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A few observations…• Gasoline prices have been low!• …because gasoline has been the “runt

of the litter”• Structural changes may be making

that permanent• But refiners are adaptable…how fast

will they adapt?• US has become a decent-sized

exporter as a result of some of these changes

But misunderstandings linger..

• The three-headed monster: keep your eye on all three heads!

• Gasoline prices need to “catch up.” Or do they?

• “Normal” catch-up may be on a new standard.

Gasoline to crude: big change

WTI as a pct of GC gasoline2005-2006

AVERAGE: 85.73

50.00

60.00

70.00

80.00

90.00

100.00

110.00

3-Jan-05

3-Apr-05

3-Jul-05

3-Oct-05

3-Jan-06

3-Apr-06

3-Jul-06

3-Oct-06

The laggardWTI as % of GC Gasoline -- recent

Average: 95.31

80.00

90.00

100.00

110.00

1/2 2/16 4/1 5/16 6/30 8/14

Why did diesel surge?• Long-time consumption trends,

particularly in Europe• The configuration of refineries was

always to make more gasoline• The Bolivian and Argentina gas messes• New sulfur rules in the US and Europe• But companies react…ingenuity and

greed triumph, eventually

Ramping it up…Gasoline yields down, distillates up

20

25

30

35

40

45

50

Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Gasoline yield

Distillate yield

Returning to normalcy?

Gulf Coast diesel over GC gasolinects/gal

-5

15

35

55

75

The ethanol impact• Ethanol having an enormous impact on the

relative price of gasoline• Despite the controversy, mandates for it are

set to grow• Iowa: first in the nation caucus• But…McCain has never been an ethanol

backer• US tariff is simply sending Brazilian material

elsewhere…with US bearing the transportation costs.

• Currently 6.6% of US gasoline consumption• Showing up in conventional markets.

More common misunderstandings..

• The curve predicts prices• Prices are a function of percentages.• Speculators pulling out of the market

led the price down• BUT…if speculators were at fault,

where were the inventories?• More likely: the diesel-driven surge

ended because of softer demand, refiner reaction

Things you will hear this election…

“The US has no energy policy.”The US has an energy policy that has been

largely bipartisan.• Minimal taxation of gasoline• Restricted drilling.• Limits on nuclear power• Turn food into fuel• Cleaning up the fuel poolThis constitutes “a policy,” because there

are clear choices being made.

The coming gas revolutionTransformative technologies might be in hydrocarbons

The shale plays: Barnett, Haynesville, Marcellus….

Aubrey McLendon, the Pied Piper of shale natural gas:

• Retrofit 25,000 gas stations at a cost of $400,000 per station.

• Fill up at $2.50/gallon [equivalent], which is $20/Mcf. Current price: less than $9/Mcf.

More McLendon…• Told the House Select Committee on

Energy Independence and Global Warming that US gas producers could increase production by by 5% annually for the next 10 years, providing enough natural gas to fuel 10% of America's cars and generate enough power to prevent the building of any new coal-fired generation plants.

Natural gas as an alternative

• The same characteristics as oil• Lower CO2 intensity• Lower emissions on almost everything• Suddenly…an abundant supply?• And that’s without expanded offshore

drilling• Can wind/solar/biomass compete

against this?

What alternatives face, or “Why I decided to love oil as an energy

source.”• Tremendously dense• Easily stored• Easily transported• As a result: invisible to society at

large• Even at these prices, still beats all

alternates.

Could research have beaten this curve?

Inflation-adjusted crude price

$-

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

Apr

-83

Apr

-85

Apr

-87

Apr

-89

Apr

-91

Apr

-93

Apr

-95

Apr

-97

Apr

-99

Apr

-01

Apr

-03

Apr

-05

Apr

-07

Basis+2004 CPI

The broad factors…mostly bullish

• World supply remains constrained: Mexico, Russia, and expected declines

• The return of nationalism: Chavez and Putin• Repeated failure of non-OPEC targets to be

reached: IEA projected 4Q ’08 at 51.8 last Dec; most recent, 51.3

• The controversy over Saudi Arabia/Ghawar• The rising demand giants• Commodity bull markets often run 18-20

years

Ominous warning: John Hess• "An oil crisis is coming."• When looking at the tight squeeze in

the supply/demand balance, "it's hard to see any relief in sight." Hess said in the opening session.

• Growth in oil demand is "unrelenting" and the world needs "a sense of urgency, or the consequences will be severe."

REAL demand destruction

• Late 1997: IEA estimates ’98 demand will be 75.6 million b/d

• By April ’99, IEA estimated world demand plunged to 73.8 million b/d

• Supply went from 75.6 million b/d to 75.3 million b/d 4Q ’97 to 4Q ’98

• Result: Lowest real crude price ever

Current demand destruction nowhere near as much

• Outright, no demand destruction at all• 4Q ’07: 87.2• Projected 4Q ’09: 89 million b/d…up 1.8

million b/d• Supply strains to keep up: • Non-OPEC…49.7 rising to 50.6• Asking OPEC to produce by 4Q 2009 32.3

million b/d• Latest Platts estimate: 32.77 million b/d

Shorter-term: downward pressure

• That OPEC output is higher than the “call” for both fourth quarter and first quarter 2009

• Fourth quarter call: 31.3 million b/d• First quarter call: 30.3 million b/d• OPEC meeting: “we’ll be good boys!”• Main players concerned with demand

destruction

What to watch for..• Upside potential: Non-OPEC output

continues to disappoint• Mexico’s train wreck gets even worse• Venezuela joins in on the highway to hell• The whispers about Saudi production turn

out to be true• Can Iraq save the day?• Downside potential: demand retreats

further…but that might mean the economy isn’t too hot!

What to watch for, con’t…

• Does natural gas pull down the price of oil?

• The big breakthrough: oil shale, at the Mahogany play

Questions?