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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
