Oil Prices: Cycle, Bubble, Oil Prices: Cycle, Bubble, or or

Fundamental ShiftFundamental Shift

C.E. BishopDirector, EconomicsMarathon Oil Corp.

Oil Market Perceptions Oil Market Perceptions

• Demand in the last decade has outpaced expectations as Asian economies grow

• Non-OPEC production has also failed to keep pace

• OPEC production and capacity has failed to meet expectations

Oil Prices and Open Interest Oil Prices and Open Interest in Crude Oil Futures and Optionsin Crude Oil Futures and Options

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

Jan-96 Jan-98 Jan-00 Jan-02 Jan-04

Con

trac

ts

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Dollars per bbl

OPEN INTEREST-FUTURES & OPTIONS (left scale)

WTI SPOT (right scale)

Source: NymexSource: Nymex

Reality CheckReality Check

• World Oil Demand is near long run expectations

• Non OPEC production exceeded expectations

• OPEC Capacity increases have not been necessary

EIA World Oil Demand ForecastsEIA World Oil Demand Forecastsmillion barrels per daymillion barrels per day

5 0

5 5

6 0

6 5

7 0

7 5

8 0

8 5

1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5

1 9 9 5 F o r e c a s t

2 0 0 5 A n n u a lE n e r g y O u t l o o k

Source: US Dept. of Energy, Energy Information Source: US Dept. of Energy, Energy Information AdministrationAdministration

China’s Increasing Share of World Oil China’s Increasing Share of World Oil Consumption Presents Logistical and Consumption Presents Logistical and

Geopolitical ChallengesGeopolitical ChallengesC h i n a ' s S h a r e o f W o r l d O i l D e m a n d

0 %

1 %

2 %

3 %

4 %

5 %

6 %

7 %

8 %

9 %

1 9 9 0 1 9 9 3 1 9 9 6 1 9 9 9 2 0 0 2 2 0 0 5

World Crude Oil Refinery DistillationWorld Crude Oil Refinery Distillationthousand b/dthousand b/d

5 0

5 5

6 0

6 5

7 0

7 5

8 0

8 5 J

an-9

6

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan-

05

3 0 %

4 0 %

5 0 %

6 0 %

7 0 %

8 0 %

9 0 %

1 0 0 %R u n s C a p a c i t y C a p a c i t y U t i l i z a t i o n ( r i g h t s c a l e )

EIA World Oil Production OutlookEIA World Oil Production Outlookmillion barrels per daymillion barrels per day

5 0

5 5

6 0

6 5

7 0

7 5

8 0

8 5

1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5

1 9 9 5 F o r e c a s t

2 0 0 5 A n n u a lE n e r g y O u t l o o k

Source: US Dept. of Energy, Energy Information Source: US Dept. of Energy, Energy Information AdministrationAdministration

Actual 2005 Production Actual 2005 Production vs 1995 EIA Outlookvs 1995 EIA Outlook

million barrels per day

- 1 2 . 0- 1 0 . 0

- 8 . 0- 6 . 0- 4 . 0- 2 . 0

0 . 02 . 04 . 06 . 08 . 0

1 0 . 01 2 . 0

O P E C N o n - O P E C

Oil reserves-to-production (R/P) ratiosOil reserves-to-production (R/P) ratios

Source: British Petroleum plcSource: British Petroleum plc

Persian Gulf Imports as a Persian Gulf Imports as a Percent of Total Oil DemandPercent of Total Oil Demand

North America North America 12%12%

Europe 19%Europe 19%

Asia 46%Asia 46%

U.S. Dept. of Energy, Energy Information Administration: International Energy Outlook 2004

Three Key IssuesThree Key Issues

• Access

• Access

• Access

ConclusionsConclusions

• Consumers make the right decisions, Consumers make the right decisions, whatever the price signals.whatever the price signals.

• Access will determine the potential for Access will determine the potential for Non-OPEC production, and the ultimate Non-OPEC production, and the ultimate response to the current price level.response to the current price level.

• Prices will moderate if the industry is Prices will moderate if the industry is permitted to do what it does best: find, permitted to do what it does best: find, produce and deliver affordable energy.produce and deliver affordable energy.