Energy Matters: Petroleum market perspectives and links to Nova Scotia retail gasoline regulation

1
Energy MattersPetroleum market perspectives
and linksto Nova Scotia retail gasoline
regulation

• Bill Simpkins
• Energy Industry Consultant
• Presented to Halifax Chamber of Commerce
• November 16, 2006

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Presentation Discussion Points

• Crude Oil Prices
• Speculation
• Fundamentals demand supply
• Influences
• Gasoline Price Regulation
• Continental market
• Nova Scotia Regulatory Goals
• What Regulation can and cant do
• Conclusions

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Crude Oil Prices

• Speculation
• Fundamentals
• Influences

4
Speculation

• Speculators have not been stellar at predicting
  crude oil prices (2004/5 predicted 21 bbl oil
  but prices were 40-50, 1998 predicted 5 but
  prices didnt fall below 10 and then rose to
  30)
• Speculators follow trends, their comments
  translate into market price movements
• From 77bbl to 57bbl
• What happened to 100 bbl oil?
• The world is awash in oil, OPEC is manipulating
  supply. What happened to peak oil theorists?
• What messages are being sent to consumers? Should
  they consume or conserve?

5
Living consequences of a commodity market that
remained too low for too long 1985-1998
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Crystal Ball Gazing
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Fundamentals

• Prices determined internationally
• Geo-political turmoil adds 15 - 20 premium to
  crude oil price
• Global consumption continues to rise
• Supply is available but future infrastructure is
  key variable
• Underinvestment in new energy supply is a looming
  risk

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Worldwide reserves
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Worldwide surplus capacity
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Worldwide consumption vs. Production
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U.S. Consumption Growth
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Fundamentals - Demand

• Global demand continues to increase 53 by 2030
• 75 of increased global demand to come from
  China, India and other developing countries
• U.S. demand increasing despite weak economy
• U.S. reliance on foreign imports rose to 10.9
  million bbl per day 69 of demand supplied from
  foreign sources, up from 65.2 last year
• China and India each have populations of more
  than one billion and grow/industrialize at an
  alarming rate
• By 2025 China GDP expected to reach 5 trillion
  (U.S.) up from 1.6 trillion last year

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Fundamentals Demand (contd)

• 1900 1970 industrialization in U.S.,
  consumption rose from 1 bbl of oil to 27 bbl per
  person/day
• China and India currently consume 1.3 and 0.7 bbl
  per person/day
• Vehicles in China expected to increase from 25
  million today to 175 million by 2020 (U.S. has
  one car for every two people while China and
  India have one car for every 280 people.)
• Total petroleum demand in China from 20012004
  would have drained all the proposed Canadian tar
  sands development slated for the next 15 years

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Fundamentals - Supply

• Worldwide reserves continue to increase 17
  higher today than 1994
• Production has increased 20 to meet demand
• Worldwide spare capacity is tight, lowest level
  over last 30 years OPEC has most ability to
  influence prices by adjusting supply but that
  ability is dwindling
• Major infrastructure investments required to keep
  pace with current demand
• Managing demand and promoting conservation play a
  major part in the solution
• Renewable fuels, alternate fuels and nuclear
  power are critical to the energy mix

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OPEC price influence limited byability to turn
taps on and off
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OPEC Price Influence
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Fundamentals Supply (Contd)

• Infrastructure investments of 20 trillion needed
  over next 25 years (IEA) previous analysis was
  3 trillion
• Refinery infrastructure investments also needed
  to supply energy products that lubricate world
  economies
• Canada currently is self-sufficient in crude oil
  and refined products
• Canada has a good national refinery
  infrastructure
• Canada (and Atlantic Canada) enjoys trade boost
  from petroleum and refined product resources

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Influences

• Iran, Iraq, Afghanistan, North Korea, Nigeria,
  Middle East conflicts, Venezuela
• Emerging economies China India
• Superpower dependence on imported crude oil
  China and the U.S.
• Political power shifts
• U.S. politics and presidential elections
• Weather events

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Dependence on foreign oil
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Gasoline Price Regulation

• Continental Market
• Nova Scotia Regulatory Goals
• What regulation can and cant do

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Continental Market
Saint John, NB
Halifax
Québec

• Open continental market
• NAFTA
• Free products movement
• Cargo, pipelines, trucks, rail
• No trade restrictions
• Favorable to Canada (trade balance)
• Canadian market 10 of US market
• Canada is a price-taker and not a price-maker

Montreal
!
Ottawa
!
Portland
Toronto
New York
!
Buffalo
!
!
Sarnia
!
Detroit
Philadelphia
From Gulf of Mexico
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Nova Scotia Regulatory Goals

• Ending pump price volatility
• Providing guaranteed compensation (min. 4 cpl
  margins) to inefficient operators

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What regulation can and cant do

• Cant create Made-In-Nova Scotia pump price
• Cant stop price volatility, volatility benefits
  consumers through sale prices, most price
  changes are downward in competitive market
• Can only regulate about 10 cpl of a 1 pump price
• Majority of retailers have opted out of gasoline
  regulation (73 of 445 total N.S. retailers 45
  of independents)
• Eliminates competition and Competition Bureau
  oversight
• Encourages inefficiency PEI retailers are
  back-to-the future
• Creates investment chill, loss of construction
  activity and spin-off investment in local economy
• Takes more money from consumers pockets

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N.S. regulation chasing a complex world
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Average Retail Prices for Regular Gasoline
(Last 52 Weeks)

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Conclusions

• Crude oil prices likely to remain high strong
  demand and tight supply infrastructure
• Crude oil prices will be volatile as a result of
  fundamentals and speculators comments on trends
• Volatility in crude oil prices will translate
  into volatile pump prices
• Petroleum prices will affect other energy sources
  such as electricity and natural gas
• Price pressure on crude oil will pump up gasoline
  prices (today we think 90 cpl is a steal)

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Conclusions (contd)

• Demand management and conservation measures are
  key to lowering energy price pressures
  improved efficiency of energy use contributes
  most to energy savings (IEA)
• Demand-side incentives (controls) needed to
  manage energy consumption alternative and
  renewable fuels, nuclear power play part of
  energy mix improves security, environmental
  protection and economic efficiency (IEA)
• Gasoline regulation in Nova Scotia doesnt stop
  price volatility but encourages market
  inefficiency and creates higher costs for
  consumers