OSU February 22-23, 2010James L. Williams WTRG Economics Global Oil Market James L. Williams WTRG Economics Oklahoma State University February 22-23, 2010 Stillwater, Oklahoma Tulsa, Oklahoma

OSU February 22-23, 2010James L. Williams WTRG Economics Oil Price - It’s not Econ 101 A.Price = f ( Supply, Demand ) B.Price = f ( Myth, Perception, Reality ) C.Price = f (Conspiracies, Politics, OPEC) D.None of the above E.All of the above Our goal is to know what is knowable and to identify the major uncertainties.

OSU February 22-23, 2010James L. Williams WTRG Economics U.S. Petroleum Consumption 12 Year Low -10%

OSU February 22-23, 2010James L. Williams WTRG Economics Slow Recovery from 1978 – 1983 Drop -6% -19% 20 years

OSU February 22-23, 2010James L. Williams WTRG Economics Residential Sector Never Recovers 1978 – 1983 Drop -6% -19% 20 years

OSU February 22-23, 2010James L. Williams WTRG Economics Commercial Sector Never Recovers 1978 – 1983 Drop -6% -19% 20 years

OSU February 22-23, 2010James L. Williams WTRG Economics Power Sector Never Recovers 1978 – 1983 Drop -6% -19% 20 years

OSU February 22-23, 2010James L. Williams WTRG Economics Industrial Sector Eventually Recovers 1978 – 1983 Drop -6% -19% 20 years

OSU February 22-23, 2010James L. Williams WTRG Economics Transportation Sector Recovers Quickly from 1978 – 1983 Drop and Peaks before the Current Recession -6% -19%

OSU February 22-23, 2010James L. Williams WTRG Economics Consumption Lessons from the 1970s First Price Spike: 1973 Embargo Short-term drop in consumption More efficient autos (5 year delay) Better home insulation Fuel switching - natural gas, nuclear Second Price Spike: Iranian Revolution & Iraq Invades Iran Long-term effects from 1973 combine with reaction to new price increase US consumption drops 19% Returns to 1978 level 20 years later.

OSU February 22-23, 2010James L. Williams WTRG Economics World - Consumption

OSU February 22-23, 2010James L. Williams WTRG Economics OECD - Consumption

OSU February 22-23, 2010James L. Williams WTRG Economics Non OECD - Consumption

OSU February 22-23, 2010James L. Williams WTRG Economics China - Consumption

OSU February 22-23, 2010James L. Williams WTRG Economics India - Consumption

OSU February 22-23, 2010James L. Williams WTRG Economics Asia Ex. China, India & Japan

OSU February 22-23, 2010James L. Williams WTRG Economics U.S. Rotary Rig Count

OSU February 22-23, 2010James L. Williams WTRG Economics U.S. Rotary Rig Count & Revenue

OSU February 22-23, 2010James L. Williams WTRG Economics U.S. Rotary Rig Count - Oil

OSU February 22-23, 2010James L. Williams WTRG Economics U.S. Rotary Rig Count - Gas

OSU February 22-23, 2010James L. Williams WTRG Economics U.S. Rotary Rig Count - Horizontal

OSU February 22-23, 2010James L. Williams WTRG Economics International Rotary Rig Count - Oil

OSU February 22-23, 2010James L. Williams WTRG Economics OPEC Rotary Rig Count

OSU February 22-23, 2010James L. Williams WTRG Economics World Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics Non OPEC Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics Russia & USSR Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics Non OPEC Declines in Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics Non OPEC Gains Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics OPEC Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics Iraq, Iran, Kuwait & Nigeria Oil Production

OSU February 22-23, 2010James L. Williams WTRG Economics Saudi Swing Producer

OSU February 22-23, 2010James L. Williams WTRG Economics Venezuela - Chavez under threat?

OSU February 22-23, 2010James L. Williams WTRG Economics Rules for Oil Price Forecasting 1.Never mention a price & a date in the same talk. 2.If you can’t forecast well forecast often. 3.If you are ever lucky enough to get it right, don’t let anyone forget it

OSU February 22-23, 2010James L. Williams WTRG Economics Supply Interruption Price Risk

OSU February 22-23, 2010James L. Williams WTRG Economics Price Risk – Recession

OSU February 22-23, 2010James L. Williams WTRG Economics Inventory / Consumption

OSU February 22-23, 2010James L. Williams WTRG Economics Demand for Futures Contracts Greater Impact Than Physical Demand?

OSU February 22-23, 2010James L. Williams WTRG Economics Demand for Futures Contracts Greater Impact Than Physical Demand?

OSU February 22-23, 2010James L. Williams WTRG Economics Futures Price and Stocks at Cushing, OK

OSU February 22-23, 2010James L. Williams WTRG Economics Demand for Futures Contracts Greater Impact Than Physical Demand Downside Risk Index funds, ETFs and swap dealers have been often been exempt from limits on number of contracts they can hold. End of September futures and options held by this group represented the equivalent of 1/2 of all NYMEX contracts. They are net long (buyers) and the equivalent of 1/3 of all futures contracts. This increased demand for futures (not physical oil) has increased the futures price. The futures price impacts the spot or cash price.

OSU February 22-23, 2010James L. Williams WTRG Economics Politics, Geopolitics & Nature Supply Interruptions Wars Natural disasters Consumer Policies Taxes – Transportation, Carbon CAFÉ – More Efficient Auto Law Import duties / restrictions Price controls Producer / OPEC Policies Quotas Embargos Taxes Royalty rates

OSU February 22-23, 2010James L. Williams WTRG Economics OPEC Production Risk Production Quotas Saudi Arabia / Yemen Venezuela Embargo Unlikely Revolution Possible? Nigeria Niger Delta / MEND Iraq +2 million??? Iran Psychological Israel Attacks?

OSU February 22-23, 2010James L. Williams WTRG Economics OPEC Concerns * OECD economy * Asian economy * Strength of the dollar * Non-OPEC production gains * Fuel switching o Natural Gas o Nuclear o Biofuels o Coal to liquids o Gas to liquids * Taxes on petroleum products * Carbon Tax * Expansion of public transportation * Efficiency * Increased oil & gas exploration * Higher taxes on petroleum

OSU February 22-23, 2010James L. Williams WTRG Economics Consuming Nations Consumer concerns * Global warming * Peak oil * Security of Supply Economic Military * Supply interruption OPEC member Hurricane * Dependence * World economy Consumer responses * Fuel switching * Natural gas * Nuclear * Biofuels * Coal to liquids * Natural gas to liquids * Improved Storage Device * Batteries * Natural gas * Taxes on petroleum products * Expansion - public transportation * Efficiency * Increased oil & gas exploration

OSU February 22-23, 2010James L. Williams WTRG Economics Risks for 2010 Upside Saudi Arabia / Yemen Venezuela Nigeria Iraq Iran Hurricanes OPEC production cut Refineries Downside U.S. Recession European Recession Asian growth More OPEC Capacity More non-OPEC Capacity Fuel Switching Efficiency

OSU February 22-23, 2010James L. Williams WTRG Economics Better battery Gas to liquids Coal to liquids Oil from algae Nuclear Solar generation Wind generation Tidal generation Geothermal Petrol powered cars lose share to electric and natural gas Desuburbanization Smaller homes Passive solar heating & cooling homes & buildings More efficient everything

OSU February 22-23, 2010James L. Williams WTRG Economics Natural Gas

OSU February 22-23, 2010James L. Williams WTRG Economics Natural Gas Gás natural

OSU February 22-23, 2010James L. Williams WTRG Economics Contact Information James L. Williams WTRG Economics P.O. Box 250 London, Arkansas Phone: Website: