The price of oil

1
The price of oil
Presentation to theRome Energy Meeting 2006

• John Gault

2
The price of oil

• Are oil prices high?
• It depends on your perspective
• Will oil prices remain high?
• It depends on your time horizon
• In the near term, fundamentals will continue to
  pull prices downward
• In the medium to long term, either OPEC or
  governments of consuming countries, or both, will
  influence prices in ways that validate at least
  some investments in non-hydrocarbon energies

3
Is the oil price high? It depends upon your
perspective.
Spot price of Arabian Light through mid-2006
inflation adjustment using GDP deflator for IMF
advanced economies
4
Is the oil price high? It depends upon your
perspective.
5
Many analysts anticipate slowing economic growth
in the near term
Projections published 17 November 2006 by a major
international bank
6
Excess production has yielded a substantial
inventory build in recent years
since end 2000, in million barrels, right-hand
scale
7
Oil industry capital investments have risen
dramatically
Sample of 30 large oil companies
8
OPEC production quotas are not proportional to
capacities
Share of OPEC-10
Production quotas as of Oct. 2006 capacities
from NALCOSA
9
Offshore rig rates have only recently exceeded
the 1980-81 peak
Source GlobalSantaFe Summary of Current Offshore
Rig Economics (SCORE)
10
Drilling activity is now greater than in the
early 1980s
World Oil
11
The political basis for consumer government
intervention a growing sense of urgency about
the environment and energy security

• March 2006 EU Commission, Green Paper
• July 2006 UK DTI, Energy Review Report
• July 2006 G8, Global Energy Security
• October 2006 UK Treasury, Stern Review The
  Economics of Climate Change
• November 2006 International Energy Agency,
  World Energy Outlook 2006
• March 2007 EU Heads of State and Government to
  agree on an Action Plan for a common EU energy
  policy
• Later in 2007 Intergovernmental Panel on Climate
  Change, Fourth Assessment Report

12
Conclusions

• Will oil prices remain high?
• In the near term, fundamentals will continue to
  pull prices downward. OPEC has not yet
  demonstrated sufficient cohesion, but eventually
  will reassert control.
• In the medium to long term, OPEC (acting on crude
  oil prices) and/or governments of consuming
  countries (acting on end-user prices) will adopt
  policies that effectively validate some, but not
  all, investments in alternatives.