Transcript Jim_Glassman_TuesdayLunch.pps

A P R I L 1 9, 2 0 0 5
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Energy and the Economy
Jim Glassman
[email protected]
212-834-5102
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
What’s up with oil? …
2
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… double OPEC’s “target”
West Texas Intermediate (Dollars Per Barrel)
60
70
50
60
50
OPEC's Price Target Range for WTI
40
40
30
30
20
20
10
10
0
0
93
94
95
96
97
98
99
00
01
02
03
04
05
Updated Through April 2005
Source: Bloomberg LLP.
3
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
Global demand is strong …
4
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… but so is supply …
Global Petroleum Supply and Demand (Millions of Barrels Annualized)
86
86
84
84
Global Supply
82
82
80
80
78
78
76
Global Demand
76
74
74
72
72
70
1997
1998
Updated Through April 2005
70
1999
2000
2001
2002
2003
2004
2005
Source: Bloomberg LLP.
5
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… and inventories are normal
US Private Oil Inventories (Millions of Barrels)
375
375
350
350
325
325
300
300
275
275
250
250
93
94
95
96
97
98
99
00
01
02
03
04
05
Updated Through April 2005
Source: American Petroleum Institute.
6
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
A weak dollar drains a petrodollar’s purchasing power …
7
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… but OPEC isn’t dragging its feet
Petroleum Output (Millions of Barrels Annualized)
30
30
OPEC Output
25
25
OPEC Quota
20
20
15
1997
15
1998
1999
2000
2001
2002
2003
2004
2005
Source: Bloomberg LLP.
8
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
… and not everything’s made in Europe
9
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
It’s a stealth OPEC move to raise the target price …
10
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… I think they know better
West Texas Intermediate (Dollars Per Barrel)
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
1975
0
1980
1985
1990
1995
2000
2005
Source: Bloomberg LLP.
11
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… and why are the Saudis saying this?
As Oil Demand Surges,
Saudis Offer to Boost Output
Rare Move Aims to Head Off
Cuts, Backlash From Buyers;
Meeting With Bush Looms
By BHUSHAN BAHREE
Staff Reporter of THE WALL STREET JOURNAL
April 7, 2005; Page A1
Saudi Arabia, the world's largest oil exporter, is telling
petroleum buyers it will supply them with all the oil they
want to help them build up inventories ahead of an
expected sharp rise in energy demand later this year.
12
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
A lower dollar reduces the price to non-dollar consumers …
13
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… so why aren’t they buying?
Petroleum Demand (Barrels)
86
30
84
28
82
26
80
24
Global Demand
78
22
76
20
74
OECD Europe's Demand
18
72
16
70
1997
14
1998
1999
2000
2001
2002
2003
2004
2005
Source: Bloomberg LLP.
14
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
In fact, the dollar/oil correlation isn’t obvious
WTI (Dollars Per Barrel)
Dollar Index (March 1973 = 100)
60
150
50
40
Nominal Oil Prices (Left Scale)
125
30
20
100
10
Nominal Trade-Weighted Dollar Versus Major Currencies
0 (Right Scale)
1975
1980
1985
1990
1995
2000
75
2005
Sources: Federal Reserve Board and Bloomberg LLP.
15
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
We have a shortage of refining capacity …
16
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… then why is the retail-crude markup so low?
Ratio of the Pump Price of Gasoline to the Crude Equivalent
4.00
4.00
3.50
3.50
3.00
3.00
2.50
2.50
2.00
2.00
1.50
1.50
1.00
1.00
95
96
97
98
99
00
01
02
03
04
05
Sources: American Petroleum Institute and Bloomberg LLP.
17
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
It’s the sweet-&-sour spread …
18
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… I don’t see it
Price Differential Between WTI and Dubai Crude (Dollars Per Barrel)
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
86
88
90
92
94
96
98
00
02
04
Source: Bloomberg LLP.
19
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
So what’s going on? …
20
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… it takes time to find equilibrium
 A market that has inelastic demand has fewer
price anchors in the near term … i.e., prices can
get out of line for a spell
 Higher levels of capacity utilization in oil
production imply less ability to absorb potential
disruptions than previously
21
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
The oil “tax” ...
22
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
Wall Street’s view of petroleum as a “tax” …
23
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Oil is a “tax” … in a narrow sense …

Rising oil prices represent a leakage from the spending stream of
countries that are net petroleum importers.

Consumers bear a disproportionate burden of the adjustment to higher
energy prices.

Rules of thumb, two ways to figure it:
 Economic models say a $10/barrel oil price raises GDP prices by 0.5
percentage point and lowers GDP by 0.5%.
 Back-of-the-envelop calculation … the US consumes 7 billion barrels
of oil annually and imports 4.5 billion barrels. So, a $10/bbl jump in
oil prices raises the nation’s aggregate energy bill by $70 billion
annually and its oil import bill by $45 billion (the rise in net imports
lowers real GDP by 0.5 percent, everything else the same)

So, last year’s surge in oil prices from $25/bbl to near $50 may have
slowed US and global growth by more than 2 percentage points in Q2 and
Q3 and by 1¼ percentage points in the year as a whole.
24
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… for oil consuming countries and sectors
US Imports and Exports to OPEC ($ Billions)
WTI ($/Barrel)
125
60
100
US Imports from OPEC (Left)
40
75
50
Oil Prices
(Right)
20
25
US Exports to OPEC (Left)
0
89
91
93
95
97
99
01
0
03
05
Sources: US Department of Commerce and Haver Analytics.
25
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Less true for natural gas
 Natural gas production is “all in the family”, so to speak, a
domestic resource
 The “tax” on consumers represents a revenue boost to
producers, who are largely domestic
26
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
But …
27
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… if demand drives oil, oil hurts demand?
Global Oil Supply Versus Demand
Price
Petroleum Supply
Final Demand
Initial Demand
Quantity
Source: Econ 101.
28
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… oil revenues don’t vanish into outer space …
Round 1 … “tax” on oil’s users
 Consumer spending is dampened, profits depressed, and GDP of net oil consuming
countries retarded by the oil “tax”
Round 2 … recycled petrodollars boost asset prices
 Rising oil prices effectively raises saving—taxing consumers and giving producers
revenues—and the flow into financial assets dampens the consumer hit
 A $10/barrel jump in oil boosts the flow of oil revenue into financial markets by
$300 billion—global oil demand runs about 30 billion barrels annually
 Oil revenues initially are invested in financial assets
Round 3 … the oil “tax” recycled
 Producers are consumers as well and they eventually spend their oil revenues—on
oil exploration and development projects, on government social outlays, for
typical consumer goods—recycling the oil tax back to industrial countries
29
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… oil producers are spenders too
Dubai to offer snow skiing in 120-degree heat
Thursday, April 07, 2005
By Jim Krane
The Associated Press
DUBAI, United Arab Emirates -- When this city's furnace-like summer gets
too hot to bear, folks will cool off at a local resort with tumbling
snowflakes, skiing and snowboarding on five trails, and, for those who
need a break from the cold, mugs of hot chocolate by the fireplace.
The resort, a faux mountainside playground dubbed Ski Dubai, is currently
a cacophony of blazing jackhammers, forests of steel scaffolding and an
emerging gray mountain of concrete slabs.
Come September, a thick insulated roof with a sky-blue ceiling will seal in
the site, with its 200-foot vertical drop and trails as long as 1,300 feet.
Kamran Jebreili, Associated Press
A billboard advertises an indoor ski attraction under construction in the
background at the Mega Mall on Sheikh Zayed High-way in Dubai.
Crank up the 23 massive air conditioners and turn on the snowmaking jets
and organizers say the concrete mountain will be covered in 28 inches of
powdery snow.
For those bundling up in parkas and strapping on their boots and gloves,
the desert outside will melt away.
"There will be no windows looking to the outside," said Phil Taylor, Ski
Dubai's chief executive, bounding up the concrete slopes and catwalks
during a brisk tour of the construction. "The idea is to create a beautiful
day in the mountains."
The Ski Dubai Web site features animations of skiing that is scheduled to
be reality by this fall.
30
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
Economic progress report …
31
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Growth is good … despite oil
US Real GDP (Annualized Percentage Change)
8
7
6
5
4
3
2
1
0
-1
-2
Bars are change from previous quarter
Line is change from four quarters earlier
Diamonds are Q4-Versus-Q4 change
4.1
4.4
4.1
4.3
4.5
4.7
4.5
4.4
3.9
2.5
2.0
2.3
2.2
1.1
0.7
0.2
8
7
6
5
4.2
4
3
2
1
0
-1
-2
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Source: US Department of Commerce.
32
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
More challenging abroad
Real GDP in Selected Regions (% Change from Four Quarters Earlier)
9
9
8
8
7
7
Asia Ex. Japan
6
5
6
5
US
4
4
3
3
2
2
EU-11
1
Japan
0
00
01
02
03
04
1
0
05
Source: JPMorgan Chase.
33
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Profits haven’t been better
After-Tax Operating Profits (Ratio to GDP)
9
9
GDP Profits,
After-Tax Profits
from Current
Production
8
7
6
8
7
6
5
5
4
4
3
3
2
2
S&P 500 After-Tax Operating
Earnings
1
1
0
0
60
65
70
75
80
85
90
95
00
05
Sources: US Department of Commerce and Standard and Poor’s.
34
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Inflation is … well … price stability …
Core Consumer Inflation (Percentage Change from 12 Months Earlier)
12
12
10
The Fed’s Forecast
(“Target”)
8
6
10
8
6
4
4
Core CPI
2
2
Core PCE Chain Price Index
0
60
65
70
75
80
85
90
95
0
00
05
Updated Through March 2005
Sources: US Department of Commerce and US Department of Labor.
35
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… you need a microscope to find something
Core Consumer Inflation (Percentage Change from 12 Months Earlier)
3
3
Core CPI
2
2
1
Core PCE Chain Prices
0
2000
2001
Updated Through March 2005
2002
2003
2004
2005
The Federal
Reserve’s
“Forecast”
(Target) for the
Core PCE Chain
Price Index
1
0
2006
Sources: Federal Reserve Board, US Department of Commerce, and US Department of Labor.
36
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
We’re not yet at full employment …
37
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Unemployment is deceptively low
Unemployment (Percent of the Labor Force)
12
12
If the
Participation
Rate Had Held
Steady
10
10
8
8
6
6
4
4
Official
Unemployment
Rate
2
2
0
0
60
65
70
75
80
85
90
95
00
05
Updated Through March 2005
Sources: US Department of Commerce and US Department of Labor.
38
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
First of all, full employment may be 4%
In my judgment, while we may not know where the
unemployment rate which is consistent with stable prices [is] … it
is clearly from what we can judge, well under 6 percent, and I
would not rule out the possibility that it is down to the 4 percent
level.”
Federal Reserve Chairman Alan Greenspan, Remarks in Semi-Annual
Testimony on the State of the Economy to the House Financial
Services Committee, US House of Representatives, February 11,
2004
39
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Second, some unemployment is hidden
Nonfarm Payrolls (Millions)
145
145
130
130
115
115
100
100
85
85
Nonfarm Payrolls
70
70
80
85
90
95
00
05
Updated Through March 2005
Source: US Department of Labor.
40
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Where is everyone?
Working Age Population and Employed (Millions)
145
175
Working Age Population (Right)
130
160
115
145
100
130
85
115
Nonfarm Payrolls (Left)
70
100
80
85
90
95
00
05
Updated Through March 2005
Source: US Department of Labor.
41
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Some gave up and went back to school
People Not in the Job Market Because They Are in School (Thousands)
12,000
12,000
2003
11,000
11,000
10,000
10,000
9,000
9,000
8,000
8,000
7,000
7,000
6,000
6,000
91
92
93
94
95
96
97
98
99
00
01
02
03
Updated Through March 2005
Source: Current Population Survey, March Annual Demographic Survey.
42
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
That artificially depresses unemployment
Unemployment (Percent)
Participation Rate (Percent)
12
80
78
10
76
Participation Rate of 20 – 24 Year
Olds (Right)
8
74
6
72
70
4
Unemployment Rate (Left)
68
2
66
0
64
60
65
70
75
80
85
90
95
00
05
Updated Through March 2005
Sources: US Department of Commerce and US Department of Labor.
43
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Considerable “slack” measured or not
Unemployment (Percent of the Labor Force)
12
12
If the
Participation
Rate Had Held
Steady
10
10
8
8
6
6
4
4
Official
Unemployment
Rate
2
2
0
0
60
65
70
75
80
85
90
95
00
05
Updated Through March 2005
Sources: US Department of Commerce and US Department of Labor.
44
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
The future looks carbon-hungry …
45
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Energy & the economy … like horse & carriage
GDP and Electricity Consumption (% Change from the Previous Year)
10
10
8
8
6
Real GDP
6
4
4
2
2
0
0
-2
Electricity Demand
-4
-2
-4
1970 1975 1980 1985 1990 1995 2000
46
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
The US economy’s bright future …
47
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Flexibility keeps the economy on a higher plane
US Real GDP (Percentage Change from Four Quarters Earlier)
25
20
15
10
5
0
-5
-10
-15
-20
25
20
15
10
5
0
-5
-10
-15
-20
Historical Average = 3.75% Annual
Growth
1851
1876
1901
1926
1951
1976
2001
Updated March 2005
Sources: US Department of Commerce, Ray Fair, Yale University, and National Bureau of Economic Research.
48
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Price stability keeps interest rates lower …
Core Consumer Inflation (Percentage Change from 12 Months Earlier)
12
12
10
The Fed’s Forecast
(“Target”)
8
6
10
8
6
Core CPI
4
4
2
2
Core PCE Chain Price Index
0
60
65
70
75
80
85
90
95
0
00
05
Updated Through March 2005
Sources: US Department of Commerce, and US Department of Labor.
49
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… the same goes for others
Consumer Price Indexes (Percentage Change from 12 Months Earlier)
25
25
Aggregate of All Industrial
Countries
20
20
15
15
10
10
5
5
0
0
-5
1970
United States
1975
-5
1980
1985
1990
1995
2000
2005
Updated Through March 2005
Sources: US Department of Commerce, and US Department of Labor.
50
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Productivity … rocket fuel
Productivity of Nonfarm Businesses (Annualized Percentage Change)
8
7
6
5
4
3
2
1
0
-1
-2
-3
8
7
6
5
4
3
2
1
0
-1
-2
-3
% Change from
Four Quarters
Earlier
Five-Year Moving
Average
60
65
70
75
80
85
90
95
00
05
Source: US Department of Commerce.
51
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Bottom line … don’t count on a slower future
Real GDP (Percentage Change from Four Quarters Earlier)
30
30
25
Historical Average =
3.75% Annually
20
25
20
15
15
10
10
5
5
0
0
Long-Run Growth
Assumption in Budget
Projections = 1.75%
Annual Growth
-5
-10
-15
-20
1851
-5
-10
-15
-20
1876
1901
1926
1951
1976
2001
2026
2051
2076
Sources: US Department of Commerce, Ray Fair, National Bureau of Economic Research.
52
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
East Asia joins the team …
53
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… and that means demand for resources
Real GDP in Selected Regions (Chained Dollars)
200000
200000
180000
180000
A world with or without East
Asia … the difference
between annual petroleum
consumption of 300 million
barrels versus 400 million
160000
140000
120000
100000
160000
140000
120000
100000
80000
80000
60000
60000
40000
40000
20000
20000
0
1990
0
2000
2010
2020
2030
2040
2050
Source: JPMorgan Chase.
54
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
Technology and economics can help …
55
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Energy’s role is shrinking …
Ratio of Petroleum Consumed to Nominal GDP
0.0016
0.0016
0.0014
0.0014
0.0012
0.0012
0.0010
0.0010
0.0008
0.0008
0.0006
0.0006
65
70
75
80
85
90
95
00
05
Sources: US Department of Commerce and Haver Analytics.
56
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… partly because GDP is getting lighter
Services Share of US GDP
0.7
0.7
Note: Services Excluding Energy, Business Outlays for Computers and
Software, and Government Outlays for Consumption and Services.
0.6
0.6
0.5
0.5
0.4
0.4
0.3
0.3
1947
1957
1967
1977
1987
1997
57
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Efficiency of electricity usage
Ratio of Electricity Demand (Millions of Megawatthours) to Real GDP
0.40
0.40
0.38
0.38
0.36
0.36
Falling Relative
Prices Would
Encourage More
Consumption
0.34
0.32
0.34
Lighter GDP is
Curbing the Amount of
Electricity to Produce
GDP
0.30
1970
1980
1990
2000
2010
0.32
0.30
2020
58
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
How much more from deregulation?
Ratio of CPI Electricity to Total CPI (August 2004 = 1.0)
1.50
1.25
1.50
East Asia's
Development Driving
Up the Cost of Carbon
Fuels
1.00
0.75
1.25
1.00
Deregulation Driving Down
the Cost of Power
Generation
0.50
0.75
0.50
47 52 57 62 67 72 77 82 87 92 97 02
59
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Carbon dependency makes it our issue
Fuel Used to Generate Electricity (Percent of Total)
Renew able
8%
Hydroelectric
6%
Coal
48%
Nuclear
19%
Natural Gas and Other
Gasses
17%
Petroleum
2%
60
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
Lessons from the Club of Rome …
61
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Failed doomsday predictions …
Proven oil reserves of 550
billion barrels in 1970 would
be exhausted by 1990
Natural gas supplies would be
gone by 2010
Food supplies would need to
triple by the turn of the
century to feed 6 billion
population
Global supplies of silver, tin,
uranium, aluminum, copper,
and lead would be exhausted
Oil prices would reach
$100/barrel
62
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
… forgot about economics
On the supply side
On the demand side
Years
of Oil
Supply
Identified Petroleum Reserves
Billions of Barrels
Global
Saudi Arabia
Iraq
Kuwait
Russia
Iran
United Arab Emirates
United States
Venezuela
Mexico
China
Libya
922
255
99
96
80
63
56
49
44
27
22
22
At China’s consumption rate
26
At US consumption rate
51
At Europe’s consumption rate
61
At Japan’s consumption rate
85
63
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Template
Oil’s price tells me …
… There’s still too much oil for
alternatives to make economic sense
64
Template
O I L & G A S C O N F E R E N C E, I n d e p e n d e n t P e t r o l e u m A s s o c I a t I o n o f A m e r I c a
Analyst Certification
The analyst(s) denoted by an "AC" certifies that: (1) all of the views expressed in this research accurately reflect his or her
personal views about any and all of the subject securities or issuers; and (2) no part of any of the analyst's compensation was, is,
or will be directly or indirectly related to the specific recommendations or views expressed by the analyst(s) in this research.
Copyright 2005 J.P. Morgan Chase & Co. All rights reserved. JPMorgan is the marketing name for J.P. Morgan Chase & Co., and its subsidiaries
and affiliates worldwide. J.P. Morgan Securities Inc. is a member of NYSE and SIPC. JPMorgan Chase Bank is a member of FDIC. J.P. Morgan
Futures Inc., is a member of the NFA. J.P. Morgan Securities Ltd. (JPMSL), J.P. Morgan Europe Limited and J.P. Morgan plc are authorized by
the FSA. J.P. Morgan Equities Limited is a member of the Johannesburg Securities Exchange and is regulated by the FSB. J.P. Morgan Securities
(Asia Pacific) Limited (CE number AAJ321) is regulated by the Hong Kong Monetary Authority. J.P. Morgan Securities Singapore Private Limited
is a member of Singapore Exchange Securities Trading Limited and is regulated by the Monetary Authority of Singapore (“MAS”). J.P. Morgan
Securities Asia Private Limited is regulated by the MAS and the Financial Services Agency in Japan. J.P.Morgan Australia Limited (ABN 52 002
888 011) is a licensed securities dealer.
Additional information is available upon request. Information herein is believed to be reliable but JPMorgan does not warrant its completeness
or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of
future results. The investments and strategies discussed here may not be suitable for all investors; if you have any doubts you should consult
your investment advisor. The investments discussed may fluctuate in price or value. Changes in rates of exchange may have an adverse effect
on the value of investments. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.
JPMorgan and/or its affiliates and employees may hold a position, may undertake or have already undertaken an own account transaction or
act as market maker in the financial instruments of any issuer discussed herein or any related financial instruments, or act as underwriter,
placement agent, advisor or lender to such issuer. Clients should contact analysts at and execute transactions through a JPMorgan entity in
their home jurisdiction unless governing law permits otherwise. This report should not be distributed to others or replicated in any form
without prior consent of JPMorgan. This report has been issued, in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and 49
of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (all such persons being referred to as “relevant persons”). This
document must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this
document relates is only available to relevant persons and will be engaged in only with relevant persons. In other European Economic Area
countries, the report has been issued to persons regarded as professional investors (or equivalent) in their home jurisdiction.
JPMorgan uses the following recommendation system: Overweight. Over the next six to twelve months, we expect this bond to outperform the
average total return of the bonds in the analyst’s (or analyst’s team’s) coverage universe. Neutral. Over the next six to twelve months, we
expect this bond to perform in line with the average total return of the bonds in the analyst’s (or analyst’s team’s) coverage universe.
Underweight. Over the next six to twelve months, we expect this bond to underperform the average total return of the bonds in the analyst’s
(or analyst’s team’s) coverage universe.
JPMorgan uses the following rating system: Improving (I) The issuer’s long-term credit rating likely improves over the next six to twelve
months. Stable (S) The issuer’s long-term credit rating likely remains the same over the next six to twelve months. Deteriorating (D) The
issuer’s long-term credit rating likely falls over the next six to twelve months. Deteriorating+ (D+) The issuer’s long-term credit rating likely
falls to junk over the next six to twelve months. Defaulting (F) There is some likelihood that the issuer defaults over the next six to twelve
months.
This report should not be distributed to others or replicated without prior consent of JPMorgan.
65