Presentation to Green Capital – 29 August 2006 What’s happening to oil prices?

Presentation to Green Capital – 29 August 2006What’s happening to oil prices?

Presented byDr Shane OliverHead of Investment Strategy and Chief EconomistAMP Capital Investors

33

Overview

Demand for oil is projected to continue rising

Supply is constrained

Peak oil advocates claims of an oil production peak around 2008 are too bearish But supply will nevertheless have trouble keeping up with demand

So the longer term outlook is for oil prices to remain high/move higher

This provides risks and opportunities for Australian industry

Source: AMP Capital Investors

44

Oil prices have risen sharply since 1998

Source: Datastream, AMP Capital Investors

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10

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70

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70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Nominal oil price

$US/barrel

55

…this has led to a sharp rise in petrol prices

Source: Thomson Financial, AMP Capital Investors

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0.90

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1.10

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1.50

98 99 00 01 02 03 04 05 06

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60

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80

90

Australian retail petrol price (LHS)

World oil price (RHS)

$A/litre $US/barrel

66

High oil prices have been driven by strong growth in demand relative to supply

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40

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140

1972 1980 1988 1996 2004 2012 2020 2028

Global oil consumption

OPEC supply

Million barrels per day

IMF demand projection


77

Emerging markets have been the key drivers of demand growth, with China the biggest

0102030405060708090

100

1995 2006

OECD (+1.1% pa)

China (+7.1%pa)

Rest of world (+1.3% pa)

Other Asia (+3.8% pa)

Global oil demand

Million barrels/day

70 mbd

84.8 mbd

Source: International Energy Agency, AMP Capital Investors

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So far there is no evidence of “demand destruction” from high oil prices

US is slowing but gasoline demand is still strong

Europe and Japan (more vulnerable than US) are growing solidly

Asia and China (again more vulnerable than US) remain strong

Reasons include: This is primarily a demand shock not a 1970s style supply shock The real oil price is still below early 1980s levels There has been no boost to inflation unlike in the 1970s

…so growth in oil demand remains strong


99

…and we are yet to see any real efficiency gains in fuel use


US automobile efficiency, miles per gallon

1314151617181920212223

80 82 84 86 88 90 92 94 96 98 00 02 04 06

1010

Leading indicators are peaking, but still point to reasonable global economic growth ahead

Source: Bloomberg, AMP Capital Investors

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99 00 01 02 03 04 05 060

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US ,German & Japanese Business Confidence

(LHS)

G3 Real GDP (RHS)

Index Annual % change

1111

Oil prices still below early 1980’s levels in real terms – so has been worse in the past !


0

20

40

60

80

100

120

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Oil price in today's dollars

Nominal oil price

$US/barrel

1212

Oil prices are “cheap” relative to other things

Jan 1980 Now % change

World oil Price, $US/barrel $US40 $US72 +80

World oil price, $A/barrel $36 $94 +161

Litre of petrol $0.33 $1.38 +318

CPI 45.7 154.3 +238

Litre of milk $0.525 $1.95 +271

Holden Commodore $7,903 $32990 +317

Average weekly wage $223.6 $1043.1 +366

Avg Australian house prices $50243 $409697 +715

All Ords share index 586 5041 +760

Source: Datastream, ABS, REIA, AMP Capital Investors

1313

Despite higher oil prices, underlying inflation remains ok= no need for aggressive interest rate hikes


-1

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90 92 94 96 98 00 02 04 06

Underlying inflation, annual % change

US

Europe

Japan

Australia

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6

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90 92 94 96 98 00 02 04 06

US

Europe

Japan

Australia

1414

China and India have a long way to go to catch up to US consumption levels – fuelling oil demand

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

Electric 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

1515

China’s oil self sufficiency is declining

Source: ISI, AMP Capital Investors

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The supply constraint - world oil rig count remains low

Source: Baker Hughes, Bank Credit Analyst, AMP Capital Investors

1976 1980 1984 1988 1992 1996 2000 2004

1500

2500

3500

4500

5500Number

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The supply constraint – limited new discoveries

Source: Association for the Study of Peak Oil

Oil discovery, rolling 3 year average relative to consumption

Billion barrels pa

ASPO Projections

1818

As a result of constrained supply and strong demand OPEC has limited spare capacity – leaving oil prices vulnerable to supply scares – Iran, Nigeria, etc


OPEC Spare Capacity v Price

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2000 2001 2002 2003 2004 2005 2006

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80Spare Capacity

(LHS)

Price (RHS)

Million Barrels per day $US/barrel

1919

Peak Oil – M.King Hubbert (a scientist with Shell) used a bell curve to correctly pick the peak in US oil production – well sort of!

Source: C. Campbell, US DOE, “Nuclear energy & the fossil fuels” – M. King Hubbert 1956, UBS, AMP Capital Investors

2020

Peak Oil – oil production to peak in 2008

Source: Association for the Study of Peak Oil and Gas, UBS, AMP Capital Investors

Oil and gas production, Billion barrels pa

2121

The Peak Oil thesis

Limited new discoveries Saudi fields on the verge of a steep fall-off in production The cost of oil extraction is rising steadily and average productivity

of current wells is lowest in 17 years Countries already in decline:

peak in 1970s: US, Venezuela, Libya, Iran, Indonesia peak in 1980s: Tunisia, Brazil, Russia peak in 1990s, Dubai, Egypt, Angola, UK

Global oil production will soon peak leading to a return to the horse and buggy if not “war, starvation, economic recession and possibly even the extinction of homo sapiens”


2222

Peak oil – so far it has been way off regarding the global peak in oil production

Source: DOE, “Nuclear energy & the fossil fuels” – M. King Hubbert 1956, UBSAMP Capital Investors

2323

A brief history of oil peaks

1855 – an advertisement for Kier’s Rock Oil advised buyers to “hurry, before this wonderful product is depleted”

1874 – Pennsylvannia state geologist estimates US only has enough oil to burn the nations lamps for the next 4 years

Pre 1950 – regular predictions of an impending peak

1973 – predictions US was entering a 125 year long “energy gap”

1989 – prediction oil production would peak that year

1995 – another geologist predicted a peak in 1996

1998 – Scientific American article predicted 2002 peak


2424

Why peak oil is too bearish

Ignores role of Middle East politics in driving “low discoveries” of recent years – Libya hasn’t been explored for years

Oil field discoveries have though been higher than Peak Oil protagonists allowed for

The timing of the peak has been pushed out regularly It ignores the role of new technology in determining recovery rates It ignores economics – higher oil prices will encourage increased

exploration, greater efficiencies and a switch to alternatives As a result the peak is likely to be pushed out so far that by the time

it arrives humanity will have moved on Hence don’t expect a return to the horse and buggy


But prices are still likely to stay high

2525

A range of oil alternatives are now becoming viable

$US a barrel Energy source

$US80 Biodiesel

$US60 US corn based ethanol

$US50 Shale oil

$US40 Tar sands, can based ethanol, gas to liquids, coal to liquids

Source: Cambridge Energy Research Associates, The Economist, AMP Capital Investors

Oil price at which at which energy alternatives are viable

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Australian industry sector exposure to oil prices

Source: Australian Bureau of Statistics, UBS, AMP Capital Investors

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Oil requirement coefficient, 1= average

Most vulnerable

Least vulnerable

2727

Conclusion

Demand for oil is projected to continue rising

Supply is constrained

Peak oil advocates claims of an oil production peak around 2008 are too bearish But supply will nevertheless have trouble keeping up with demand

So the longer term outlook is for oil prices to remain high/move higher

This provides risks and opportunities for Australian industry


2828

Thank you

QUESTIONS?

2929

Important note

Neither AMP Capital Investors Limited (ABN 59 001 777 591)(AFSL 232497), nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this presentation.

Past performance is not a reliable indicator of future performance.

While every care has been taken in the preparation of this document, AMP Capital Investors makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.

This document has been prepared for the purpose of providing general information, without taking account of any particular investor's objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor's objectives, financial situation and needs.

This document is solely for the use of the party to whom it is provided.

Presentation to Green Capital – 29 August 2006 What’s happening to oil prices?

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Transcript of Presentation to Green Capital – 29 August 2006 What’s happening to oil prices?