Oil and the Global Economy Southwest Chemical Association Houston, Texas

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Oil and the Global EconomySouthwest Chemical
AssociationHouston, Texas

• Chuck Bishop, Dana Chair
• University of Findlay
• September 27, 2007

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NYMEX Light Sweet Crude Oil PriceWTI per barrel
The industry does not price independently of the
Nymex
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On the Road of Life Reality is Just a Speed
Bump
But it can throw you way off the track...
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Global Capital Flows are Huge
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Money flows into commodities
The size of the US equity market is roughly 18
trillion. A shift of 1 to oil would exceed the
total value of futures and options on the Nymex.
Source Goldman Sachs, PIRA
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Goldman-Sachs Commodity IndexComponents and
Dollar Weights
Source http//www2.goldmansachs.com/gsci/economi
c Table 1 rounded to the nearest tenth pct.
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Financial Market Impact
Rising open interest with rising prices funds
are still going long
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An Event-Driven Market
Anything!?!
Nymex Crude Oil Price
Iran
Hurricanes
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A World of Challenges

• Sub prime Mortgage Mkt.
• Import dependency
• Economic weakness
• Ultra Low Sulfur Diesel Supplies
• Hurricane season
• Ethanol supplies logistics
• Non Opec project delays

• Kim Jong Il
• Nigeria production
• Venezuelan taxes
• Iraqi production
• Iranian nuclear plans
• Chinese Demand
• Saudi reserves
• Refinery capacity
• Peak Oil

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Should we be worried?
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Prospects for the World Economy

• Economic growth is driven by population,
  technology, policy and trade.
• Rapid growth in the developing world will
  increase the competition for resources and
  markets
• Biotechnology will increasingly influence both
  economics and energy, through contributions to
  agriculture, alternative fuels and health care.

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Potential Growth Is Higher

• World economic growth has largely benefited from
• Monetary stabilization
• technology
• Market pricing
• Reduction in trade barriers

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China is Dependent on Trade ( of GDP)
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Chinas share of World Output vs. its share of
World Oil Use
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Were the fundamentals a surprise?
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WTI in US Dollars per barrel and Euros per barrel
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Two-Thirds of OECD Oil Demand is Transportation
Fuel
International Energy Agency, Paris
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US Gross Product Imports000s b/d
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World Distillate Prices per barrel
Light Product Prices and Spreads
World Gasoline Prices per barrel
No escaping the fact that oil is a world market.
Any increase in US imports must be bid away from
Asia or Europe.
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Markets Respond to Price
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Non-OPEC Capacity Plans are Robust
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OPEC Capacity Plans are Robust
Source http//www.opec.org
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Change in World Oil Demand million b/d
Substitution effects include other fuels, energy
saving technologies, and a less energy -
intensive output mix.
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There are always risks in the market
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Policy Risks

• BIO FUELS - This is where economic realities will
  come most to bear. (E85, Cellulosic, palm oil,
  etc.)
• VEHICLE MANDATES - Huge current capital stock
  slows transition. Mandates on consumers
  politically difficult as manufactures already
  supply wide range of fuel efficiency choices.
• CLIMATE RATIONING - Catch 22 stalemate.
  Political solution requires low economic impact.
  Low economic impact produces no climate impact.
• PUNITIVE TAXES A growing risk based on profit
  backlash and alternative fuel and technology
  subsidies.

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Conclusions

• Markets are working to lower prices
• Policy is working to thwart markets
• Costs will rise