WHY ARE OIL PRICES SO HIGH?

WHY ARE OIL PRICES SO HIGH?

David LongOxford Petroleum Research Associates

Flame 2005www.oxfordpetroleum.com

Not speculation...

-

100,000

200,000

300,000

400,000

500,000

600,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Op

en In

tere

st (

Co

ntr

acts

)

0

10

20

30

40

50

60

WT

I Nea

rby

$/b

arre

l

Commercial

Non-commercial

Non-reporting

Long

Short

Source: CFTC, Nymex

...but structural changeNYMEX WTI: NEARBY & FORWARD CURVES

10

15

20

25

30

35

40

45

50

55

Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05

$/b

bl

Source: Nymex

Key questions

• Are we running out of oil?• Will strong oil demand persist?• Will Opec expand capacity?• What is the future for oil prices?

Are we running out of oil?• No – plenty of oil liquids left to develop• But – remaining reserves concentrated in

Middle East and FSU• Non-Opec production excluding FSU and

unconventional oil is already on plateau• Non-Opec including FSU/unconventional

oil expected to peak around 2010• Middle East Opec will have to supply

most of the new oil to meet future demand growth

Problem is not how much oil ...

billion barrelsCumulative production 701Known oil reserves 890Undiscovered 210 - 728Total (without growth) 1800 - 2319Reserves growth 0 - 684Total (with reserves growth) 1800 - 3003Heavy/extra-heavy oil 460 - 600

Bitumen/tar sands 300 - 400Total (with unconventional) 2560 – 4003Natural gas liquids ~200Oil liquids yet-to-be produced 2000 - 3500Oil shales ~14,000

Source: USGS, Campbell & Laherrere

... but where it is

CUMULATIVE PRODUCTION

30%

9%

4%16%

27%

7%

7%

North America

South America

Europe

Former Soviet Union

Middle East

Africa

Asia Pacific

REMAINING & UNDISCOVERED

7%

6%

3%

17%

55%

7%5%

Source: USGS

Growing supply gap ...

Source: PFC Energy

... to be filled by Opec?

Source: IEA, World Energy Outlook, 2004

Will strong demand persist?

• Recent acceleration in global oil demand• Huge potential of developing economies • But are high growth rates sustainable?

– limits on carbon emissions– supply security issues– who will provide the extra capacity?

Accelerating demandGROWTH IN WORLD OIL DEMAND

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

mn

b/d

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

OECD Non-OECD ex FSU FSU World growth %

Source: IEA, Argus Fundamentals

Following the same path?

Source: IEA, World Energy Outlook, 2004

Sustainable growth?CHINA: OIL DEMAND FORECASTS

0

10

20

30

40

50

60

70

80

90

100

1965 1975 1985 1995 2005 2015 2025

mil

lio

n b

/d

China = US per capita demand by 2030

Current World oil demand

Past 5 years = 8% growth

Current US oil demand

Forecast = 4% growth

Source: BPSR, IMF, Opra

Is supply secure?

Source: IEA, World Energy Outlook, 2004

Will Opec expand capacity?

• Higher prices or bigger market share?• Low cost reserves favour bigger

market share• But market power favours higher oil

prices

Price or market share?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1918 1928 1938 1948 1958 1968 1978 1988 1998

Sh

are

of

wo

rld

cru

de

pro

du

cti

on

0

10

20

30

40

50

60

70

80

90

100

$/b

arr

el

Non-Opec crude

Opec crude

Oil price ($ 2003)

Opec formed in 1960

Source: DeGolyer & MacNaughton, Opec, BPSR, Argus Fundamentals

Low cost reserves = bigger share...

Known oil reserves

OpecNon-Opec

...but market power = higher prices

Source: IEA, World Energy Outlook, 2004, Opra

OPEC OIL PRODUCTION & NET REVENUES*

0

10

20

30

40

50

60

70

2005 2010 2015 2020 2025 2030

Pro

du

ctio

n, m

illio

n b

/d

0

100

200

300

400

500

600

700

Rev

enu

es, $

bill

ion

(20

00$)

Net revenues - low price scenario

Net revenues - high price scenario

Production - high price scenario

Production - low price scenario

* after operating and investment costs

What is the future for oil prices?

• Opec policies now favour high oil prices• No alternative to Middle East oil

reserves• Oil demand will be constrained by:

– high oil prices– carbon emission limits– supply security concerns

• Iraq remains a wild card

WHY ARE OIL PRICES SO HIGH?

David LongOxford Petroleum Research Associates

Flame 2005www.oxfordpetroleum.com

Downstream capacity shortage?

• Rising refinery utilisation rates• Widening quality differentials• Surging tanker rates

Rising utilisation rates

WORLD (EX FSU): REFINERY CAPACITY & UTILISATION

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1980 1983 1986 1989 1992 1995 1998 2001 2004

tho

us

an

d b

/d

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Capacity

Throughputs

Utilisation

Source: BPSR, Argus Fundamentals

Widening quality differentials

Source: Argus Fundamentals

Surging tanker rates

Source: Argus Fundamentals