The History of the Future Price of Oil

The History of the Future Price of Oil JJ Dooley, MA Wise and PJ Runci Joint Global Change Research Institute May 28, 2008 PNNL-SA-60763

Climate change is a long-term strategic problem with implications for today Stabilizing atmospheric concentrations of greenhouse gases and not their annual emissions levels should be the overarching strategic goal of climate policy. This tells us that a fixed and finite amount of CO 2 can be released to the atmosphere over the course of this century. We all share a planetary greenhouse gas emissions budget. Every ton of emissions released to the atmosphere reduces the budget left for future generations. As we move forward in time and this planetary emissions budget is drawn down, the remaining allowable emissions will become more valuable. Emissions permit prices should steadily rise with time. $/tonne CO2 (2000$) Global Fossil Fuel Carbon Emissions Gigatons per Year.r - 20 15 10 5 $250 $200 $150 $100 $50 $0 450 ppm Stabilization 550 ppm Stabilization 650 ppm Stabilization 750 ppm Stabilization Historical Emissions GTSP_750 GTSP_650 GTSP_550 GTSP_450 GTSP Reference Case 1850 1900 1950 2000 2050 2100 2150 2200 2250 2300 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2

Stabilization of CO 2 concentrations means fundamental change to the global energy system 1400 1200 History Future 2100 740 ppm 1400 1200 History Future 2100 550 ppm 1000 2050 510 ppm 1000 2050 490 ppm EJ/year.. 800 600 Today 380 ppm EJ/year. 800 600 Today 380 ppm 400 200 1900 300 ppm 1950 310 ppm Preindustrial 280 ppm 0 1850 1900 1950 2000 2050 2100 Oil Natural Gas Coal Biomass Energy Non-Biomass Renewable Energy 400 200 Preindustrial 280 ppm 1900 300 ppm 1950 310 ppm 0 1850 1900 1950 2000 2050 2100 Oil + CCS Natural Gas + CCS Coal + CCS Nuclear Energy End-use Energy 3

CCS Deployment by Electric Utilities IGCC+CCS and Nuclear Are Keys to Decarbonizing Baseload Power $/MWh 60.0 50.0 40.0 30.0 20.0 PC Dispatch Cost Min Dispatch 50 pctile 90 pctile Gas CC PC PC PC Gas CT Gas Steam In, conventional fossilfired power plants were the predominant means of generating competitively priced electricity. $/MWh 10.0 0.0 Renewables 0 20000 40000 60000 80000 100000 120000 140000 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 Nuclear 2045 Nuclear IGCC CCS PC Dispatch Cost Min Dispatch 50 pctile 90 pctile New Gas CC PC MW 0.0 Renewables 0 50000 100000 150000 200000 250000 MW PC Gas CC Gas CT Gas Steam However, given today s and (likely) tomorrow s higher natural gas prices and the imposition of a hypothetical binding greenhouse gas control policy, While renewables are likely to grow substantially, IGCC+CCS and nuclear become -- in some regions of the U.S. -- the dominant means of generating lowcarbon baseload electricity. 4

Two Core Principals for Good Guide Climate Policy (Edmonds, 1999) Credible Commitment There needs to be a credible expectation that the future energy regime will be different than the past. Technology maturation cycles are significantly longer than political cycles, the Commitment must be binding and transcend multiple political cycles for non-carbon energy technologies to have a chance of achieving significant market penetration. Means of Controlling Real Costs There needs to be a credible expectation that the cost of implementing a commitment will not be too onerous. If sticking with the Commitment is too painful (costly), it will ultimately implode. 5

US Oil Prices 1861-2008 $160 Average Anual Oil Prices US Dollars $140 $120 $100 $80 $60 $40 $20 Real (US$) Average 2008 Price through May 16, 2008 Nominal (US$) 1861 1871 1881 1891 1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 6

$160 $140 $120 $100 $80 $60 $40 $20 U.S. Oil Prices 1969-2008 Average 2008 Price through May 16, 2008 7 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2007 1973 1971 1969 Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$)

Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$) $160 $140 $120 $100 $80 $60 $40 $20 History of Oil Price Projections and Actual Oil Price (real US$) 1969 1972 1975 Average 2008 Price through May 16, 2008 1978 1981 1984 1987 1990 1993 1996 1999 2002 2008 2011 2014 Resources in America's Future (RFF 1962) Steele (Feb 1973) Baughman Free Flowing Imports Scenario (Feb 1973) Baughman Restricted Imports Scenario (Feb 1973) IEW (December 1981) Low Cost Scenario:Energy in a Finite World (1981) 2017 2020 2023 2026 2029 High Cost Scenario: Energy in a Finite World (1981) Yergin & Hillenbrand (1982) Low Price Yergin & Hillenbrand (1982) High Price AEO 1982 AEO 1983 IEW (July 1984) AEO 1984 AEO 1985 AEO 1986 AEO 1987 IEW (January 1987) Long Range Projections: Low Energy Efficiency Case (DOE 1988) Long Range Projections: Reference Case (DOE 1988) Long Range Projections: High Energy Efficiency Case (DOE 1988) AEO1989 IEW (January 1990) AEO 1990 AEO 1991 AEO 1992 GRI 1992 AEO 1993 IEW (January 1993) AEO 1994 AEO 1995 IEW (January 1996) AEO 1996 AEO 1997 AEO 1998 AEO 1999 AEO 2000 AEO 2001 AEO 2002 AEO 2003 AEO 2004 AEO AEO 2006 Actual 8

$160 $140 $120 $100 $80 $60 $40 $20 Oil Prices and Projections Pre-1973 Arab Oil Embargo (real US$) Average 2008 Price through May 16, 2008 9 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2007 1969 Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$)

Expectations and Incentives Matter: Pre-1973 Arab Oil Embargo $8,000 Federal Energy R&D Investments (1961-2008) $7,000 Millions of Real US$ $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Millions of barrels of peroleum used to generate electricy within the U.S. per year 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Other Energy R&D (e.g., Basic Energy Sciences) Nuclear (Fission) Fusion Liquid Metal Fast Breeder Reactor (1968-1985) Fossil Synfuels Program (1970-1984) Sequestration Large Scale Solar Demonstrations (1978-1982) Renewable Energy Energy Conservation Efficiency and Renewables 700 600 500 400 300 200 100 U.S. Oil-fired Electric Generation Investments (1950-2007) Petroleum (millions of barrels per year) Petroleum (percent of total electricity generation) 18% 16% 14% 12% 10% 8% 6% 4% 2% Petroleum-fired generation as a percent of all electricity generation Federal investments in energy R&D were stable or in decline and were overwhelmingly focused on nuclear power. The electric utility sector was rapidly expanding its use of (cheap) petroleum. 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 0% 10

$160 $140 $120 $100 $80 $60 $40 $20 Oil Prices and Projections Made Between the Major Oil Disruptions of the 1970s (real US$) Average 2008 Price through May 16, 2008 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2007 11 1969 Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$)

Millions of Real US$ $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Millions of barrels of peroleum used to generate electricy within the U.S. per year Federal Energy R&D Investments (1961-2008) 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Other Energy R&D (e.g., Basic Energy Sciences) Nuclear (Fission) Fusion Liquid Metal Fast Breeder Reactor (1968-1985) Fossil Synfuels Program (1970-1984) Sequestration Large Scale Solar Demonstrations (1978-1982) Renewable Energy Energy Conservation Efficiency and Renewables 700 600 500 400 300 200 100 U.S. Oil-fired Electric Generation Investments (1950-2007) 0 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Expectations and Incentives Matter: Between the Major Oil Disruptions of the 1970s Petroleum (millions of barrels per year) Petroleum (percent of total electricity generation) 18% 16% 14% 12% 10% 8% 6% 4% 2% Petroleum-fired generation as a percent of all electricity generation Millions of Real US$ $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 Federal and private sector investments in energy grew dramatically and became a more well rounded portfolio of activities. Electric utilities quickly reversed course and rapidly decreased their use of petroleum. Major US Oil and Gas Companies Investments in Energy R&D (1961-2008) 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Other/Unclassified Energy R&D Nonconventional Energy R&D Downstream Natural Gas Other Coal Coal Gasification/Liquefaction Other Petroleum Gas to Liquids Oil and Gas Recovery 1999 2001 2003 12

$160 $140 $120 $100 $80 $60 $40 $20 Oil Prices and Projections 1980s (real US$) Average 2008 Price through May 16, 2008 13 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2007 1971 1969 Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$)

Millions of Real US$ $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Federal Energy R&D Investments (1961-2008) 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Other Energy R&D (e.g., Basic Energy Sciences) Nuclear (Fission) Fusion Liquid Metal Fast Breeder Reactor (1968-1985) Fossil Synfuels Program (1970-1984) Sequestration Large Scale Solar Demonstrations (1978-1982) Renewable Energy Energy Conservation Efficiency and Renewables As time passed and the oil disruptions of the 1970s faded into memory, the less priority was accorded to investments in new energy technologies. Expectations and Incentives Matter: The 1980s U.S. Venture Capital Invested in "Industrial/Energy" Field, Millions of Constant US$ Millions of Real US$ U.S. Venture Capital Investments in Energy 1980-2007 $2,500 $2,000 $1,500 $1,000 $500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 Venture Capital Investments in "Industrial/Energy" Deals Venture Capital Devoted to "Industrial/Energy" Deals as a Percent of All Venture Capital 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 2006 2007 25% 20% 15% 10% 5% 0% Funding for "Industrial/Energy" Field as a Percent of All U.S. Venture Capital Funding Major US Oil and Gas Companies Investments in Energy R&D (1961-2008) Other/Unclassified Energy R&D Nonconventional Energy R&D Downstream Natural Gas Other Coal Coal Gasification/Liquefaction Other Petroleum Gas to Liquids Oil and Gas Recovery 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 14

Expectations and Incentives Matter: The 1980s 2,500 North Dakota / Wyoming 3,900 miles of CO 2 pipeline built to date Miles of Large CO2 Pipelines by State and Decade of Construction 2,000 1,500 1,000 500 Louisiana / Mississippi Texas/ New Mexico / Colorado / Oklahoma 0 Pre-1980 1980-1990 1990-2000 2000s >60% of this was built in the 1980s >50% was built in and around West Texas in the 1980s 15

Active CO 2 -driven EOR Floods in the U.S. per Year U.S. Domestic Oil Production using CO 2 EOR (b/d) 120 100 80 60 40 20 0 300,000 250,000 200,000 150,000 100,000 50,000 - Active CO2-driven EOR Projects Domestic Oil Price ( US$) 1971 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 CO2-driven EOR Production (b/d) Domestic Oil Price ( US$) Expectations and Incentives Matter: The 1980s 1971 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 $90 $80 $70 $60 $50 $40 $30 $20 $10 $90 $80 $70 $60 $50 $40 $30 $20 $10 Average Domestic Oil Price $/bbl ( US$) Average Domestic Oil Price $/bbl ( US$) Most of the existing CO 2 pipeline infrastructure was built during a period of rapidly declining oil prices. This was in part due to the fact that the federal government was sending a clear signal that it would support domestic oil production and that this support would not be short-lived: During the relatively short period 1980-1985, major U.S. oil companies paid over $88.5 billion in Windfall Profits Taxes to the U.S. Government. It was also due to the fact that their was a widely held belief that oil prices would begin to increase in the near future. 16

$160 $140 $120 $100 $80 $60 $40 $20 Oil Prices and Projections 1990s (real US$) Average 2008 Price through May 16, 2008 17 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2007 1969 Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$)

Millions of Real US$ $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Federal Energy R&D Investments (1961-2008) 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Other Energy R&D (e.g., Basic Energy Sciences) Nuclear (Fission) Fusion Liquid Metal Fast Breeder Reactor (1968-1985) Fossil Synfuels Program (1970-1984) Sequestration Large Scale Solar Demonstrations (1978-1982) Renewable Energy Energy Conservation Efficiency and Renewables As time passed and the oil disruptions of the 1970s faded into memory, the less priority was accorded to investments in new energy technologies. Expectations and Incentives Matter: The 1990s U.S. Venture Capital Invested in "Industrial/Energy" Field, Millions of Constant US$ Millions of Real US$ U.S. Venture Capital Investments in Energy 1980-2007 $2,500 $2,000 $1,500 $1,000 $500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 Venture Capital Investments in "Industrial/Energy" Deals Venture Capital Devoted to "Industrial/Energy" Deals as a Percent of All Venture Capital 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 2006 2007 25% 20% 15% 10% 5% 0% Funding for "Industrial/Energy" Field as a Percent of All U.S. Venture Capital Funding Major US Oil and Gas Companies Investments in Energy R&D (1961-2008) Other/Unclassified Energy R&D Nonconventional Energy R&D Downstream Natural Gas Other Coal Coal Gasification/Liquefaction Other Petroleum Gas to Liquids Oil and Gas Recovery 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 18

$160 $140 $120 $100 $80 $60 $40 $20 Oil Prices and Projections 2000s (real US$) Average 2008 Price through May 16, 2008 19 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2007 1969 Previous Global Oil Price Projections vs Actual Global Oil Price $/bbl (real US$)

Expectations and Incentives Matter: The 2000s 120 $90 100 80 60 40 20 0 Active CO2-driven EOR Projects 1971 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 $80 $70 $60 $50 $40 $30 $20 $10 CO 2 -driven EOR on the upswing. More venture capital is being devoted to energy investments. 20 Active CO2-driven EOR Floods in the U.S. per Year Average Domestic Oil Price $/bbl ( US$) 300,000 250,000 200,000 150,000 100,000 50,000 Domestic Oil Price ( US$) CO2-driven EOR Production (b/d) $90 $80 $70 $60 $50 $40 $30 $20 $10 1971 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 - U.S. Domestic Oil Production using CO2 EOR (b/d) Average Domestic Oil Price $/bbl ( US$) Domestic Oil Price ( US$) U.S. Venture Capital Investments in Energy 1980-2007 $2,500 $2,000 $1,500 $1,000 $500 25% U.S. Venture Capital Invested in "Industrial/Energy" Field, Millions of Constant US$ Funding for "Industrial/Energy" Field as a Percent of All U.S. Venture Capital Funding Venture Capital Investments in "Industrial/Energy" Deals Venture Capital Devoted to "Industrial/Energy" Deals as a Percent of All Venture Capital 20% 15% 10% 5% 0% 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 2006 2007

The Recent History of World Oil Prices in Local Currencies

Apr-08 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Selected Currency Exchange Rates 2002-2008 NominalUS$ Euros Canadian $ 100 Japan Yen 23 Jan-08 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-03 Oct-02 Jul-02 Apr-02 Jan-02 per US$

140 120 100 80 60 40 20 0 World Oil Prices 2002-2008 Expressed in Local Currencies NominalUS$ Euros Canadian $ 100 Japan Yen 24 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 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-02 Oct-02 Jan-02 Apr-02 local currency per barrel

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 World Oil Prices in Local Currency Jan 2002=1 NominalUS$ Euros Canadian $ 100 Japan Yen 25 Oct-02 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 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Apr-02 Jul-02 Jan-02 Jan 2002=1

Back-up Slides 27

Federal Energy R&D Investments (1961-2008) $8,000 $7,000 Millions of Real US$ $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 Other Energy R&D (e.g., Basic Energy Sciences) Nuclear (Fission) Fusion Liquid Metal Fast Breeder Reactor (1968-1985) Fossil Synfuels Program (1970-1984) Sequestration Large Scale Solar Demonstrations (1978-1982) Renewable Energy Energy Conservation Efficiency and Renewables 28

U.S. Oil-fired Electric Generation Investments (1950-2007) 700 18% Petroleum (millions of barrels per year) Millions of barrels of peroleum used to generate electricy within the U.S. per year 600 500 400 300 200 100 Petroleum (percent of total electricity generation) 16% 14% 12% 10% 8% 6% 4% 2% Petroleum-fired generation as a percent of all electricity generation 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 0% 29

Major US Oil and Gas Companies Investments in Energy R&D (1961-2008) Millions of Real US$ $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 Other/Unclassified Energy R&D Nonconventional Energy R&D Downstream Natural Gas Other Coal Coal Gasification/Liquefaction Other Petroleum Gas to Liquids Oil and Gas Recovery $500 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 30

$2,500 $2,000 $1,500 $1,000 $500 U.S. Venture Capital Investments in Energy 1980-2007 25% 20% 15% 10% 5% 0% 31 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2006 2007 1980 1981 U.S. Venture Capital Invested in "Industrial/Energy" Field, Millions of Constant US$ Funding for "Industrial/Energy" Field as a Percent of All U.S. Venture Capital Funding Venture Capital Investments in "Industrial/Energy" Deals Venture Capital Devoted to "Industrial/Energy" Deals as a Percent of All Venture Capital

Number of U.S. CO 2 EOR Floods 1971-2008 120 $90 Active CO 2 -driven EOR Floods in the U.S. per Year 100 80 60 40 20 Active CO2-driven EOR Projects Domestic Oil Price ( US$) $80 $70 $60 $50 $40 $30 $20 $10 Average Domestic Oil Price $/bbl ( US$) 0 1971 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 32

300,000 250,000 200,000 150,000 100,000 50,000 - Domestic U.S. CO 2 EOR Oil Production 1971-2008 CO2-driven EOR Production (b/d) $90 $80 $70 $60 $50 $40 $30 $20 $10 33 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 1971 U.S. Domestic Oil Production using CO2 EOR (b/d) Average Domestic Oil Price $/bbl ( US$) Domestic Oil Price ( US$)