Investing in Energy - Essay Example

Investing in Energy Question 01: Why do we care about this history and how does it relate to today, particularly Egypt, OPEC, Israel, Saudi Arabia and the politics of the Middle East and energy? Start with the maps and drawing of countries after WWI and who got what and who did not? Think about the interests and perspectives of all the parties involved in Egypt and the less energy rich countries? How does this play out in today’s political environment? One reason for the oil foreign policy being different from the conventional Prisoner’s Dilemma game is that we are dealing with exchanges in the world’s political economy. One of the most common and fundamental interests of a multi-national corporation are the land rights on which oil can be produced and manufactured. Most of the oil consumed in the world today has moved from one country to another. It is, by far, the largest single commodity in international trade. This is why it is important. The Red Line Agreement of July 31, 1928 is an example in the history of oil co-operation, in which the United States did not get what it wanted in negotiations. Negotiations for the agreement began with the US and Great Britain squaring off for access to oil in the region that is now Iraq. At the end of World War I, the San Remo agreement awarded Britain mandate over Iraq, but the Americans opposed this. They claimed that since the war was won by the Allies collectively, oil exploration rights in the Iraq region should be shared. However, the British refused. Facing this impasse, the seven American oil companies decided to pursue their oil interests by official means through the Turkish Petroleum Company (TPC, later known as the Petroleum Company). Thus, negotiations with the TPC began in 1922, with the Americans actively pursuing the open-door policy. Essentially, it was in their interest to be assured that they had access to the oil regardless of the new developments that took place in oil production, in the Mesopotamian region. This was a critical time for the Germans and French, since the US was making the transition from being one of the major providers of oil to one of the largest importers. One of the biggest problems for the American group and their pursuit of the open door policy is what is referred to as the “self-denying clause.” In the Foreign Office Agreement of 1914, the “self-denying clause” prohibits owners of TPC from handling the production or manufacturing of crude oil other than through the TPC. Though it did not first include USA, after long negotiations regarding the open door policy and the self-denying clause, the compromise was that the self-denying clause would not apply to the American companies within the TPC allocated area, but would apply in outside areas. Another reason the US was more willing to allow the self-denying clause to go through was because of new discoveries of oil in the Iraq. Also related to the agreement, the American companies did not want the TPC to compete with other existing oil companies, nor did they want to pay taxes on TPC earnings. This effort faced opposition from the French because of the threat it posed to their earnings. There were many difficulties of allocating interest in the TPC among the participants, but in the end everyone’s desires were accounted for. The American group obtained 23.75% interest, as Anglo-Persian and Royal Dutch-Shell agreed to take care of Gulbenkian’s 5%, while the French (CFP) agreed to give Royal Dutch-Shell 1.75% in order to make up for the loss to Gulbenkian. This put the three large groups at 23.75% with Gulbenkian at 5%. Corporations in the Middle Eastern door had the American group think in terms of long term benefits. Negotiations might have been completed more efficiently since it was eventually proven that dropping the open door clause would have been more helpful beyond merely getting the American group into the action. According to John M. Blair in The Control of Oil, the world’s objectives in regards to oil should be: “(1) to increase supply by stimulating exploration, improving recovery, and developing alternate fuels (particularly for motor vehicle transportation); (2) to reduce demand; (3) to lessen the ability of the major companies to aggravate the shortage to their own advantage; and (4) to infuse competition, if possible, among the producing countries” (Blair, 1976). In this and every other case one cannot find evidence of efforts made by multinational corporations or host nations to reduce the demand of oil. Clearly, MNC’s and host nations will find it difficult to act for the long term good of the world in regards to the oil political economy. In the Red Line Agreement, the US found it more profitable to drop their position on the open door policy and cooperate. Therefore it follows those conditions for co-operation, in the world oil economy, between MNC’s, member companies and host governments, which are more easily achieved when the short term advantages of mutual cooperation is substantially higher than that of not cooperating. Question 02: What does your energy future look like in 2030? What is your energy scenario? This is not a reasonable question since you have just been exposed to some excellent background information from Lindemer presentation slides and we are beginning to look at the Shell technology background and scenarios this week. What are the factors driving your scenario, what is the politics, and what is driving demand, supply and price of energy? In 2030, economic recovery and growth improved living standards and promised that new energy technologies can be seen. But the challenge is how to meet the world’s growing energy needs while also reducing the impact of energy use in the environment. Global energy demand in 2030 will be almost 35 percent higher than today. The lengthy lead time needed for new projects means that energy supply cannot adjust rapidly enough to weaker demand. This increases market volatility. Concerns about employment, debt, economic competitiveness, energy security and climate change are now being used to justify this. The availability of abundant and affordable gas would reduce the need for accelerating energy efficiency, particularly in industry and buildings. More gas production will boost the liquid supply profile, reducing the need for early efficiency measures in transport. Most of the countries involved in energy consumption will figure out making investments in alternate options available for renewable energy so that customer attitudes can be shaped according to the most suitable solutions of efficiency measures. “The net effect is that global oil demand will increase. Demand will remain strong in Middle East and other developing countries. The success in unconventional gas production in the US”, which may be replicated elsewhere in the world, will underpin this demand growth (Watkins, 2011). The overall carbon dioxide future is likely to be closer to the challenge scenario than to plans. The emissions growth needs to be done in developing economies before an overall emissions reduction is achieved. We have to focused on maintaining levels of activity more efficiently, recognizing that success will require the application of technological solutions and changes in behavior. And this could only happen if governments and regulators introduce stricter efficiency standards and incentives. We have to make better use of available energy resources, and stop wasting what we have. Coupling the abundant, clean renewable energy that is available from the waves, winds and sun rays could provide enough power to run the world. But finding the economical ways to do so still remains to be a challenge. Innovations in energy storage, transmission and demand-side management may help to remove some of the constraints that have historically limited the growth of renewable energy (Yergin, 1999). Recent developments in superconductivity could radically improve the practical value of offshore wave-power generators and wind turbines that have been installed out of sight and mind of homeowners. Lithium-ion batteries can provide significantly more power than other battery technologies. The next generation lithium battery could be a Li-polymer battery, which is light-weight and can be produced in very thin form. Lithium batteries also have no memory effect; meaning that the way the battery is recharged over time does not impact the battery’s performance. In the next 20 years, almost everyone will be driving electric cars instead gasoline cars, as they are more efficient for personal transportation. An alternative way to store energy is in the form of hydrogen. The production of hydrogen requires the use of electricity to extract the gas from water. Hydrogen is only as clean as the power sources used to produce it. The future practical applications are the Solid Oxide Fuel Cell, which run on natural gas, and the Proton Exchange Membrane fuel cell, which run on hydrogen. References: Blair, John M., 1976. The Control of Oil, New York: Pantheon Books, pp. 31-34 Watkins, E., 2011. “Watching The World: Shell’s scenarios to 2050”. Oil & Gas Journal. Available at: [Accessed: 24 February 2011]. Yergin, D., 1999. The Prize: The Epic Quest for Oil, Money, and Power New York: Simon & Schuster. Read More