Truth About Oil Gasoline Primer

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America is in a global struggle for energy security and

many Americans lack a full understanding of the oil and

natural gas industry. Consumers and policymakers alike

need fact-based information. API has assembled this oil

and gasoline primer to encourage a constructive public

policy debate on meeting the growing energy needs of

consumers and industry.

Future Global Energy Demand Page 1The Myth of Big Oil Page 22006 Largest Oil and Gas Companies Page 3Diesel, Gasoline and Crude Prices Page 4

Average Price Increases Page 5Key Factors Affecting Markets Page 6World Oil Consumption Page 7OPEC Surplus Production Capacity Page 8EIA Price Forecast Page 9Commodity Performance Page 10WTI in Dollars and Euros/Yen Page 11What Consumers Are Paying Page 12Return on Investment Page 13Earnings by Industry Page 14Who Owns the Oil Companies? Page 15Stock Repurchases Page 16

Income Taxes Paid Page 17Taxes Paid by Oil Versus Manufacturing Companies Page 18Capital Spending: Where Funds Go Page 19New Investments Increasing Page 20Refinery Capacity Expands Page 21Projected Refining Capacity Page 22Environmental Expenditures Page 23U.S. Crude Oil Resources Page 24U.S. Natural Gas Resources Page 25Energy Efficiency Page 26Future U.S. Energy Demand Page 27Ethanol in Brazil Page 28U.S. Corn Use Page 29Technology Investments Page 30Emerging Energy Investments Page 31Ensuring Our Energy Security Page 32

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Table of Contents


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Source: World reserves of 1. 3 trillion barrels as of January 1, 2007 according to Oil and Gas Journal December 24, 2007Leading companies: Oil and Gas Journal September 17, 2007

2006 Largest Oil and Gas Companies (percent of worldwide reserves)



Even the largest U.S. based international investor owned company accountsfor just a small fraction of the worlds oil reserves and production.

2006 Largest Oil and Gas Companies (percent of worldwide production)

Source: Estimated world total of 72.4 million barrels a day in 2007 according to Oil and Gas Journal December 24, 2007Leading companies: Oil and Gas Journal September 17, 2007


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Until recently, gasoline and diesel fuel pricesclosely tracked the cost of crude oil. But over

the last year the supply and demand picture

has changed. Demand for gasoline has beenmet with strong supply fed by record refineryproduction and high levels of imports. Bycontrast, the market for diesel is much tighter.While production has been strong, supplies havebeen limited by weaker imports. The Europeansare exporting less to the United States, because

they are keeping more diesel for domesticconsumption.

Diesel prices also are higher today, because itis a more advanced, low-sulfur fuel. Such fuelshelp improve air quality but they are more

expensive to refine. Todays diesel contains less than 15 parts per million of sulfur, comparedwith 500 parts prior to 2006.



Diesel, Gasoline and Crude Prices

Source: NYMEX (WTI crude oil) and AAA (gasoline and diesel)


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The price of West Texas Intermediate crude oilhas increased by 95 cents per gallon for theperiod from January 1 through April 8th

of this year compared to the same period lastyear. Diesel prices are averaging 97 cents moreper gallon and gasoline 74 cents per gallon more.



Average Price Increases Year to Date (cents per gallon) January 1 to April 8

Source: NYMEX (WTI crude oil) and AAA (gasoline and diesel)


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Economists like to say that it all boils down tosupply and demand. But there are many factorsaffecting the tried-and-true laws of economics

and those factors have contributed to todayshigh-demand, tight-supply world energy market.For starters, demand is very strong, coming frommature economies like the United States andEurope plus the developing economies of countries like China and India. And as percapita income rises in those developing countries, the demand for energy is expected

to continue growing.

Tight supplies have been aggravated by politicalinstability, resource mismanagement andweather. The Iraq insurgency, civil unrest in

Nigeria and political uncertainty in Venezuelaare among the examples. And hurricanes in

the Gulf of Mexico have affected operationsin both the United States and Mexico.

Finally, the decline in the value of the U.S.dollar against other countries has put Americanconsumers at a disadvantage. Americanconsumers must now pay more for crude oil

than countries with stronger currencies.

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Key Factors Affecting Markets

Iran

Iraq Insurgency

Weather

NigerianCivil Strife

Venezuela

Value ofU.S. Dollar

OPEC Decisions


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The worlds demand for oil has increased sharplyin recent years, rising from 77 million barrelsper day in 2001 to 85 million barrels per day in

2007. The U.S. Energy Information Administrationexpects world oil consumption to grow by 1.2million barrels a day in 2008 and by 1.3 millionbarrels a day in 2009.

Non-OECD countries are projected to account for1.1 million barrels per day of world consumptiongrowth in 2008, with gains concentrated in China,

the Middle East oil-producing countries, India, andother Asian countries.

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Source: EIA, Short-Term Energy Outlook , April 2008

World Oil Consumption


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Looking ahead, the Energy InformationAdministration projects the annual price of WTI crude will increase from an average of $72

per barrel in 2007 to $100 per barrel this year.But some easing of the oil market by 2009 isexpected due to increased production outside of OPEC and planned additions to OPEC capacity.

EIA expects the projected higher costs for crudeoil will be passed on to all petroleum productprices with retail gasoline prices expected to

average 55 cents per gallon more in 2008.



Source: EIA, Short-Term Energy Outlook , April 2008

EIA Price Forecast Year Percent Change

2006 2007 2008 2009 2006-2007 2007-2008 2008-2009

WTI Crude a 66.02 72.32 100.61 92.5 9.5 39.1 -8.1

Gasolineb

2.58 2.81 3.36 3.24 8.9 19.8 -3.7

Diesel c 2.70 2.88 3.62 3.39 6.6 25.7 -6.5

Heating Oil d 2.48 2.72 3.46 3.30 9.4 27.4 -4.7

Natural Gas d 13.75 13.00 13.83 14.15 -5.4 6.3 2.3

a West Texas Intermediate b Average Regular Pump Price c On-Highway Retail d Residential Average

($/barrel)

($/gallon)

($/gallon)

($/gallon)

($/mcf)


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In addition to the rising cost of energy materials, there has been a worldwide increase in the costof other commodities because of strong demand

created by economic growth. When crude oil (e.g.

WTI and Brent) and refined products like gasolineare compared with other commodities, theprice increases experienced with energy related

commodities are about average.



Source: Deutsche Bank Global Markets Research, Bloomberg

Commodity performance year to date, January 1 through March 31 (2008)


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Percentage of Change of West Texas Intermediate Crude (WTI)in Dollars and Euros (January 2007 - April 2008)

Percentage of Change of West Texas Intermediate Crude (WTI)in Dollars and Yen (January 2007 - April 2008)

During the last year, the depreciation of the U.S.dollar against other countries around the worldhas accelerated. For American consumers it

means they are more affected by rising crude oilprices than the citizens of other countries that

use currencies like Euros or Yen. Conversely, asoil prices have gone up all around the world, theprice increase has been less for countries who

have a strong currency other than the U.S. dollar.

Source: Federal Reserve Bank of St. Louis, EIA, NYMEX


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The biggest single component of retail gasolineprices is the cost of the raw material used toproduce gasolinecrude oil. For example in 2007,

crude oil alone makes up 58 percent of pumpprices. Refining the crude oil into gasoline

accounted for 17 percent of the retail price.Retailing added another 10 percent to the retailprice of gasoline. Taxes accounted for 15 percent

of the price of gasoline.



Source: Average of gasoline components from January through December 2007 as reported by EIA.*Earnings differ by company. Figure represents average 2007 industry earnings for every dollar of sales calculated from data reported by Oil Daily .

What consumers are paying for at the gasoline pump

8.3% Earnings*

58% 17% 10% 15%

Crude Oil Refining Retailing Taxes


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Where ourinvestments

are going

Because the oil and natural gas industry ismassive and requires huge investments, itsearnings contribute greatly to the American

economy and way of life. They allow companies to reinvest in the facilities, infrastructure andnew technologies that keep America going strong well into the future while generating returns that meet shareholder expectations.

The oil and natural gas industry is probably oneof the worlds largest industries. Its revenuesare large, but so are its costs of providing consumers with the energy they need. Among

those are the cost of finding and producing

oil and natural gas and the costs of refining,distributing and marketing it. These costs remainhuge, regardless of whether earnings are high

or lowas was the case throughout most of the1990s and during other industry bust periods.

It is only in recent years that the return oninvestment (net income/net investmentin place) for the industry has matched orexceeded the returns for the S&P Industrials.

Return on Investment (net income/net investment in place)

S&P Industrials U.S. Oil and Natural Gas

Source: EIA, Performance Profiles of Major Energy Producers, various issues and 2006 S&P figure compiled by PWC from Compustat data.


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It may seem surprising that oil and natural gasearnings are typically in line with the averageof other major U.S. manufacturing industries.

This fact is not well-understood, however, in par tbecause reports usually focus on only half thestorythe profits earned.

Profits reflect the size of an industry, but theyrenot necessarily a good reflection of financialperformance.

Profit margins, or earnings per dollar of sales(measured as net income divided by sales),provides one useful way to compare financial

performance among industries of all sizes.

The latest published data for 2007 shows theoil and natural gas industry earned 8.3 centsfor every dollar of sales compared to 7.3 centsfor all U.S. manufacturing and 8.9 cents forU.S. manufacturing, excluding the financiallychallenged auto industry.



2007 Earnings by Industry (net income/sales)

Sources: Based on company filings with the federal government as reported by U.S. Census Bureau and Oil Daily .


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Contrary to popular belief, and what somepoliticians might say, Americas oil companiesarent owned just by a small group of insiders.

Only 1.5 percent of industry shares are ownedby company executives. The rest is owned by tens of millions of Americans, many of themmiddle class.

If youre wondering who owns Big Oil, chancesare good the answer is you do. If you havea mutual fund account, and 55 million U.S.households do, theres a good chance it invests

in oil and natural gas stocks. If you have an IRAor personal retirement account, and 45 millionU.S. households do, theres a good chance

it invests in energy stocks.

When politicians talk about taxing Big Oil or taking their record profits, they should thinkabout who would really be hurt.

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Who Owns Big Oil? (Holdings of Oil Stocks, 2007)

Source: SONECON, The Distribution of Ownership of U.S. Oil and Natural Gas Companies , September 2007

29.5%Mutual Funds

and Other Firms

27.0%PensionFunds

23.0%IndividualInvestors

14.0%IRAs

5.0% Other Institutional Investors1.5% Corporate Insiders


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The oil and natural gas industry is very capitalintensive and devotes the largest share of itsearnings to add new property, plant and

equipment to its upstream and downstreamoperations.

When companies repurchase stock, they aresupporting the equity value of the company.This in turn helps the owners of the companiesretirees, future retirees and millions of Americanswho have invested their earnings in a securefuture.

It is the responsibility of company officials tobuild value for shareholders; one way to do thisis through stock repurchases. Earnings are

also used for paying dividends which additionallybenefit shareholders.

While the share of stock repurchases in the oiland gas industry has increased in recent years,it is less than half of that for the S&P industrialgroup. For the last 11 years, the oil and gasindustry spent 21 percent of net income onstock repurchases while the rate for the S&Pindustrials was 52 percent.

Stock Repurchases as a Share of Net Income

Oil and Natural GasS&P Industrials

Source: EIA, Performance Profiles of Major Energy Producers




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According to publicly available data on the top27 energy companies tracked by the EIA, the

total current income taxes paid worldwide by

these companies nearly doubled between 2004and 2006, increasing from $44.8 billion to$81.5 billion.

The average effective tax rate (current taxes) of the top 27 energy companies was 37.1 percentin 2006. This indicates that taxes took up37.1 cents of every dollar of pre-tax income. Incomparison, according to the Tax Foundation, 2

the effective tax rate for the market as a wholeis 32.3 percent, or 4.8 percent less than the topenergy companies.

Imposing additional taxes on the U.S. oil andnatural gas industry is contrary to the goal of providing stable and cost-effective supplies of

energy for American consumers and discourages the tremendous capital investments needed to meet the nations growing energy needs.

Repeal of tax provisions designed to encourageinvestment in the United States will discouragenew domestic oil production and refineryinvestments, threaten American jobs, and makeit less economic to produce domestic energyresources thereby increasing our dependenceon imported crude oil and gasoline.


The Truth About Oil and Gasoline: An API PrimerPage 17

1 Energy Information Administration, 2006 Performance Profilesof Major Energy Producers , December 2007. These 27 companiesaccounted for about 44 percent of the total U.S. crude and NGLproduction, 43 percent of natural gas production, 81 percent of U.S.refining capacity and 3 percent of U.S electricity. These companiesinclude: Amerada Hess, Anadarko Petroleum, Apache, BP America, BurlingtonResources, Chesapeake Energy, Chevron, CITGO Petroleum, ConocoPhillips Petroleum,Devon Energy, Dominion Resources, El Paso, EOG Resources, Equitable Resources,ExxonMobil, Kerr-McGee, Lyondell Chemical, Marathon Oil, Motiva Enterprises,Occidental Petroleum, Shell Oil, Sunoco, Tesoro Petroleum, Total Holdings USA,Valero Energy, The Williams Companies, XTO Energy

2 Tax Foundation, Large Oil Industry Tax Payments Undercut Casefor Windfall Profits Tax, January 2006.

$24.0

$14.5

$26.3

$44.8

$66.9

2001 2002 2003 2004 2005

Current income taxes paid by oil companies 1 (billions of dollars)

Source: EIA, Performance Profiles of Major Energy Producers , Table B12.

2006

$81.5


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To understand the oil and natural gasindustry one must recognize it as an industrycharacterized by long lead times, massive capital

requirements and returns realized only decadeslater in the face of very real investment risks.Significant oil and gas discoveries that areannounced today often result from investmentsbegun by companies as far back as a decadeor more ago. Planning and investment cannotbe turned on and off like a spigot, withoutentailing huge, potentially non-recoverable costsand delaying urgently needed projects.

Because the industry must plan and operateunder these long lead times, it is hypersensitive

to minimizing risk over the course of its

investments. It is crucial for an industry thatmust manage such huge risks that governmentprovide an energy policy and tax framework thatencourages investment, rather than discourage.

To meet the continued, growing demand for oiland natural gas, our industry has continued toinvest heavily. New investment in 2006 reachedmore than $176 billionmore than a 30 percentincrease over 2005. Investment in 2007 grewanother 4 percent to $183 billion.



Capital Spending

Source: Oil and Gas Journal , April 2, 2007


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