Peak Oil and REMI PI+: State Fiscal ImplicationsPeak Oil and REMI PI+:

State Fiscal ImplicationsJim Peach

Arrowhead Center Prosper Project

and Department of Economics and International Business

New Mexico State Universityjpeach@nmsu.edu

This presentation was prepared for the annual REMI User Conference in Portland, Oregon, October 13-16, 2009. The presentation is one of a series of reports on energy and economic development in New Mexico and was prepared as part of New Mexico State University’s Arrowhead Center’s PROSPER project funded by U.S. Department of Energy Grant Award Number DE-NT0004397.

DISCLAIMER

This report was prepared as an account of work sponsored by an agency of the UnitedStates Government. Neither the United States Government nor any agency thereof, norany of their employees, makes any warranty, express or implied, or assumes any legalliability or responsibility for the accuracy, completeness, or usefulness of any information,apparatus, product, or process disclosed, or represents that its use would not infringeprivately owned rights. Reference herein to any specific commercial product, process, orservice by trade name, trademark, manufacturer, or otherwise does not constitute or implyits endorsement, recommendation, or favoring by the United States Government or anyagency thereof. The views and opinions of authors expressed herein do not necessarilystate or reflect those of the United States Government or any agency thereof.

Outline

• What is peak oil?• Why peak oil (and gas) matters

– (In energy and non-energy states)– National Real GDP, employment and income– State Real GDP, employment and income– State fiscal issues

• Reserves and Production• Peak oil in REMI PI+• Conclusions

Hubbert’s Peak:From M. King Hubbert’s “Nuclear Energy and Fossil Fuel”—a paper delivered to the American

Petroleum Institute’s 1956 annual conference

No copyright notice appears on this paper. Mr. Hubbert is deceased.

Hubbert’s Peak Again (page 9)

For the mathematically inclined

Production at time t

The peak is given by the first derivative of the production equation

From: “Hubbert’s Petroleum Production Model: An Evaluation and Implications for World Oil Production Forecasts”, Alfred J. Cavallo, Natural Resources Research,Vol. 13,No. 4, December 2004

National and State Timing of Peak OIl

• Hubbert (1956) maintained that the peak oil concept could be applied to:– A particular oil field– A region such as a state– A nation– The World

• Hubbert was very careful not to suggest that all of these various peaks would occur at the same time!

– Hubbert also considered the possibility of multiple maxima (peaks)

• There is no particular reason why peak oil in New Mexico or some other state will occur at the same time as peak oil in the US or the World.

• There are many reasons to assume that these peaks will not occur at the same time.

The Oil Peak in New Mexico

Source: Starbuck and Peach, 2009.

The Natural Gas Peak in New Mexico ?

Source: Peach and Starbuck, 2009.

What are Proved Reserves?

“Proved reserves of crude oil are the estimated quantities which geological and engineering data demonstrate with reasonable certainty can be recovered in future years from known reservoirs, assuming existing economic and operating conditions. Proved reserves make up the domestic production base and are the primary source of oil and gas.” (Energy Information Administration)

http://www.eia.doe.gov/neic/infosheets/petroleumreserves.html

Problems with “Proved Reserves”

• Ambiguous definition –no specific criteria • Self-reported by oil and gas companies

– Vested interest in low reserve figures?

• Proved reserves keep growing (world, nation, and states)• Shale oil not included

– Shale oil reserve estimates 2.0 Trillion bbls in US– Known technology, – No drilling risk– Cost of production estimates: $25 - $30 per barrel for in situ (retort recovery)– Environmental risk ? – Energy intensive production

World Crude Oil Production: 1980 to 2008(1,000s of barrels per day)

World Crude Oil Reserves(Source: U. S. Department of Energy, Energy Information Administration)

US Reserves and the Peak

Are reserves being depleted?

Where are US Reserves?

Thirty-one states have crude oil reserves (2007). The top five are: Texas, with 5.1 billion barrels Alaska, with 4.2 billion barrels California, with 3.3 billion barrels New Mexico, with 735 million barrels Wyoming, with 690 million barrels

New Mexico Crude Oil Reserves and Production:1997-2007

(millions of barrels)

New Mexico Oil and GasWhy the Peak Matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates, August 14, 2009

New Mexico Oil and GasWhy it matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates” , August 14, 2009 and State Board of Finance,“Continuing Disclosure” Reports, various years.

New Mexico Oil and GasWhy it matters?

New Mexico Oil and GasWhy peak oil matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates, August 14, 2009

New Mexico Oil and GasWhy peak oil matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates, August 14, 2009

New Mexico Oil and GasWhy peak oil matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates, August 14, 2009

New Mexico Oil and GasWhy peak oil matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates, August 14, 2009

New Mexico Oil and GasWhy peak oil matters?

Source: “New Mexico Department of Taxation and Revenue“Consensus Revenue Estimates, August 14, 2009

Peak Oil in the REMI PI+ Model:Standard National and Regional Controls

New Mexico

Value Added in Oil and Gas Extraction:REMI PI+ Standard National Control

(Billions of $2000)

REMI Peak OIL?2016

Employment in Oil and Gas Extraction:REMI PI+ Standard National Control

(1,000s of jobs)

Peak Oil2016

Fuel Price Assumptions in the REMI PI+ Model

Alternative Scenario 1National Assumptions

• Goal: Remove peak oil assumption (at least partly)• Scenario:

– Changes were made only to employment/output in Oil and Gas Extraction– No changes made 2007 to 2016 (current peak)– Maintain 2016 employment/output in Oil and Gas Extraction 2017 to 2050

• No direct changes made to other sectors including– Natural Gas Distribution– Support Activities for Mining– Transportation– fuel costs, or – oil/gas price assumptions

• In other words, this is less than a complete removal of peak oil.

Alternative Oil and Gas Scenario(Maintain employment/output share in oil and gas extraction)

• Simulation 2017-2050 major results (No change through 2016 Peak)• Total Employment increases by average of 1.85% per year

– 1.9 million jobs per year average – (2.6 million in 2050)

• Real GDP ($2000) increases by average of 2.03% per year– $551 billion in GDP per year– ($1,080 Billion in 2050)

• Real Disposable Personal Income increases by average of 1.79%– $250 billion per year average– $485 billion in 2050

Alternative Scenario for the National Economy:(Maintain employment output share in oil and gas extraction)

Differences in Real GDP (Billions of 2000$)

No change2007-2016

Alternative Scenario for the National Economy:(Maintain employment output share in oil and gas extraction)

Differences in Employment (1,000s of Jobs economy wide)

No Change2007-2016

Alternative Scenario for the National Economy:(Maintain employment output share in oil and gas extraction)

Differences in Value Added in Oil and Gas Extraction (Billions of $2000)

No Change2007-2016

Alternative Scenario for the National Economy:(Maintain employment output share in oil and gas extraction)

Differences in Employment in Oil and Gas Extraction (1,000s of jobs)

Prices In New National Control

Yellow = Gasoline and Oil Blue = Fuel Oil and CoalRed = Gas

2050 pricesBlue 7.074Yellow 6.690

2025Blue 3.144Yellow 2.974

2025 Standard ControlBlue 3.138Yellow 2.968

2050 Standard ControlBlue 7.008Yellow 6.627

New Mexico Value Added in Oil and Gas Extraction:REMI PI+ Standard Regional Control

(Billions of $2000)

Peak Oil2016

New Mexico Employment in Oil and Gas Extraction:REMI PI+ Standard Regional Control

(1,000s of Jobs)

Peak Oil2016

New Mexico Scenario 1National Changes Only

• That means, the alternative national scenario was used as input to create a new Regional Simulation for New Mexico.

• There were no other changes made to the model!

Not really

Alternative Regional Simulation for New Mexico (1)National control without peak –no changes to NM model

Changes in Value Added (Billions of $2000)

No changes 2007-2016

Alternative Regional Simulation for New Mexico (1)National control without peak –no changes to NM model

Percent Changes in Value Added (black) and employment (red)

No changes2007 - 2016

Alternative Regional Simulation for New Mexico (1)National control without peak –no changes to NM model

Changes in Employment (1,000s of Jobs)

No changes2007-2016

Alternative Regional Simulation for New Mexico (1)National control without peak –no changes to NM model

Changes in State Revenue (Billions of $)

No changes2007-2016

Alternative Regional Control for New Mexico

Percent Changes in State Revenue

A changing peak?The peak in 2008 and 2009 versions of the REMI model

National Value Added in Oil and Gas Extraction in billions of constant (2000) dollars.Standard national controls in 2008 and 2009 models.

Some Tentative Conclusions

• Peak oil (and gas) may or may not occur soon• The REMI PI+ peak oil assumption is quantitatively important in national

and state level simulations in energy and non-energy states.– Removing the peak at the national level results in substantial increases in Real GDP,

employment and income – Using a ‘peak-less’ national control results in large changes in state GDP, employment,

personal income and state tax revenue –at least for New Mexico.– Non-energy states should also be careful of the national peak oil assumption in the

standard national control

• Scenarios other than peak oil in 2016 should be considered in any long-run modeling exercise

– If you are still convinced that peak oil is coming (or has already arrived), at least run alternative dates for the peak in long term simulations

Thank you!

Questions?