Oil Price Factors If you use these images, please credit L. A. Starks, author 13 DAYS: THE PYTHAGORAS CONSPIRACY lastarksbooks.com

Crude Oil Price

Four Macro Factors 1) US Dollar Weakness; Oil denominated in Dollars 2) Oil as Inflation Hedge 3) Demand for ALL Commodities (Real Assets Excluding Real Estate) 4) Oil is Single-Source Fuel for Transportation; Undiversified

Dollar Weakness and Oil Price

Oil Supply Demand Inflection Point MMBPD of spare supply capacity, 3% of total All in Saudi Arabia OPEC not meeting until September Short-term marginal cost of supply is very large ($110-$120/bbl) Rut of Upward Momentum

Short Term Disruptions Fog on the Houston Ship Channel; GOM hurricanes Weekly oil and gasoline inventory changes Conflict involving oil assets anywhere Forties pipeline shutdown due to Scottish refinery strike Nigerian bombings and strike Attack on Japanese oil tanker

Longer Term Supply Estimates 3.4 to 6 trillion bbls; used 1 trillion Total geologic estimates dont matter; political & economic limits frame availability Practical peak or plateau; 65% of reserves owned by NOCs IOCs have full access to 7% NOCs revenue-rich; resources as patrimony; different development incentives some starved of capital by govt (Venezuela, Nigeria, Iran)

January 2008 Oil Production

US Crude Oil Imports Aug-07Sep-07Oct-07Nov-07Dec-07Jan-08 Canada1,9501,9601,8891,9191,7841,944 Saudi Arabia1,4681,4411,3701,5301,6751,479 Mexico1,3811,2931,3221,4841,2341,198 Nigeria1,1841,1371,1841,2451,2101,163 Venezuela1,1381,1461,2211,2271,2461,135 Angola Iraq Algeria Ecuador Kuwait Colombia Brazil

Impediments

Reserves (less available or costly) Projects coming on this year w/total peaks 3 MMBPD Saudi Arabia not above 12.5 MMBPD - Al-Naimi Russiachanging terms, (New Cold War), production plateau Mexico (Constitution), Cantarell declining from 2.0 to 1.3 MMBPD Venezuela (political), declining Iraq (War) Nigeria (MEND, tax regime)

Other Reserves (less available or costly) cont. 40 billion barrels in US off limits (political) US Alaska Prudhoe declining Some Brazil (hostile geology) Canadian tar sands, $65/bbl Ultra Deepwater GOM Arctic seabed (hostile geology) Lack of good field data for Saudi Arabia, Russia

Reserves (more available) US-Bakken Shale Some Brazil Saudi Arabia Khurais Iraqi discussions with IOCs Kashagan USGC (Jack field; Lower Tertiary play)

Drilling and Transport Costs All drilling costs much higher (Rig shortage for deepwater GOM like Jack field) Credit crunch has limited access to capital Transport more expensive: Russia 2007 cutoff through Belarus Ethanol (US, Brazil Esso news) Oil sands to USGC Alaskan gas to US; KEY to Alaska oil field development; TransCanada only licensee

Refining Oil without refining is a swimming pool without water Supply of refining capacity is 2nd-level effect most miss US refining at capacity; no new refineries NIMBY, long payback, regulatory step function changes Debottlenecking secret Port Arthur Motiva (Shell-Aramco), 275 to 600 KBPD Change in crude quality Increasing imports of gasoline, other petroleum products

Demand Forecast reduced, 86.6 MMBPD Level of effect from US economic weakness *Price signals in US are key Increasing fuel efficiency (rolling stock turnover) Story is China, India, Middle East *No price signals, Middle East and Asia Western consumption a target

Increasing Asian Car Demand

Alternatives Ethanol: hero to zero Food prices up 83%; law of unintended consequences BPs prescience Ethanol mandate Higher CAFÉ standards Biofuels not from foodstocks (no drinkable jet fuel) Hybrids & Electric

Factors That Could Bring Down Oil Prices (Short Term) Change in Fed monetary direction (stop rate drop) Move of speculative/investment funds away from commodities Corn-derived ethanol Price signals are powerful; invisible hand (millions) US conservation, consumer and industrial Transport substitutes: videoconferencing, carpooling, mass transit

Factors That Could Bring Down Oil Prices (Long Term) Short-term factors plus capital investment Drop levy on imported ethanol Non-food biofuels Other non-petroleum transport fuel and cars that can use it US fleet meeting higher CAFÉ standards Meaningful number of hybrids and electric Other countries reduce subsidies

Oil Price Predictions $50-$80 If dollar strengthens to level of euro, $70/bbl Rubins estimate of $120/bbl Traders betting own money; NYMEX collected wisdom

NYMEX Forward Price Curve