How Not To Transition to the Fuels of the Future

How Not To Transition to the Fuels of the Future Presentation before Alyeska Pipeline Service Company Anchorage, Alaska September 29, 2009 Lucian Pugliaresi Energy Policy Research Foundation, Inc. Washington, DC www.eprinc.org 1

EPRINC Fighting Ignorance About Oil Markets Since 1944* * It s taking longer than we thought. 2

If global demand increases without adequate investment in new production capacity, given natural decline rates, there is risk of a significant liquids supply gap. MILLION BARRELS PER DAY 120 100 80 60 40 20 Demand mitigation in the short-term Existing Production Capacity Required New Capacity 2015 30 45 MBOE/D 2030 70-100 MBOE/D Unconventional and biofuels Conventional non OPEC Conventional OPEC 0 2007 2015 2030 Source: CSIS, National Petroleum Council 3

Projected Petroleum Imports History Projections million barrels per day Consumption Domestic Supply 60% Net Imports 54% Source: EIA/AEO 2008 4

THE TAKE AWAYS or EPRINC s UNIFIED THEORY Expectations Matter (and sometimes they come true) Recent Run Up in Oil Prices Was A Supply Disruption (no one saw it because it wasn t in the briefing book) Peak Oil is for Sissies What Things Cost are Important (especially if there are no benefits) Lower Oil Imports Are Important, But Do Not Buy as Much Energy Security as You Think Petroleum Products, i.e., gasoline, diesel, jet fuel are made from Crude Oil (this is more important than you think)

Happiness Growth Index 180 160 140 Happiness Index 120 100 80 60 40 20 0 0 100 200 300 400 500 600 700 800 900 1000 Cumulative Happiness Estimate 6

A Turkey Before and After Thanksgiving (Hume's Problem) 180 160 140 Happiness Index 120 100 80 60 40 A Thanksgiving Surprise! 20 0 0 100 200 300 400 500 600 700 800 900 1000 Consecutive Days Fed by Friendly Humans 7

Why Did Oil Prices Climb So High? 8

1973-1974 Arab Oil Embargo NOT AN EMBARGO, but instead a Structural Shift in Ownership and Control of the Resources of the Middle East Fundamental Change in Expectations on Production from Middle East Producers As an Embargo it was a failure, market was integrated (lesson not yet learned by Chavez) 9

Oil Price, Production, Consumption 1970-1990 40 80 35 70 30 60 25 50 $/barrel 20 15 1974-75: production declined 4.85% 40 30 mbd 10 20 5 10 0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 0 Crude Oil Price (Saudi Light) World Production World Consumption 10

1979 Price Shock OIL MARKET WAS NOT FRAGILE, but instead there was a shift in: expectations regarding regional risk; i.e. more risky Prospects for future output from Iran and Iraq were reduced substantially, i.e., access to those reserves would now be delayed 11

1986 Price Collapse Saudi Arabia abandons role as swing producer at low levels of net demand for SA crude Shift in expectations on Saudi decision making within OPEC and as regulator of world oil market Sustained reduction in oil use as a percentage of GNP in major Western countries 12

1986 Price Collapse 43 42 41 40 39 mbd 38 37 Non OPEC Production OECD Demand 36 35 34 33 1980 1981 1982 1983 1984 1985 1986 1987 1988 Source: EIA Data, 13

1998 Price Collapse: Six Central Issues Asian economic crisis brings a collapse in net demand OPEC misreads the oil market Warm 1997-98 summers in N. America, Europe, Asia Increase in Russian oil exports as Ruble collapses Chinese authorities decrease imports in Q4 of 1998 UN authorizes increase in Iraqi exportation in 1998 Asian economic crisis brings a collapse in net demand 14

95 A Series of Unfortunate Events Leading to New Expectations Positive Expectations Expectations Shift Negative Expectations 160 90 Oil development in Iraq delayed Yukos -- Kremlin taking control of Russian oil development Russia takes over Sakhalin II, Chavez Nationalizes Projects 140 120 Global Production, million b/d 85 80 Continuing civil strife in Sudan, Nigeria 100 80 60 $/bbl 75 Outlook positive for expanded output from Nigeria, Mexico, Venez., Russia, North Slope 4.2 5.8 70 OPEC Excess Capacity remains limited Congress continues ban on ANWR and offshore development Nigeria rebels hurt output 1.9 1.3 0.95 1.3 2 1.7 0 2001 2002 2003 2004 2005 2006 2007 2008e 40 20 World Oil Production (EIA) OPEC Excess Capacity (EIA) Expected Production (EIA 2001 Predictions) Crude Oil Price

Expectations and Reality 95 140 120 90 100 million bpd 85 80 Supply/Demand relationship returning to equilibrium 80 60 $/bbl 40 75 70 Source: EIA Data and EPRINC Calculations EIA 2001 price projections (on par with those of PIRA, Deutsche Bank, IEA, etc.) 2001 2002 2003 2004 2005 2006 2007 Q1 2008 Q2 2008 Q3 2008 World Oil Supply - Actual World Oil Demand - Actual Expected Supply (EIA 2001 Predictions) Expected Demand (EIA 2001 Predictions) Actual Price (nominal $/bbl) Expected Price 20 0 16

Country Positive Expectations Negative Events Lost Production (bpd) Iraq A Series of Unfortunate Events, by country: Promise of investment in oil sector after war, increased production. Sustained turmoil drops output below pre-war levels 600,000 Nigeria 4 mbd expected by 2010 Civil strive and attacks on infrastructure, 2005-2007 saw decline to 2.1 mbd 500-700,000 Venezueala Potential for growth after stagnant production Russia Projection seen at 12 mbd by 2010 after privatization of industry brought western influence, $ and new production Nationalization of oil industry, production nosedive Re-nationalization leads to decreased production and investment 800,000 200,000 Sudan Additional proven reserves and access to new fields Civil strife, attacks on infrastructure, new fields remain inaccessible 200,000-250,000 17

A Series of Unfortunate Events (cont.) Argentina Huge production gains from 1991-2001 Oil industry nationalized in 2004, production and investment dropped 100,000 Kazakhstan Production from Kashagan was expected to begin in 2005 Technical difficulties with some political disagreements TBD US ANWR was part of Bush's energy policy when he took office in 2000 Currently no access to ANWR or OCS up to 1,000,000 Canada (Alberta) Oil sands contain 95% of Canada's 179 billion barrels of reserves In 2007 new taxes and royalty rates helped to reduce lease sale revenues by 50% compared to 2006 TBD Mexico Production expected to reach 4 mbd by 2005 Production in decline since 2004. Cantarell declining and PEMEX needs funding. 500,000 + Estimated loss of supplies to the world market, 2005-2010: 2.5-4.5 mbd 18

Highlights from EIA November STEO 2008 consumption to grow by only 100,000 bd 2009 consumption to remain flat 2007 2009 OECD consumption to drop by 2.2 mbd 2007 2009 Non-OECD growth of 2.3 mbd Non-OPEC production to grow by 500,000 bd in 2009 450,000 bd growth in the U.S. OPEC Surplus Capacity to grow With production cuts and new projects coming online, surplus capacity could reach 4 mbd in 2009 compared to 1.6 mbd in Q2 2008. 19

Demand Destruction Worldwide OECD reduced demand by about 1.5 mbd in 2008 compared to 2007 and by another 1.2 mbd in Q1 2009. Non-OECD demand, up 1.3 mbd in 2008, has returned to 2007 levels (36.8 mbd). Q1 2009 world demand (83.1 mbd) lowest since 2004-2005 90 mbd 80 70 60 50 40 30 Q1 2009 world demand down 2.6 mbd from 2007 - Non-OECD demand flat Non-OECD Demand OECD Demand 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Q1 2009 OECD demand down nearly 3 mb in Q1 2009 compared to 2007 20

World Oil Supply Since 2003 86 85 84 83 82 81 80 79 78 2003 2004 2005 2006 2007 2008 2009 (Through June) Source: EIA Data 21

What s Happened Since 2007? 3 85 2 65 1 45 mbd 0 25 $/bbl -1 5-2 -15-3 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Supply Since Q1 2007 Consumption Since Q1 2007 $/bbl Change Since Q1 2007-35 Source: EIA Data, EPRINC Calculations: All Figures Indexed to 2007 22

What About Peak Oil The Wrong Question!!!

The Peak Oil Problem: New Supplies Will Be More Expensive, but We Are Not Running Out of Oil 24

San Joaquin Valley Testing Hubbard-Method Predictions for Reserves and Production Cumulative Discoveries Percent Attributable to 1915 (Billions of Barrels) 1964 1982 2000 7.7 11.8 16.1 49% 69% 76% Cumulative production as of 8.0-9.5 11.9-12.1 16.1-16.2 Year 2000 production projected in: (mb/d) 44-112 189 597(actual) Source: EPRINC, October 2006. Does the Hubbard Method Provide a Reliable Means for Predicting Future Oil Production, Richard Nehring, October 2006, 25

Permian Basin Testing Hubbard-Method Predictions for Reserves and Production Cumulative Discoveries Percent Attributable to 1950 (Billions of Barrels) 1964 1982 2000 17.6 27.9 35.2 85% 86% 84% Cumulative production as of 19-27.5 28.5-30.5 35.8-37.5 Year 2000 production projected in: (mb/d) 162-479 326-479 910(actual) Source: EPRINC, October 2006. Does the Hubbard Method Provide a Reliable Means for Predicting Future Oil Production, Richard Nehring, October 2006, 26

Real Imported Crude Oil Prices Since 1980 140 120 100 $/barrel 80 60 $0-50 $50-100 $100+ 40 20 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: EIA 27

Real Imported Crude Oil Prices 1980-2008 Source: EIA 28

2.2 U.S. Natural Gas Marketed Production 2 1.8 trillion cubic feet 1.6 1.4 1.2 1 Jan-1973 Jan-1974 Jan-1975 Jan-1976 Jan-1977 Jan-1978 Jan-1979 Jan-1980 Jan-1981 Jan-1982 Jan-1983 Jan-1984 Jan-1985 Jan-1986 Jan-1987 Jan-1988 Jan-1989 Jan-1990 Jan-1991 Jan-1992 Jan-1993 Jan-1994 Jan-1995 Jan-1996 Jan-1997 Jan-1998 Jan-1999 Jan-2000 Jan-2001 Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Energy Policy Research Foundation, Inc. 1031 31st St, NW Washington, DC 20007 202.944.3339 www.eprinc.org 29

Why You Should Stop Worrying About Peak Oil You ll never get the right answer Put your effort into something useful, such as the backstop price Congress has already decided that any alternative fuel, no matter how expensive, is worth supporting as an alternative to petroleum 30

ETHANOL A CAUTIONARY TALE

U.S. Oil Refineries History: 1970 - Present 32

US Ethanol Consumption: 2006 - Present 100 mil. gal./month 8 7 6 5 4 3 2 1 0 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Demand Mandate Requirement for 2008 Mandate requirement assumes 750 million gallons per month for 12 months to reach the 9 billion gallon mandate for 2008. Source: Renewable Fuels Association 33

Cost of Ethanol Subsidies $7 billion per year (Economist, 2007) About $1.90/gallon. More than 200 types of subsidies $11.2bn+ since 2005 on tax breaks for companies that blend ethanol into petrol (Financial Times) Billions of dollars of subsidies for ethanol producers Tariff on ethanol imports Aimed at preventing imports from Brazil 54 cents/gallon Source: The Economist, Financial Times 34

A Selection of Ethanol Subsidies 2008 Ethanol Subsidies $ Million Market Price Support on Domestic Production 2,240 Market Price Support on Exports 30 Volumetric Excise Tax Credit (Blender's Credit)* 4,335 Reductions in State Motor Fuels Tax 440 Federal Small Producer Tax Credit 170 Excess of Acclerrated Over Cost Depreciation 680 Federal Grants, Demonstration Projects, R&D 350 Access to Tax-Exempt Solid Waste Bonds 110 Deferral of gain on sale of farm refineries to coops 20 Crop Support to Corn 730 Crop Support to Sorghum 20 Credits for Clean Fuel Refueling Infrastructure 20 35

Ethanol Subsidies Total 2008 Ethanol Subsidies: $9.15 billion Total Subsidy Per Gallon of Ethanol: $1.08 TotalSubsidy Per Gallon of Gasoline Displaced, BTU Equivilent $1.63 (Total does not include cost of fuel, only the fuel subsidy), * = EPRINC Estimate, not all subsidies are listed Source: http://www.globalsubsidies.org/files/assets/brochure_-_us_update.pdf, EPRINC calculated Blender's Credit 36

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FFVs and E85 Usage 7 10.00% Million Vehicles 6 5 4 3 2 1 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Light Duty E85 FFV's In Use % of FFV's Actually Operating on E85 0 0.00% 2003 2004 2005 2006 2007 Source: EIA Data, DOE Data, EPRINC Calculations 38

Enter the RIN A RIN (short for renewable identification number ) is a 38-character code that represents a gallon (or often a batch) of ethanol A blender that cannot meet its quota for the year could buy RINs from a blender who already has or expects to exceed the quota.. EPA set the blend requirement for ethanol in the U.S. gasoline pool at 10.21 percent for 2009. As ethanol approaches, and possibly exceeds the blend wall in 2010 or 2011 we may see some additional discounting in ethanol at the pump When the standard for renewable biofuels (ethanol) in the gasoline pool will increases from 10.5 billion gallons in 2009 to 12 billion gallons in 2010, incremental volumes will have to move through E-85 outlets. 39

EISA 07 Renewable Fuels Standard 50 45 40 Biomass based Diesel Billion Gallons 35 30 25 20 15 10 5 0 Any Advanced Cellulosic Advanced Corn Ethanol / Other EPACT 05 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 10% Ethanol Penetration (The Blend Wall) Source: DOE, EIA Data and June 2009 STEO. Blend wall assumes projected 2009 gasoline consumption found in the June 2009 EIA STEO. 40

The Blend Wall in a low RBOB World 2.5 Estimated all-in cost for ethanol: corn + operating costs + capital costs 2 $/gallon 1.5 1 0.5 0 Price difference between ethanol and RBOB After serving its role as an oxygenate, ethanol must compete directly with gasoline 1 2 3 4 5 6 7 8 9 10 11 12 13 % of Gasoline Pool Ethanol loses significant value as it moves into E85 Blender's Credit: $0.45/gallon Falling values for ethanol will be mirrored by rising values for RINs RBOB (NYMEX Futures: March Delivery) Ethanol's Value Relative to Gasoline Ethanol (CBOT Futures: March Delivery) Corn Feedstock - $ per gallon of Ethanol All In-Cost of Ethanol Production 41

U.S. Refiners' Future Cost of Production (2020-2030) 35 30 Blend Wall Costs $/bbl 25 20 15 Stationary Emissions Costs @ $40/ton Stationary Emissions Costs @ $20/ton Section 199 Costs 10 Most Complex Generally Larger Least Complex Generally Smaller Product Combustion Costs @ $20/ton Effective Production Cost 5 0 5 mbd 10 mbd 15 mbd Source: EPRINC Calculations, EIA Data 42

What Were They Thinking? 15 billion gallon mandate easily achievable with growing gasoline demand -- blend wall would not exceed 10% (2007 forecast environment). Gasoline prices would rise making ethanol cost competitive an antidote to high gasoline prices. Mandates were needed to overcome resistance from the petroleum industry. Rural renaissance. And besides it would deliver substantial benefits in lower emissions of GHGs. 43

What did they miss? Gasoline demand did not grow, prices fell RFS mandates were volumetric driving fuel sector to the blend wall in next year or two. Ethanol not cost competitive under most scenarios. Ethanol substitutes for gasoline -- not crude oil -- leading to refinery output inefficiencies Food versus fuel problem. Carbon benefits under attack from ILUC. 44

Ethanol s Share of Crude Products and Gasoline 25 8 7 20 6 mbd 15 10 5 4 3 % U.S. Finished Motor Gasoline Product Supplied (Thousand Barrels per Day) U.S. Crude Oil and Petroleum Products Product Supplied (Thousand Barrels per Day) Ethanol Share of Finished Motor Gasoline (%) 5 2 1 0 0 Jan-2005 Mar-2005 May-2005 Jul-2005 Sep-2005 Nov-2005 Jan-2006 Mar-2006 May-2006 Jul-2006 Sep-2006 Nov-2006 Jan-2007 Mar-2007 May-2007 Jul-2007 Sep-2007 Nov-2007 Jan-2008 Mar-2008 May-2008 Jul-2008 Ethanol Share of Crude Oil and Petroleum Products (%) 45

Product Prices and Share 400 8 350 7 300 6 cents per gallon 250 200 150 100 5 4 3 2 % CBOT Ethanol Futures NYMEX RBOB Futures Ethanol Production's Share of Finished Motor Gasoline Supplied (%) 50 1 0 0 Dec/05 Mar/06 Jun/06 Sep/06 Dec/06 Mar/07 Jun/07 Sep/07 Dec/07 Mar/08 Jun/08 Sep/08 Dec/08 Mar/09 Source: EIA Data, CME Group, EPRINC Calculations. All prices are for front month futures contracts. Prices are not BTU adjusted. 46

Ethanol Production Costs for a 50 million gallon/year plant Per Gallon Costs and Credits Corn Feedstock -$1.27 Operating Costs - $0.52 Capital Costs - $0.24 Dried Distillers Grain + $0.40 Total Cost: $1.63 Current Price of Ethanol $1.669 *Does not include VEETC and other subsidies or transportation costs. Operating and capital costs from Iowa State. See: http://www.card.iastate.edu/publications/dbs/pd FFiles/06bp49.pdf. Corn and Ethanol futures prices from CME group for July 2009 delivery. 47

Ethanol and Gasoline 400 8 350 7 300 6 250 5 Ethanol Futures cents/gallon 200 150 100 4 3 2 % NYMEX RBOB Futures Ethanol Production's Share of Finished Motor Gasoline Supplied (%) 50 1 0 0 Dec/05 Feb/06 Apr/06 Jun/06 Aug/06 Oct/06 Dec/06 Feb/07 Apr/07 Jun/07 Aug/07 Oct/07 Dec/07 Feb/08 Apr/08 Jun/08 Aug/08 Oct/08 Source: EIA Data, Bloomberg, CME Group, EPRINC Calculations 48

Retail Fuel Prices $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 E85 Price Per Gallon E85 BTU Adjusted* Gasoline Diesel* $0.00 4/1/00 11/1/00 6/1/01 1/1/02 8/1/02 3/1/03 10/1/03 5/1/04 12/1/04 7/1/05 2/1/06 9/1/06 4/1/07 11/1/07 6/1/08 1/1/09 *Price is per gallon of gasoline equivalent (BTU basis), according to DOE conversion standards: 1 Gallon of Gasoline = 1.333 gallons of E85 and 0.904 gallons of diesel. Source: DOE Data 49

Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending Compatibility issues have kept ethanol and blends out of petroleum pipelines. The industry is studying compatibility. While optimism is prevalent, if and to what extent ethanol and its blends will be deemed suitable for pipeline input is unclear. Ethanol movement by rail grows, with unit trains offering the best economics. Few ethanol plants and fuel terminals have sidings for rail cars/unit trains. Trucks commonly cover the first and last mile. New oil terminal facilities are configuring rail access where they can. Rail offers routes that suit ethanol transport geographically; pipelines more often are laid-out for Gulf Coast-North/NE transport. Ethanol needs to be supplied universally. Transport systems still need to be established for ESIA 2007 supply amounts. 50

Issues Identified in the EPRINC/EIA Workshop---Still Applicable to Future Ethanol Blending (Contd) Corn will likely be the feedstock of choice until 2015. Will there be enough supply? And at what cost to the food supply? 5.5 billion bushels will be needed, as well as significant new production capacity. E-10 is successfully operating in current model autos, most current model marine and small power applications. It was seen as the predominant fuel. Other higher blends were not seen as an option; a standardized E-85 product will absorb mandated ethanol amounts. Concern was expressed regarding the slow roll-out of E-85 51

Cellulosic Ethanol? Not a commercial product now Focal point of a great deal of R & D Many promising projects A number of corporate entities involved Still in the lab If Cellulosic moves beyond the lab, significant capital investment needed 16 bgy = 1 million bbls per day. That is the amount of crude produced in Texas! Policy-makers have placed a bet on something that does not exist If Cellulosic is not available as EISA mandates, EPA will likely issue a waiver 52

U.S. Retail Prices: Gasoline vs. Diesel 2006-2008 500 450 (cents/gal) 400 350 300 250 200 150 US Regular - All US Diesel - All US Ultra Low Sulfur US Low Sulfur Source: http://tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm 53

Synfuels Corp Synthetic Fuels Corp. (SFC) - 1979 Use coal to produce 2 mbdoe by 1992 New jobs and revenues expected, The new Office of Coal Commerce in the Illinois Department of Commerce and Community Affairs calculates that every 4 million tons' annual increase in coal output creates 4,013 new jobs, producing a $76 million annual increase in personal income in the state, $6.7 million of which ends up in state and local tax coffers. Cost would be $88 billion over 10 years, partially funded by a windfall profits tax on oil companies. Reagan eventually ended the project in 1986 as oil prices collapsed. Source: Illinois Issues, University of Illinois, 1982. http://www.lib.niu.edu/1982/ii820420.html TIME Magazine 54

SHOULD WE DRILL FOR OIL* *AKA, BIG OIL SHOULD USE IT OR LOSE IT

A Future of Imports A Future Introduction of Imports mbd 25 20 15 10 5 EIA Net Imports EIA Crude/NGL Production 0 2006 2015 2025 2030 mbd 25 20 15 10 5 0 2006 2015 2025 2030 Global Insight, Inc. Net Imports Global Insight, Inc. Crude/NGL Production mbd 25 20 15 10 5 0 2006 2015 2025 2030 Deutsche Bank Net Imports Deutsche Bank Crude/NGL Production All estimates from the EIA s 2008 Annual Energy Outlook. EIA estimates assume EISA2007 biofuel production levels are met. 56

13 U.S. Crude Oil Net Imports Worst-Case Economic Scenario: 0% Annual GDP Growth Through 2020 With Crude Oil Prices Rising 3% Annually mbd 12 11 10 9 Positive Economic Growth, GDP +2.5%/yr No Economic Growth, GDP +0%/yr 8 7 6 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0% GDP Growth and RFS is met in 2020 57

Stripper Well Production 20 18 Percent of Oil Production 16 14 12 10 8 65 67 69 71 73 75 77 79 81 83 85 Percent of Oil Wells Source: EIA Data, http://www.eia.doe.gov/pub/oil_gas/petrosystem/us-3o.html 58

Lost Production Breakeven Points for Repeal of Percentage Depletion Where Increased Revenue to Treasury = Financial Loss to U.S. Economy from Higher Crude Oil Imports, 2010 2020 800 700 600 000 bd of Lost Production 500 400 300 200 Baseline Historical Natural Decline Rate (1994-2006), 3%/yr 4%/yr decline, +1% over base 13%/yr decline, +10% over base Revenue Neutral Breakeven Point for Percentage Depletion 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Source: EPRINC calculations. Marginal oil wells tend to decline at about 3 percent per year. The loss in the depletion allowance will likely increase this rate of decline to anywhere from 4 to 13 percent per year. Natural gas production, which has experienced very low prices as gas values, at least for the near term have decoupled from crude oil, is probably even more at risk. 59

National Academies Study on Oil in the Sea Highlights from Oil in the Sea III (2003) Operational discharges from vessels in general and tankers in particular have substantially declined over the last 25 years. Only 1 percent of the oil discharges in North American waters is related to the extraction of petroleum. Although large quantities of VOC (volatile organic compounds) are emitted from tankers and production platforms, these consist of mostly lighter compounds and only small amounts deposit to the sea surface. 61

Oil s Tax Bill $160 Income Taxes Paid in 2006: Oil Companies vs. The Bottom 75% of Individual Taxpayers $138B $136B $120 billion $80 $40 $0 Source: API Oil Company Income Taxes Paid in 2006 Income Taxes Paid by the Bottom 75% in 2006 (estimate) 62

U.S. Gov t Revenues from Leases FY2008 Minerals Management Service had distributed a record $23.4 billion to state, American Indian and federal accounts from onshore and offshore energy production $10 billion from bonus bid payments from lease sales $17.3 billion went to the U.S. Treasury 2007 - $11.6 billion 2006 - $12.8 billion Source: MMS, http://www.mms.gov/ooc/press/2008/pressdoi1120.htm 63

Energy Subsidies Not Related to Electricity Production Category Fuel Consumption (Quadrillion BTU) FY 2007 Subsidy and Subsidy per Million Suppot (million 2007 BTU dollars) Coal 1.93 78 0.04 Refined Coal 0.16 214 1.35 Natural Gas and Petroleum Liquids 55.78 1921 0.03 Ethanol/Biofuels 0.57 3249 5.72 Geothermal 0.04 1 0.02 Solar 0.07 360 2.82 Other Renewables 2.5 184 0.14 Hydrogen * 230 NM Total Fuel Specific 60.95 6237 0.1 Total Non-Fuel Specific NM 3597 NM Total End-Use and Non-Electricity NM 9834 NM Source: EIA Data 64

Are We Using Too Much Oil?

World GDP vs. Oil Production Source: CFTC Interim Report on Crude Oil, June 2008 66

Oil Intensity of GDP Source: CFTC Interim Report on Crude Oil, June 2008 67

Cost to consumers.. Source: New York Times, USA Today 68

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Some Observations on the Market for Middle Distillates

World Oil Consumption 72

Oil Prices by Currency Source: CFTC Interim Report on Crude Oil, June 2008 73

World Oil Consumption Source: CFTC Interim Report on Crude Oil, June 2008 74

Distillate Consumption Growth: 2003-2007 Source: EIA Data 75

Operable Refiners and Capacity 20 350 18 16 300 Capacity, mbbl/d 14 12 10 8 6 250 200 150 100 Operable Refineries Capacity Operable Refineries 4 2 50 0 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: EIA Data 76

U.S. Total Gasoline Imports 2 1.5 mbbl/d 1 0.5 0 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: EIA Data 77

U.S. Distillate Fuel Oil Net Imports 1000 Thousand bbl/d 500 0-500 -1000 Currently Exporting 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: EIA Data 78

Profitability in Refining and Marketing 2007-2008 (with year-over-year change) 14 12 20.94% 10 billion dollars 8 6 4 23.52% -54.98% 2-46.07% -70.88% -86.30% 0 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Q2 2008 Net Income for Refining and Marketing Source: EIA Data and EPRINC Calculations 79

Refiner Margins vs. ROI 30 60 % 25 20 15 10 5 0 50 40 30 20 10 cents/gallon -5 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ROI U.S. Refining Composite Refiner Margins Source: EIA Data 80

4-Week Average U.S. Finished Motor Gasoline Product Supplied (Thousand Barrels per Day) 10 9.5 9 8.5 8 7.5 7 6.5 6 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: EIA Data 81

What it takes to offset 1 gigaton of carbon TODAY S TECHNOLOGY Coal-fired power plants Geologic sequestration Nuclear Efficiency Wind energy Solar photovoltaics Biofuels for transport CO 2 storage in forests Actions providing 1 Gt mitigation/year Build 1,000 zero-emission 500 MW coal-fired power plants Install 3,700 sequestration sites like Norway s Sleipner project (0.27 MtC/year) Build 500 new nuclear plants, each 1 GW in size Deploy 1 billion new cars at 40 miles per gallon (mpg) instead of 20 mpg Install capacity to supply 50 times the current global wind generation Install capacity to supply 1000 times the current global solar PV generation Convert a barren area 15 times the size of Iowa s farmland (30 million acres) to biomass production Convert a barren area 30 times the size of Iowa s farmland to new forest Source: DOE Climate Change Technology Program 82