Energy Turmoil Donald A. Norman Manufacturers Alliance/MAPI May 20, 2008 Steel Manufacturers Association Annual Members Conference May 19-21, 2008

Dollars per Barrel Source: Energy Information Administration Refiner Acquisition Cost The Price of Oil January May 2008

Cents per Gallon Source: Energy Information Administration Gasoline and Diesel Prices January March 2008

Forecast Note: Shaded area represents average (2.5 million barrels per day) World Oil Spare Production Capacity Is Projected to Increase, But Is Still Below Historical Norms Million barrels per day Source: EIA, Short-Term Energy Outlook, April 2008

Price of Oil in Dollars Up 220% Effective Price of Oil When Dollars Are Purchased with Euros: Up 120% The price of oil in dollars has risen faster than the price of oil in Euros Dollars Per Barrel Sources: Energy Information Administration, Federal Reserve Board 5

Source: Author’s calculations

Impact of a $10 Rise in Oil Prices on the U.S. Economy Percent Deviation from Baseline Projection Year 1Year 2Year 3 Real GDP Consumer Prices Source: Global Insight

But until oil prices reached $100 per barrel, the impact of higher oil prices on the U.S. economy was muted. Why?

Energy Expenditures as Percent of Disposable Income Percentage of income spent on energy is below historical peak but it is rising 6.6% 4.2% 9

Thousand Btu’s per chained 2000 Dollar Total Energy/GDP Energy intensity of the U.S. economy has fallen and will continue to do Source: Energy Information Administration 10 Forecast

11 Source: Energy Information Administration But the Tortoise (Auto Fuel Efficiency) has lost this race to date %∆Gasoline Consumption = %∆ in Number of Vehicles Plus %∆Miles Driven per Vehicle Minus %∆ Miles per Gallon

EIA Short-Term Oil Outlook YearPercent Change WTI Crude ($/bbl) Gasoline ($/gallon) Diesel ($/gallon) U.S. Oil Consumption (million bbls/day) China Oil Consumption (million bbls/day) World Oil Consumption (million bbls/day) Source: Energy Information Administration, Short-Term Energy Outlook, May

EIA Long-Term Oil Outlook 2006 (million bbls/day) 2030 (million bbls/day) Annual Rate of Growth, (Percent) Consumption U.S % China % India % Middle East % World % Production Conventional Oil % Unconventional Oil % Total Production % Source: Energy Information Administration, Annual Energy Outlook 2008, March

Million Barrels of Oil per Day EIA, IEA, Exxon (Average of Long-Term Forecasts--2007) Production reaches maximum in 2011 (CIBC 2008) The Cone of Uncertainty: Divergent Views World Oil Production in mmb/d difference

My Current Outlook Short-Term relief in 2009 as new oil production capacity comes on stream Longer-Term: Production will reach a plateau without improved access/economics World oil demand will grow (but U.S. consumption will fall if the price remains high) Demand growth in the Middle East will reduce OPEC exports, adding further pressure on prices A rise in the value of the U.S. dollar would help to reduce the price of oil (and other commodities)

Unsolicited Advice to President-Elect __________ and Congress: A Full Court Press for Energy Policy Oil and Natural Gas—Open more areas to drilling and development LNG Terminals—Aside from new domestic production, our only source for new natural gas supplies Clean Coal—The reality is that coal is here to stay Nuclear Power—Let’s get going! Energy Conservation—But how? Mandates? Government Investment? Energy Taxes? Market Forces? ? Ethanol—What happened to this promise? Solar and Wind—But beware of overly optimistic projections