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

Presented by Dr Shane Oliver Head of Investment Strategy and Chief Economist AMP Capital Investors. Presentation to Green Capital – 29 August 2006 What’s happening to oil prices?. Overview. Demand for oil is projected to continue rising Supply is constrained

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

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  1. Presented by Dr Shane Oliver Head of Investment Strategy and Chief Economist AMP Capital Investors Presentation to Green Capital – 29 August 2006What’s happening to oil prices?

  2. 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

  3. 80 $US/barrel 70 60 Nominal oil price 50 40 30 20 10 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Oil prices have risen sharply since 1998 Source: Datastream, AMP Capital Investors

  4. $A/litre $US/barrel 1.50 90 1.40 80 1.30 70 1.20 60 Australian retail 1.10 50 petrol price (LHS) 1.00 40 0.90 30 0.80 20 World oil price (RHS) 0.70 10 0.60 0 98 99 00 01 02 03 04 05 06 …this has led to a sharp rise in petrol prices Source: Thomson Financial, AMP Capital Investors

  5. 140 Million barrels per day 120 IMF demand 100 Global oil projection 80 consumption 60 40 OPEC supply 20 0 1972 1980 1988 1996 2004 2012 2020 2028 High oil prices have been driven by strong growth in demand relative to supply Source: Datastream, AMP Capital Investors

  6. Emerging markets have been the key drivers of demand growth, with China the biggest Global oil demand 100 Million barrels/day 84.8 mbd 90 Rest of world 80 70 mbd (+1.3% pa) 70 Other Asia 60 (+3.8% pa) 50 China (+7.1%pa) 40 30 OECD 20 (+1.1% pa) 10 0 1995 2006 Source: International Energy Agency, AMP Capital Investors

  7. 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 Source: AMP Capital Investors

  8. US automobile efficiency, miles per gallon 23 22 21 20 19 18 17 16 15 14 13 80 82 84 86 88 90 92 94 96 98 00 02 04 06 …and we are yet to see any real efficiency gains in fuel use Source: Datastream, AMP Capital Investors

  9. Index Annual % change 2 5 US ,German & Japanese Business Confidence 4 1 (LHS) 3 0 2 G3 Real GDP (RHS) -1 1 0 -2 99 00 01 02 03 04 05 06 Leading indicators are peaking, but still point to reasonable global economic growth ahead Source: Bloomberg, AMP Capital Investors

  10. 120 $US/barrel 100 Oil price in today's dollars 80 60 40 20 Nominal oil price 0 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Oil prices still below early 1980’s levels in real terms – so has been worse in the past ! Source: Datastream, AMP Capital Investors

  11. 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

  12. Underlying inflation, annual % change 7 7 6 6 Europe Europe 5 5 4 4 Australia Australia 3 3 US US 2 2 1 1 Japan Japan 0 0 - - 1 1 90 90 92 92 94 94 96 96 98 98 00 00 02 02 04 04 06 06 Despite higher oil prices, underlying inflation remains ok= no need for aggressive interest rate hikes Source: Datastream, AMP Capital Investors

  13. 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

  14. China’s oil self sufficiency is declining Source: ISI, AMP Capital Investors

  15. Number 5500 4500 3500 2500 1500 1976 1980 1984 1988 1992 1996 2000 2004 The supply constraint - world oil rig count remains low Source: Baker Hughes, Bank Credit Analyst, AMP Capital Investors

  16. The supply constraint – limited new discoveries Oil discovery, rolling 3 year average relative to consumption Billion barrels pa ASPO Projections Source: Association for the Study of Peak Oil

  17. OPEC Spare Capacity v Price Million Barrels per day $US/barrel 7 80 Price (RHS) Spare Capacity 70 6 (LHS) 60 5 50 4 40 3 30 2 20 1 10 0 0 2000 2001 2002 2003 2004 2005 2006 As a result of constrained supply and strong demand OPEC has limited spare capacity – leaving oil prices vulnerable to supply scares – Iran, Nigeria, etc Source: AMP Capital Investors

  18. 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

  19. Peak Oil – oil production to peak in 2008 Oil and gas production, Billion barrels pa Source: Association for the Study of Peak Oil and Gas, UBS, AMP Capital Investors

  20. 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” Source: AMP Capital Investors

  21. 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

  22. 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 Source: AMP Capital Investors

  23. 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 Source: AMP Capital Investors

  24. A range of oil alternatives are now becoming viable Oil price at which at which energy alternatives are viable Source: Cambridge Energy Research Associates, The Economist, AMP Capital Investors

  25. Australian industry sector exposure to oil prices 4.0 Oil requirement coefficient, 1= average 3.5 Most vulnerable 3.0 2.5 2.0 1.5 Least vulnerable 1.0 0.5 0.0 Govt Health Mining Textiles Repairs Utilities Finance Clothing Transport Education Wholesale Chemicals Beverages Misc manu Fab metals Agriculture Retail trade Paper & pub Meat & diary Construction Basic metals Mach & equip Cultural & rec Accom & cafes Communications Prop & bus services Source: Australian Bureau of Statistics, UBS, AMP Capital Investors

  26. 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 Source: AMP Capital Investors

  27. Thank youQUESTIONS?

  28. 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.

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