Geopolitical Factors and Increasingly Turbulent Supply and Demand Scenarios in Energy Markets: Modeling Rejuvenated Interest in Biomass Energy Sources
Farina, Ronald F., Journal of Global Business and Technology
As the peak of global oil production approaches, increasing competition resulting from increasing demand in emerging economies challenges traditional energy market relationships. Recent events underscore additional disruptions and uncertainty in energy markets, resulting from random fluctuations introduced by wars and natural disasters. This paper proposes a modeling approach to understanding and predicting the impacts of these combined factors in the context of turbulent market conditions.
The model is capable of capturing price, yield, unit transformations, capacity and other important data. It also proposes the use of the model to examine the role of alternative fuel technologies in smoothing the transition from the fossil fuel era. An example of biomass ethanol is provided. The model employs generalized network optimization methodology and provides a general structure with data from 2004 as a base case. A brief tutorial on generalized network formulations in the energy context is included.
Turbulent shifts are occurring in the world's oil driven energy markets. Large new players such as China, India and Brazil have appeared on the demand side. The energy demand among emerging economies is likely to equal or exceed first world economies by 2025 (Figure 1). Furthermore, larger players such as China will introduce uncertainties into traditional market relationships. China has already begun to compete with the United States and Europe for Canadian, Venezuelan and Russian oil.
The increase in competition is complicated by the onset of the limitations associated with a finite resource in the context of increasing demand. The "End of Oil" or "Peak Oil" can be viewed as the point where world production will cease to increase at an increasing rate. It will then continue to increase at a decreasing rate. Ultimately it will peak and then, finally, decrease. "Peak Oil" occurred in the United States in thel970s. This peak was precisely predicted by M. King Hubbert' s model in 1962. Globally, we are already beginning to see signs of the early stages of the approach of "Hubbert's Peak" (Figure 1). The onset can be characterized by ever increasing, highly unstable and fluctuating oil prices. Also, in 2005, global spare capacity reached a near 20 year low of 1 million barrels per day. Consequently, there is virtually no safety net as there had been in the past. Some argue that 2005 is the beginning of the peak; although, most estimates of peak production vary from 2026 to about 2039. The latter estimate was made by the U.S. Department of Energy's Energy Information Administration (EIA).
Hubbert's model was based on DF. Hewett's (1929) statistical models of the depletion of non renewable resources. While accurate at the time, it may be too simplistic as the global peak approaches. Sources of variation resulting from conservation programs and the implementation of alternative fuels technologies may significantly affect depletion. Additional uncertainties in supplies due to conflicts in the Middle East, such as the Iraq war, further muddy the waters. Finally, significant unexpected random variations in supply and refining capacity can occur as a result of natural phenomena, as in the case of hurricanes Katrina and Rita.
New more sensitive and reactive tools to assist decision makers are needed. These tools could be used to assist in developing effective energy strategies to cope with increasingly turbulent supply and demand scenarios in energy markets. The technique presented in this paper employs a modeling approach. It evaluates the strategic role of biomass and related technologies as the new energy mix shifts. The transition period encompasses biomass; hydrocarbon based non-conventional oil, enhanced oil recoveries and existing capacities. The eventual mix is likely to include mainstream biomass, nuclear, hydro, wind, solar, new oil, coal and natural gas based technologies. …