General Equilibrium Impacts of New Energy Technologies on Sectoral Energy Usage by David John Ramberg B.A. with Honors, Economics, University of Washington (1995) S.M., Technology and Policy, Massachusetts Institute of Technology (2010) Submitted to the Engineering Systems Division in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Engineering Systems at the MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 2015 c Massachusetts Institute of Technology 2015. All rights reserved. Author............................................................................ Engineering Systems Division May 12, 2015 Certified by........................................................................ Mort D. Webster Associate Professor Doctoral Committee Chair Certified by........................................................................ John E. Parsons Senior Lecturer, Sloan School of Management Thesis Supervisor Certified by........................................................................ Jessika E. Trancik Atlantic Richfield Career Development Assistant Professor in Energy Studies Doctoral Committee Member Certified by........................................................................ John Reilly Director, Joint Program on the Science and Policy of Global Change Doctoral Committee Member Accepted by....................................................................... Munther A. Dahleh William A. Coolidge Professor of Electrical Engineering and Computer Science Acting Director, Engineering Systems Division 2 General Equilibrium Impacts of New Energy Technologies on Sectoral Energy Usage by David John Ramberg Submitted to the Engineering Systems Division on May 12, 2015, in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Engineering Systems Abstract The dissertation examines conditions under which gas-to-liquids (GTL) technology penetra- tion shifts the crude oil-natural gas price ratio. Empirical research finds long-run relation- ships between crude oil and natural gas prices. Some studies include time trends that steadily evolve the pricing relationship, while others show a long-run relationship that occasionally shifts significantly. A common hypothesis is that technologies that increase substitutability or complementarity between fuels are the source of the price linkage. However, empirically measuring the effects of a gradually-penetrating technology across narrow time frames is not possible due to intervening economic shocks. This thesis examines the effects of an energy conversion technology penetration on the crude oil-natural gas price ratio through its influ- ence on sectoral energy use in the U.S. GTL must be less expensive and more efficient, and natural gas prices must be lower, than currently forecast for an effect to be measured. In the absence of a technology that explicitly allows for substitution between natural gas and petroleum-based fuels, different rates of demand growth result in a steadily-rising oil-gas price ratio. If a viable GTL technology successfully competes against petroleum-derived refined fuels, it dampens crude oil price increases and brings the oil-gas price ratio below the levels found in cases without a viable GTL technology. Doctoral Committee Chair: Mort D. Webster Title: Associate Professor Thesis Supervisor: John E. Parsons Title: Senior Lecturer, Sloan School of Management Doctoral Committee Member: Jessika E. Trancik Title: Atlantic Richfield Career Development Assistant Professor in Energy Studies Doctoral Committee Member: John Reilly Title: Director, Joint Program on the Science and Policy of Global Change 3 4 Acknowledgments This thesis could not have been completed without the assistance and support of my family, advisors, professors, and classmates. I am especially indebted to my thesis advisor, John Parsons, who has patiently shepherded me through each of my aca- demic crises. I am grateful my other doctoral committee members: Committee Chair Mort Webster, John Reilly (who has consistently found funding for me to complete my thesis and who resuscitated my research from near-death) and Jessika Trancik. Their input and advice has been invaluable to my work and personal development. Thanks to Professor Trancik, who agreed to act as Chair during my Defense because of Mort’s unexpected and unavoidable absence, I was able to defend my disserta- tion as scheduled. I am deeply indebted and grateful to her. Elizabeth Milnes also deserves thanks for managing to maintain my defense date despite the emergency. I thank the following people who offered their time to help with my research proposal and findings: Professors Chris Magee, Joe Sussman, Henry Jacoby, and Jim Utterback, and fellow students Bruce Cameron, Don Mackenzie, Zoe Szajnfarber, Regina Clewlow, Valerie Karplus, David Keith, Erica Gralla, Tom Heaps-Nelson, Judy Maro, Jennifer Morris, Bryan Palmintier, Julio Pertuze, Lara Pierpoint, Tommy Rand-Nash, and Nidhi Santen. Ineverwouldhavemadeitthroughcourseworkandgeneralexamswereitnot for the camaraderie of Claudia Octaviano, Rebecca Saari, Vivek Sakhrani (i.e., “The Best Study Group Ever”), Alex Jacquillat, Arzum Akkas, Maite Pena-Alcaraz, and the rest of my cohort. I owe my grasp of the GTAP database, GAMS and the EPPA model to the guid- ance of Sergey Paltsev, Henry Chen, John Reilly, Justin Caron and (again) Jennifer Morris. And thanks to Stephen Zoepf for being my "LaTeX guru" and fellow parent- grad student-amigo. Most of all I thank my wife Magalí for her patience, sacrifice and emotional sup- port when I was sure I would never finish the dissertation. My children, Viggo and Luella, gave me joy when I was spent and spent Magalí when I stayed in the office. Fi- 5 nally, I credit my parents, David and Molly Ramberg and my grandmother, Dorothy Eastman, with instilling in me the work ethic and respect for education without which I would never have found myself at MIT – let alone completed two degrees. My work at the Institute has been funded by BP, the MITEI ENI Energy Fellow- ship, the MITEI Martin Family Fellowship, and sponsors of MIT’s Joint Program on the Science and Policy of Global Change. The Joint Program on the Science and Pol- icy of Global Change is funded by the U.S. Department of Energy, Office of Science un- der grants DE-FG02-94ER61937, DE-FG02-08ER64597, DE-FG02-93ER61677, DE- SC0003906, DE- SC0007114, XEU-0-9920-01; the U.S. Department of Energy, Oak Ridge National Laboratory under Subcontract 4000109855; the U.S. Environmen- tal Protection Agency under grants XA-83240101, PI-83412601-0, RD-83427901-0, XA-83505101-0, XA-83600001-1, and subcontract UTA12-000624; the U.S. National Science Foundation under grants AGS-0944121, EFRI-0835414, IIS-1028163, ECCS- 1128147, ARC-1203526, EF-1137306, AGS-1216707, and SES-0825915; the U.S. Na- tional Aeronautics and Space Administration (NASA) under grants NNX06AC30A, NNX07AI49G, NNX11AN72G and Sub Agreement No. 08-SFWS-209365.MIT; the U.S. Federal Aviation Administration under grants 06-C-NE-MIT, 09-C-NE-MIT, Agmt. No. 4103-30368; the U.S. Department of Transportation under grant DTRT57- 10-C-10015; the Electric Power Research Institute under grant EP-P32616/C15124, EP-P8154/C4106; the U.S. Department of Agriculture under grant 58-6000-2-0099, 58-0111-9-001; and a consortium of 35 industrial and foundation sponsors (for the complete list see: http://globalchange.mit.edu/sponsors/all). 6 Contents 1Introduction 15 1.1 Gas-to-liquids(GTL)technology . 17 1.2 The crude oil-natural gas price relationship . 18 1.3 Research question and experimental design . 20 1.3.1 Hypothesis: an energy conversion technology will influence the crude oil-natural gas price relationship . 22 1.3.2 Experimentaldesign . 24 1.3.3 Relevance of this research . 26 1.4 Structure of this dissertation . 27 2TheoreticalBackgroundandmodelselection 29 2.1 Energy pricing relationships and price formation literature . 29 2.1.1 Using cointegration to identify long-run crude oil-natural gas price relationships . 30 2.1.2 Perspectives on fossil fuel price analyses . 39 2.2 Purposesofvariouseconomicmodels . 42 2.2.1 The Fossil Fuels Complex from a systems perspective . 42 2.2.2 Modelingtechnologiesintheeconomy. 50 2.3 Model selection: Computable General Equilibrium . 64 3KeyAspectsofGTLTechnologies 65 3.1 History of gas-to-liquids technologies . 65 3.2 Technical overview of GTL fuels and technologies . 70 7 3.2.1 Gas synthesis . 71 3.2.2 Fischer-Tropsch (FT) synthesis . 75 3.2.3 Productupgrading ........................ 78 3.2.4 Comparing emissions of GTL plants and petroleum refineries . 79 3.2.5 GTLfuelcharacteristics . 80 3.3 EconomicsofGTLprojects ....................... 81 3.3.1 DataonGTLprojects ...................... 82 3.3.2 DCFmodelparametersforaGTLproject . 88 3.3.3 Discounted cash flow models of GTL plants . 94 3.3.4 Profitability range of 18 GTL technologies . 105 3.4 GTL as a potentially disruptive technology . 107 3.4.1 IsGTLInnovative?. 108 3.4.2 IsGTLdisruptive? ........................ 109 4Methodology 111 4.1 TheCGEmodel.............................. 111 4.2 Adapting the model to this research . 113 4.2.1 RepresentingGTLinaCGEcontext . 115 4.3 Designing the experiment . 117 4.3.1 Factors that affect the crude oil-natural gas price ratio and GTL penetration ............................ 117 4.3.2 Experimentaldesign . 119 5Results 123 5.1 The effects of energy technology penetration on the crude oil-natural gas price relationship when distillate exports are restricted . 124 5.1.1 Differences between the shifts