The New World Order in Energy: Peak Oil or Peak Prices? Prepared For: APIC Marketing Seminar by CMAI Asia Petrochemical Industry Conference 2008 Raffles City Convention Centre, Singapore May 2008 Prepared by: John H. Vautrain Purvin & Gertz, Inc.
Don t believe everything you hear. Many intelligence reports are contradictory; even more are false and most are uncertain. --Carl von Clausewitz 2
Both oil production and prices are at very high points. Global Oil Demand MB/D Arab Light Crude Oil Price Constant U.S. $/B 90,000 70 80,000 70,000 60,000 50,000 40,000 30,000 Demand Price 1986 1991 1996 2001 2006 60 50 40 30 20 10 0 3
Global crude prices are not responsive to inventory signals. Historically rising inventories would trigger crude price downturns. Since early 2003, price has not been responding Dubai FOB, $/B OECD Crude Inventory, Mil Bbls 100.00 Dubai 400 90.00 OECD Crude Inventory 500 80.00 70.00 600 60.00 50.00 40.00 30.00 20.00 Priceinventory strongly correlated Priceinventory correlation broken 700 800 900 10.00 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 Note: Inventory plot is inverse of the 5 month rolling average inventory. Inventory corrected for trend and seasonal effects from the monthly inventory data. 1,000 4
Why are prices so high? Demand has been growing rapidly. Spare production capacity is no longer as great as it once was. Worries about adequacy of supply have triggered the price rise. What about supply? Will it continue to be enough? If there isn t enough supply, then what happens? 5
Non-OPEC R/P ratio is declining. Non-OPEC reserves peaked in the mid-1990s. Production has been increasing only by reducing R/P ratio we are pulling down these dwindling reserves faster. Recent experience is non- OPEC replaces about 75% of production with new reserves suggesting production could fall in the medium term. Production, Million B/D R/P Ratio, years Reserves, billion bbl 40 20 38 19 36 18 34 17 32 16 30 15 28 14 26 13 24 12 22 11 20 10 1980 1983 1986 1989 1992 1995 1998 2001 2004 200 180 160 140 120 100 80 60 40 20 0 Production R/P Reserves Source: BP Statistical Review & P&G Analysis 6
What role will CIS play? Cold War-era reserve data is of questionable quality. Substantial investments have been made that have raised reserves over the past decade. Production is responding and can increase more if logistics issues are resolved. Russian policies are not aligned to maximum production. Production, Million B/D R/P Ratio, years 14 42 13 39 12 36 11 33 10 30 9 27 8 24 7 21 6 18 5 15 Reserves, billion bbl 140 120 100 80 60 40 20 4 12 1980 1983 1986 1989 1992 1995 1998 2001 2004 0 Production R/P Reserves Source: BP Statistical Review & P&G Analysis 7
OPEC reserve uncertainty No one really knows what OPEC reserves are. OPEC is seeking now to expand production capacity. How much more how fast? Production, Million B/D 110 R/P Ratio, years 100 90 40 80 35 70 30 60 25 50 20 40 15 30 Reserves, billion bbl 1000 900 800 700 600 500 10 20 1980 1983 1986 1989 1992 1995 1998 2001 2004 400 Production R/P Reserves Source: BP Statistical Review & P&G Analysis 8
Peak prices: Caused by what? Peak price is consistent with having surplus production capacity. Where will this oil come from: Non-OPEC? FSU? OPEC? Are predictions of peak oil necessarily true? 9
What if oil has peaked? End of life as we know it? Global Oil Demand Million B/D 105 100 Demand-driven Supply-driven 95 90? 85 80 75 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015? 10
Demand has fallen before. Why? Global Oil Demand MB/D 70000 65000 60000 Supply Driven Crisis OECD Gasoline MB/D 14500 14000 13500 13000 55000 50000 45000 All Petroleum Products OECD Gasoline CAGR% 1970-1979 1979-1983 All 3.8-2.6 Products Gasoline 3.0-2.0 12500 12000 11500 11000 10500 40000 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Failure of production Failure of product supply Frank shortfall Consumer panic 11 10000
Efficiency is key to peak oil response. 25 24 23 22 21 20 Global Gasoline Demand, MMB/D Annual New Vehicle Efficiency Gain 1% 3% 5% 7% 9% Consumer leads government Driving habits Vehicle class selection Existing fleet Replacement fleet New vehicle efficiency gains CAFE standards set a target floor not a ceiling. 19 2009 2010 2011 2012 2013 2014 2015 12
Elastic response OPEC s nightmare Price Short Term Long Term Elastic response builds with time Demand can fall far more than supply limits require Stress within OPEC can develop Production quota allocation Opportunity for cheating Quantity Demanded 13
Crude price drivers Rising demand Depleting reservoirs Concentrated OPEC control More extreme exploration locations New E&P technology Advancing efficiency Environmental factors Competing fuels 14
Both production and price peaked at the last crisis. Global Oil Demand MB/D 70,000 Arab Light Crude Oil Price Constant U.S. $/B 90 65,000 60,000 55,000 50,000 45,000 40,000 35,000 Demand Price 30,000 1970 1975 1980 1985 80 70 60 50 40 30 20 10 0 15
About This Presentation This presentation has been prepared as a public speech and there are no legal beneficiaries of this work. Any third party in possession of the presentation may not rely upon its conclusions without the written consent of Purvin & Gertz, Inc. This presentation is copyrighted by Purvin & Gertz, Inc. Possession of the presentation does not carry with it the right of publication. Purvin & Gertz Inc. conducted this analysis and prepared this report utilizing reasonable care and skill in applying methods of analysis consistent with normal industry practice. All results are based on information available at the time of review. Changes in factors upon which the review is based could affect the results. Forecasts are inherently uncertain because of events or combinations of events that cannot reasonably be foreseen including the actions of government, individuals, third parties and competitors. NO IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE SHALL APPLY. 17