Is The World Facing a 3Is The World Facing a 3rdrd Oil Shock?Oil Shock?

FVG & IBP WorkshopFVG & IBP Workshop–– Rio de Janeiro, Brazil, 12 July, 2004 -

Klaus RehaagKlaus RehaagHead, Oil Industry & Head, Oil Industry &

Markets DivisionMarkets Division

Editor, Oil Market Editor, Oil Market ReportReport

International Energy International Energy AgencyAgency

Paris, FranceParis, France

klaus.rehaag@iea.orgklaus.rehaag@iea.org

OverviewOverview-- Is The World Facing A Third Oil Shock? Is The World Facing A Third Oil Shock? --

- Is the civilized world coming to an end?

- What constitutes an “oil shock”?

- Are we running out of oil?

- Are we faced with a supply crunch?

- Is the system capacity constrained?

- Are we overloading the system?

Nominal vs. Real Crude Prices Nominal vs. Real Crude Prices –– Base 1972, US$ Per BarrelBase 1972, US$ Per Barrel

0

5

10

15

20

25

30

35

40

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Dubai (nominal) Dubai (real)

Iran-Iraq War

End of Administrative Pricing

Invasion of Kuwait

Second Gulf Crisis

OPEC Target Reductions

Tight Stocks

OPEC Quota Increases

Asian Financial Crisis

Iranian Revolution

Arab Oil Embargo

A A ‘‘ThirdThird”” Oil Shock?Oil Shock?

““TwoTwo”” oil shocks:oil shocks:

•• Arab oil embargoArab oil embargo

•• Iranian revolutionIranian revolution

What makes these events unique What makes these events unique –– defining characteristics?defining characteristics?

•• Political nature of supply disruption?Political nature of supply disruption?

•• Supply shortfall?Supply shortfall?

•• Sharp price adjustment?Sharp price adjustment?

Have experienced other major supply & price adjustments (up, dowHave experienced other major supply & price adjustments (up, down):n):

•• End of Administrative PricingEnd of Administrative Pricing

•• Gulf war II / Invasion of KuwaitGulf war II / Invasion of Kuwait

•• Collapse of FSUCollapse of FSU

•• Asian Financial CrisisAsian Financial Crisis

•• Venezuela / Nigeria / Gulf War IIVenezuela / Nigeria / Gulf War II

Anatomy of a Anatomy of a ““ThirdThird”” Oil Shock?Oil Shock?

Can construct a Middle East doomsday scenario Can construct a Middle East doomsday scenario –– political oil embargopolitical oil embargo

But how likely?But how likely?

•• Revenue dependency Revenue dependency -- in everyonein everyone’’s interest to keep oil flowings interest to keep oil flowing

•• Trade with communist Russia, China happened during the Cold WarTrade with communist Russia, China happened during the Cold War

•• Iran still struggling to recover lost oil revenues, developmentIran still struggling to recover lost oil revenues, development

•• Will take years to regain confidence in Venezuelan oil industryWill take years to regain confidence in Venezuelan oil industry

•• Permanent loss of demand:Permanent loss of demand:

High prices and supply insecurity promote policies to encourage High prices and supply insecurity promote policies to encourage

fuel efficiency, fuel substitution, development of alternative ffuel efficiency, fuel substitution, development of alternative fuelsuels

Individuals change behavior if perception of structural shiftIndividuals change behavior if perception of structural shift

Once developed, technologies will not go away (oil sands; GTL, Once developed, technologies will not go away (oil sands; GTL,

coalcoal--toto--liquids; fuel cells; solar; CNG; combined cycle; hydrogen)liquids; fuel cells; solar; CNG; combined cycle; hydrogen)

Roller Coaster of World Demand GrowthRoller Coaster of World Demand Growth

-3

-2

-1

0

1

2

3

419

74

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

mb/d

What is “NORMAL” demand growth?

Traditional rule of thumb: 0.4 to 0.6 of GDP growth

Gulf War I - Collapse of FSU

Iranian Revolution – Iran-Iraq War - High Oil Prices - Stagflation

Asian Financial Crisis

End Admin Pricing

Structural Changes in Fuel Oil Demand (Structural Changes in Fuel Oil Demand (MtoeMtoe))OECD

0

50000

100000

150000

200000

250000

300000

1971 1976 1981 1986 1991 1996 20010%

5%

10%

15%

20%

25%

OECDTOT % of total demand

NON OECD

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

1971 1976 1981 1986 1991 1996 2001

0%

5%

10%

15%

20%

25%

30%

NONOECDTOT % of total demand

- IEA countries committed not to build

any further oil generating facilities

- Steady OECD decline - fuel oil demand

plummeted from 18% to under 5%

- Problem for refiners – how to dispose

of bottom of the barrel?

- Fuel oil much larger component of overall

non-OECD demand – 10% of barrel

- Demand may increase over the short-term

with rapid economic expansion and limited

alternative power generation infrastructure

Us Gasoline Prices & ConsumptionUs Gasoline Prices & Consumption

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

1972

1974

1976

1978198019821984198

6198

8199019921994199

6199

8200

02002

Nominal Real

Nominal vs. real US gasoline prices Nominal vs. real US gasoline prices –– base 1972, US$ per base 1972, US$ per litrelitre

Leaded regular from 1972 to 1979 unleaded regular from 1980

0

50

100

150

200

250

300

350

400

450

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

1.55

Per Capita (right axis) Absolute

US Gasoline Consumption (US Gasoline Consumption (MtoeMtoe))

Climbing in absolute terms, Climbing in absolute terms, reasonably steady on a per capita reasonably steady on a per capita basisbasis

A A ““ThirdThird”” Oil Shock?Oil Shock?

Two questions:Two questions:

•• If political embargo unlikely, could something else cause a 3If political embargo unlikely, could something else cause a 3rdrd oil shock?oil shock?

•• Would the severity of the impact be the same today as before?Would the severity of the impact be the same today as before?

Undoubtedly, prices pressured during an oil shock, but Undoubtedly, prices pressured during an oil shock, but ……

But current prices high But current prices high …… at the same time, robust economy growthat the same time, robust economy growth

•• Lower energy intensities in global economies?Lower energy intensities in global economies?

•• Reduced price elasticity?Reduced price elasticity?

•• Lagged price effects?Lagged price effects?

Structural changes in economy reduce potential impact of oil shoStructural changes in economy reduce potential impact of oil shock?ck?

•• Oil plays less all pervasive role in overall economyOil plays less all pervasive role in overall economy

•• Oil effectively becoming a transportation fuelOil effectively becoming a transportation fuel

Or unique set of circumstances:Or unique set of circumstances:

•• Liquidity Liquidity -- income effects (temporarily) swamp price effects?income effects (temporarily) swamp price effects?

Oil Demand Recovery: OECD Vs NonOil Demand Recovery: OECD Vs Non--OECD OECD (Mb/d)(Mb/d)

2003: OECD leads demand growth, driven by economic recovery and one-off events (weather, fuel switching); non-OECD hit by SARS

2004: non-OECD takes lead, spurred by Chinese economy

-1

-0.5

0

0.5

1

1.5

2

2.5

1Q20

012Q

2001

3Q20

014Q

2001

1Q20

022Q

2002

3Q20

024Q

2002

1Q20

032Q

2003

3Q20

034Q

2003

1Q20

042Q

2004

3Q20

044Q

2004

OECD Non-OECD

Non-OECD drives demand growth

Oil Demand Growth (mbd) vs. PriceOil Demand Growth (mbd) vs. Price

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

mb/d

0

5

10

15

20

25

30

35

40

US$/bbl

Annual Global Demand Growth WTI

Disconnect

Oil Demand growth (%) vs. GDP growthOil Demand growth (%) vs. GDP growth

0

1

2

3

4

5

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

%

Annual Global Demand Growth GDP growth

What is normal??? A forecaster’s nightmare

Anemic growth

Return to “normal”?

NYMEX WTI Monthly PriceNYMEX WTI Monthly Price

10

15

20

25

30

35

40

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

US$/bbl

Average daily price: $19.63 US/bbl

Average daily price (2000- 2004): $28.87 US/bbl

WTI NYMEX Futures WTI NYMEX Futures -- 60 months 60 months

10

15

20

25

30

35

40

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58US$/bbl

2004 2001 1998 2000 1995

Current Expectation: higher average long-run prices

2000

2001

2004

Regional OECD Oil and Energy Intensity 1971Regional OECD Oil and Energy Intensity 1971--20012001

OECD

Non OECD

0.1

0.15

0.2

0.25

0.3

1971 1975 1979 1983 1987 1991 1995 1999

0.7

0.75

0.8

0.85

0.9

1971 1975 1979 1983 1987 1991 1995 1999

OECD

3.5

3.7

3.9

4.1

4.3

4.5

4.7

4.9

1971 1975 1979 1983 1987 1991 1995 19990.7

0.75

0.8

0.85

0.9

0.95

1

1971 1975 1979 1983 1987 1991 1995 1999

Source: IEA Oil Information 2001, IEA Energy Balances of OECD Countries

Non OECD

Oil Intensity (metric tonnes per thousand 95 US$)Energy Intensity (toe per capita)

Unique Circumstances Unique Circumstances –– GDP & Oil Demand GrowthGDP & Oil Demand Growth

Global economic recovery and strong demand growth driven by Global economic recovery and strong demand growth driven by United States and ChinaUnited States and ChinaUnited States:United States:•• Liquidity infusion Liquidity infusion –– low interest rate policy & tax cutslow interest rate policy & tax cuts•• Depleted industrial inventoriesDepleted industrial inventories•• Efficiency gains (outsourcing)Efficiency gains (outsourcing)•• Burgeoning trade deficitBurgeoning trade deficit•• Increased car travel Increased car travel –– reduced shortreduced short--haul air traffichaul air traffic•• High natural gas prices High natural gas prices -- electricity brown outselectricity brown outs

China:China:•• Liquidity infusion Liquidity infusion –– inexpensive and widely available creditinexpensive and widely available credit•• Major infrastructure development programsMajor infrastructure development programs•• Strong industrial and manufacturing trade developmentsStrong industrial and manufacturing trade developments•• Managerial class with significant disposable incomeManagerial class with significant disposable income•• Rising income level for growing urban populationRising income level for growing urban population•• Power generation shortfallPower generation shortfall•• Rural & urban road constructionRural & urban road construction•• SARSSARS

(mb/d)

2

2.5

3

3.5

4

4.5

5

5.5

6

6.5

1Q1993 4Q1994 3Q1996 2Q1998 1Q2000 4Q2001 3Q2003

65

67

69

71

73

75

77

79

81

83

China quarterly demand World demand (right scale)

China, The Engine of Demand growthChina, The Engine of Demand growth

Since the early 1990s, oil Since the early 1990s, oil

demand in China has grown demand in China has grown

faster than anywhere elsefaster than anywhere else

EverEver--growing share of global growing share of global

oil demandoil demand

Leading driver of global Leading driver of global

demand growthdemand growth

Net importer since 1993 Net importer since 1993 -- so so

oil demand fluctuations affect oil demand fluctuations affect

global oil market & trade global oil market & trade

flows in a big way flows in a big way

Impact on world market Impact on world market

stability / oil securitystability / oil security

Yet Chinese oil consumption Yet Chinese oil consumption

remains exceptionally low remains exceptionally low ––

lots of room to growlots of room to grow

Oil Demand Recovery: Emergence of China Oil Demand Recovery: Emergence of China (Mb/d)(Mb/d)

-1

-0.5

0

0.5

1

1.5

2

2.5

1Q20

012Q

2001

3Q20

014Q

2001

1Q20

022Q

2002

3Q20

024Q

2002

1Q20

032Q

2003

3Q20

034Q

2003

1Q20

042Q

2004

3Q20

044Q

2004

OECD Non-OECD ex.China China

Strong economic growth + power shortages fuel Chinese oil demand growth

Robust Chinese growth throughout the period

China: Oil Demand Growth vs. GDP Growth (%)China: Oil Demand Growth vs. GDP Growth (%)

-1%

1%

3%

5%

7%

9%

11%

13%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Annual Demand Growth GDP growth

Oil demand growth outstrips GDP growth (shortfall electrical generating capacity)

Chinese Chinese per capita per capita Oil Demand vs. Other Large Oil Demand vs. Other Large

Consuming Countries (barrels/year)Consuming Countries (barrels/year)

0

5

10

15

20

25

30

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Japan

US

Germany

Korea

China

Long way to grow on a per capita basis

Per CapitaPer Capita Oil Demand in China vs.PeerOil Demand in China vs.Peer--Group Group Economies (barrels/year)Economies (barrels/year)

0

1

2

3

4

5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

China Indonesia India Brazil Poland

Chinese oil demand per capita grew 78% from 1991Chinese oil demand per capita grew 78% from 1991--2000, faster than other 2000, faster than other

large emerging economies large emerging economies –– oil consumption still less than 1.5 b/y at bottom oil consumption still less than 1.5 b/y at bottom

of range of peer emerging economiesof range of peer emerging economies

Variables Effecting an Variables Effecting an ““Oil Shock?Oil Shock?

Duration of supply disruptionDuration of supply disruption

How much oil is lostHow much oil is lost

Timing of the loss (slack or peak demand)Timing of the loss (slack or peak demand)

Strength of the underlying economyStrength of the underlying economy

Government policy reactions (monetary, fiscal)Government policy reactions (monetary, fiscal)

Level and availability of spare production capacityLevel and availability of spare production capacity

Level of industry stocksLevel of industry stocks

Emergency coordination and preparednessEmergency coordination and preparedness

Availability of strategic stocksAvailability of strategic stocks

0

1

2

3

4

5

6

7

8

9

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04

m b/d

23000

24000

25000

26000

27000

28000

29000

30000

31000

32000

kb/d

Iraq O PEC -10 (Effe ctive C apacity) Ve n /Nig/Ind O PEC Production

OPEC Spare Production Capacity *OPEC Spare Production Capacity *Effective spare capacity of less than 1 mb/dEffective spare capacity of less than 1 mb/d

* IEA definition: available in 30 days and sustainable for 90 days

Unmistakable Downward TrendUnmistakable Downward Trend-- USUS--50 Crude Stocks 50 Crude Stocks --

US-50 Industry Crude Oil Stocks (mb)

260

270

280

290

300

310

320

330

340

350

360

1992 1994 1996 1998 2000 2002 2004

US-50 Industry Crude Oil Stocks (days of forward demand)

17

19

21

23

25

27

1994 1996 1998 2000 2002 2004

Industry more efficient (mergers & acquisitions, information technology, just-in-time inventory management practices)

IEA Strategic Stocks & Emergency ResponseIEA Strategic Stocks & Emergency Response

12,884

9,4338,617

5,3923,680

1,563784 390

0

2000

4000

6000

8000

10000

12000

14000

kb

/d

1 2 3 4 5 6 7 8

Month

\

Maximum Drawdown Profile forMaximum Drawdown Profile forIEA Public Oil Stocks, 2002IEA Public Oil Stocks, 2002

Stockdraw2086 kb/d

DemandRestraint330 kb/d

FuelSwitching67 kb/d

SurgeProduction17 kb/d

IEA Gulf War Contingency PlanIEA Gulf War Contingency PlanIndustry vs. Public StocksIndustry vs. Public Stocks

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

100%A

ust

ralia

Au

stri

a

Bel

giu

m

Can

ada

Gre

ece

Ital

y

Lu

xem

bo

urg

New

Zea

lan

d

No

rway

Po

rtu

gal

Sw

eden

Sw

itzer

lan

d

Tu

rkey

Un

ited

Kin

gd

om

Net

her

lan

ds

Sp

ain

Ire

lan

d

Fra

nce

Den

mar

k

Fin

lan

d

Un

ited

Sta

tes

Ko

rea

Hu

ng

ary

Jap

an

Cze

ch R

epu

blic

Ger

man

y

To

tal

Eu

rop

e

INDUSTRY

PUBLIC

Supply Crunch Supply Crunch –– The Coming The Coming ““Oil ShockOil Shock””??

While political oil embargo less likely some argue global economWhile political oil embargo less likely some argue global economy faced y faced

with supply crunch (with supply crunch (““peak oilpeak oil””) with similar devastating results) with similar devastating results

Critical issue is on of reserves and depletion ratesCritical issue is on of reserves and depletion rates

•• Older fields are mature, decliningOlder fields are mature, declining

•• New discoveries smaller fieldsNew discoveries smaller fields

•• Industry forced to produceIndustry forced to produce--out more quicklyout more quickly

•• Global reserves overGlobal reserves over--stated for political reasonsstated for political reasons

•• Shift to more expensive, risky nonShift to more expensive, risky non--conventional areasconventional areas

•• Have to run harder just to tread water (offset depletion)Have to run harder just to tread water (offset depletion)

Resource constraints Resource constraints –– already captured lowalready captured low--hanging fruithanging fruit

Supply constraints will push up price, limit demand growth, negaSupply constraints will push up price, limit demand growth, negatively tively

impact & curtail economic growthimpact & curtail economic growth

Where is the Oil (& Money) Coming From?Where is the Oil (& Money) Coming From?Incremental Barrels Needed to Offset Depletion & Meet Demand GroIncremental Barrels Needed to Offset Depletion & Meet Demand Growthwth

Assumptions:- 2004 demand at 81.1 mb/d – 2% per annum demand growth- 70% of filds in decline - depletion rates from 7% in 2005 rising to 10% in 2015

0

1

2

3

4

5

6

7

8

9

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

Demand Growth Depletion

Challenge of DepletionChallenge of Depletion

Depletion is real, represents a significant challengeDepletion is real, represents a significant challenge

But depletion is NOT something new, something unheard ofBut depletion is NOT something new, something unheard of

Offsetting trends:Offsetting trends:

•• Technology (3D, 4D, offset drilling)Technology (3D, 4D, offset drilling)

•• Information revolution (computing power)Information revolution (computing power)

•• TieTie--ins (established infrastructure)ins (established infrastructure)

•• ReRe--definition of definition of ““nonnon--conventionalconventional””

•• Ignores nonIgnores non--conventional reserves (oil sands, liquids, GTL)conventional reserves (oil sands, liquids, GTL)

IEA expect continued growth in nonIEA expect continued growth in non--OPEC supplyOPEC supply

Issue over shortIssue over short-- mediummedium--term:term:

•• Not want to understate problem, but Not want to understate problem, but ……

•• Immediate problem is access to reserves vs. running out of oil Immediate problem is access to reserves vs. running out of oil

Proven Crude Oil and NGL Reserve Assessments*Proven Crude Oil and NGL Reserve Assessments*(billion barrels)(billion barrels)

0

200

400

600

800

1000

1200

IHS Energy OPECSecretariat

WorldEnergyCouncil

Oil and GasJournal

World Oil USGS 2000 ODAC(Campbell)

BP

Source: WEO 2001 , BP statistical Review 2002*Effective Date: WEC end 1999, USGS end 1996, all others end 2000

Latest BP Statistical Review Raises Global Reserve Estimates to 1147.7

The Reserve Base is Substantial The Reserve Base is Substantial (World proven reserves, b.bbl, start(World proven reserves, b.bbl, start--2003)2003)

0

20

40

60

80

100

120

Saudi A

rabiaIra

qUAE

Kuwait Iran

Venez

uelaRuss

iaUSALib

yaNig

eriaChin

aQat

arM

exic

oNorw

ayAlg

eria

Kazak

hstan

Brazil

Azerb

aijan

Canada

Oman

AngolaIn

diaIn

donesia UK

Ecuad

or

Company estimates suggesttrue Russian reserves>=100 b.bbl??

(260 b.bbl)

Missing Canadian Non-Conventional Oil Sands Reserves of 12 – 176 b.bbl

Missing non-conventional reserves

Main NonMain Non--OPEC Supply Changes 2002OPEC Supply Changes 2002--20102010

211

846640 293

1110 1045

1305

250

585470

-5

155310 260 285

Total Non-OPEC 2002-2004 +2.1 mb/d (+0.6 OPEC NGL etc)2004-2006 +2.6 mb/d (+0.6 OPEC NGL etc)2006-2008 +2.0 mb/d (+0.5 OPEC NGL etc)2008-2010 +0.8 mb/d (+0.5 OPEC NGL etc)

Asia

FSU

N.America

-385-135

-425

-920

1720

95

-140-45

-270

Non OPEC Incremental Supply Growth 2004Non OPEC Incremental Supply Growth 2004--20102010

-1

-0.5

0

0.5

1

1.5

2

2003 2004 2005 2006 2007 2008 2009 2010

mb/d

48

50

52

54

56

58

60

62

64

mb/d

Other BrazilNorth America Total Russia Kazakhstan Total OPEC-NGL/Non-Conv.Total Non OPEC Production (right axis)

Strong NonStrong Non--OPEC Supply Growth Until Late Decade?OPEC Supply Growth Until Late Decade?

0

500

1000

1500

2000

2004 2005 2006 2007 2008 2009 20103000

4000

5000

6000

7000

OPEC crude non-OPEC supply (inc OPEC NGL etc) OPEC spare

OPEC/non-OPEC kb/d OPEC spare cap, kb/d

Assumes demand growth of 2% pa

5000

6000

7000

8000

9000

10000

11000

12000

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

Russia Azerbaijan Kazakhstan Turkmenistan Others

FSU Oil Production 1991FSU Oil Production 1991--20042004kb/d

FSU, not simply Russia, has been the engine of non-OPEC supply growth

KazakhstanKazakhstan’’s Place in nons Place in non--OPEC SupplyOPEC Supply

0

1

2

3

4

5

6

7

8

9

RussiaUSAMexicoChinaNorwayCanadaUKBrazilKazakhstanAngolaMalaysiaOmanIndiaArgentinaEgypt

-800 -400 0 400 800 1200 1600 2000

Incremental Non-OPEC Supply 2003-2010Kb/d

RUSSIA

KAZAKHSTAN

ANGOLA

AZERBAIJAN

BRAZIL

CANADAUSA

UK

NORWAY

Non-OPEC Production 2003, Kb/d

With ongoing investment,Kazakhstan likely to rise in theranks of non-OPEC producers…

…but potential for non-OPEC growthwidespread (15 countries likelyto see>100kb/d growth 03-10)

Brazil

The Challenge of Demand GrowthThe Challenge of Demand Growth

Access to reservesAccess to reserves

Where is the money coming from?Where is the money coming from?

Will we get the timing right?Will we get the timing right?

R&D is R&D is ““sexysexy”” but who is going to invest in the downstream?but who is going to invest in the downstream?

Who is going to build Who is going to build ““spare capacityspare capacity”” (production, refining)?(production, refining)?

•• Security of supply is a Security of supply is a ““public goodpublic good””

•• Does focus on ROCE contribute to lower spare capacity?Does focus on ROCE contribute to lower spare capacity?

•• How How ““planplan”” in a deregulated, liberalized marketin a deregulated, liberalized market

Can the oil industry attract investment at lower prices?Can the oil industry attract investment at lower prices?

Will reduced spare capacity contribute to higher volatility, marWill reduced spare capacity contribute to higher volatility, market ket

instability? Will it frighten away capital?instability? Will it frighten away capital?

Are we overAre we over--taxing the system?taxing the system?

Keeping Up With Demand GrowthKeeping Up With Demand Growth

0

0.5

1

1.5

2

2.5

3

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

mb/d

65

70

75

80

85

90

95

100

105

110

115

Will high prices dampen future demand growth?

Annual demand growth

1% annual growth rate

3% annual growth rate

mb/d

Historical OPEC Spare Production CapacityHistorical OPEC Spare Production Capacity-- Current Spare Capacity Less Than 1 mb/d Current Spare Capacity Less Than 1 mb/d --

0

2

4

6

8

10

12

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Source: Source: EIAEIA

Costs money to build & maintain spare capacity. Given internal OPEC policies, may contribute to market tension and potential downward pressure on price.

Mbd

Refinery Utilization Rates Already High in U.S. & Refinery Utilization Rates Already High in U.S. & Europe, Set to Improve in Asia . . .Europe, Set to Improve in Asia . . .

50

60

70

80

90

100

1980 1985 1990 1995 2000 2005 2010

USEuropeAsia

PercentPercent

Source: Purvin and Gertz INC.

Industry overbuilt capacity – very costly from a margin perspective –took a long time to wear off

Who will process incremental crude?

Limited Surplus Tanker CapacityLimited Surplus Tanker CapacityOil Tankers in LayOil Tankers in Lay--Up Up –– Waiting For ContractWaiting For Contract

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Contango %

<200,000 200-299,999 >300,000

Source: Kearney

Like stocks and spare production and capacity, the tanker market is stretched contributing to higher freight rates and increased price volatility

Who will ship incremental barrels (primary yards full)?

Conclusion Conclusion –– Third Oil ShockThird Oil Shock

Political oil embargo possible, but unlikelyPolitical oil embargo possible, but unlikely

More likely to be challenged by mobilizing investment More likely to be challenged by mobilizing investment –– gaining gaining

access to reservesaccess to reserves

Structural changes in the global economy could shift price and Structural changes in the global economy could shift price and

income elasticities income elasticities

Strong nonStrong non--OPEC supply growth through to end of the decadeOPEC supply growth through to end of the decade

Faced with tighter spare capacity (stocks, production, refining,Faced with tighter spare capacity (stocks, production, refining,

shipping, supply logistics)shipping, supply logistics)

Tighter capacity reduces buffer and contributes to higher overalTighter capacity reduces buffer and contributes to higher overall l

prices, greater price volatility market instability and fosters prices, greater price volatility market instability and fosters

speculationspeculation

Strong oil demand growth could eventually overStrong oil demand growth could eventually over--tax the systemtax the system

Strategic stocks are a stabilizing factor Strategic stocks are a stabilizing factor -- important insuranceimportant insurance

Not Not ““running out of oilrunning out of oil”” just yetjust yet

IEA Organization StructureIEA Organization Structure

Executive DirectorSpecial Assistant

Deputy Executive DirectorSpecial Assistant

EnergyStatistics

InformationSystems

AdministrativeUnit

Non-MemberCountries

Energy EfficiencyTechnology and

R&D

Oil Markets &Emergency

Preparedness

Long TermCo-operation andPolicy Analysis

Central & EasternEurope

Africa

Asia

Latin America

Middle East

Energy EfficiencyPolicy Analysis

Energy TechnologyPolicy

Energy TechnologyCollaboration

Economic Analysis

Energy & Environment

Energy Diversification

Country Studies

Oil Industry & Markets

Oil Market Report

Public InformationOffice

Internet/Library

Legal Counsel

IEA MembersIEA Members

New Zealand (1977)

Australia (1979) Austria Belgium

Canada Czech Republic (2001)

Denmark

Finland (1992) France (1992) Germany

Greece (1977) Hungary (1997) Ireland

Italy (1978) Japan South Korea (2001)

Luxembourg The Netherlands

Norway participates in the

Agency under a special Agreement

Portugal (1981) Spain

Switzerland Turkey (1981)

United Kingdom United States

Sweden

EC15 in 1974 26 member countries in 2004

The International Energy Agency (IEA) was established in November 1974 in response to the 1973 oil crisis as an autonomous intergovernmental entity within the Organization for Economic Cooperation and Development (OECD) to ensure the energy security of industrialized nations.

Under the Agreement on an International Energy Program (IEP), IEA Member countries commit to hold emergency oil stocks equivalent to 90 days of net oil imports and to take effective cooperative measures to meet any oil supply emergency. Over the long term, Members strive to reduce their vulnerability to a supply disruption. Means to attain this objective include increased energy efficiency, conservation, and the development of coal, natural gas, nuclear power and renewable energy sources, with a strong emphasis on technology.

In 1993, IEA Members adopted Shared Goals that highlight the importance of ensuring the energy sector's contribution to sustainable economic development, social welfare and protection of the environment. In addition, formulation of energy policies should encourage free and open markets. The IEA is based in Paris and acts as a permanent secretariat to the Member countries, monitors the energy markets, organises the response to emergency situations and keeps energy and environmental policies and practices under constant review to encourage the use of best practices among Members and beyond. The IEA also promotes rational energy policies in a global context through co-operative relations and dialogue with non-Member countries, including major energy producers and consumers, and operates a permanent information system on the international energy market.

…BALANCING ENERGY SECURITY, ECONOMIC GROWTH & ENVIRONMENTAL PROTECTION

IEA Formation & AimsIEA Formation & Aims