Workshop on the economic impact of rising oil prices

DIRECTORATE-GENERAL INTERNAL POLICIES OF THE UNION - DIRECTORATE A -

ECONOMIC AND SCIENTIFIC POLICIES

Workshop on the economic impact of rising oil prices

28 June 2006 European Parliament Brussels

9.30h – 18.00h

Table of Contents Page n° Programme 01

Session I 04

Part 1: Macroeconomic consequences of rising oil prices 04Dietrich DOMANSKI, BIS 05Marcelo SANCHEZ, ECB 17Dr. Hans DE JONG, ABN Amro 30 Part 2: Consequences of rising oil prices for financial stability

43

Jeffrey CURRIE, Goldman Sachs 44Christie SANDERS, Sanders Research 102Pekka LÖSÖNEN, EUROSTAT 138Dr. C. CAMPBELL, Association for the Study of Peak Oil (ASPO) 157 Session II Part 1: Microeconomic consequences of rising oil prices, competitiveness and taxation

198

David BALDOCK, Institute for European Environmental Policy 199Stephan HERBST, Toyota Motors Europe 207Dr. Manfred MEIER, Volkswagen 227Olivier SCHAEFFER, EREC N/A Part 2: Geopolitics and Security of Supply 239Dr. Hasan QABAZARD, OPEC 240Pierre SIGONNEY, TOTAL 251Raphael SAUTER, SPRU Energy Group, University of Essex 265Alexandre CLAUWAERT, SUEZ 275

DIRECTORATE-GENERAL INTERNAL POLICIES OF THE UNION - DIRECTORATE A -

ECONOMIC AND SCIENTIFIC POLICIES

Workshop on the economic impact of rising oil prices Draft Programme

28 June 2006

European Parliament Brussels Room ASP 5G3 9.30h – 18.00h

9.30 - 12.30 Session 1 Macroeconomic consequences of rising oil prices

• Comparing previous oil price shocks to the current situation: Why does the economy react differently this time round (low inflation, so far no second-round effects)?

• What macroeconomic consequences can be expected from the current oil price situation? - inflation - demand - employment - growth

• Which macroeconomic policies would be appropriate?

Guest speakers: - Dietrich Domanski, Head of Macroeconomic Monitoring Unit, BIS - Marcelo Sanchez, Senior Economist, ECB - Drs Han. de Jong, Chief Economist, ABN Amro 10.45 - 11.00 Coffee break

Page 1 of 291

Consequences of rising oil prices for financial stability

• Is there speculation going on in the financial markets in a noticable volume? Are new instruments being created to speculate on oil price changes? Can speculation or the use of speculative instruments seriously endanger financial stability?

• How can the lack of transparency be tackled (Joint Oil Data Initiative)? • Recycling of petrodollars • Peak oil discussion

Guest speakers: - Mr. Jeffrey Currie, Goldman Sachs, Managing Director and Head of Commodities Research - Christie Sanders, Managing Director Sanders Research - Pekka Lösönen, Eurostat - Joint Oil Data Initiative Representative - Dr C. Campbell, Chairman & Founder of the Association for the study of Peak Oil (ASPO) 14.30 - 18.00 Session 2 Microeconomic consequences of rising oil prices, competitiveness and taxation

• Sectoral impacts due to substitution effects based on the assumption of high standing oil prices. Who will be the winners/losers? Which are the impacts on economic sectors, notably on transport, petrochemicals, automotive, farming, tourism etc. Which types of substitution effects might occur?

• Potential impacts on trade due to rising transportation costs. Which are the impacts on division of work within firms and among firms, their current organisation being based on cheap transportation costs?

• How to take advantage of the move towards a new era of high oil prices in terms of competitiveness and new economic activities for the EU? Can public policies speed up the adaptation of the EU economy to an era of high oil/fossil energy prices? Which are the best policy tools: industrial policy, R&D policy, taxation? Is there room for economic policy to decrease the level of uncertainty about future energy situation? Which are the links with environmental considerations, notably environmental taxation?

• How to take into account all costs related with energy production, consumption and use, notably negative side effects (negative externalities) so that economic decisions are based on all parameters? How to better 'internalise' negative externalities due to oil consumption? Opportunity for an EU tax?

Guest speakers: - David Baldock, Institute for European Environmental Policy - Stephan Herbst, Toyota Motor Europe, Manager Environmental Analysis and Strategy - Dr Manfred Meier, Director Technology Science,Volkswagen, - Olivier Schaeffer, Policy Director, EREC Panellist: - Robert Klotz, European Commission, DG Comp, Unit Energy and Water

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16.00 - 16.15 Coffee break Geopolitics and Security of Supply

• Visionary and strategic assessment of the situation • Are there competition issues on a global level? (oligopoly structure) • Which would be the best structure of the EU energy market taking into account the need

for security of supply? • Oil versus gas – repercussion on the gas market and gas price changes • New industrial revolution, futuristic visionary thinking, moving towards an exit from oil

dependency • To which extent can renewable energy contribute to security of supply? Which renewable

energy should be preferred? Which are the drawbacks of renewable energies? Are all renewable energies neutral for the environment?

Guest speakers: - Dr Hasan Qabazard, Director Research Division, OPEC - Mr Pierre Sigonney, Strategy Department of Total - Raphael Sauter , SPRU Energy Group University of Sussex (author of Exploiting the oil GDP effect to support renewables redeployed) - Alexandre Clauwaert, Strategy department Suez (gas, electricity and renewables) Panellist: - Ioannis Samoulidis, European Commission, DG Tren, Energy Policy and Security of Supply

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Session I Part 1: Macroeconomic consequences of rising oil prices

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28 June 2006

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1

Why is the current oil price shock different? A macroeconomic assessment

Workshop on the economic impact of rising oil pricesEuropean ParliamentBrussels

Dietrich DomanskiHead of Macroeconomic Monitoring Bank for International Settlements

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2

Overview

2

How large is the current oil price shock compared to those in the 1970s?Why have oil importing economies been much more resilient than in the past?Will the effects of high energy prices remain benign?

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3

Oil prices have reached new record highs in nominal terms and have risen sharply in real terms...

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4

...while the economic upswing has remained intact in oil importing countries

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The income effect of rising oil prices has been much smaller than in the past...

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...and the re-spending of petrodollars has helped European exporters

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Inflation has remained subdued...

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...supporting domestic demand growth through easy financing conditions

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9

Oil prices are expected to remain high...

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...while inflation risks might at some point rise

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Credible monetary policy has helped to avoid second round effects

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12

Conclusion

Oil prices have risen primarily because of strong global demand growth and not disruptions of oil supply.Low and stable inflation has mitigated the impact of rising energy prices on oil importing countries.But concerns about oil supply have grown and inflation risks seem to have increased recently.

12Page 16 of 291

Oil price shocks and macroeconomic developments

Marcelo SánchezEuropean Central Bank


European Parliament, Brussels, 28 June 2006Page 17 of 291

1 Motivation

• Monitoring developments over the medium term

• highlight in red;

Outline

• Transmission channels

• The evidence

• Additional remarks

Page 18 of 291

1 Motivation



Outline


• The evidence


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Oil price shocks are expected to have• supply-side effects: higher inflation and lower

real output• terms-of-trade effects: support aggregate

demand in oil exporting countries and lower it in oil importing countries

Transmission channels

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1 Motivation



Outline


• The evidence


Page 21 of 291

Empirical analysis favours non-linear models- non-linear models predict larger macroeconomic impact that the linear one - “scaled” model rescales oil prices taking into account their changing variability over time

The evidence

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The evidence: A 100% oil price shock

A ) L in e a r m o d e l

E c o n o m ie s a fte r 1 y e a r a fte r 2 y e a rs a fte r 1 y e a r a fte r 2 y e a rsE u ro a re a -0 .5 -1 .3 1 .7 1 .6 F ra n c e -0 .7 -2 .0 2 .5 3 .1 G e rm a n y -0 .2 -0 .5 1 .1 1 .2 I ta ly -0 .5 -1 .8 3 .9 4 .4U S -1 .2 -2 .7 3 .2 4 .4

B ) S c a le d m o d e l

E c o n o m ie s a fte r 1 y e a r a fte r 2 y e a rs a fte r 1 y e a r a fte r 2 y e a rsE u ro a re a -2 .2 -4 .3 3 .3 2 .2 F ra n c e -2 .4 -4 .7 5 .7 7 .4 G e rm a n y -2 .6 -3 .7 1 .5 1 .3 I ta ly -3 .7 -5 .4 9 .8 1 2 .7U S -3 .4 -5 .0 5 .0 5 .9

re a l G D P g ro w th in f la t io n

re a l G D P g ro w th in f la t io n

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The evidence: How much the shock explains

Non-linear model

Economies after 1 year after 2 years after 1 year after 2 yearsEuro area 6.0 9.1 10.1 6.7 France 6.0 8.7 16.1 12.3 Germany 1.0 1.9 3.1 2.6 Italy 6.2 7.7 14.2 10.1US 3.8 5.0 8.4 5.9

real GDP growth inflation

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The evidence: Does oil still shock?

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The evidence: Does oil still shock?

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1 Motivation



Outline


• The evidence


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Additional remarks

• Labour market- oil shocks found to lower real wages and raise unemployment

• Long-run growth- oil shocks seen as discouraging investment, with an adverse effect on capacity expansion

• First versus second round effects- hard to disentangle; both likely to play a role

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[The end]

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Economic impact of rising oil pricesPresentation to workshop of the European Parliament

28 June 2006

Han de Jong, Chief Economist

Page 30 of 291

2

Key areas of focus

Differences between various oil price shocks and the implications

Desirable policy response

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3

Different impact 70s/80s versus now

Smaller impact on inflation

Smaller negative impact on economic activity

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4

Differences with 1970s and 1980s

Magnitude of oil price rise

Importance of the oil price

Cause of the oil price rise

Economic setting- Transmission process

- Policy setting

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5

Oil price (USD/barrel)1980: real = nominal

Source: Thomson Financial

010203040506070

70 75 80 85 90 95 00 05nominal real

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6

36 months cumulative change of real oil price

Source: Thomson Financial

-100

0

100

200

300

400

500

60 65 70 75 80 85 90 95 00 05

USD EUR

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7

Oil use per unit of real GDPUS 1970=100

Source: Thomson Financial, BP

020406080

100120

65 70 75 80 85 90 95 00 05

United States Germany France UK

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8

Real oil priceUSD/barrel

Source: Thomson Financial, BP

0

10

20

30

40

1965 1970 1975 1980 1985 1990 1995 2000not adjusted adjusted for oil intensity

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9

Cause of oil price increase

70s and 80s: exogenous shocks

Now: demand driven disturbance of supply-demand balance

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10

Economic setting

Transmission process globalisation has put a lid on inflation (temporary or permanent?)

Policy setting: monetary policy

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11

Conclusions economic impact

Inflation remains a risk

Modest growth impact

Redistribution of wealth to oil exporters

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12

Desirable policy response

Monetary policy?

General government- Lower fuel taxes?

- Budgetary stimulus?

- Tax oil industry’s profits?

- Market transparancy?

- Stimulate alternatives?

Page 41 of 291

13

Disclaimer

This presentation is provided to you for information purposes only. Before investing in any product of ABN AMRO Bank N.V., you should inform yourself about various consequences that you may encounter under the laws of your country. ABN AMRO Bank N.V. has taken all reasonable care to ensure that the information contained in this document is correct but does not accept liability for any misprints. ABN AMRO Bank N.V. reserves the right to make amendments to this presentation.

Page 42 of 291

Session I Part 2: Consequences of rising oil prices for financial stability

Page 43 of 291

Reassessing long-term commodity prices

June 2006

Jeffrey Currie Goldman Sachs International 44 (0)20 7774 6112 [email protected]

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For important disclosures, see page 55, go to http://www.gs.com/research/hedge.html, or contact your investment representative.

The Goldman Sachs Group, Inc.

Page 44 of 291

The revenge of the old economy

Page 45 of 291

Goldman Sachs Global Investment Research 3

Poor returns in commodity sectors led investment to flow elsewhere

Source: Compustat and Goldman Sachs Commodity Research.

Cash Return on Cash InvestedS&P 500 excluding Financial sector, 1991- 2000 Average Return

0%

5%

10%

15%

20%

25%

Overal

l

Utilities

Materia

ls

Energy

Indus

trials

Teleco

mmunica

tion S

ervice

s

Consu

mer Disc

retion

ary

Inform

ation

Tech

nolog

yCon

sumer

Staples

Health

Care

Commodity Sectors

Page 46 of 291


Return on capital employed in energy sectors has remained below that in the rest of the economy, leading to underinvestment in energy market infrastructure

Source: Compustat and Goldman Sachs Commodity Research.

percent return

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Oil & Gas Drilling Integrated Oil & GasOil & Gas Exploration & Production Oil & Gas Refining, Marketing & Transportation

All US economic sectors

Median return on invested capital

Page 47 of 291

The transition between an exploitation phase and an investment phase: The revenge of the old economy, Part II

Page 48 of 291


The industry has exhausted spare capacity, ending an exploitation phase and beginning a new investment phase

20

30

40

50

60

70

80

90

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

Global production capacity

Global output

Source: International Energy Agency (IEA) and Goldman Sachs Commodity Research and DOE.

million b/d

Global oil production and capacity Global refining capacity

million b/d

20

30

40

50

60

70

80

90

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

Global Refining Capacity

World Petroleum Supply

World Petroleum Demand

Page 49 of 291


The market has experienced similar investment phases in the past that lasted c. 10-15 years

Source: BEA and Goldman Sachs Commodity Research.

Vertical axis: age of the capital stock for energy

New Investment

Phase

4

5

6

7

8

9

10

11

12

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Mining exploration, shafts and wells Petroleum and natural gas

Exploitation Phase

Investment Phase

Investment Phase

Exploitation Phase

Exploitation Phase

Page 50 of 291


0

1

2

3

4

5

6

7

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Investment Phase

Investment Phase

Exploitation Phase

Exploitation Phase

Exploitation Phase

Investment phases are typically characterised by rising prices, while prices decline during exploitation phases

Source: Goldman Sachs Commodity Research.

Real price index 1925 = base year

New Investment

Phase

Page 51 of 291


Project complexity requires a well-trained labour force, which is currently very limited

Source: IPAA and Goldman Sachs Commodity Research.

1000 employees

400

500

600

700

800

900

1000

1100

1200

1975 1980 1985 1990 1995 2000

Extraction, refining and transportation employment in oil and gas sectors in the U.S. has declined since 1980s.

Page 52 of 291


As investment rises, costs rise as demand for greenfield projects increases against limited resources: reserve access, technology and labour

Source: Baker Hughes and Goldman Sachs Commodity Research

Left axis: $/bbl, right axis: rig count

0

6

12

18

24

30

36

42

48

54

60

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 20051000

1200

1400

1600

1800

2000

2200

2400

2600

2800

3000

Marginal costs (left axis)

Global rig counts (right axis)

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Cost structure drives long-term price while fundamentals drive curve shape

Page 54 of 291


The key is to decompose the long-term oil price into (1) the long-dated oil price, and (2) the spread between the spot and long-dated oil price

$/bbl


= MC

35

40

45

50

55

60

65

2005 2006 2007 2008 2009 2010 2011

The long-dated component of price

P = MC + d, where d is a delivery premium in a bull market or a discount in a bear market

In a bull market the spread is positive reflecting a premium for prompt delivery with $20/bbl being the

historical high

In a bear market the spread is negative reflecting the cost of carrying inventory

with a historical minimum of $10/bbl

Page 55 of 291


The rise in marginal costs has pushed up long-dated oil prices

Source: Department of Energy and Goldman Sachs Commodity Research.

$/bbl

0

5

10

15

20

25

30

35

40

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Long-dated oil prices

Marginal costs

Marginal cost is defined as the average of the highest cost (or bottom quartile) producers

Page 56 of 291


The fundamentals are priced into the spread between spot and long-dated prices


Spot – 5-yr forward price in $/bbl (vertical axis); US crude stocks in millions of barrels (horizontal axis)

-20

-15

-10

-5

0

5

10

15

20

250 270 290 310 330 350 370

Recent observation

Observations are from 1991 to current

The fundamental relationship between inventories and the spread between spot and long-dated oil prices still holds

true as it did 10 years ago.

Page 57 of 291

A cyclical bear market at $70/bbl

Page 58 of 291


The rise in long-dated prices has dragged up spot prices despite weakening time spreads


$/bbl

10

20

30

40

50

60

70

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

The rise in the price level was driven by higher long-dated prices reflecting increased cost uncertainty

Over the last year time spreads have contracted reflecting weaker fundamentals

Page 59 of 291

Rebalancing the oil market

Page 60 of 291


Rule of thumb: Commodity returns are pro-cyclical as negative returns are mostly associated with economic downturns

-0.4

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Global recession

US Recession

German and Japanese Recession

Asian Financial Crisis

September 11th 2001 recession

Source: Goldman Sachs Commodities Research.

Annual GSCI returns

Page 61 of 291


Is the secular repricing of oil complete? If so, we expect a cyclically strong market for energy in 2006

Source: Goldman Sachs Commodities Research.

10

20

30

40

50

60

70

2001 2002 2003 2004 2005 2006

Long-dated oil prices (5-year forwards) have traded near $60/bbl since July of last year

Page 62 of 291


As global oil output has not grown since November 2004, only modest demand growth will shift the balance

68

69

70

71

72

73

74

75

76

Jan 03 Apr 03 Jul 03 Oct 03 Jan 04 Apr 04 Jul 04 Oct 04 Jan 05 Apr 05 Jul 05 Oct 05 Jan 06-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5Level of global output (left axis)

YoY change of global output (right axis)

mmb/d mmb/d

Source: Goldman IEA and Sachs Commodities Research.Page 63 of 291

Are metals going to follow energy in 2006?

Page 64 of 291


Metals consumption has been driven by a massive infrastructure boom in the Non-OECD

200

250

300

350

400

450

500

550

600

1950 1956 1962 1968 1974 1980 1986 1992 1998 200480

90

100

110

120

130

140

150

160

170

180

Copper MT/USbil dollar of real global GDP (left axis)

Copper OECD MT/USbil dollar of real global GDP (left axis)

Copper non-OECD MT/USbil dollar of real global GDP (right axis)

Source: WBMS and Goldman Sachs Commodity Research

Copper consumption in MT/US bil dollar in real global GDP

Page 65 of 291


Source: CRU, WBMS, Goldman Sachs Commodities Research.

This has created an acceleration in global metals demand since the mid-1990s

Global copper consumption

Thousand metric tons

Global aluminum consumption

Thousand metric tons

8

9

10

11

12

13

14

15

16

17

18

80 85 90 95 00 05

1980 -1994 CAGR: 1.7%

1995 - 2005 CAGR: 3.5%

2002 - 2005 CAGR: 5.0%

Strong metals demand growth from 1994 to 2000 was mainly due to robust economic growth in the developed economies...

13

15

17

19

21

23

25

27

29

31

33

80 85 90 95 00 05

1980 -1994 CAGR: 2.2%

1995 - 2005 CAGR: 4.2%

2002 - 2005 CAGR: 7.5%

… but in the past five years it has been mainly emerging market demand -- particularly China.

Page 66 of 291


Globally, the value of copper consumption as a share of GDP is still below the levels of the 1960/70s when Japan built infrastructure

0.00%

0.05%

0.10%

0.15%

0.20%

0.25%

0.30%

0.35%

0.40%

0.45%

0.50%

1900

1904

1908

1912

1916

1920

1924

1928

1932

1936

1940

1944

1948

1952

1956

1960

1964

1968

1972

1976

1980

1984

1988

1992

1996

2000

2004

2006 estimate using year-to-date average copper prices

2006 estimate assuming prices remain at current levels through the end of the year

Source: United States Geological Survey (USGS), World Bureau of Metals Statistics (WBMS), A Maddison, Contours of the World Economy:

the pace and pattern of change, 1-2030AD, Cambridge University Press, 2007, Louis Johnston, Saint John’s University; Samuel Williamson,

The Miami University and Goldman Sachs Commodity ResearchPage 67 of 291


Source: CRU, Goldman Sachs Commodities Research.

Strong demand growth and a modest pace of investment suggest production bottlenecks will become more frequent

Copper smelting capacity utilization

Percent

72%

74%

76%

78%

80%

82%

84%

86%

1990 1995 2000 2005

1990-2005 Average: 78.1%

2006-2009E Average: 83.6%

Copper smelter capacity utilization is projected to be at historically high levels for the next five years

Page 68 of 291


Source: Brook Hunt, IAI, Goldman Sachs Commodities Research.

Alumina capacity is now exhausted

Global alumina capacity and production

Million metric tons

15

25

35

45

55

65

75

1975 1980 1985 1990 1995 2000 2005

Including Estimated East Europe

Capacity

Production

Forecast

Page 69 of 291


Production costs for metals are up sharply

Input costs for aluminum productionUS$/mt

Source: Platts, Metals Bulletin and Goldman Sachs Commodity Research.

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Power cost (Assuming 15MWh electricity : 1mt aluminum)

Alumina cost(Assuming 1.92mt alumina : 1mt aluminum)

Page 70 of 291


Metals producers are facing an increasingly difficult operating environment

• Producer country governments are raising taxesExamples: Chile has just adopted a new tax law which will require mining companies to pay up to 5% of operating income, while the new Peruvian tax requiring payment of up to 3% of mineral sales has just become effective

• Labour unions are demanding higher payExamples: Just in copper in recent months, we have the strike at Asarco, as well as labour actions at KCM and Chambishi in Zambia, and Zaldivar and Escondida Norte in Chile

• Opposition from local communities is increasingExample: BHP pays 3% of the Tintaya mine’s profits to Peruvian community groups, but unrest continues

• Infrastructure to support mining operations is inadequateExample: Heavy Chinese investment is needed in Brazilian rail and port infrastructure to allow the further development of the Brazilian resource extraction industry

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As a result, long-dated prices are beginning to rise in metals as well

75

80

85

90

95

100

105

110

115

120

125

130

135

140

145

150

2000 2001 2002 2003 2004 200550

75

100

125

150

175

200

Nickel (rhs)

Copper

Aluminum

Zinc

Five-year forward pricesIndex, January 2000 = 100t


Page 72 of 291


Aluminum 3mo to 5yr backwardation vs. visible inventories

-30

-20

-10

0

10

20

30

40

4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0

Backwardation reflects inventory dynamics

Source: Goldman Sachs Commodity research

Vertical axis: percent backwardation; horizontal axis: weeks of consumption

Page 73 of 291


Copper 3mo to 5yr backwardation vs. visible inventories

-20

0

20

40

60

80

100

1.0 2.0 3.0 4.0 5.0 6.0 7.0

Backwardation reflects demand rationing

Backwardation reflects inventory dynamics


Vertical axis: percent backwardation; horizontal axis: weeks of consumption

Page 74 of 291


Prices across most of the commodities remains well below historical real peaks with the exception of zinc

Crude oil Gold Silver Copper Zinc Nickel AluminumNYMEX COMEX COMEX LME LME LME LME

$/bbl $/oz $/oz $/MT $/MT $/MT $/MTMonthly pricesMax 84.04 1748 90.98 11930 3057 29254 4785Max Date Mar-81 Sep-80 Jan-80 Apr-74 Feb-89 Feb-89 Jun-88April 2006 70.16 612 12.65 6320 3041 18047 2647April 2006 % Max 83% 35% 14% 53% 99% 62% 55%Daily pricesMax NA 2091 104.06 13103 3470 30173 5396Max Date NA 1/21/80 1/21/80 5/6/74 5/9/06 1/3/89 6/1/88Recent peak NA 702 14.52 7815 3470 20000 3012Recent peak % Max NA 34% 14% 60% 100% 66% 56%

Source: BP, NYMES, R Shiller, Irrational exuberance, Princeton 2005 and Goldman Sachs Commodity Research

Real prices in 2006 dollars

Page 75 of 291

Gold has diverged from fundamentals

Page 76 of 291


Source: LBMA and Goldman Sachs Commodity Research.

We believe gold is well supported over the long run

Gold actual and estimated fair value price

US$/toz

225

275

325

375

425

475

525

575

625

675

725

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Gold

Currency Basket

A currency basket comprised of AUD, CAD, ZAR, EUR, JPY and INR explains 80% of historical variation in gold prices. Deviations reflect a re-equilibration of the level of the relationship between the currency basket in gold in response to lower supply growth (e.g. South African production) and increased investment in jewellery demand. We believe that the relationship between changes in gold prices and the exchange rates will reassert itself in coming months, albeit at a higher equilibrium level.

Page 77 of 291


ETFs have added significantly to gold demand

0

50

100

150

200

250

300

350

400

450

500

11/04 2/05 5/05 8/05 11/05 2/06

Source: World Gold Council and Goldman Sachs Commodity research

Metric tons

Page 78 of 291


Global mine production has slipped in recent years

1700

1800

1900

2000

2100

2200

2300

2400

2500

2600

2700

1990 1992 1994 1996 1998 2000 2002 2004Source: GFMS and Goldman Sachs Commodity research

Metric tons

Page 79 of 291


The relationship appears to have resumed after a period of re-equilibration

350

400

450

500

550

600

650

700

750

2004 2006

Gold

Currency Basket(Adjusting for new equilbrium)

Currency Basket

Currency Basket(Without adjusting for new

equilibrium)

From September 2005 through March 2006, the correlation between gold and the dollar appeared to break down. While it is still early, it appears that the relationship has returned over the past two months.


US$/toz

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Investment uncertainty makes finding a new equilibrium difficult and generates significant upside risk

Page 81 of 291


In the current environment, long-dated prices now exceed the highest cost projects …


$/bbl

0

5

10

15

20

25

30

35

40

45

50

55

60

65

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Long-dated oil prices Marginal costs

Long-dated oil prices have risen far above even the most costly production, as measured by the average of high-cost producers

average of the highest cost (or Marginal cost is defined as the

bottom quartile) producers

Page 82 of 291


… while reinvestment rates have fallen and cash reserves have surged

Source: Goldman Sachs Commodity research.

-400

-300

-200

-100

0

100

200

300

400

500

600

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 200545%

55%

65%

75%

85%

95%

105%

115%

This lack of reinvestment has caused global industry cash

reserves to surge to an estimated $500 billion

(left axis)

Reinvestment rates have decreased as uncertainty

has discouraged investment (right axis)

$ bn

Page 83 of 291


This overshoot reflects increased uncertainty in the industry’s cost structure


$/bbl

0

5

10

15

20

25

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mean F&D cost per barrel

High cost

Low cost

Page 84 of 291


A simple example of investment under uncertainty

A simple example explained


Investment under uncertaintyProject has a $40/bbl breakeven cost today

with a 50% chance of dropping to $20/bbl next year

Prices are $50/bbl and are expected to remain at these levels

If we invest today,Project has an NPV of $1.1 billion

However, if we delay investment, then there is a 50% chance that costs decline and the NPV of the delayed project is $3.0 billion50% chance that costs are unchanged and the NPV of the delayed project is $1.0 billion

The expected NPV of the delayed project is $2.0 billionExpected NPV = 50% low-cost NPV + 50% high-cost NPV($2,000 = 0.50*$3,000 + 0.50*$1,000)

If prices remain at $50/bbl we will delay investment until next year, asExpected NPV of a delayed project > NPV of investing today in the project(i.e., $2,000 > $1,100)

This implies that the value of the option to wait is $900 millionThe difference between the NPV of delaying investment and the NPV of investing today($900 = $2,000 - $1,100)

To incentivize investment today the price would need to rise such that theNPV of investing today is equal to the NPV of delaying investment at a price of $50/bbl

Prices would need to rise to $58.50/bbl to increase the NPV of investing today to $2.0 billion

As a result, the uncertainty has pushed prices up nearly $9/bbl to incentivize investment today

Page 85 of 291


Once uncertainty is resolved, the premium will disappear as long-term oil prices find a new equilibrium

Vertical axis: $bb/; horizontal axis time


Uncertainty Premium

Once the marginal project is known and the uncertainty is resolved, the long-dated price will quickly converge back

down to the cost of that marginal project, which would become the new equilibrium price.

MC = $40

MC = $20

Currently, the market is unclear on which project will actually be at the margin

Currently, the market is unclear on which project will actually be at the margin

Page 86 of 291

Agriculture prices are likely to be supported by low inventories, Chinese draught, and bio-fuel demand

Page 87 of 291


Low inventory levels suggest further upside for wheat

Wheat inventories

Days of forward coverage

Source: USDA and Goldman Sachs Commodity Research.

Wheat, actual and fair value

Cents per bushel

Source: CBOT and Goldman Sachs Commodity Research.

70

80

90

100

110

120

130

140

70/71 75/76 80/81 85/86 90/91 95/96 00/01 05/0650

100

150

200

250

300

350

400

Global (lhs)

US (rhs)

200

250

300

350

400

450

500

550

600

650

95 96 97 98 99 00 01 02 03 04 05 06

Fair ValueActual

Page 88 of 291


Increasing speculative interest is also a support for wheat prices

Left axis: number of contracts; right axis: cents per bushel

Source: CFTC and Goldman Sachs Commodity Research.

-80,000

-60,000

-40,000

-20,000

0

20,000

40,000

60,000

2001 2002 2003 2004 2005 2006250

270

290

310

330

350

370

390

410

430

Wheat Net Speculative Length (left axis) Wheat Price (right axis)

Page 89 of 291


Corn prices have converged to our fair value estimates

Corn inventories



Corn, actual and fair value

Cents per bushel


150

200

250

300

350

400

450

500

95 96 97 98 99 00 01 02 03 04 05 06

Fair Value

Actual

0

20

40

60

80

100

120

140

160

180

70/71 75/76 80/81 85/86 90/91 95/96 00/01 05/060

50

100

150

200

250

Global (lhs)

US (rhs)

Page 90 of 291


Net speculative length for corn has increased recently



-180,000-160,000-140,000-120,000-100,000

-80,000-60,000-40,000-20,000

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

2001 2002 2003 2004 2005 2006150

170

190

210

230

250

270

290

310

330

350

Corn Net Speculative Length (left axis) Corn Price (right axis)

Page 91 of 291


Soybean inventories are expected to be higher next year

Soybean inventories



Soybean, actual and fair value

Cents per bushel


0

20

40

60

80

100

120

70/71 75/76 80/81 85/86 90/91 95/96 00/01 05/060

20

40

60

80

100

120

Global (lhs)

US (rhs)

350

450

550

650

750

850

950

1050

95 96 97 98 99 00 01 02 03 04 05 06

Fair Value

Actual

Page 92 of 291


Speculators are short soybeans



-150,000

-100,000

-50,000

0

50,000

100,000

150,000

2001 2002 2003 2004 2005 2006250

350

450

550

650

750

850

950

1,050

1,150

Soy Net Speculative Length (left axis) Soy Price (right axis)

Page 93 of 291



China may take the opportunity to rebuild historically low grain inventories

Chinese wheat production

Million metric tons

Chinese wheat inventories


25

35

45

55

65

75

85

95

105

115

125

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

0

50

100

150

200

250

300

350

400

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Page 94 of 291



Supply constraints have resulted from lacklustre acreage growth and stable yields

Area harvested for wheat in ChinaMillion hectares

Wheat yields in China have stabilized, further curtailing the ability of production to meet demand

Mt/hectare

20

22

24

26

28

30

32

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

15

20

25

30

35

40

45

50

55

60

65

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003

Page 95 of 291


Agriculture demand is tied to economic expansionChinese demand for beef is likely to continue to grow as the country becomes wealthier


0

2

4

6

8

10

12

0 5000 10000 15000 20000 25000 30000

China Korea Japan

kg of beef per capita (vertical axis); Real GDP PPP per capita (horizontal axis)

Page 96 of 291

DisclosuresJune 26, 2006

Page 97 of 291


Disclosures

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universeRating Distribution

OP/Buy IL/Hold U/Sell

26% 59% 15%

Investment Banking Relationships

OP/Buy IL/Hold U/Sell

58% 52% 47%Global

As of April 1, 2006, Goldman Sachs Global Investment Research had investment ratings on 2,048 equity securities.Goldman Sachs uses three ratings relative to each analyst's coverage universe - Outperform, In-Line and Underperform.See "Ratings, Coverage Views and related definitions" below. NASD/NYSE rules require a member to disclose thepercentage of its rated securities to which the member would assign a buy, hold, or sell rating if such a system were used.Although relative ratings do not correlate to buy, hold, and sell ratings across all rated securities, for purposes of theNASD/NYSE rules, Goldman Sachs has determined the indicated percentages by assigning buy ratings to securities ratedOutperform, hold ratings to securities rated In-Line, and sell ratings to securities rated Underperform, without regard to thecoverage views of analysts.

Page 98 of 291


Disclosures

Regulatory disclosures

Disclosures required by United States laws and regulationsSee company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; marketmaking and/or specialist role.

The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html.

Additional disclosures required under the laws and regulations of jurisdictions other than the United StatesThe following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. Canada: Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. Japan: See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). United Kingdom: Goldman Sachs International is authorised and regulated by the Financial Services Authority. Persons who would be categorized as private customers in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.

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Page 99 of 291


Disclosures

Ratings, coverage groups and views and related definitionsBuy, Neutral, Sell –Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock’s return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25-35% of stocks as Buy and 10-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee.

Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership.

Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst’s investment outlook on the coverage group relative to the group’s historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.

Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC).Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

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Page 100 of 291


Disclosures

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No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.Page 101 of 291

Sanders Research Associates

Losing ControlA presentation to the EC Workshop on the

Economic Impact of Rising Oil Prices

June 28, 2006

Page 102 of 291

Sanders Research AssociatesPage 103 of 291


The world financial system can recycle petrodollars easily

Now the destination is the United States, unlike the 70s, when it was third world borrowers

Derivatives are a potential problem, but for the real economy, not the financial sector per se

Peak oil changes everything

Page 104 of 291






Page 105 of 291


US Current Account Deficit with World Regions

Page 106 of 291






Page 107 of 291






Page 108 of 291



Peak Oil is with us now

Production probably topped out between early November 2005 and late January 2006

Even if it didn’t, production of light sweet crudes has peaked

This means costs are rising

Prices are not yet reflecting this

For the first time in the Age of Oil, the Anglo-Saxon (UKUSA) countries do not control the world’s marginal barrels of crude and units of natural gas

Page 110 of 291








Page 111 of 291


Source: Kenneth Deffeyes www.princeton.edu/hubbert

Oil and Gas Liquids2004 Scenario

Page 112 of 291








Page 113 of 291








Page 114 of 291








Page 115 of 291


World Oil Production & Real Oil Price

Page 116 of 291








Page 117 of 291



The Oil Clocks

Page 119 of 291



The Gas Clocks

Page 121 of 291



Oil Power is moving East

Shanghai Cooperation Organisation is an alternative framework for Eurasia

Iran is an observer, and wants permanent membership

Between them, Russia and Iran control over 40% of world gas reserves

Page 123 of 291



The problem for the West is not access, but control

The western political economy is based on a growth model dependent on debt expansion

US political economy is organised on twin assumptions of free space and energy that validate increasing debt levels

These can no longer be taken for granted

Page 125 of 291






Page 126 of 291


US: Total Debt as % of GDP

Page 127 of 291






Page 128 of 291






Page 129 of 291



Ultimately the problem is the value of the collateral underlying the debt

The value of the equities and the real estate at the end of the yield curve is the mathematical underpinning of the West’s debt structure

With structurally higher energy prices, there is more of a burden on labour to absorb increased costs through lower wages and compensation

Page 131 of 291


The Real Yield Curve

Gold Cash Bonds Equities & Real Property

Now 1 2 34 5

30 years

Page 132 of 291





Page 133 of 291





Page 134 of 291



US to introduce national universal conscription, i.e. corvée

US is building labour camps

North America is consolidating into a regional bloc with UK and Japanese wings

Europe and US are moving to enlarge and centralise when better solutions are to get smaller and decentralise

Page 136 of 291


The Joint Oil Data InitiativeThe Joint Oil Data InitiativeA concrete action to improve transparency in oil markets A concrete action to improve transparency in oil markets

Workshop on the economic impact of rising oil pricesWorkshop on the economic impact of rising oil pricesEuropean Parliament, 28 June 2006European Parliament, 28 June 2006

P. Lösönen, EurostatP. Lösönen, Eurostat

Page 138 of 291

At the end of the 90’s At the end of the 90’s

there was an unusually high volatility of oil pricesthere was an unusually high volatility of oil prices

At the same time quality of global oil statistics was At the same time quality of global oil statistics was not satisfactory:not satisfactory:

Supply did not match with demandSupply did not match with demand

Real production, stocks and demand were not Real production, stocks and demand were not known known

The poor quality of oil statistics was identified The poor quality of oil statistics was identified as an aggravating factor for the volatilityas an aggravating factor for the volatility

The need for reliable oil data became evident The need for reliable oil data became evident to have more transparency in the oil marketto have more transparency in the oil market

BackgroundBackground

Page 139 of 291

Table 1WORLD OIL SUPPLY AND DEMAND

(million barrels per day)

1997 1998 1Q99 2Q99 3Q99 4Q99 1999 1Q00 2Q00 3Q00 4Q00 2000 1Q01 2Q01 3Q01 4Q01 2001

OECD DEMANDNorth America 22.7 23.1 23.6 23.5 24.1 24.3 23.9 23.6 23.7 24.3 24.4 24.0 24.3 23.9 24.5 24.7 24.3Europe 15.0 15.3 15.8 14.4 14.7 15.6 15.1 15.1 14.5 15.0 15.3 15.0 15.3 14.6 15.1 15.6 15.2Pacific 9.0 8.4 9.4 7.9 8.2 9.1 8.6 9.3 8.0 8.3 8.8 8.6 9.5 8.1 8.4 9.0 8.7

Tota l OECD 46.7 46.8 48.7 45.7 47.0 49.0 47.6 47.9 46.3 47.7 48.4 47.6 49.1 46.6 48.0 49.3 48.2

NON-OECD DEMANDFSU 3.8 3.7 3.6 3.3 3.4 3.7 3.5 3.6 3.4 3.5 3.7 3.5 3.6 3.4 3.3 3.5 3.5Europe 0.8 0.8 0.8 0.7 0.7 0.7 0.7 0.8 0.7 0.7 0.8 0.8 0.8 0.8 0.7 0.8 0.8China 4.2 4.2 4.4 4.6 4.3 4.6 4.5 4.7 4.5 5.1 4.8 4.8 4.9 5.0 5.0 5.3 5.0Other Asia 6.7 6.7 7.0 7.1 7.1 7.1 7.1 7.1 7.3 7.3 7.2 7.2 7.3 7.4 7.5 7.5 7.4Latin America 4.7 4.8 4.6 4.8 4.9 4.8 4.8 4.7 4.8 4.9 4.8 4.8 4.8 4.9 5.0 5.0 4.9Middle East 4.0 4.2 4.3 4.4 4.4 4.2 4.3 4.3 4.4 4.5 4.3 4.4 4.4 4.6 4.7 4.5 4.6Africa 2.3 2.3 2.3 2.3 2.3 2.4 2.3 2.4 2.3 2.3 2.4 2.3 2.4 2.4 2.4 2.4 2.4

Tota l Non-OECD 26.5 26.7 27.0 27.2 27.1 27.5 27.2 27.5 27.6 28.2 27.9 27.8 28.2 28.5 28.7 28.9 28.6

Total Demand1 73.1 73.5 75.8 72.9 74.1 76.5 74.8 75.5 73.9 75.9 76.4 75.4 77.3 75.0 76.7 78.2 76.8

OECD SUPPLYNorth America 14.6 14.5 14.1 13.9 13.9 14.1 14.0 14.3 14.4 14.3 14.2 14.3 14.4 14.5 14.6 14.8 14.6Europe 6.7 6.7 6.8 6.5 6.7 7.1 6.8 7.1 6.6 6.6 6.9 6.8 6.9 6.6 6.5 6.9 6.7Pacific 0.7 0.7 0.6 0.6 0.7 0.7 0.7 0.9 0.9 0.8 0.9 0.9 0.8 0.8 0.8 0.8 0.8

Tota l OECD 22.1 21.9 21.5 20.9 21.3 22.0 21.4 22.3 21.8 21.7 22.0 21.9 22.1 21.9 21.9 22.5 22.1

NON-OECD SUPPLYFSU 7.2 7.3 7.4 7.4 7.5 7.6 7.5 7.7 7.8 8.0 8.2 7.9 8.2 8.2 8.3 8.4 8.3Europe 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2China 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.3 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2 3.2Other Asia 2.2 2.2 2.3 2.2 2.2 2.2 2.2 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3Latin America 3.4 3.6 3.8 3.8 3.8 3.8 3.8 3.7 3.7 3.8 3.9 3.8 3.9 3.9 3.9 3.9 3.9Middle East 1.9 1.9 1.9 1.9 1.9 2.0 1.9 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0Africa 2.7 2.8 2.7 2.7 2.8 2.9 2.8 2.9 2.9 2.8 2.8 2.8 2.9 2.9 2.9 2.9 2.9Tota l Non-OECD 20.9 21.2 21.5 21.5 21.6 21.8 21.6 21.9 22.0 22.4 22.7 22.2 22.7 22.8 22.8 22.9 22.8

Processing Gains2 1.6 1.6 1.7 1.6 1.6 1.7 1.7 1.7 1.7 1.7 1.7 1.7 1.8 1.7 1.7 1.8 1.8Tota l Non-OPEC 44.5 44.7 44.6 44.0 44.6 45.5 44.7 45.9 45.5 45.7 46.4 45.9 46.6 46.4 46.5 47.1 46.6

OPECCrude 27.2 28.0 27.8 26.3 26.2 26.1 26.6 26.5 27.8 28.4 29.0 27.9NGLs 2.7 2.8 2.8 2.8 2.8 2.8 2.8 2.8 2.9 2.9 2.9 2.9 3.0 3.0 3.0 3.0 3.0Tota l OPEC 29.9 30.8 30.6 29.1 29.1 29.0 29.4 29.3 30.7 31.3 31.9 30.8

Total Supply3 74.4 75.5 75.3 73.1 73.6 74.5 74.1 75.2 76.2 77.0 78.3 76.7

STOCK CHANGES AND MISCELLANEOUSReported OECDIndustry 0.3 0.2 -0.7 0.4 -0.2 -2.4 -0.7 -0.3 0.9 0.4 -0.1 0.2Government 0.0 0.1 0.0 0.0 -0.1 -0.1 -0.1 0.0 0.0 0.0 -0.3 -0.1

Tota l 0.3 0.3 -0.7 0.4 -0.3 -2.5 -0.8 -0.3 0.9 0.4 -0.4 0.2Floating Storage/Oil in Trans it 0.1 0.1 0.0 0.1 -0.1 -0.1 -0.1 0.0 0.1 0.0 0.4 0.1Misce llaneous to ba lance 4 0.9 1.6 0.2 -0.3 0.0 0.5 0.1 0.1 1.4 0.7 1.9 1.0

Total S tock Ch. & Mis c 1.3 2.0 -0.5 0.2 -0.4 -2.0 -0.7 -0.2 2.3 1.2 1.9 1.3

Memo items :Call on OPEC crude + Stock ch.5 25.9 26.0 28.3 26.1 26.7 28.2 27.3 26.7 25.4 27.3 27.0 26.6 27.8 25.6 27.2 28.0 27.2Tota l Demand ex. FSU 69.3 69.8 72.1 69.6 70.6 72.9 71.3 71.9 70.5 72.4 72.7 71.9 73.7 71.6 73.3 74.7 73.3Tota l demand exc. FSU (% ch)6 3.1 0.7 3.7 1.8 1.5 1.7 2.2 -0.3 1.2 2.6 -0.2 0.8 2.5 1.6 1.2 2.7 2.01 measured as de live rie s from re fine rie s and primary s tocks , comprises inland deliverie s , interna tional marine bunkers and refine ry fue l and includes crude for direct burning, oil from non-conventiona l sources and othe r sources of supply

2 ne t of volumetric ga ins and los ses in the re fining process (excludes ne t ga in/loss in former USSR, China and non-OECD Europe) and marine transporta tion losses3 comprises crude oil, condensa tes , NGLs, oil from non-conventional sources and other sources of supply4 includes changes in non-reported s tocks in OECD and non-OECD areas5 equa ls tota l demand minus total non-OPEC supply minus OPEC NGLs and thus includes "Miscellaneous to ba lance" for his torica l time pe riods6 yea r on yea r % growth in global oil demand excluding FSU

Miscellaneous to balance 0.9 1.6 0.2 -0.3 0.0 0.5 0.1 0.1 1.4 0.7 1.9 1.0

Table 1WORLD OIL SUPPLY AND DEMAND

-3000

-2000

-1000

0

1000

2000

3000

4000

1Q19

863Q

1986

1Q19

873Q

1987

1Q19

883Q

1988

1Q19

893Q

1989

1Q19

903Q

1990

1Q19

913Q

1991

1Q19

923Q

1992

1Q19

933Q

1993

1Q19

943Q

1994

1Q19

953Q

1995

1Q19

963Q

1996

1Q19

973Q

1997

1Q19

983Q

1998

1Q19

993Q

1999

1Q20

003Q

2000

Thou

sand

bar

rels

per

day

Page 140 of 291

7th International Energy Forum (IEF) meeting 7th International Energy Forum (IEF) meeting in Riyadh, 2000in Riyadh, 2000

In 2001 six international In 2001 six international organisationsorganisations (APEC, (APEC, Eurostat, IEA, OLADE, OPEC and UNSD) Eurostat, IEA, OLADE, OPEC and UNSD) launched the launched the Joint Oil Data ExerciseJoint Oil Data Exercise ((JODEJODE))

A small questionnaire including main flows A small questionnaire including main flows of crude oil and petroleum productsof crude oil and petroleum products

Deadline one month after the reference Deadline one month after the reference month (Mmonth (M--1 reporting)1 reporting)

OrganisationsOrganisations collect the data from their collect the data from their member countriesmember countries

JODE (2001)JODE (2001)

Page 141 of 291

8th IEF meeting in Osaka, 20028th IEF meeting in Osaka, 2002

Full political support to continue the efforts to Full political support to continue the efforts to increase transparency of oil dataincrease transparency of oil data

The six The six organisationsorganisations made the exercise made the exercise permanent and renamed it permanent and renamed it Joint Oil Data Joint Oil Data Initiative (JODI)Initiative (JODI)

Rotating coordinationRotating coordination

InterInter--secretariat meetingssecretariat meetings

ConferencesConferences

FromFrom JODE JODE toto JODIJODI

Page 142 of 291

Creation of JODI databaseCreation of JODI database in 2004in 2004

Data quality (timeliness, completeness and Data quality (timeliness, completeness and accuracy) had improved significantlyaccuracy) had improved significantly

IEF secretariat (IEFS) situated in Riyadh, Saudi IEF secretariat (IEFS) situated in Riyadh, Saudi Arabia started its work in December 2003Arabia started its work in December 2003

IEFS took over the coordination role of JODI in IEFS took over the coordination role of JODI in 2005 (the 7th international 2005 (the 7th international organisationorganisation in in JODI)JODI)

Comprehensive quality evaluation of the JODI Comprehensive quality evaluation of the JODI data in 2005 (world topdata in 2005 (world top--30 oil producers, 30 oil producers, consumers and stock holders)consumers and stock holders)

Opening of the World Jodi Database to public, Opening of the World Jodi Database to public, 19 November 200519 November 2005

Milestones of JODI after the Milestones of JODI after the IEF meeting in OSAKA 2002 IEF meeting in OSAKA 2002

Page 143 of 291

King Abdullah of Saudi Arabia King Abdullah of Saudi Arabia launching the JODI World Databaselaunching the JODI World Database

Page 144 of 291

Accessible to publicAccessible to public

www.jodidata.orgwww.jodidata.org

Currently production, stocks, stock change and Currently production, stocks, stock change and demand of crude oil and petroleum products demand of crude oil and petroleum products are in public domainare in public domain

Data covers more than 90% of the world crude Data covers more than 90% of the world crude oil production and consumptionoil production and consumption

Includes data from 92 countries Includes data from 92 countries

Indication of the quality of the data by the Indication of the quality of the data by the color of the cell, a unique feature color of the cell, a unique feature

World JODI databaseWorld JODI database

Page 145 of 291

A View of the Live Database

Monthly update, M-1 data

Color code indicating data comparability(blue, yellow, white)

Page 146 of 291

7

6

3.0% Total Oil Demand

Denmark

592

642

692

742

792

842

892

942

992

Oct-02Nov-02Dec-02Jan-03Feb-03Mar-03Apr-03May-03Jun-03 Jul-03 Aug-03Sep-03Oct-03Nov-03Dec-03Jan-04Feb-04Mar-04Apr-04May-04Jun-04 Jul-04 Aug-04Sep-040

1

2

3

4

5

Timeliness MOS M-1 M-2

MOS RangeM-1MOS M-2

Product FlowTimeliness

>10

<10

<5

<30

<25

Page 147 of 291

World World JODI JODI

DatabaseDatabase

CTY

CTY

CTY

CTY

CTY

CTY

CTY CTY

CTY

CTY

CTY

CTY

CTY CTY

CTY

CTY

CTY

CTY

Six Organisations plus the IEFS as Co-ordinator

Page 148 of 291

Creation of JODI user and methodology manualCreation of JODI user and methodology manual

First edition scheduled by the end of June 2006First edition scheduled by the end of June 2006

Data providers and data usersData providers and data users

Training of statisticiansTraining of statisticians

Venezuela in August 2006 for Latin American countriesVenezuela in August 2006 for Latin American countries

South Africa at the end of 2006 for African countriesSouth Africa at the end of 2006 for African countries

Enlargement of public part of JODI databaseEnlargement of public part of JODI database

Currently crude oil production, stocks, stock change and Currently crude oil production, stocks, stock change and demand of petroleum products are in public domain demand of petroleum products are in public domain

Quality evaluation of refinery input and output data in Quality evaluation of refinery input and output data in view to opening this data into public in 2006view to opening this data into public in 2006

Preparation of the 6th JODI conference at the end of Preparation of the 6th JODI conference at the end of November in RiyadhNovember in Riyadh

Ongoing activities Ongoing activities

Page 149 of 291

1.1. Political Political awarenessawareness of the difficulties of the difficulties encountered in improving data quality has encountered in improving data quality has risenrisen

2.2. Statistical Statistical systemssystems in many countries are in many countries are improving / have improvedimproving / have improved

3.3. AttitudesAttitudes towards confidentiality and towards confidentiality and reliability are evolvingreliability are evolving

4.4. A worldA world--wide wide networknetwork of oil statisticians have of oil statisticians have been created multiplying contacts between oil been created multiplying contacts between oil companies, countries and organisations companies, countries and organisations paving the way for the global harmonisation paving the way for the global harmonisation of energy statisticsof energy statistics

5.5. JODI has demonstrated that oil producer JODI has demonstrated that oil producer ––consumer dialogue is has lead and is further consumer dialogue is has lead and is further leading to concrete actionsleading to concrete actions

Main achievements of JODI Main achievements of JODI beyond data collectionbeyond data collection

Page 150 of 291

And then, what’s next?And then, what’s next?Expanding the JODI Questionnaire

Horizontally: more products (NGLs, …)

Vertically: more flows (stocks, trade,…)

Duplicating the approach to gas?

Using a similar approach to reserves?

Page 151 of 291

High volatility of oil prices can create High volatility of oil prices can create instability in economyinstability in economy

There are several possible reasons for There are several possible reasons for fluctuating oil pricesfluctuating oil prices

Uncertainty in supply / demandUncertainty in supply / demand

Natural disasters, for example hurricane Katrina Natural disasters, for example hurricane Katrina in the US in 2005in the US in 2005

Wars, for example Iraqi warWars, for example Iraqi war

Political instability, case VenezuelaPolitical instability, case Venezuela

Unknown oil stock level, production and demand Unknown oil stock level, production and demand = POOR STATISTICS= POOR STATISTICS

Can transparency in oil Can transparency in oil statistics improve financial statistics improve financial

stabilitystability

Page 152 of 291

☺☺JODI has certainly improved the transparency JODI has certainly improved the transparency in oil marketsin oil markets

☺☺Policy makers and other stake holders can be Policy makers and other stake holders can be more sure about the stocks levels and have a more sure about the stocks levels and have a better view the probability of real shortage in better view the probability of real shortage in supplysupply

Natural disasters etc. cannot be predictedNatural disasters etc. cannot be predicted

Speculation of oil futures cannot be stopped Speculation of oil futures cannot be stopped just by improving the statisticsjust by improving the statistics

• Feedback from the data users is essential– If the data does not fulfill expectations,

• Proposals for improvements are welcome

• More resources have to be engaged

Can transparency in oil Can transparency in oil statistics improve financial statistics improve financial

stabilitystability

Page 153 of 291

Launch of the JODELaunch of the JODE

55 countries

55 countries

Strong political support reaffirmed + launch JODI databaseStrong political support reaffirmed + launch JODI database

Strong political supportStrong political support

5th JODIConference

5th JODIConference

Amst.May 04

ViennaMay 01

ViennaOct. 01

BangkokApril 01

RiyadhNov. 01

Luxem.Jan. 02

MexicoMay 02

ViennaApril 02

OsakaSep. 02

QuitoNov. 97

MadridJuly 00

ParisNov. 00

ParisNov. 99

RiyadhNov. 00

CairoOct 03Abu Dhabi

Jan. 02

BangkokFeb. 04

ViennaJan. 03

ParisJuly 02

ParisDec. 03

ViennaJun. 04

BaliOct 04

Decision to make the exercise a permanent reporting mechanism (JODE=> JODI)

Decision to make the exercise a permanent reporting mechanism (JODE=> JODI)

Focus on Data QualityFocus on Data Quality

Prepare a JODI World DatabasePrepare a JODI World Database

Page 154 of 291

Lessons from the InitiativeLessons from the Initiative

A lot can be achieved by working together

A close interaction between organisations, countries and the industry is key to move a process

Improving data transparency will not happen over night

Transparency will not happen if not all the parties do not full participate

Page 155 of 291

www.jodidata.org

Thank youThank youPage 156 of 291

Peak Oil&

The Impact of Oil Depletion

ByC.J.Campbell

ASPO IRELANDwww.peakoil.ie

Page 157 of 291

Find it first

It costs money to find oil$10 - 20 million a wildcat

But it takes much more than moneyIt takes the right geology

We have new sophisticated methods to searchBut the same rocks and essentials

Page 158 of 291

The Essentials

Oil & Gas formed in the geological pastA finite resources subject to depletionEach gallon used means one less left

Production mirrors discoveryMany different categories

Some: easy, cheap and fast to produceOthers: difficult, expensive & slow

Page 159 of 291

It is so obvious

Depletion is easy to grasp We are born, we die and pass middle ageThe glass starts full and ends empty

Page 160 of 291

A Pint of Murphy’s Stout

Page 161 of 291

The same applies to Oil

How has such an obvious and important truth been obscured and confused ?

Ambiguous definitionsMisunderstood reporting practicesDifferent mindsets

Page 162 of 291

Mindsets : who to listen to?

The Geologist measures NatureHe can’t change the Cretaceous

The Economist measures MoneyHe can manipulate behaviour

The Engineer does thingsGive him a screwdriver & he goes to the Moon

The Manager makes money & image

Page 163 of 291

The Eternal Conflict between

Fact of FaithPeople once thought the

Earth was flat

and greeted science with suspicion and

resentment.

Some still do.

Page 164 of 291

The Economist’s Faith in Market Forces

What the High Priest saysMinerals are inexhaustible and will never be depleted. A stream

of investment creates additions to proved reserves from a very large in-ground inventory. The reserves are constantly being renewed as they are extracted..…

Professor Adelman (M.I.T)

Page 165 of 291

Petroleum Geology in

three minutes

One Viewpoint

Page 166 of 291

On a mule in Colombia in 1960

Technology - no more advanced than the hammer,hand lens and mule - found much of the world’s oil

Page 167 of 291

4

AndesMountains

Foothills+1+2+3+4

+1+2(3)+4

Basin centre

uplifted

Interior of the Earth

Required1.Source2.Reservoir3.Trap4.Seal

(1)+2(3)(4)

10 000m Cretaceous sands and clays

Page 168 of 291

Page 169 of 291

9

1.Dissipation

2. Escape

3. Oilfield

Source

Migration of OilSurface of the Earth

Oil generation at 2000m

depth

Page 170 of 291

8

Oil

Gas

Water

Geology of an Oilfield

SandstoneReservoir Migrating Oil

Seal

Page 171 of 291

9

What an Oil Reservoir looks like

Oil fills the pore-space between the grains of sand,which are coated in a film of water. The oil has to flowthrough these constrictions.

Oil

Seal

Well

x

Page 172 of 291

N.W EuropeOil GeneratingZones

Where oil isand

where it is not

Page 173 of 291

Reporting Reserves

Three kinds of reportScientific Estimates of VolumeFinancial StatementsPolitical Postures

All valid within their spheres but deeply confused.

Page 174 of 291

Oil Company practice

0

50

100

150

200

250

Rep

orte

d R

eser

ves

Exploration Development

“Selling” the project to management to meet Economic Criteria

Scientific Judgement of a prospect’s size

Cautious Phased Development

Confidential Public

Reserve growth

Page 175 of 291

What Oil Companies say now

From denial to acceptanceChevron – deserves a medalExxon – hidden messagesShell – “easy oil has peaked”BP – the most obtuse

New messages in different words and deeds

Reason for mergers14 major oil companies reduced to 5.

Page 176 of 291

How Lord Browne Misleads

0

5

10

15

20

25

30

2000 2020 2040 2060 2080 2100

Prod

uctio

n G

b/a

“Reserves support current production for 41 years”

Cliff or slope?

But BP now stands from Beyond PetroleumPage 177 of 291

OPECReserve

Reporting

Competingfor

QuotaKuwait 1984

Produced = 22 GbRemaining = 64Found = 86 (~ 90)orIncreasing Recovery from 30% to 40%

A.Dhabi Iran Iraq Kuwait N.Zone S.Arabia Venezuela1980 28 58 31 65 6.1 163 181984 30 51 43 64 5.6 166 251985 31 49 45 90 5.4 169 261986 30 48 44 90 5.4 169 261987 31 49 47 92 5.3 167 251988 92 93 100 92 5.2 167 561989 92 93 100 92 5.2 170 581990 92 93 100 92 5.0 258 591991 92 93 100 95 5.0 259 591992 92 93 100 94 5.0 259 631993 92 89 100 94 5.0 259 651995 92 88 100 94 5.0 259 651996 92 93 112 94 5.0 259 651997 92 93 113 94 5.0 259 721998 92 90 113 94 5.0 259 731999 92 90 113 94 5.0 261 732000 92 90 113 94 5.0 261 772001 92 90 113 94 5.0 261 782002 92 90 113 94 5.0 259 782003 92 126 115 97 5.0 259 782004 92 126 115 99 5.0 259 772005 92 132 115 102 5.0 264 80Page 178 of 291

But Nature does not lie

A field contains what it contains The term Reserves is confused for financial, commercial and political reasons

Valid in their contexts but misleadingThe discovery trend is critical

Need to backdate revised estimates and overcome the illusion of “Reserve Growth”

Page 179 of 291

Real Discovery Trend

Past discovery by ExxonMobil

0

10

20

30

40

50

60

1930 1950 1970 1990 2010 2030 2050

Gb

0

10

20

30

40

50

60

PastFutureProduction

Past afterExxon-Mobil3yr movingaverage

Page 180 of 291

Examples

Production mirrors discovery After 20-45 years.

Discovery peaked in most countries long ago.The larger fields were found first

Too big to miss

Page 181 of 291

US-48

0

5

10

15

20

25

30

1930 1950 1970 1990 2010 2030 2050

Dis

cove

ry G

b

0

2000

4000

6000

8000

10000

Prod

uctio

n kb

/d

Peak to Peak 40 years

Peak Discovery

Page 182 of 291

Russia

0

5

10

15

20

25

30

35

1930 1950 1970 1990 2010 2030 2050

Dis

cove

ry G

b

0

2000

4000

6000

8000

10000

12000

14000

Prod

uctio

n kb

/d


Fall of Soviets

Page 183 of 291

Egypt

00.20.40.60.8

11.21.41.61.8

1930 1950 1970 1990 2010 2030 2050

Dis

cove

ry G

b

0

200

400

600

800

1000

Prod

uctio

n kb

/d


Page 184 of 291

China

02468

10121416

1930 1950 1970 1990 2010 2030 2050

Dis

cove

ry G

b

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Prod

uctio

n kb

/d


Page 185 of 291

United Kingdom

0

1

2

3

4

5

1930 1950 1970 1990 2010 2030 2050

Dis

cove

ry G

b

0

500

1000

1500

2000

2500

3000

Prod

uctio

n kb

/d


Piper Accident plus a discovery lull

Page 186 of 291

All Oil & Gas

0

10

20

30

40

50

1930 1950 1970 1990 2010 2030 2050

Prod

uctio

n, G

boe/

a

Non-con GasGasGas LiquidsPolar OilDeepwaterHeavy OilsRegular Oil

Page 187 of 291

First Half of the Age of Oil

The End of the First Half of the Oil AgeIt lasted 150 years

A short span of history.

It stimulated rapid expansion of:IndustryTransport & tradeAgriculturePopulationFinancial Capital

Page 188 of 291

Population

0123

4567

0 500 1000 1500 2000 2500Anno Domini

Bill

ions

of P

eopl

e

First Oil Well ?

All animals use energy from their muscles

But Home Sapiens was the first to use external sources

Page 189 of 291

Evolution of MoneyHomo Sapiens: the first animal to use external energy & trade

Simple barterGold and silver coins

Owning the mine = unearned wealthConquest for gold & silver

The Spanish Empire in Latin AmericaPaper money

At first backed by gold : but later faith aloneEffectively a licence to use energy

Much previously minted by the Federal ReserveNow, Middle East governments through petrodollars

Page 190 of 291

Wall Street & War

Wall Street needsenergy supply: prompting moreresource wars totake what is left.

Page 191 of 291

The Second Half Dawns

Marked by the decline of oil and all that depends on itIncluding Financial Capital

Physical decline of oil is gradual but the turning point is unprecedented.

Debt is losing its collateral.Was based on oil-driven expansion

All quoted companies are over-valuedTacitly assume business-as-usual energy supply

Does it herald - Stock Market Crash ? The Second Great Depression ?

Page 192 of 291

Price Shocks First Signs of Crisis

0

10

20

30

40

50

60

70

1996 1998 2000 2002 2004 2006 2008 2010

Bre

nt C

rude

US

$

But prices may crash if demand falls with recessions

Price Shocks as production capacity limits breached

Price - six times cost to producegives false liquidity

Cost

Page 193 of 291

Plan of ActionCollect proper data.

Use Foreign Service to secure.Resign from International Energy Agency.

Inform the public.Cut waste

Especially in transport sector.New building standards; town planning.Live differently: end consumeristic ethic.

Turn to new energy sources from from tide, sun, wind, bio-mass, ? nuclear.

Page 194 of 291

Regionalise and Ruralise

Rediscover the regions New Community SpiritLiving within their resourcesChange Mindset from “poverty” to success in sustainable living

Urban living becomes more difficultMigration ceases to be viable

Page 195 of 291

Depletion Protocol

Importers to cut imports to match current Depletion Rate (2.5% a year)

Consequences:Stops destabilising false liquidity

From profiteering from shortageForces consumers to face realityAllows poor countries to afford needs

Page 196 of 291

Thank Youand

Good Luck

Page 197 of 291

Session II Part 1: Microeconomic consequences of rising oil prices, competitiveness and taxation

Page 198 of 291

Oil Prices and Transport Sector Responses

David BaldockDirector

The Institute for European Environmental PolicyWorkshop on Economic Impacts

Of Rising Oil Prices

28 June 2006

www.ieep.org.uk

Page 199 of 291

Outline

• Context• Transport and oil dependency• Elasticities of demand• Decoupling

• Substitution• Alternative fuels• Efficient vehicles

• Policies and Choices

Page 200 of 291

Transport and Oil Dependency in the EU

Industry9%

Transport55%

Services and Households

16%

Other20%

Page 201 of 291

Easy Wins are Possible

• In Road Transport• Correct tyre pressure could save 125,000 bbl/day • Enforced 90kph speed limit could save over 0.5 mbbl/day

• In Maritime Transport• Slower ship speeds could save 23% of fuel used

• A wide range of technical and operational responses available

Page 202 of 291

Alternative Fuels

• Alternative Fossil Fuels• A range of sources eg oil shales, tar sands• Likely high energy costs to extract

• Biofuels• ‘1st generation’ offer some CO2 benefits• ‘2nd generation’ likely to be much better • A wider range of feedstocks will be usable

• High oil prices make the alternatives more attractive• There is a choice between high and low carbon routes

Page 203 of 291

Vehicle Efficiency

• A ‘win-win-win’ option• Reduced cost• Reduced fuel dependency• Reduced greenhouse gases

• Enormous technical potential• Dieselisation• Improved engines and drivetrains• Lighter and more streamlined vehicles• Hybrids• Fuel cells

• … but progress is not fast enough

Page 204 of 291

Voluntary Agreements with Carmakers

100

120

140

160

180

200

220

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Aver

age

CO2

Emis

sion

s (g

/km

)

ACEA JAMA KAMA ACEAtarget

JAMA/KAMAtarget

EUtarget

Page 205 of 291

Future Choices

• Stronger policies are likely to be needed• A mandatory requirement on carmakers• Continuing development of advanced biofuels• Better use of vehicle and fuel taxes

• Significant change is possible in transport• Some operational changes could be cheap and easy• Bigger technical changes may be cost-justified by high oil price

• Potential benefits are large• Reduced oil dependency• Reduced greenhouse gases• Reduced running costs

• … and so are the risks of inaction!Page 206 of 291

TOYOTA MOTOR EUROPE

Impact of oil price and climate Impact of oil price and climate change on the car industrychange on the car industry

Dr. Stephan Herbst Manager Analysis & Strategy – Environmental AffairsToyota Motor Europe

Page 207 of 291

TOYOTA MOTOR EUROPE

TMUK [United Kingdom]

AvensisCorolla H/B

Engine 2005 production:

264 k cars, 174 k engines

TMMP [Poland]Transmission

Gasoline engine2005 production: 337 k units T/M(incl. for TPCA)100 k engines

(for TPCA)

European Headquarter

TMIP [Poland]

Diesel engine2005 production:

50 k units

TMMT [Turkey]

Corolla SedanCorolla Wagon

Corolla Vers2005 production: 158 k cars

TPCA [Czech]

Aygo2005 production: 36k cars

Caetano [Portugal]

Dyna

Manufacturing Companies and Headquarters

TMMF [France]

Yaris2005 production: 181 k cars

TMMR [Russia]

CamryProduction will start

in Dec 2007

Page 208 of 291

TOYOTA MOTOR EUROPE

Toyota Motor Europe

137

85 88 117 105172 179 171

215

393

466

583638

0

100

200

300

400

500

600

700

K unit

'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

TMUK TMMF TMMT TPCA

323

450384 412

471541

592656 666

756835

916964

0

200

400

600

800

1000

1200

'80 '90 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05

SalesProduction

Page 209 of 291

TOYOTA MOTOR EUROPE

Different perspectives II. Automotive Industry Technology

III. Oil Industry Energy/Fuels

IV. Government Framework

I. Customer Awareness

Page 210 of 291

TOYOTA MOTOR EUROPE

To what extend are you personally affected by various increases in the cost of driving a car?

Fuel prices

Car insurance

Maintenance

Parking fees

Prices of spare parts

New-car prices

Road charges

Prices of accessories

Prices for optional equipment

50.3%

33.4%

31.1%

24.7%

22.6%

21.9%

20.7%

17.9%

17.8%Source: Internal source 2005.

I. Awareness

Page 211 of 291

TOYOTA MOTOR EUROPE

Have the rising costs of driving stopped you from buying a new car?

Yes

No

I hadn’t intended buying a new car

Don’t know

30.2%

Source: Internal source 2005.

45.1%

23.9%

0.9%

I. Awareness

Page 212 of 291

TOYOTA MOTOR EUROPE

Importance of Low Fuel Consumption when buying a new car

• The importance of low fuel consumption as a purchase reason decreased in all segments. However, it has started to increase slightly.

• Low fuel consumption is most important in the A segment

Source: Internal source – MM5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005

%

A segmentB segmentC segmentD segment

4*

13*

7*

10*9*

4*4*

4*

* No of ranking

I. Awareness

e.g.

Aygo

Yaris

Corolla

Avensis

Page 213 of 291

TOYOTA MOTOR EUROPE

Expected annual mileage

• Expected annual mileage (average) decreased slightly

Source: Internal Source 2005 – MM5

0

5.000

10.000

15.000

20.000

25.000

2000 2001 2002 2003 2004 2005

annu

al m

ileag

eA segmentB segmentC segmentD segment

I. Awareness

(ave

rage

)

Page 214 of 291

TOYOTA MOTOR EUROPE

TMC Environmental Forum June 13, 2006President Watanabe’s Key Messages

1. We recognize that Mobility entails negative aspects caused by environmental issues, congestion, and traffic accident

2. Responding to issues of Energy and Climate Change is one of the biggest challenges

3. It is essential to realize a ‘Sustainable Mobility Society’

4. Toyota will give top priority on the development of technologies and products that contribute to tackling environmental and safety issues

II. Technology

Page 215 of 291

TOYOTA MOTOR EUROPE

Investments in R&D (global)

Encouraging our Engineers to push the boundaries

II. Technology

Page 216 of 291

TOYOTA MOTOR EUROPE

Evolution of Toyota Diesel Market Share

54%52%48%

38%41%

45%

20%

29%

40%38%35%

31%

0%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004 2005

Market

Toyota

II. Technology

Page 217 of 291

TOYOTA MOTOR EUROPE

Page 218 of 291

TOYOTA MOTOR EUROPE

50.000 hybrids sold in Europe

Page 219 of 291

TOYOTA MOTOR EUROPE

Toyota’s Fuel Cell TechnologyPrius FINE-X

Engine Fuel Cell

Secondarybattery

Motor

Power control unit

Power control unitSecondary

battery

Motor

II. Technology

Page 220 of 291

TOYOTA MOTOR EUROPE

Requirement for Automotive fuelsIII. Energy/Fuels

Page 221 of 291

TOYOTA MOTOR EUROPE

Toyota’s diesel fuel scenarioIII. Energy/Fuels

Page 222 of 291

TOYOTA MOTOR EUROPE

Toyota’s gasoline scenarioIII. Energy/Fuels

Page 223 of 291

TOYOTA MOTOR EUROPE

Government

- Consistent and long-term policy approach based on sustainable mobility criteria(e.g. emissions, safety, access to mobility, affordability, competitiveness)

- Harmonised car taxation in Europe (CO2 based) (vehicle excise duty, company car tax)

IV. Framework

Page 224 of 291

TOYOTA MOTOR EUROPE

Conclusion – impact of oil price & CO21. Consumer awareness & behaviour is unclear (no major changes)

2. Further Technology & fuels development is important for Toyota

- Revamping of the entire engine and transmission line-up

- Making hybrid vehicles more widespread and developing new technologies

• Doubling number of hybrid models

• Plug-in hybrid

- Initiatives towards the diversification of energy sources

• Bio-enthanol / Flex Fuel Vehicles (FFV)

• Fuel cell development

3. Government support needed

Page 225 of 291

TOYOTA MOTOR EUROPE

Thank you for your kind attention !

Page 226 of 291

Group External Relations

Economic impact of rising oil prices

Microeconomic consequences

of rising oil prices, competitiveness and taxation

28th June 2006

Page 227 of 291


Volkswagen Group 2005 Change %

Deliveries to customers th. vehicles 5,192 + 1.0

Production th. vehicles 5,219 + 2.5

Workforce thousand 344.9 + 0.7

Production sites 44

Profit after tax million € 1,120 + 60.7

Key data January – December 2005

Sales revenue million € 95,268 + 7.1

- thereof in Europe 31

Page 228 of 291


Development of oil prices

0

20

40

60

80

100

120

1990 1995 2000 2005 2010 2015 2020 2025 2030

2006 high

reference

low

high = world conventional crude oil resource base is 15 percent smaller than the USGS mean oil resource estimate, production more costly, OPEC contribution to total oil production = 31%

low = world conventional crude oil resource base is 15 percent larger than the USGS mean oil resource estimate, cheaper production, OPEC contribution to total oil production = 40%

* weighted average price of all crude oil containing less than 0.5% sulphur by weight that is imported by US oil refinersUSGS = U.S. Geological Survey

Source: Energy Information Administration – Official Energy Statistics from the U.S. government

World oil prices in 2004 dollars per barrel as forecasted by the end of 2005*

Page 229 of 291


Cost of automotive mobility – Germany

Cost of living and automotive mobility in Germany (2000 = 100)

60

70

80

90

100

110

120

130

140

150

160

Janu

ary 19

95Ja

nuary

1996

Janu

ary 19

97Ja

nuary

1998

Janu

ary 19

99Ja

nuary

2000

Janu

ary 20

01Ja

nuary

2002

Janu

ary 20

03Ja

nuary

2004

Janu

ary 20

05Ja

nuary

2006

Cost of automotive mobility Passenger cars Fuels Automobile insurance Annual Circulation TaxCost of living

[%]

Source: VDA

Page 230 of 291


Cost of automotive mobility – Europe

[%]

Cost of living and automotive mobility in EU-25 (2005 = 100)

60

70

80

90

100

110

120

Janua

ry 199

6Ja

nuary

1997

Janua

ry 199

8Ja

nuary

1999

Janu

ary 200

0Ja

nuary

2001

Janu

ary 20

02Ja

nuary

2003

Janu

ary 20

04Ja

nuary

2005

Janu

ary 20

06

Cost of automotive mobility New and used vehicles FuelsCost of living

Source: Eurostat

[%]

Operating costs of mobility within EU-25 have increased above average, by 34%, in the last decade while the costs of living have only risen by 26% in the same period.

Page 231 of 291


Cost of automotive mobility

The cost of automotive mobility is influenced byseveral developments:

Fuel pricesFuel taxation systemCar taxation system

The taxation system should be harmonised throughout the EU.At present, there are luxury tax, registration tax and additional taxes in several countries.The car taxation system is currently based on different aspects within the EU (cylinder capacity, CO2 performance, kilowatt, exhaust emissions, fuel consumption, weight).

Road pricingVehicle prices which are heavily influenced by requirements on vehicle characteristics set out by EU regulation, e.g. in theareas of CO2, safety and recycling.

Page 232 of 291


Integrated Approach

=

achieving goals in the mostcost-efficient way

(macroeconomic minimisation of costs impacting

on the microeconomic situation, e.g. in the area

of CO2 reduction)

Page 233 of 291

Group External RelationsNovember 2003 End 2005 – CARS 21 Second Half 2006

Objectives of the Integrated Approach as a multi-stakeholder-approach:Minimisation of CO2 abatement costsMaximisation of CO2 reductionSustainable and affordable mobilitySecurity of energy supplyCompetitiveness of the Europeanautomotive industryTechnological leadershipof the Europeanindustry

EU-wide harmonised CO2-based vehicle taxation (ACT) CO2-based biofuel taxationA

ltern

ativ

efu

els

Veh

icle

and

pow

ertra

inm

easu

res

CO2 – Climate Protection 2008 – 2012Evolution of the ACEA Integrated Approach (as in June 2006)

Driv

er tr

aini

ng/

mob

ility

rela

ted

mea

sure

s

Alte

rnat

ive

fuel

s

Veh

icle

and

pow

ertra

inm

easu

res

Driv

er tr

aini

ng/

mob

ility

rela

ted

mea

sure

s

EU-wide harmonised CO2-based vehicle taxation (ACT)

Alte

rnat

ive

fuel

s

Veh

icle

and

pow

ertra

inm

easu

res

Driv

er tr

aini

ng/

mob

ility

rela

ted

mea

sure

s

Page 234 of 291


ACEA CO2 agreementStructural characteristics of CO2 abatement costs (societal costs) with

increasing CO2 reduction, as in June 2006

200

400

600

800

20082005 2010

20122015

abatement costs

€/t CO2 vehicle technologies (Hybrid included)

CO2 neutral fuels/ alternative fuels

Page 235 of 291


Comprehensive and market-driven incentive system,level-playing field for 1st and 2nd generation biofuels.Avoidance of excessive incentives and of a long-termmisallocation of economic resources.Long-term framework conditions, only gradual alterationthrough re-evaluation of sustainability in order to ensurethe investments made.Basis for the harmonisation of fuel taxation within theEU/ at present: amendment of the directive on biofuels.

Sustainability Rating for biofuels according to their:- CO2 efficiency (WtT)- sustainability criteria (biodiversity, avoidance of rainforest deforestation, reduction of the

use of fertilisers and pesticides, complexity of supply etc.)

Classification into sustainability classes (e.g. six SI classes*) as a basis for taxation(full tax rate ↔ highest tax allowance).Obligation to produce certification on SI classes is with the biofuel producer.

* SI Sustainability Index

SI 0SI 1

SI 2

SI 3

SI 4

SI 5Sustainability Index SI = f(CO2 efficiency, sustainability criteria)

tax rate

[Ct/l]

full tax rate on

gasoline or diesel

Biofuel taxation – Proposal VW

Page 236 of 291


Biomass

Biofuelproducer

Tax authorities/ customs set tax rate

Market

Certification organisation assesses the production method of biofuels or fuel

components and quantifies the sustainability performance of the whole production

procedure.

Certification organisation assesses the whole production procedure as well as the conformity to existing

infrastructure and fuel quality.

Fuel trading and producing companies

Biofuel taxationCertification and taxation practices

Page 237 of 291


If the current development continues, the economic challenge for the consumer will be to earmark an increasing part of the budget for mobility.

Against the background of a constant purchasing power, the rise of automotive mobility costs leads to an increasing risk for the competitiveness of the European automotive industry and European growth and employment.

Lean and Better Regulation – Enforcement of CARS 21.Integrated approach in order to achieve objectives in the mostcost-efficient way.EU-wide harmonisation of passenger car taxation.Market introduction of and level-playing field for biofuels as an accompanying measure in order to contain the crude oil market’s speculative elements.

Request: No further increase of mobility costs.

Conclusion

Page 238 of 291

Session II Part 2: Geopolitics and Security of Supply

Page 239 of 291

Organization of the Petroleum Exporting Countries 1

Geopolitics and security of supply

Presented byDr. Hasan M. Qabazard

Director, Research Division, OPEC

European Parliament, BrusselsJune 28, 2006


Page 240 of 291


Global energy security

This is so fundamental to life in the 21st century that every effort should be made to:

Clarify its meaningGain a consensus on itEmbody its true principles in decision-making across the energy sector

Page 241 of 291


Qualities of energy security

This should …

• Be reciprocal – security of demand is as important as security of supply

• Apply to all energy sources free from prejudice

• Extend across the entire supply chain

• Cover all foreseeable time-horizons

• Focus on the most modern products, with the highest environmental standards and latest technology

• Apply to rich and poor nations alike

• Be openly receptive to dialogue and cooperation

Page 242 of 291


OPEC oil and gas reserves versus production

64

29 39

9

15

1210

8

21

59 51

83

0%10%20%30%40%50%60%70%80%90%

100%

Proven OilReserves

CrudeProduction

Proven GasReserves Gas Marketed

OPEC ME Rest OPEC Non OPEC

Proven oil reserves 897 billion barrels > 78% of world shareCrude oil production 30 million barrels a day about 42% of world shareCrude oil exports > 21 million barrels a day > 50% of world share

Page 243 of 291


There is considerable uncertainty overhow much oil OPEC will need to produce (mb/d)

Significant uncertainties with substantial downside risks.Considerable implications on the scale and timing of investments!“Road-map” for oil demand is called for!

Page 244 of 291


Taxation of oil productsDiesel prices and taxes, December 2005

60%

44%

50%

48%

34%

25%

19%

0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40

UK

Italy

Germany

France

Japan

Canada

USA

US$/litre

Crude CIF PriceIndustry MarginTax

Page 245 of 291


Supply chain tightness: downstream bottlenecksHigh capacity utilization rates

75

80

85

90

95

100

Jan04

Apr04

Jul04

Oct04

Jan05

Apr05

Jul05

Oct05

Jan06

Apr06

%

EU-16 USA Asia*

*/ Asia = Japan, South Korea, China, India and Singapore

Page 246 of 291


Crude oil prices: much affected by products markets, too!US $/b

-20

0

20

40

60

80

100

120

J-03

A-03

J-03

O-03

J-04

A-04

J-04

O-04

J-05

A-05

J-05

O-05

J-06

A-06

Unleaded Gasoline WTI Gasoline crack

Page 247 of 291


Dialogue and cooperation

The way forward for all playersOPEC continues to make big effortWidened and deepened in open and constructive manner

ExamplesNew OPEC energy dialogues with European Union, China and RussiaInternational Energy Forum, with Joint Oil Data InitiativeNon-OPEC at OPEC Conferences; OPEC and non-OPEC experts’ meetings …Joint annual workshops organised by OPEC and International Energy Agency

Page 248 of 291


Concluding statement

Follow the path of order and stability in the international oil market.

Adhere to a broader vision, embracing such issues as sustainable development and environmental

harmony.

In this way, it would be possible to imbue the industry with an enriched experience of energy

security.

Page 249 of 291


www.opec.org

Thank you

Page 250 of 291

DSER/DSPJune 28, 2006

Workshop on the impact of oil pricesSession on Geopolitics and Security of Supply

European ParliamentBruxelles 28 June 2006

Pierre Sigonney

Page 251 of 291

30/06/2006 2Émetteur

Source: O&G Journal, USGS 2000, IEA

Former Soviet Union

77

Latin America99

Asia-Pacific36

Africa100

Europe17

North America52

Middle East729

Proven Reserves(as of 1/1/2005)

Oil Resources:

Proven Reserves

Reserve growth

Undiscovered Reserves

Billion barrels

CONVENTIONAL OIL

1110

~ 600 ~ 650

Proven oil reserves cover today more than 40 years of demand…

Extra Heavy

Oil

~ 600

Estimated Reserves

… but are very concentrated in the Middle East

Page 252 of 291


3134

37

0

20

40

60

80

100

120

2000 2005 2010 2020

OECD Africa Asia Latin America FSU OPEC

After 2010, a growing dependence on OPEC production

Mb/d Oil supply to 2020

?

• A significant decrease in OECD oil supply after 2010• Global production from non OPEC should be at best stable after 2010• OPEC decisions will define oil supply (growth in Irak, extra-heavy oil in Venezuela…)

Page 253 of 291


Gas supply in Europe relies on diversificationand high investment

LNG

Billions of m3Pipelines

Source : Total

Norway90 ->140

Atlantic LNGNigeria, Trinidad

10 -> 30

Middle-EastLNG 7->40

North AfrikaPipe 45->65 LNG 30->45

Caspian/M.E.Pipe 0 -> 20

Russia160 ->200

ImportsImports250250-->410 Gm3>410 Gm3

ProductionProductionexcludingexcluding NorwayNorway

240240-->160 Gm3>160 Gm3

Demand570->710 Gm3

NorwayNorway9090-->140 Gm3>140 Gm3

Gas flows in 2005 and 2015

Page 254 of 291


Oil & gas majors : small players in terms of production, big players in terms of investment

Other internationalcompanies

and independents

World oil production in 2005(82 million barrels per day)

5 Majors:

ExxonMobil

ChevronBP

Shell

TOTALNational oil companies

13%

56%

•13% of oil production•23% of E&P capex

Source: Reported data, Total estimates.

31%

Other internationalcompanies andindependents

ExxonMobil

Chevron

BPShell

TOTAL

National oil companies

23%32%

45%

Global E&P capex in 2005($225 billion)

15Page 255 of 291


Kuito (CVX)Girassol (Total)Xikomba (XOM)BBLT (CVX)Dalia/Camelia (Total)Greater Plutonio (BP)

Licence Awarded Discovery Onstream

2005

2006

2007

2001

2002

2003

2004

1997

1998

1999

2000

1993

1994

1995

1996

International companies : increasing field complexity is driving up technical costs and project timescales

Oil & gas technical costs:

Notes: Technical costs: consolidated subsidiaries (FAS 69); Wood Mackenzie data on development timescales

Angola oil projects timescales:

$/b

0

2

4

6

8

10

12

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

CAPEX Exploration costs OPEX

Page 256 of 291


0

20

40

60

80

100

120

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070

Reducing oil demand growth to less than 1% per annum wouldbe the best solution. But is it realistic?

2004 provedreserves

Slowing demand growth would help manage the tensions on oil markets

Mb/d

IEA 2005

Demand 1.5%

Demand 0.7%

Demand 1%

Source: IEA, TOTAL

Page 257 of 291

DSER/DSPJune 28, 2006

Back up

Page 258 of 291


0

20

40

60

80

100

120

1970 1975 1980 1985 1990 1995 2000 20050

20

40

60

80

100

120

$2005/b (monthly average)

Oil prices are volatile: today’s price is no guide to the future !

Sources : IEA, Total

Mb/d

Brent real price($2005/barrel)

Oil demand

Page 259 of 291

30/06/2006 10Émetteur

Non-OECD demand-OECD DemandMb/d Mb/d

0

10

20

30

40

50

60

1971 1981 1991 2001 2011 2021

0

10

20

30

40

50

60

1971 1981 1991 2001 2011 2021

Transportation

Petrochemicals

HeatingElectricity

Transportation

Petrochemicals

HeatingElectricity

To avoid a crisis, oil demand should stabilise in the OECD to allowdemand to grow in the non-OECD

OIl demand growth of 1% over 2005-2020

Source: IEA; TOTAL

Page 260 of 291

11Émetteur

0

15

30

45

1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

Source: IEA

Mb/d

Heavy fuel + coke

Heat

Transport fuels

Refineries conversion

World Production

Others (chemicals, bitumen…)

A lighter product mix will necessitatenew refining conversion capacities

Total is developing a hydrocracker at the Normandy refinery to produce 40 000 b/d of diesel to help answer Europe demand

Page 261 of 291

30/06/2006 12Émetteur

The growing role of gas in power production meansa global market with a key role for LNG

Trends in natural gas demand 2004-2015 (Bm3/year)

LNG importsPipeline importsLocal production

1 Bm3/year = approx. 0.1 Bcfd

2004 2010(e) 2015(e)

North America

400

800

Asia2004 2010(e) 2015(e)

200

400

Europe2004 2010(e) 2015(e)

200

400

600

• Natural gas reserves are relatively abundant -proven reserves equal ~65 years of today’sproduction

• ‘Peak gas’ should notoccur before 2040

• Gas markets are highlyreliant on transport logistics - a worldwide gasmarket requires thedevelopment of a strongLNG network

Total is a key player in the LNG market with participations in 6 export projects (Qatar, Indonesia, Yemen, Iran, Nigeria, Norway)

Page 262 of 291

30/06/2006 13Émetteur

Accelerating energy efficiency improvments is necessary for oiland all the other sources of energy

We’ve been achieving 1.5/2.0% p.a. Can we get to 2.5/3.0% p.a. ?* Energy efficiency is calculated as the ratio of world GDP, at constant prices, over world energy demand, in tonnes oil equivalent.

-2%

0%

2%

4%

6%

8%

1970 1975 1980 1985 1990 1995 2000 2005

Energy efficiency Oil intensity

1.5%

Oil intensity reduction (10 years average mean)

Energy efficiency growth (10 years average mean )

2%

Annual change in energy efficiency*

Page 263 of 291

30/06/2006 14Émetteur

Improvements in renewable power generation cost are made to match conventional electricity costs, especially if distribution costs are high

Sources: IEA, Total

($/MWh)

SolarSolar

Thermo-dynamic

Geothermal Offshore WindOnshore Wind0

50

100

150

200

250

300

350

650

Biomass

20052005 Retailprice

Production costof conventional energy : coal, gas, nuclear

Generation Costs

Page 264 of 291

Sussex Energy GroupSPRU - Science and Technology Policy Research

The Oil-GDP effect and its implications for the deployment of renewable energies

and security of supply

Raphael Sauter and Shimon Awerbuch

SPRU, University of Sussex

Workshop on the economic impact of rising oil pricesEuropean Parliament, Brussels 28th June 2006

Page 265 of 291


• The Oil-GDP effect

• Investment in renewable energy as a way to mitigate the fossil fuel price risk

• Avoided GDP losses

• Implications for security of supply

• Conclusions

Overview

Page 266 of 291


The Oil-GDP effect

• Oil price increases and volatility dampen economic growth by raising inflation and unemployment

• Since the mid 1980s not only oil price levels but also volatility is an important factor

• Asymmetric relationship between oil price increases / decreases and GDP

• Despite changes in the oil-GDP effect, there is no doubt about the negative impact of oil price fluctuation on GDP

• Doubling in oil prices reduces GDP by around 5% - however very different for individual countries:

Page 267 of 291


Oil-GDP effect: % GDP change for oil price doubling

C o u n t r yG D P

E la s t ic i t y C o u n t r yG D P

E la s t ic i t yT a iw a n - 8 .4 % In d o n e s ia - 4 .3 %

H o n g K o n g - 6 .5 % M a la y s ia - 5 .6 %J a p a n - 5 .8 % N o r w a y 5 .1 %

S o u th K o r e a - 8 .7 %P h il ip p in e s - 3 .6 % a /

S in g a p o r e - 4 .2 %T h a ila n d - 8 .4 %

F r a n c e - 9 .8 %G e r m a n y - 8 .1 %

G r e e c e - 2 .4 %U .K . - 3 .8 %

A v e r a g e 6 .3 % A v e r a g e - 1 .6 %a . S ta t is t ic a lly In s ig n if ic a n t .S o u r c e : P a u l L e ib e y , IE A /A S E A N W o r k s h o p , A p r i l 2 0 0 4

% G D P C h a n g e fo r O i l - P r ic e D o u b l in g Im p o r t e r s E x p o r t e r s

-Source: Paul Leiby, IEA ASEAN Workshop, April 2004

Page 268 of 291


Investments in renewable energy sources to mitigate oil-GDP effect

Investments in renewable energy sources create benefits in terms of avoided GDP loses:

• A higher share of renewables in the electricity supply reduces demand for natural gas which reduces natural gas prices

• Through the gas-oil substitution effect oil prices will come under pressure

• Avoided oil price increases and volatility produce avoided GDP losses

Page 269 of 291


-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Change in RE Share10% RPS

Change in RE Share 20% RPS

Yearly Change in Natural Gas Price 10%RPS

Yearly Change in Natural Gas Price 20%RPS

% changes U.S. Gas Wellhead Price and additional RES-E share

Source: Own calculations based on Union of Concerned Scientists, 2002

A 10% RES-E increase reduces natural gas prices on average by 8.2%

Page 270 of 291


Avoided GDP losses for 10% RES-E addition

$0

$30

$60

$90

$120

$150

$180

US EU-25 OECD World

Bill

ions

$U

SD

High Estimate

Low Estimate

Source: Awerbuch and Sauter (2005), Energy Policy, in press

Avoided GDP losses would offset 32 Avoided GDP losses would offset 32 -- 38% of 38% of investment in renewable energy in the EUinvestment in renewable energy in the EU

Page 271 of 291


Implications for security of supply

Investments in renewable energy sources enhance energy security:

• by helping reduce exposure to oil-GDP losses• by contributing to an optimized generation portfolio and

therefore mitigating risk due to minimised exposure to fossil fuel price volatility

• by providing a form of ‘national insurance’ (Lind/Arrow) in that prices move against the value of other financial assets

Page 272 of 291


Conclusions

• Investment costs in renewables can partially be offset by avoided GDP losses

• Currently fuel price risks in the electricity supply system are passed through to consumers and reduce their disposable income

• European oil and gas market structures will have to change to fully allow for the potential of avoided GDP losses

• An increased share of renewable energy sources in the supply portfolio constitutes a no regrets policy

• Similar conclusions apply to investments in energy efficiency measures

Page 273 of 291


Contact details

Thank you for your attention!

Raphael SauterSPRU - Science & Technology Policy Research

University of SussexBrighton, UK

BN1 9QETel +44 (0)1273 873615Fax +44 (0)1273 685865

http://www.sussex.ac.uk/spru

[email protected]

Page 274 of 291

Geopolitics and supply securityGeopolitics and supply security

Alexandre ClauwaertJune 2006

Page 275 of 291

2

CurrentCurrent situation : situation : Growth Growth of of the electric and the electric and energy needsenergy needs

290

710

770New Capacities

2030 capacities2005 capacities

Total 710 1060

Sources: Estimations AIE

Electricity Production – UE 25Needs in new capacities (GW)

Total 710 1060

Sources: Estimations AIE

– UE 25

Sources:UCTE

Electricity Transport

Sources:UCTE

The european sub-markets in 2003

Investments needs for electricity infrastructures are estimated at 750 B €

by AIE for the period 2005-2030 for EU-25

Netincrease

Replacement

Page 276 of 291

3

Increased Increased pressure on pressure on energetic independanceenergetic independance

68

5045

0

50

100

Global energetic dependance* (%)

* Importations in % of the consommationSources : European Commission estimations

1990 2005 2030

68

5045

0

50

100

1990 2005 2030

))

305

526611

1 369

880

711

0

500

1 000

1 500

Fossile energies importations and production Mtep

Sources : European Commission estimations

Importations

Production

1990 2005 2030

305

526611

1 369

880

711

0

500

1 000

1 500

Mtep

Importations

Production

1990 2005 2030

An energetic dependance that has increased since 10 years….

…and that may reach 70% in 2030…

Growth of direct and indirect demand of natural gas, coal and oil products (transport)

Page 277 of 291

4

PreservingPreserving an an energeticenergetic independanceindependanceNatural gasNatural gas

Source : BP Statistical Review

Main risks :

Geopolitics risk

Technical risk

Arbitration risk unfavourable to Europe

Tension on gas supplies ?

Main gas reserves available for Europe (in Tm3)

0.6 1.7

2.547.0UK

NL

NorwayRussie

4.51.3 1.8

5.0

Algerie LibyeEgypte

Nigeria

26.7

25.76.7 6.1

Iran

Qatar

0.6 1.7

2.547.0UK

NL

Russia

4.51.3 1.8

5.0

Algeria LibyaEgypt

Nigeria

26.7

25.76.7 6.1

Iran

Qatar

SaoudiArabia

Page 278 of 291

5

Sources of Sources of natural gasnatural gas

232188

105

97131 236

34

97

124

58105

145

2*

2*

17

3655

24

2014

392523

ε

ε8

19

20

(Bm3) (%) (Bm3) (Bm3)(%) (%)

421 100 523 100 612 100

* Imports from NorwaySources: AIE, Brokers' reports

LNG

2002

PipeImpo

rts

2010 2020

IndigenousProductionEU-15

EU 15Natural GasSupply

189 336 50764 8345

CAGR02-20

7.5

5.1

(4.3)

2.1

Europe (15)

Norway

Non-Europ.

Countries

5.2

n.s.A key-role to play for the LNG in

the diversification of the gas supply sources which explains the

expected growth in this sector.

Page 279 of 291

6

Economical competitivityEconomical competitivity

Long-lasting high oil price prospects

Nominal crude oil prices

US$ per barrel

$-

$20

$40

$60

$80

$100

$120

$140

1970 1980 1990 2000 2010 2020 2030

Break Point

Asian Phoenix

Global FissuresHistory

Source: CERA

0,005,00

10,0015,0020,0025,0030,0035,0040,0045,0050,00

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

Gas prices

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7

0

10

20

30

40

50

60

70

80

CCGT Coal Nuclear

[Technology]

[€/M

Wh]

SRMC Total fixed costs Total investment costs

LRMC Comparison 2007 Baseload O ti

Economical competitivity Economical competitivity of of electricalelectrical production production costscosts

Source : Suez Electrabel june 2006 forwardsPage 281 of 291

8

Economical competitivityEconomical competitivityof of renewable renewable production production costscosts

30 40 50 60 70 80 90

hydroelectricity low (High fall 800kW, 6000 hours)

PAC SOFC-biogaz 8760 hours *

CCGT 8760 hours

Ground wind-energy 2500 hours

Geothermy DOM *

methanisation

biogas de CSD

enr marines *

Geothermy HDR *

hydroelectricity high (Low fall 500kW, 3624 hours)

codigestion

PV commercial

PV residential

€/MWh2015 2007

100 200 300 400 500 600

Photovoltaïc

Photovoltaïc

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9

The environmental The environmental stakesstakes

Kyoto Protocol

− 5% reduction of GES emissions in 2012 in regard to 1990…− …until now the electrical sector is responsible for 39% of the

emissions − European system EU-ETS

Combustion directive (SO2, NOx) ‘Large combustion plants’

726484

964

?

726484

964

?

Sources : AIE

Electricity ProductionCO2 Emissions* through Combustible (t 2 /GWh)

Pétrole Gaz

Nucléaireet

Renouvelables

* l

Sources : AIE

2/GWh)

Coal Oil Gas

Nuclearand

Renewables

*Emissions bound to combustible extraction , to installationsConstruction and to the equipment functioning.

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10

A A strain strain on on the reserve margins the reserve margins on on thethescale scale of of the the continental block (NWE)…continental block (NWE)…

Supply and Demand Balance: NWE with LT contracts

150000

170000

190000

210000

230000

250000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

MW

Guaranteed Capacity Testing / In Construction Wind in 2004Peak load derated (with LT contracts) Reserves Required by TSO Generation Adequacy 5%Generation Adequacy 5% - 10% FRA Source: RALM

Estimated needs between 16 et 22 GW ( 2010 )Page 284 of 291

11

……until nowuntil now the prices the prices have not have not yet reached yet reached thethe longlong--term term marginal marginal costcost (LRMC)(LRMC)

29,99

46,47

65,25 64,25

22,55

28,52

57,36

21,19

55,9058,78 58,80

64,45

52,390

31,5833,46

45,978

51,6953,48

56,40

29,49

24,07

54,58

46,672

29,22 28,13

20

25

30

35

40

45

50

55

60

65

70

75

80

2001 2002 2003 2004 2005 2006 2007 2008 2009

€/M

Wh

APX EEX PWN LRMC CCGT ZEE without CO2 LRMC CCGT ZEE with CO2

Reference Date: 31/05/2006

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12

The energy mix problemThe energy mix problem

131

146

26134

12

170

34

2005 2030

178 376

Sources : Estimations AIE

Electric Production Capacities in Renewable energies (GW)

Total (GW)

Others*Biomass and wastes

Wind energy

Hydro

* Solar, geothermic, tides/waves.

131

146

26134

12

170

34

2005 2030

178 376

Sources : Estimations AIE

Total (GW)

Hydro

Part of the answer to theenvironmental stakes…

… but a potential partially limited by:

− Potential largely exploited in hydraulic

− A photovoltaic solar development not very credible in the short-term

Developing prospects are thus centered on wind energy and biomass (co)firing

The renewable energies stakes

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13

The energyThe energy mix problemmix problem

The historical nuclear development depends on localeuropean countries policy.

Strongly divided positions in relation to nuclear relaunch

An element of answer to the Kyoto constraints, but environmental elements still to be clarified (spent fuel)

The nuclear stakes

0%

10%20%

30%40%

50%60%

Nuclear part in the capacities (in %)

56%

18%

37%

16%12%

0%

19%

France

German

y

Belgium UK

Spain Ita

ly

UE 25

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14

The fossil energy stakes

A contribution that remains important for the countries who choose to abandon the nuclear…

Major stakes in terms of R&D needed to assure the competitivity of this technology → Zero Emission Technology problem

− Integration of the technologies in the working of the existingpower plants (i.e Tests-projects)

− Increase of the efficiency of the coal power plants

− Reduction of the costs of the captation/sequestration technologies

The energy mix problemThe energy mix problem

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15

The community directives describe a general framework

But :

• A very uneven implementation− Eligibility rythm− Unbundling of activities− Access to the networks

• A very incomplete taking into account of the long-term stakes of the sector− A primat to the development of the short-term competion

A A european marketeuropean market beingbeing developeddeveloped… … requiring requiring a a greater technical and regulatory greater technical and regulatory coordinationcoordination

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16

A A marketmarket structured around structured around large large actors actors andand undergoingundergoing consolidation consolidation movementsmovements ……

Turnover 2004 (B€)Turnover 2004 (B€)

40.746.9 4444.7 34.3 24.6 17.9 17.60.4

10.30.16.3

EdF*

RWEEon

Enel

Veolia

GdF

Iberdrola

Gas

NaturalEndesa

Services &Energy

Environment

Other activities

11.4

29.346.9

1.55.9

33.6

1.0

43.7

5.2

29.1

3.6

16.0

5.0

17.99.9

6.2

17.6

European groups

Suez

CEZ

3.3

…

…

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17

-Strategic vision

-What we need:

- Certainty on governments’ behaviour in uncertain matters,like CO2,market design, acceptable energy mix, external relations with major supplying countries…

-European market design and structure, investor friendly environment-Demand reduction methods-Diversification, role of LNG, rebirth of nuclear generation-Renewable energies

SynthesisSynthesis

Security of Supply

AffordabilitySustainability

Competitivemarket

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Documents

Workshop on the economic impact of rising oil prices