1. World Petroleum Market Changes and Impact on U.S. Joanne Shore John Hackworth Energy Information Administration OPIS Supply Summit October 2004 www.eia.doe.gov

2. Overview What is driving petroleum prices? How high, how long? What does this mean for the U.S.?

3. Shifts in Crude Oil Price Levels Source: Reuters West Texas Intermediate Crude Cushing spot price

4. Demand & Supply Price Pressures Demand Supply

5. World Demand Swings: Not Above 2 MMB/D Since 1970’s & Recently Driven by Non-OECD Recent Growth Slowed Source: EIA; MMB/D – Million barrels per day

6. 2004 World Demand Surprisingly Strong Recent Growth Source: History – EIA; Forecast Short-Term Energy Outlook, October 2004

7. OPEC Production Adjusts with Demand and Price Source: EIA

8. Significant OPEC Production Growth Required in 2004-5 To Balance Demand Annual World Oil Demand Growth Annual Non-OPEC Capacity Growth Source: EIA; Forecast Short-Term Energy Outlook, October 2004

9. Supply/Demand Balance: Inventories Surprising demand growth tightens market But does that explain price? Demand Supply

10. World Market Balance is Tight, But Similar to 2003 Source: International Energy Agency Venezuela

11. What Other Factors Might Be Affecting the Market Surplus crude oil production capacity? Surplus world refining capacity? Wrong crude oil being available? Speculators?

12. Surplus Crude Oil Production Capacity Shrank in 2004 Source: EIA Estimates

13. Available Crude Capacity Affects Price Source: Reuters WTI April 1999-Aug 2004; EIA Calculations

14. Surplus Crude Oil Production Capacity & Inventories Explain Price Source: EIA

15. Other Crude Oil Price Increase Theories... We have run out of world refining capacity It’s the wrong crude oil It’s those speculators (not fundamentals)

16. Has World Refining Capacity Maxed Out, Driving Up Product Prices? Recent claims of being maximum sustainable capacity are exaggerated Comparing world product demand and capacity can be misleading Must look at regional utilizations However, demand growth is outpacing capacity growth – for the moment

17. Asia is Where Major Increases in Refinery Utilization is Occurring Asian utilization increased, but “Asia” varies immensely China and India are big demand drivers and are adding capacity (soon enough?) Singapore export center utilization increased

18. Singapore Utilization Pattern Source: EIA, IEA, BP

19. Atlantic Basin – Business As Usual Source: IEA 2004 Estimates

20. Are High Crude Prices Due to the “Wrong” Crude Oil being Available? OBSERVATIONIMPACT High crude oil prices Lower residual fuel prices relative to crude, thus downward heavy crude price pressure Marginal crude production is heavy More heavy crude oil means downward heavy price pressure High refining utilization Theoretically, conversion capacity becomes fully utilized, yield of residual fuel increases Heavy crude not the “best” to meet demand But better than none

21. Speculators’ Influence Speculators are a factor in the market, but this focus is sometimes misdirected Speculators ultimately hover around fundamentals If speculators were banned from trading, would prices drop to $20 or $30? No. Fundamental factors (production, demand, available surplus capacity) explain most of the price level

22. How High for How Long? EIA Forecast Uncertainties

23. Crude Oil Price Outlook: Higher for Some Time (Monthly Average) Sources: History: EIA; Projections: Short-Term Energy Outlook, October 2004.

24. World Crude Market Future – Timing is the Key 2004 high demand growth unexpected, –Growth ahead, but –How much? Limited surplus crude production capacity & geopolitical unrest (e.g., Iraq, Russia) added price pressure. –How fast will extra capacity emerge? –When will instability decline?

25. What Does the Tight World Market Mean for the U.S. U.S. demand growing Sources of product supply –U.S.? –Imports? Factors affecting product imports Price implications

26. U.S. Light Product Demand Growth Light products – Gasoline, distillate, jet Source: EIA, Short-Term Energy Outlook October 2004 Lower Growth

27. Refining Capacity Surplus Shrinking Creating Short-Term Challenge Gross Inputs Operable Capacity Source: EIA

28. Role of Gasoline Imports – Now and in the Future Historically, imports have been an essential supply source Need increased import volume in future Will import supply be available? –How essential these imports have been –Why imports have been a competitive supply source –Future impacts of U.S. specification changes –The impacts of international supply/demand

29. Imports Have Been Economic Source: EIA

30. Gasoline Net Imports – An Essential Supply Source PADD 1 Sources of SupplyImport Destinations 885 MB/D (2003) Source: EIA

31. Import Sources Nearby dedicated suppliers –Canada –Virgin Islands –Venezuela Nearby economic sources –Western Europe – symbiotic relationship –Eastern Europe –Latin America –Africa Other incremental supply –Middle East and Asia

32. Changing U.S. Sulfur Specifications May Change Import Sources Country20042005/20062010 U.S.12030 E.U.15050 (10)10 Brazil100040080 Argentina35050N/A South Korea13050N/A Source: Hart International Fuel Quality Center Gasoline Sulfur Specifications (ppm)

33. Some Historical Suppliers Cannot Produce Low Sulfur Gasoline But Others Filling In Source: EIA, Form EIA-814

34. Changing Specs and RFG Supply Sources into New York and Connecticut 2001 Jan-Jun2004 Jan-Jun Source: EIA Estimates Notes: P1 is PADD 1, P3 is PADD 3

35. EU-15 Demand Mix May Imply Excess European Gasoline Supply Source: History IEA; Forecast Purvin & Gertz

36. Gasoline Import Availability Stable or Increasing W. Europe gasoline/diesel imbalance continues Increased E. Europe export capability Dedicated U.S. import sources remain Potentially high U.S. gasoline margins Decreasing U.S. gasoline spec changes limit supply sources in short run Demand outside U.S. growing faster than refining capacity

37. Petroleum Product Price Pressures Crude prices up What about product prices?

38. Gasoline & Distillate Cracks (Cents per Gallon) Increasing Volatility & Level Since 2000 Gulf Coast Conventional - WTI Reuters Monthly Average Product Spot Prices minus WTI Spot Price

39. Sources of Product Price Pressures Tight world petroleum markets translate to high crude oil prices and higher product cracks Imports likely to be more expensive due to U.S. product specification changes & high world demand Increased potential of U.S. price volatility from: –Tight world markets (low inventories), –Increasing number of fuels, –High U.S. capacity utilization But higher product margins near term may encourage more U.S. refinery capacity expansion

40. Major Near-Term Uncertainties World demand remains strong, and winter is the world high demand season OPEC cannot control the market since it has little or no spare capacity Geopolitical unrest continues to cause crude oil supply interruptions Hurricanes created a temporary “gap” in U.S. supplies High refinery utilizations slow product rebalancing Timing to a more balanced market is highly uncertain