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L. A. Starks, author 13 DAYS: THE L. A. Starks, author 13 DAYS: THE PYTHAGORAS CONSPIRACYPYTHAGORAS CONSPIRACY

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Crude Oil Price

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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

Dollar Weakness and Oil Price

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Oil Supply Demand Inflection Point

2-2.4 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 don’t 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

January 2008 Oil Production, Source: Oil and Gas Journal

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US Crude Oil Imports

Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08

Canada 1,950 1,960 1,889 1,919 1,784 1,944

Saudi Arabia 1,468 1,441 1,370 1,530 1,675 1,479

Mexico 1,381 1,293 1,322 1,484 1,234 1,198

Nigeria 1,184 1,137 1,184 1,245 1,210 1,163

Venezuela 1,138 1,146 1,221 1,227 1,246 1,135

Angola 400 578 342 408 439 566

Iraq 520 603 490 508 378 543

Algeria 572 503 213 184 348 366

Ecuador 240 234 222 154 195 247

Kuwait 139 143 150 154 158 239

Colombia 152 165 164 197 113 171

Brazil 250 213 172 78 171 169

US Crude Oil Imports, Largest Sources

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08

Impediments

Oil Reserves, Political Limits, 2004 Est.

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BBOE 263 133 115 77 72 35

Saudi Iran Iraq Venezuela Russia Nigeria

Reserves(less available or costly)

Projects coming on this year w/total peaks 3 MMBPD

Saudi Arabia not above 12.5 MMBPD - Al-Naimi Russia—changing 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

Asian Demand Potential

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Japan (2006)

China (2005)

India (2003)

China at US levels

India at US levels

Number of Cars

Alternatives

Ethanol: hero to zero Food prices up 83%; law of unintended

consequences BP’s 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 Rubin’s estimate of $120/bbl Traders betting own money; NYMEX

collected wisdom

NYMEX Forward Price Curve

NYMEX Crude Oil Futures, 4-29-08

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$/BBL 115.6 114.7 114.0 113.4 112.8 112.2 111.6 107.5 106.0 105.5

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