Oil Prices Primer Why Prices are Dropping and If it Will Stop April 1, 2016 Producer: Ben Booker Edited by: Katharine Conlon Director: Afzal Bari

Oil Prices Have Dramatically Declined in the Past Decade OIL PRICES April 1, 2016 | Ben Booker Source: National Journal, Axis Data and Charts, U.S. Energy Information Administration Prices of West Texas Intermediate Crude Oil in U.S. Dollars 1

Prices are Falling to Levels Not Seen Since the Early 2000’s OIL PRICES April 1, 2016 | Ben Booker Source: National Journal, Axis Data and Charts, International Monetary Fund, December 9, Prices of Brent Crude Oil in U.S. Dollars 2

Oil Prices are Falling Due to a Supply Glut and Slowing Demand OIL PRICES April 1, 2016 | Ben Booker Source: Mike Scott, “What’s Driving the Plunge in Oil Prices?,” Fortune, December 22, Reasons For Falling Crude Oil Prices ReasonDetails Supply Has Increased Dramatically in the Past Six Years U.S. oil production has increased substantially due to hydraulic fracturing Other suppliers have maintained their oil production Demand has slowed down unable to keep up with increased supply China’s growth has slowed down in the past couple of years European economy has stagnated Emerging markets are slowing down as well Greater energy efficiency and transition to green technology has reduced demand Producers are having difficulty coordinating production The Organization of Petroleum Exporting Countries (OPEC) has found it difficult to coordinate oil production Continued tensions remain between Russia and OPEC about oil productions due to market share 3

U.S. Production Has Increased Substantially Due to Better Oil and Gas Exploration Techniques OIL PRICES April 1, 2016 | Ben Booker Source: Jude Clemente, “ U.S. Oil Production Forecasts Continue to Increase,” Forbes, May 7, 2015; Lizzy Gregory, “Fracking,” Noun Project, March 16, 2016; Adam Terpening, “SAAGD,” Noun Project, March 16, 2016 Why U.S. Oil Production Has Increased More Revenue High oil prices made expensive oil and gas exploration operations profitable like offshore drilling and fracking Hydraulic Fracking Hydraulic fracking uses high-pressure water and sand to reach deposits thought unreachable. Greatly expands the potential oil and gas deposits in the U.S. Horizontal Drilling Horizontal drilling has further opened up areas to production since many oil reservoirs are horizontal, not vertical 4

The U.S. Has Surged to be the Top Oil Producer Causing Unrest Amongst OPEC Members Like Saudi Arabia OIL PRICES April 1, 2016 | Ben Booker Source: CNN Money, “Top Oil Producers,” February 11, Top Ten Oil Producers 5

U.S. Overtook Saudi Arabia as the Top Oil Producer in 2014 OIL PRICES April 1, 2016 | Ben Booker Source: CNN Money, “World’s Top Oil Producers,” February 11, Oil Production in Millions of Barrels per Day on Average ■ United States ■ Saudi Arabia ■ Russia 6

Unlike in Previous Supply Gluts, OPEC Has Not Decreased Production Due to Fears of Losing Market Share OIL PRICES April 1, 2016 | Ben Booker Source: Nick Cunningham, “Why Saudi Arabia Won’t Cut Oil Production,” CNN Money, December 23, 2015; Counting the Cost, “Why is OPEC Refusing to Cut Oil Production,” Al Jazeera, December 13, 2015; Vladimir Soldatkin, “Russia Oil Output Freeze in February, First Sign of Freeze Deal,” Reuters, March 2, 2016; Alex Lawler, “Oil Below $37 As U.S. Inventory Rise Counters Output Freeze Plan,” Reuters, March 2, 2016 Who is Not Decreasing Oil Production and Why Gulf States wants to undercut U.S. production OPEC, more specifically, Saudi Arabia and other Gulf States want to undercut new non-OPEC competitors like the U.S. Saudi Arabia is concerned that if OPEC lowers production, the U.S. will continue to produce and take some of OPEC’s market share from them U.S. oil is generally more expensive to produce, which Saudi Arabia hopes will make U.S. production unsustainable at low oil prices Not all OPEC members agree with the Saudi’s perspective, especially Venezuela and Algeria who are facing huge budget deficits because of low oil prices Russia is the major non-OPEC producer who is fighting production cuts Russia is the second largest oil exporter after Saudi Arabia Russia is facing financial difficulties because of low oil prices, but has been unwilling to lower production They are concerned both with Saudi Arabia and the U.S. taking a larger share of the oil market if they cut back on production OPEC and Russia Make a Deal OPEC and Russia made a deal in February 2016 that they would freeze oil production to January levels February production indicated Russia had abided by the agreement The problem is January production was unusually high so production is locked at a high production rate, which will not ease the supply glut Russian fears emerged though when U.S. oil crude supply was higher than expected undercutting oil prices 7

Saudi Arabia is Also Not Lowering Production Because of Geopolitical Tensions with Iran OIL PRICES April 1, 2016 | Ben Booker Source: Nick Cunningham, “Why Saudi Arabia Won’t Cut Oil Production,” CNN Money, December 23, 2015; Counting the Cost, “Why is OPEC Refusing to Cut Oil Production,” Al Jazeera, December 13, Background to Saudi Arabia and Iran Geopolitical Tensions V.S. Saudi Arabia’s Goals and Interests Saudi Arabia is the leading Sunni Arab power in the Middle East Currently engaged in proxy wars with Iran in Syria and Yemen Wants to keep production high to undercut Iran’s oil production as they reenter the oil market The hope is to weaken Iran’s economy and stop them from funding proxy wars Iran’s Goals and Interests Iran is the leading Shia power in the Middle East Currently supports Shia/Alawite leadership in Iraq, Lebanon, Syria and Yemen countering Saudi’s Sunni influence Sanctions are being lifted after nuclear deal permitting Iran to reenter oil market Iran wants to reclaim oil market share it lost while being under sanctions 8

Major Oil Producers are the Biggest Losers, While Major Importers in Europe and Asia Benefit From Low Oil OIL PRICES April 1, 2016 | Ben Booker Source: Tim Bowler, “Falling Oil Prices: Who Are the Winners and Losers?,” BBC, January 19, 2015 Major Winners and Losers Because of Low Oil Prices ■ Winners ■ Mixed ■ Losers Venezuela is the worst hit by oil prices due to large budget deficits and political instability 9

Oil Demand Continues to Fall Due to Slowing Chinese Economic Growth and Anemic Economies Elsewhere OIL PRICES April 1, 2016 | Ben Booker Source: Bradley Olson, “If China Slows, Where Will Oil Demand Go?,” Market Watch, January 25, 2016; World Bank, “GDP Growth Annual,” March 2016; A. Gary Shillin, “Truth-Telling on China’s Economy,” Bloomberg View, November 18, Effect of Slow Economic Growth on Oil Prices Chinese Growth Has Slowed and Economy Is Transitioning China’s economy grew at 6.9% last year down from its double digit growth over the past 15 years This has resulted in a decline in the amount of oil it is importing Estimates are Chinese oil demand in the next fifteen years will be less than half of what it was in the previous 15 years due to slower growth and increasing environmental regulations Besides slowing down,. China’s economy is transitioning away from an industrial manufacturing to service-based economy Industrial sector consumes more energy than service sector resulting in a lower oil demand Developed and Developing Economies are Slowing Down as Well European Union and Japan have both had very slow growth averaging GDP growths of.83% and 1.4% respectively since 2010 Many emerging economies have been heavily dependent on Chinese demand to bolster their growth Now their economies are slowing or even going into recessions like Brazil’s, which shrunk 3% 10

Increasing Energy Efficiency, Regulations and Temperatures are Contributing to Low Oil Demand OIL PRICES April 1, 2016 | Ben Booker Source: Mike Scott, “What’s Driving the Plunge in Oil Prices?,” Fortune, December 22, 2015; Brad Plumer, “Why Crude Oil Prices Keep Falling and Falling, in One Simple Chart,” Vox, February 8, 2016 Other Reasons Oil Demand is Low ReasonBackground and Detail Economies are Becoming More Energy Efficient Mandatory energy efficiency standards have been rising resulting in less energy consumption This includes fuel efficiency standards which has led to less oil consumption Technology has driven greater energy efficiency as well Climate and Energy Agreements U.S. and China have both committed to carbon emission reductions Global community approved the Paris Climate Accord, which puts added pressure to divest from fossil fuels like oil Warmer WeatherGlobally, the past winter has been the warmest winter on record Warmer weather reduced energy demand and thus the need for more oil 11

Oil Prices May Remain Low for the Next Few Years Due to Untapped Supply and Climate Change Regulation OIL PRICES April 1, 2016 | Ben Booker Source: Mike Scott, “What’s Driving the Plunge in Oil Prices?,” Fortune, December 22, 2015; Brad Plumer, “Why Crude Oil Prices Keep Falling and Falling, in One Simple Chart,” Vox, February 8, 2016; Ted Grajeda, “Iraq,” Noun Project, March 21, 2016; Ted Grajeda, “Libya,” Noun Project, March 21, 2016 Reasons Why Oil Prices May Remain Low ReasonBackground and Detail U.S. oil production is becoming more competitive Saudi Arabia is banking on low oil prices driving U.S. oil producers out of business because their drilling operations are more expensive However, U.S. oil producers have adapted to low oil prices and have become more efficient U.S. has a backlog of drilled, but uncompleted oil wells that when finished, could add another 400,000 barrels of oil per day Iran, Iraq,and Libya still have plenty of potential oil reserves Iran is now ramping up production after sanctions have been lifted adding more oil to the market to reclaim its market share Iraq and Libya have had lower production than usual because of conflict As they stabilize, more oil will enter the market Climate regulation After the Paris Climate Agreement, countries are under pressure to diversify their energy from oil and gas Markets are expecting carbon to be priced soon driving away long-term oil investment Auto industry has indicated they are wanting to transition to alternative fuels All of this will reduce demand for oil, which may lower prices 12