Rares Business Strategy Services

1
Reducing industry vulnerability in the face of
rising prices - A perspective on transport energy
availability and the emissions trading scheme
ATA Maintenance Conference Melbourne 9 November
2008
2
The Australian transport sector is increasingly
being shaped by two globally significant
imperatives.

• Uncertainty about future availability of
  transport energy
• Uncertainty about future price of transport
  fuels
• Uncertainty about timeframe for substitution of
  genuine alternatives

ENERGY imperative

• Uncertainty about price impact on transport
  fuels (now future)
• Uncertainty about GHG accounting and scope of
  CPRS
• Uncertainty about opportunities for carbon
  reduction

GREENHOUSE imperative
3
The energy imperativeDemand, supply and future
price of transport fuels
4
Global oil demand is forecast to increase
significantly over the next 20 years.
140
Million barrels per day
120
IMF demand
100
Global oil
projection
80
consumption
60
40
OPEC supply
20
0
1972
1980
1988
1996
2004
2012
2020
2028
Source Datastream, AMP Capital Investors
5
A significant contributor to recent growth in
demand has been the growth in Asia esp. China
and India
6
There is significant potential for Asias demand
for oil to grow even faster in the next 10 - 20
years
China
Affluence indicator
India
USA
China India US Oil (barrels per person,
pa) 2.0 0.8 25.2 Copper (pounds per person,
pa) 4.9 0.9 15.8 Cars (per 1000
people) 6 10 475 TVs (per 1000 people) 304 NA 835
Living space (sq feet per person) 66 NA 718 Electr
ic power (kw hrs per person) 827 644 12322 Mobile
phones (per 1000 people) 110 41 451
Source Bank Credit Analyst, Fed Reserve of
Dallas, ISI, UBS, AMP Capital Investors
7
Projections of growth in China in the next 5
years are very strong

• Chinas Eleventh five year plan (2006 to 2010)
  forecasts annual average GDP growth of 7.5
• This follows actual annual growth of 9.5 between
  2001 and 2005 0.9 higher than forecast in the
  Tenth five year plan.
• Contrary to suggestions by some economic
  commentators, growth in China is not expected to
  put the brakes on increasing demand for oil in
  the next five to ten years.
• In fact, there are some suggestions that China
  will begin to stockpile energy now to
  accommodate future economic growth.

8
Despite sustained increases in global oil prices
..
A/litre
US/barrel
1.50
90
1.40
80
1.30
70
1.20
60
Australian retail
1.10
50
petrol price (LHS)
1.00
40
0.90
30
0.80
20
World oil price (RHS)
0.70
10
0.60
0
98
99
00
01
02
03
04
05
06
Source Thomson Financial, AMP Capital Investors
9
global economic confidence remains steady,
raising questions about demand elasticity (and
the viability of oil alternatives).
Annual change in underlying inflation
7
7
6
6
Europe
Europe
5
5
4
4
pa
Australia
Australia
3
3
US
US
2
2
1
1
Japan
Japan
0
0
-
1
-
1
90
92
94
96
98
00
02
04
06
90
92
94
96
98
00
02
04
06
Source Datastream, AMP Capital Investors
10
Advocates of the peak oil and gas scenario
suggest we already have (or soon will) reach peak
global oil production.
Source Association for the Study of Peak Oil and
Gas, UBS, AMP Capital Investors
11
But analysis of actual production casts doubt
about the magnitude and timing of the current
peak oil predictions.
Source DOE, Nuclear energy the fossil fuels
M. King Hubbert 1956, UBS AMP Capital Investors
12
Examination of oil discovery rates and.
Source Association for the Study of Peak Oil
13
..falling rates of excess oil capacity, point
to the fact that we may now be nearing peak
production.
14
Analysis of the relationship between price and
supply suggests that that BOTH prices and supply
are trending upwards in terms of (a) OPEC
production..
15
. and (b) non-OPEC production - which is
contrary to classical economic theory of supply
versus demand.
16
Analysis of this anomaly, highlights the fact
that oil prices are increasingly being affected
by non-economic drivers
17
The impact of non-economic drivers is making
traditional forecasting techniques increasingly
irrelevant.
Oil price 2008
Oil price 2015

• Source China State Information Centre (October
  2005)

18
The risk of continued upward movement in oil
prices is more likelythan not (and is unlikely
to be resolved by tweaking of petrol taxes)

• 2006 price forecasts
• US37/bbl by 2015
• ABARE, May 2006
• US47/bbl by 2014
• US EIA, 2006
• US64/bbl in December 2012
• NYMEX Oil futures, September 2006
• US380/bbl by 2015
• IXIS-CIB, April 2006

Annual price increase of 22 cpl (or 18)
Oil price at US65 in October 08 NYMEX at
US81/bbl (Dec 2012)
19
Oil prices have increased dramatically in the
past 12 month, only to be arrested by the global
financial crisis
82
- 17
20
There is growing evidence suggesting an
increasing weakness in the historical
relationship between crude oil prices and the
pump price.

• Recent evidence suggests that there is growing
  disparity in the price movements of crude oil
  versus the retail price of transport fuels
  (petrol and diesel)
• Crude oil - US90bbl (Oct 07) to US65bbl (Oct
  08)
• TGP of diesel - 1.38 per litre (Oct 07) to
  1.64 per litre (Oct 08)
• A significant part of this explanation lies in
  the variation in international exchange rates,
  namely
• When commodity prices are high (including oil
  prices), AUS trades higher.
• When commodity prices are low, AUS trades lower
  .
• The weakness of the relationship is likely to
  become more pronounced owing to Australias
  increasing reliance upon imported transport fuels
  (esp. diesel)
• Australian importation of finished product
  increased from 15 of total transport energy
  imports in 2000/01 to 38 in 2005/06 (ABARE
  2007).
• National self-sufficiency is expected to decline
  to less than 40 by 2020 (CSIRO 2002)

21
The energy imperative will likely result in
increased uncertainty and upward movement of
freight costs

• The relationship between supply and demand is
  becoming increasing fragile, apparently due to
  lower spare capacity in stored supply.
• Global demand for oil is not likely to slow in
  the future - and may even accelerate owing to the
  demand from major Asian economies.
• There is a growing level of uncertainty about the
  real magnitude of global oil reserves - with the
  oil producers being the keepers of the numbers.
• Oil prices are becoming increasingly volatile,
  largely due to the impacts of non-economic
  influences or premiums.
• Most oil forecasts over the past two years have
  been well below actual oil prices even after
  the affects of the world financial crisis are
  considered.

22
The Greenhouse imperativeFreight in a carbon
constrained economy
23
Transport is now the worst performing sector
under the Kyoto Protocol and seriously
jeapardises the achievement of (Europes) Kyoto
targets (EFTE 2006)
24
The CPRS will create a new impetus for commercial
vehicle operators to reduce consumption of carbon
intensive products such as coal fired power and
conventional transport fuels.

• Approximate price impact of AU20 increment of
  CO2-eq

• Fleet operators that can identify and secure fuel
  efficiency savings can potentially secure an
  early mover competitive advantage.

25
Fuel costs will rise under the proposed Carbon
Pollution Reduction Scheme (CPRS). The initial
cost and net trajectory remain unknown.
Carbon price AUD/CO2eq
2020
2030
2040
2010
2050
26
GHG reduction from road transport (and
particularly road freight) must therefore be an
essential element in Australias GHG response

• Transport is the third largest source of GHG
  emissions in Australia
• Road transport accounts for 90 of GHG emissions
  and will therefore continue to be a major focus
  of greenhouse-related public policy
• The Carbon Pollution Reduction Scheme (CPRS) will
  likely result in a relatively small initial
  increase in the cost of transport fuels.
• This initial increase will be offset by a
  reduction in Federal Fuel excise in the first
  three years (for cars) and the first 12 months
  (for commercial vehicles)
• But the real risk lies in future increases in the
  cost of conventional transport fuels in the short
  to medium term (i.e. to 2020) as the cost of
  carbon increases. The magnitude and timing of
  these increases is currently the subject of a
  high level of uncertainty.

27
Reducing industry vulnerability in the near
termFuel efficiency, freight efficiency, and
alternative fuels
28
The key challenge for the Australian commercial
vehicles industry will be to reduce its economic
vulnerability in the face of these two
imperatives
29
The way forward will require coordinated industry
action across three fronts

• Improved fuel efficiency of conventional freight
  vehicles
• Explore the opportunities for improving the
  efficiency of the existing fleet
• Opportunities include improved vehicle
  aerodynamics, automated manual transmissions, and
  Eco Drive
• Improved freight efficiency
• Larger truck-trailer combinations for inter-city
  haul
• Urban freight centres and improved freight
  logistics (inter-company)
• Alternative fuel and drive train technologies
• Technologies must respond to the dual challenges
  by offering an abundant, price stable, and low
  carbon solution
• Key opportunities in electric hybrid, hydraulic
  hybrid, and natural gas

PERFORMANCE UNCERTAINTY is the immediate
challenge for industry
30
Summary

• Two major and global imperatives are influencing
  the price of conventional fuels.
• There is significant uncertainty about the future
  direction of fuel prices, but analysis of the
  fundamentals suggests continued upward price
  pressure is more likely than not.
• The global price of crude is likely to be less of
  a predictor of retail prices in Australia than in
  the past, owing to increased import volumes of
  finished product.
• The CPRS will impose a new price pressure that is
  likely to be initially modest and increase over
  time with future movements in the carbon price.
• In view of these factors, the opportunity for
  reduced vulnerability is likely to comprise three
  actions
• Securing fuel efficiency improvements from the
  existing fleet
• Adoption of larger vehicles for long-haul
• Adoption of alternative fuels and drive trains.

31
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32
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