VJC H2 Econ P1 QN

1    VICTORIA JUNIOR COLLEGE 2014 JC2 PRELIMINARY EXAM H2 ECONOMICS – PAPER NO. 9732/01 17 September 2014 8:00 – 10:15 am Wednesday 2 hours 15 mins Additional Materials: Answer Paper _________________________________________________________________________ READ THESE INSTRUCTIONS FIRST Write your name and class on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagram, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Answer all questions. At the end of the examination, fasten your wo rk securely, by question, using the strings provided. The number of marks is given in [ ] at the end of each question or part question. ___________________________________________________________________ This document consists of 8 printed pages.

2    Answer all questions. Question 1 US Natural Gas Boom Extract 1: America’s bounty - Gas works At the turn of the millennium, America’s conventional gas fields were in decline. Natural gas from shale rock was known to geologists but had never been worth extracting. Now shale contributes a third of America’s gas supplies. By 2035, the country’s share of total world supplies could be nearly half. A key reason for this rise is the improvement in hydraulic fracturing (or fracking) to obtain the gas, which caused the cost of producing natural gas to tumble down. Figure 1: USA natural gas price, US$* Source: The Economist, 2 June 2012 Cheap gas is helping various parts of America’s economy. The country’s industry uses around a third of its gas output. The biggest winner might be the petrochemicals industry. It uses gas as feedstock to make chemicals such as methanol and ammonia, a vital ingredient of fertiliser. These chemicals in turn pr ovide cheaper raw materials for carmakers, agriculture, household goods and builders, or go for export at prices to compete with the world’s lowest-cost producers, the state-owned petrochemicals firms in the Middle East. Dow Chemical and others have announced a raft of new investments in America to take advantage of low gas prices. The United States might export fewer cheap raw materials to countries with low labour costs to be made into goods to export back to America. The country could do the job itself, shortening the supply chain and returning manufacturing jobs to America in industries where petrochemicals are a large part of the cost base. There are non-industrial benefits too. Low gas prices have meant saving the average American household US$926 a year and lowering the cost of heating schools and other government buildings. Source: Adapted from, The Economist, 14 July 2012 Extract 2: America’s cheap gas: Bonanza or bane The shale gas billowing out of American soil is a source of concern as well as cheap energy. Instead of banking handsome profits, many of the oil and gas firms that drill for shale gas are suffering from the boom. Abundant supplies and slow growth in demand have sent gas prices crashing. After falling to below US$2 per mBTU (British thermal units) in early 2012, prices have now nudged back to US$3.40. But for m any drillers this is still not enough. Most gas wells require US$4 or more to cover costs. However, energy giants such as ExxonMobil, Shell and Chevron are able to put up with low prices.

3    To cork the flow, firms have shut down some existing wells and stopped investment in new ones. Exporting liquefied natural gas (LNG) would be another way to deal with the gas glut. Outside America, prices are typically much higher. But gas-consuming American businesses object. In the hope of keeping domestic gas prices ultra-low, they are lobbying the government to block exports. Source: Adapted from, The Economist, 2 March 2013 Extract 3: Thanks to LNG, spare gas can now be sold the world over Some 90 per cent of gas trade in the world is regional, where gas is supplied through pipelines; liquefied natural gas (LNG) connects the bits where the pipelines do not reach. The technology for LNG allows “stranded” gas, too far from its markets to travel down pipelines, to get to customers. Some gas-market analysts reckon that the growth in LNG and its ability to link regional markets will cause a more global and competitive market to emerge. However, building a liquefaction facility is highly capital-intensive. Big LNG projects need customers in order to secure finance for building the liquefaction and re-gas terminals and the specialist tankers that shuttle betw een them. And costs have been increasing steeply, making it ever harder for the export of natural gas to be profitable. Currently, only 19 countries export LNG, with the 10 biggest companies in the LNG market supplying more than two-thirds of the world’s demand. Source: Adapted from, The Economist, 14 July 2012   Extract 4: Can natural gas help tackle global warming? The United States has reached a striking mile stone. Carbon-dioxide emissions from the energy sector have sank to their lowest levels in 20 years. Many analysts give credit to the recent flood of cheap natural gas, which is shoving aside coal as America's top source of electricity. The burning of natural gas to produce a certain amount of energy creates only about half as much carbon-dioxide as from burning coal, with carbon-dioxide being the main gas warming the planet. Yet some environmentalists have argued that the accolades for natural gas are premature. While the shale gas boom has led to lower carbon pollution from U.S. power plants, the process to extract natural gas from shale rock can release plenty of methane into the atmosphere, which is a potent greenhouse gas. Officially, the Environmental Protection Agency (EPA) estimates that those methane leakage rates are about 3 percent only. But the EPA number is only an estimate, and it's based on industry data that is hard to verify. However, it is possible for gas producers to employ a range of technologies, from better pipeline maintenance to dry seals on compressors that can reduce the amount of methane escaping into the air. The view that natural gas has a modest role in a clean energy future is supported by the fact that natural gas is still a fossil fuel, which even if it produces less carbon than coal, still produces a fair amount of carbon. Studies have shown that replacing all of the world’s coal plants with natural gas would do little to slow global warming as compared to having a climate policy that explicitly reduces emissions. There is also the worry that the flood of cheap shale gas in the United States has undermined the advance of lower-carbon sources such as wind, solar, and nuclear power which could prove counterproductive in the long run. However, given the “constraints of money and politics”, natural gas may still have an important role as a “bridge fuel” en route to the cleaner and renewable energy sources. Source: Adapted from, Washington Post, 20 August 2012

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