1. Two oil imponderables: markets and politics Bob Tippee, Editor, Oil & Gas Journal PVF Roundtable Aug. 19, 2008

2. Background: US energy politics  Era of regulation: ’70s (’30s for natural gas) through mid-’80s  Era of deregulation: mid-’80s through 2005  Reregulation now

3. Characteristics of the eras  Era of regulation Price and consumption controls Shortage Category cheating  Era of deregulation Adequate supply Low prices most of the time Inattention to energy Policy tilt

4. The policy tilt  Prices decontrolled  Consumption decontrolled  Domestic supply limits on… Federal leasing, permitting restrictions Refinery construction

5. The global context  Demand growing worldwide, too  Supply expansion reaching limits  Supply jolts of 2002, 2003, 2005

6. The reckoning

7. US gasoline and politics

8. New attention to energy  Energy Policy Act of 2005 -- reregulation  Bush in 2006: US “addicted to oil”  Energy Independence and Security Act of 2007 -- reregulation  Continuing pressure on candidates, lawmakers to do something about high gasoline prices

9. Proposition The market is beating politicians to the punch with price relief.

10. OGJ annual forecasts  Forecast & Review Jan. 21, 2008  Midyear Forecast July 14, 2008 Marilyn Radler, Senior Editor – Economics Laura Bell, Statistics Editor

11. High crude prices: the reasons  Fundamentals Demand rising faster than supply can expand Market’s “cushions” thin  Extraordinary forces Weak dollar Rush of scared money into commodities

12. World oil demand (MMb/d) Source: IEA except OGJ forecast for ’08. 86.8 +0.9% FSU +2.4% China +6.7% ME +4.6% LA +5.4% January: +1.8% 2009: 87.7 (IEA July)

13. World demand: observations  OECD demand down 1%  Non-OECD demand up 3.3%  GDP growth in Non-OECD oil exporters  Subsidies in Asia, Latin America, Middle East Lifting in much of Asia Staying in much of L. America, Middle East

14. World oil supply (MMb/d) *Plus other biofuels. Source: IEA Stocks +0.6 87.4 +2.2%

15. Non-OPEC supply (MMb/d) Source: IEA; Note: Angola (1.7 MMb/d), Ecuador (0.5 MMb/d) joined OPEC in ’07. 50 N.C. 2009: 50.6 (IEA July)

16. Yearly change: demand, non-OPEC supply (MMb/d) Source: IEA. Note: Angola, Ecuador joined OPEC in 2007. Expected non-OPEC up 1.1 MMb/d in January Expected demand up 1.5 MMb/d in January 2009 (IEA July): Demand +.800 Non-OPEC +.600

17. Pressure on OPEC (MMb/d)  Needed from OPEC in ’08 = 32.3  May OPEC crude (IEA) = 32.3  Group quota = 29.67  May OPEC capacity (IEA) = 34.97  Effective spare capacity (less Indonesia, Iraq, Nigeria, Venezuela) = 1.95 (1.7 in July IEA)  Stocks low

18. OPEC’s spare capacity (EIA)

19. OPEC production capacity in ’08  Saudi Arabia +.200-.300 to 10.95*  Nigeria +.200-.300 to 2.16  Angola +.170 to 2.05  Algeria +.050 to 1.45 via EOR Total OPEC: +600 Mb/d to 35.6 MMb/d (End-’07 f’cast: 35.8 MMb/d) Change net of decline in MM b/d *Plan: to 12.5 MMb/d by end ’09; Source: IEA

20. Summary: Global oil market  Extraordinary forces waning  Demand growth slowing  Supply growth in prospect  “Cushions” thickening

21. US product demand (MMb/d) 20.25 -2.2% Note: Before exports (1.55 MMb/d in ’08). Source: EIA for 2004-07 20.7 N.C. January: -0.6% All product categories down

22. Gasoline, distillate demand (MMb/d) Source: EIA for 2004-07 4.18 -1% 9.2 -1% ’08 ULSD forecast assumes 80% of distillate Red line = ULSD

23. Gasoline, ethanol use (MMb/d) ’08 is mandate (587 Mb/d) 9.2 -1% Source: EIA

24. ULSD, biodiesel use (MMb/d) Source: EIA 3.34 +13% Applied 80% factor to dist. demand

25. Industry oil imports (MMb/d) 12.95 -3.6% 64.0 Top numbers: % of total US demand: 64.966.363.165.9 Source: EIA for 2004-07 Imports down.48; demand down.45; liquids output up.06

26. US total liquids production (MMb/d) 6.97 +1.2% Source: EIA for 2004-07

27. US gas consumption (tcf) Source: EIA for 2004-07 23.86 +3.5%

28. Marketed gas production (tcf) 21.2 +5% Source: EIA for 2004-07

29. US gas imports (bcf) 4.2 -9.1% LNG 0.4 -51% Source: EIA for 2004-07

30. Summary: US oil market  Oil demand down  Gasoline demand down  Diesel use rising; supply a question  Ethanol use growing (mandate)  Oil production, refining capacity rising  Gas production zooming

31. Energy proposals now  OCS leasing off East Coast  More subsidies for politically favored energy sources  Heavy spending on alternative fuels  All in framework of “doing something” about high gasoline prices

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