Markets and Politics

1
Markets and Politics

• Bob Tippee
• Editor, Oil Gas Journal
• PVF Roundtable General Assembly Meeting
• Aug. 18, 2009

2
Crude prices
3
Oil prices track stock prices
Source KBC Market Services, Monthly Oil Market
Outlook, Aug. 6, 2009
4
World oil demand (MMb/d)
83.9 -2.8
86.3 -0.2
FR 85.4
Source IEA
5
IEAs demand view
2009 vs. 2008
Million b/d
2008 vs. 2007
To 83.8 MMb/d for 09
Forecast month
Source IEA Monthly Oil Market Report for each
month indicated
6
World oil supply (MMb/d)
84.6 -2.2
FR 85.7
Plus other biofuels. Source IEA
7
Non-OPEC supply (MMb/d)
Source IEA Note Includes OPEC members as of
1-1-09. Angola (1.7 MMb/d), Ecuador (0.5 MMb/d)
joined OPEC in 07. Indonesia withdrew from OPEC
in 08.
8
OPEC NGL (MMb/d)
5.2 11
2010 6.1
Source IEA
9
Forcing balance (MMb/d)
Source IEA OGJ assumption.
10
Observations (MMb/d)

• Call 28.2
• Quota 24.85
• Call - Iraq _at_ 2.4 25.8
• June OPEC-11 crude 26.12

11
OPECs market view
Source OPEC Monthly Oil Market Report, January
2009
12
OPEC production/OECD stocks
Source OPEC Monthly Oil Market Report, June 2009
13
OECD stocks (days supply EIA)
14
OPEC spare capacity (EIA)
15
The market a snapshot

• Demand will be down in 09 but the amount of
  expected decline is stabilizing
• Cushions thick stocks, pn capacity
• OPEC has tried to follow demand down with
  production cuts
• Demand revival depends on economy

16
IMFs World Economic Outlook
Percent quarter-over-quarter annualized.
Updated July 8, 2009.
17
The questions

• What drives prices?
• Fundamentals (supply and demand)
• Investment flows
• Currency fluctuations
• Will OPEC wait too long to raise output?
• Non-OPEC output?
• Role of speculators?

18
US energy shares
Source EIA for 2004-08
19
US product demand (MMb/d)
18.76 -3.4
18.73 -3.9
Note Before exports (1.76 in 08 1.85 in 09).
Source EIA for 2004-08.
20
Gasoline, distillate demand (MMb/d)
9.01 .02
3.76 -4.7
Source EIA for 2004-08
21
Gasoline, ethanol use (MMb/d)
9.01 0.2
EISA mandate 2.4 MMb/d in 2022 (all biofuels)
09 is mandate (724 Mb/d)
Source EIA for 2004-08
22
ULSD, biodiesel use (MMb/d)
3.008 -6.2
Applied 80 factor to dist. demand
08 production 44,500 b/d 08 consumption
20,900 b/d 22 mandate 326,160 b/d
Source EIA for 2006-08
23
Industry oil imports (MMb/d)
65 of demand
12.15 -5.8
Source EIA for 2004-08
24
US refining
MMb/d

Source EIA for 2004-08
25
US total liquids production (MMb/d)
7.05 4.6
Source EIA for 2004-08
26
US gas consumption (tcf)
22.75 -2.0
Source EIA for 2004-08
27
Marketed gas production (tcf)
21.23 -1.0
21.2 5
Source EIA for 2004-08
28
US gas imports (tcf)
LNG 0.53 50
Source EIA for 2004-08
29
US drilling--completions
43,384 -16.7
36,788 -29.4
Source API for 2004-08
30
US drilling rig count
1,503 -19.5
1,235 -33.9
Source Baker Hughes for 2004-08
31
The budgets costs (ex. climate)
32
Renewables instead of oil 1
From Treasury Department explanations of budget
oil, gas provisions
The measure or its result, like other oil and
gas preferences the administration proposes to
repeal, distorts markets by encouraging more
investment in the oil and gas industry than would
occur under a neutral system
33
Renewables instead of oil 2
To the extent the measure or result
encourages overproduction of oil and gas, it is
detrimental to long-term energy security and is
also inconsistent with the administrations
policy of reducing carbon emissions and
encouraging the use of renewable energy sources
through a cap-and-trade program.
34
Closing the gap takes money
Source US Energy Information Administration
35
Arithmetic of subsidies - 1

• Oil gas in 1981
• 38.1 x 1015 btu
• 10.9 billion subsidies (percentage vs. cost
  depletion and expensing ED costs)

• Ethanol in 2007
• 550 x 1012 btu
• 3.2 billion subsidies

29/MMbtu
5.82/MMbtu
Source Federal Financial Interventions and
Subsidies in Energy Markets 2007, Energy
Information Administration, April 2008
36
Arithmetic of subsidies - 2

• Oil gas in 2007
• 30.57 x 1015 btu
• 1.74 billion subsidies (various, mostly for
  small producers)

• Ethanol in 2007
• 550 x 1012 btu
• 3.2 billion subsidies

5.82/MMbtu
5.7/MMbtu
37
Cost to displace oil and gas

• By 5 from projected 2020 usage levels
• Assuming 6/MMbtu subsidization of 2.93 quads of
  solar, wind, and biofuels
• Requires subsidies totaling 17.6 billion

NOTE 2007 subsidy levels solar 7.16/MMbtu,
wind 6.87/MMbtu (production), 5.82/MMbtu
ethanol (consumption/blending)