily dependent on fossil fuels

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• As per UNFCC (The United Nations Framework Convention on Climate Change), despite the
targets, nations plan to produce more fossil fuels, which is not in line with limiting global
warming to 1.5 degrees Celsius.

Read more about Paris Agreement:

https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
https://unfccc.int/news/governments-fossil-fuel-production-plans-dangerously-out-of-sync-with-paris-limits
• Oil and its vital role

• Historical perspective on the development of oil industry

E L
• Oil: one of the driving forces of World Politics
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1. Petroleum Economics: Issues and Strategies of Oil and Natural Gas Production by
Rognvaldur Hannesson, Praeger, 1998.

2. Price of Oil by Roberto M. Aguilera and Marian Radetzki, Cambridge University Press,

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2015.

T E
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3. Verleger, P. K. (1990). Understanding the 1990 Oil Crisis. The Energy Journal, 11(4),
15–33. http://www.jstor.org/stable/41322669
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Thank
P TE You…
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 Petroleum Economics and Management
Prof. Anwesha Aditya
Humanities and Social Sciences, IIT KHARAGPUR

E L
P T
N

Module 01: Introduction

Lecture 03 : Energy and Sustainability
• Energy and Sustainability

• Fossil Fuels and Green House Gases

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Oil: a Nonrenewable Resource

• Remains of organic materials like debris from marine organisms and one-time
forests stored underground forms oil.

• This is a continuous and ongoing process.

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• However, the rate of formation of new oil is much less than the rate at which it is
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T
used at present. Hence, over time we will run out of oil.

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• Moreover, there is uncertainty regarding the exact amount of reserves.
 ENERGY AND SUSTAINABILITY:
Traditional renewable energy sources
Our ultimate source of energy is the sun, also referred to as the Hydrogen Bomb Mother

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 Plants use photosynthesis process to convert light energy into chemical energy.
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But we, human beings, cannot harness that energy directly;

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N first converted into some useful form;
 To utilize the solar energy it need to be
Examples
• We eat plants that use sunlight to produce chemical substances that we can digest, or animals
and fish that themselves live on plants or plankton.

• We build shelters and make tools from wood, use wood or dung for fire to keep us warm or to fuel
heat-driven production processes.

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• These examples may seem to be out dated and leads to emission of GHGs, but at the same time

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these are sustainable because they utilize the incoming flow of energy from the sun.

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• A plant is grown over a season and represents stored-up energy of few months/years; domestic
animals are raised and slaughtered periodically, but all these use the inflow of energy from sun in
a repetitive cycle.
Change brought about by industrial revolution

• Industrial revolution made accessible to us new forms of energy that increased our productive
capacity manifold and increased our comfort.

• But energy harnessed by the industrial revolution basically reflect the stored-up sunshine from
the past millennia.

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P T
• Coal is fossilized vegetation and considered as the king of the industrial revolution. Petroleum
is fossilized marine organisms. By burning them we are using up the gifts of the past.
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• This is not sustainable as it cannot be carried on forever. No one knows how much coal and oil
is in the ground.
 Transition from fossil fuels to renewable energy

• Renewable resource is based on continuous flow of sunshine; not on depletion of stored-up

sunshine harnessed by organisms that lived millions of years ago.

• Processes like windmills, hydroelectric power plants, and tidal power plants utilize the
forces which driven by sunshine (climatic phenomena like wind and rainfall) or gravity (tidal
waves, hydroelectric power).
E L
P T
• Processes such as photovoltaic cells (or solar cells) can convert the flow of sunshine into
electricity.
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• The technology to use these processes are expensive, environmentally offensive, or not
easily accessible.

• As fossil fuels become scarce and expensive these sustainable energy forms will
become more advantageous and they will increasingly replace fossil fuels.

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• Nuclear fusion is another undepletable source of energy.

P T
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• However, till now fossil fuels reign supreme.
Fossil Fuels and Greenhouse Gases

• The increased concentration of C02 and other greenhouse gases (GHGs) increases
global mean temperature.

• Since fossil fuels are responsible for substantial part of the man-made greenhouse gas
emissions, a reduction in the use of these forms of energy is expected to reduce GHGs.

E L
T
• Considering the Paris agreement, further production of fossil fuels may lead to sea

N P
level rise, extreme weather conditions and other risks from climate change events.

• Therefore, there’s a high trade-off between energy needs and sustainability.

Global GHGs by Economic Sector, 2010 Global carbon emissions from fossil fuels

E L
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N Source: Boden, Marland, and Andres (2017).

Source: IPCC, 2014

Read more about it:

https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data
Fossil Fuels and Greenhouse Gases
Figure: CO2 emissions by fuel type (World)

Three fossil fuels namely coal, oil

and gas are the major contributors

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of carbon emissions.

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NP

Source: Our World in Data based on Global Carbon Project

• Traditional renewable energy sources

• Transition from fossil fuels to renewable energy

E L
P T
• Fossil Fuels and Green House Gases: some evidences

N
1. Petroleum Economics: Issues and Strategies of Oil and Natural Gas Production by
Rognvaldur Hannesson, Praeger, 1998.

2. Price of Oil by Roberto M. Aguilera and Marian Radetzki, Cambridge University Press,
2015.

3. Boden, T. A., Andres, R. J., & Marland, G. (2017). Global, regional, and national fossil-
fuel co2 emissions (1751-2014)(v. 2017). Environmental System Science Data

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Infrastructure for a Virtual Ecosystem (ESS-DIVE)(United States); Carbon Dioxide

Ridge, TN (United States).

T E
Information Analysis Center (CDIAC), Oak Ridge National Laboratory (ORNL), Oak

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4. Change, I. C. (2014). Mitigation of climate change. Contribution of working group III to
the fifth assessment report of the intergovernmental panel on climate change, 1454,
147.
 L
Thank
P TE You…
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 Petroleum Economics and Management
Prof. Anwesha Aditya
Humanities and Social Sciences, IIT KHARAGPUR

E L
P T
N

Module 01: Introduction

Lecture 04 : North-South Conflict, Way to Future
• North-South Conflict

• Way to future

• Ethanol Blending
E L
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North-South conflict???
• Ongoing debate between developed and developing countries regarding who have
emitted the most over the years and who is responsible. Developing countries are of
the view that we should enjoy laxer environmental regulations for the time being as
advanced nations have already grown at the expense of the environment.

E L
• Increase in use of energy is expected in LDCs not only for communication and

P T
industrial processes, but also for relieving people from physical toil and unsanitary

N
conditions (e.g. breathing the thick smoke of cow dung).
North-South conflict???
• Industrialized and post-industrialized nations are the major contributors of historical
carbon emissions (Ülgen, 2021). For instance, US and the EU are responsible for the 47
percent historical emissions, while Brazil, China and India share is only around 17
percent.

• The global North have higher per capita emissions, energy use. For instance, Use of
primary energy per capita in 1990 was 7.6 tonnes oil equivalents in USA and 3.76 in
E L
Europe & Central Asia, but 0.35 in India, 0.33 in South Asia.
P T
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• Since the global north are responsible for historical emissions yet the larger burden is
borne by the poorer nations (Poverty-Environment Nexus) in tackling extreme weather
events.

https://carnegieeurope.eu/2021/10/06/how-deep-is-north-south-divide-on-climate-negotiations-pub-85493
Energy use* (kg of oil equivalent per capita)
Region 1971 1990 2000 2010 2013 2014
United States 7645 7672 8057 7161 6906 6961
Europe & Central Asia _ 3763 3199 3309 3221 3162
OECD members 3676 4133 4447 4234 4075 4021
China 465 767 899 1955 2204

E L
2224

T
Low & middle income 445 943 875 1227 1303 1329
Middle income
South Asia
439
253
959
333
896
394
1273
515
N P1361
550
1384
574
India 267 350 417 562 606 637
World 1338 1664 1637 1875 1894 1920

Source: W orld Bank based on IEA statistics

https:/ / www.iea.org/ stats/ index.asp

*Energy use refers to use of primary energy before transformation to other end-use fuels, which is
equal to indigenous production plus imports and stock changes, minus exports and fuels supplied
to ships and aircraft engaged in international transport.
Energy Use per person, 2021 (kilowatt-hour)
F £ž₍ 0- "( 2 ž"$ ž₍ "$ ž₍ 2 ⁴ £�"ứụứủ
* fiZ‚ | ª !˝ „Z!fi–`!–fi�ª !£fiP�˝ VZ„!Z�ZP`‚ £P£̀ª ₁!O˝ `!L�„–!–`~Z‚ !L‚ ZL„!–\!P–fi„˝ › · � –fi!£fiP�˝ V£fi| !`‚ Lfi„· –‚ `₁!~ZL� fi| !LfiV
P––' £fi| ₄

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Ĉ!' H ~ Ď₁ĈĈĈ!' H ~ ĊĈ₁ĈĈĈ!' H ~ ĖĈ₁ĈĈĈ!' H ~ ĎĈĈ₁ĈĈĈ!' H ~
8 –!VL`L Ċ₁ĈĈĈ!' H ~ Ė₁ĈĈĈ!' H ~ ĎĈ₁ĈĈĈ!' H ~ ĊĈĈ₁ĈĈĈ!' H ~ ĖĈĈ₁ĈĈĈ!' H

A–˝ ‚ PZ₃!: ˝ ‚ !H –‚ �V!£fi!( L`L!OL„ ZV!–fi!%=!7 !A~£z !( L`L!=–‚ `L� : ˝ ‚ H –‚ �V0fi( L`L₄–‚ | ₎ ZfiZ‚ | ª !7 !&&!%J
8 –`Z₃!* fiZ‚ | ª !‚ Z\Z‚ „ !`–!· ‚ £› L‚ ª !ZfiZ‚ | ª !4 !`~Z!ZfiZ‚ | ª !£fi· ˝ `!OZ\–‚ Z!`~Z!`‚ Lfi„ \–‚ › L� –fi!`–!\–‚ › „ !–\!ZfiZ‚ | ª !\–‚ !ZfiV3˝ „ Z!9„ ˝ P~!L„ !Z�ZP`‚ £P£̀ ª !–‚ !· Z`‚ –�!\–‚
`‚ Lfi„ · –‚ `. ₄

Source: O ur W orld in Data based on BP & Shift Data Portal

Per Capita Primary Energy Consumption by Source,
2021 (kilowatt-hour)

E L
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Source: O ur W orld in Data based on BP Statistical Review of W orld Energy

Way to Future
If the emissions of carbon dioxide are to be stabilized or cut back one of the two things must
happen.

i. the poor masses of the world will continue to remain in poverty

ii.
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the inhabitants of the rich countries will have to compromise their standards of living

E
P T
Neither of the above options is likely to happen.

N
Use of nuclear power and other renewable sources of energy can be the way out.
Ethanol Blending: A Way Ahead?
• Ethanol: Organic chemical used in consumer and industrial products and is an agricultural by-
product.

• Ethanol is produced from the by-product of sugarcane in the process of making sugarcane.

• Recognizing its potential, now it is used as a cleaner alternative energy.

E L
T
• It is a less polluting fuel and delivers almost equal efficiency that too at a lower cost than petrol
(NITI Aayog, 2021)*

N
• If blended with petrol, it may strengthen India’s energy needs.
P

*Read more about it:

https://www.niti.gov.in/sites/default/files/2021-06/EthanolBlendingInIndia_compressed.pdf
Ethanol Blending: A Way Ahead?
• Economic interest of farmers: Surplus food grains production can be utilized in ensured price
value.

• Can also address environmental concerns by reducing carbon emissions.

• Reduction of fuel import bills and increasing self reliance.

E L
T
• India has already achieved E10 (fuel consists of 10 percent ethanol and 90 percent petrol) much
before the deadline.

N P
• India is now looking to achieve E20 by 2025 and 5 percent biodiesel blending in diesel by 2030.

*Read more about it:

https://www.niti.gov.in/sites/default/files/2021-06/EthanolBlendingInIndia_compressed.pdf
Ethanol blending program in India
• Project started on a pilot basis in 2001.

• Ethanol Blended Petrol (EBP) Programme launched in 2003.

E L
• It faced severe challenges in the early phases and it did not meet success due to high taxation

P T
of ethanol, procurement challenges and limited availability of feedstock (raw material).

N
• In 2014, it was reintroduced and the process were simplified. Governments also directed Oil
PSEs to set up bio-refineries.
Ethanol blending program in India
• IDR Act Amendment, 2016: Clarity on the roles of Central and State Governments for the
supply of ethanol.

• National Policy on Biofuels, 2018: Involving all stakeholders.

E L
T
• Major Boost: In 2018, GST on ethanol reduced from 18 to 5 per cent.
P
N
• 2020: NBCC approved maize for ethanol production. Also in the same year, Oil Marketing
Companies (OMCs) have increased ethanol storage capacity.

Read more about the success story:

https://mopng.gov.in/files/Whatsnew/ethenol-groth-story.pdf
Ethanol Statistics
• For instance, India achieved 10 percent ethanol blending (E10) and saved foreign exchange
amounting to INR 41,000 crores in last few years.

• Reduction of 192 lakh tonnes of carbon emissions in last 7 years.*

annum (INR 30,000 crores).

E L
• India aims to achieve 20 percent ethanol blending (E20) and can save USD 4 billion per

P T
N
• Farmers of the country have earned Rs 40,600 crore in the last eight years due to increase
in ethanol blending.

• Ethanol production capacity doubled in last 4 years.*

* Ministry of Petroleum and Natural Gas, GoI

• Debates between the developed and developing countries or
North-South conflict

E L
• The future ahead: more sustainable sources of energy

P T
N
1. Petroleum Economics: Issues and Strategies of Oil and Natural Gas Production by Rognvaldur
Hannesson, Praeger, 1998.

2. Price of Oil by Roberto M. Aguilera and Marian Radetzki, Cambridge University Press, 2015.

3. Sarwal, R., Kumar, S., Mehta, A., Varadan, A., Singh, S. K., Ramakumar, S. S. V., & Mathai, R. (2021).
Roadmap for Ethanol Blending in India 2020-25: Report of the Expert Committee.

E L
T
4. Ülgen, S. (2021). How Deep Is the North-South Divide on Climate Negotiations?.

P
N
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Thank
P TE You…
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