Energy Turmoil

Donald A. NormanManufacturers Alliance/MAPI

May 20, 2008

Steel Manufacturers AssociationAnnual Members Conference

May 19-21, 2008

Source: Energy Information Administration

Refiner Acquisition Cost

The Price of Oil January 2000 - May 2008

Source: Energy Information Administration

Gasoline and Diesel Prices January 2000 - March 2008

0

1

2

3

4

5

6

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Forecast

Note: Shaded area represents 1997-2007 average (2.5 million barrels per day)

World Oil Spare Production Capacity Is Projected to Increase, But Is Still Below Historical Norms

Million barrels per day

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

Price of Oil in Dollars Up 220%

Effective Price of Oil When Dollars Are Purchased with Euros: Up 120%

The price of oil in dollars has risen faster than the price of oil in Euros

Sources: Energy Information Administration, Federal Reserve Board5

Source: Author’s calculations

Impact of a $10 Rise in Oil Prices on the U.S. Economy

Percent Deviation from Baseline Projection

Year 1 Year 2 Year 3Real GDP -0.2 -0.4 -0.5Consumer Prices 0.5 0.7 0.7

Source: Global Insight

But until oil prices reached $100 per barrel, the impact of higher oil prices on the U.S. economy was muted.

Why?

Percentage of income spent on energy is below historical peak but it is rising

6.6%

4.2%

9

Total Energy/GDP

Energy intensity of the U.S. economy has fallen and will continue to do

Source: Energy Information Administration10

Forecast

11Source: Energy Information Administration

But the Tortoise (Auto Fuel Efficiency) has lost this race to date

%∆Gasoline Consumption = %∆ in Number of VehiclesPlus %∆Miles Driven per VehicleMinus %∆ Miles per Gallon

EIA Short-Term Oil OutlookYear Percent Change

2006 2007 2008 20092006-2007

2007-2008

2008-2009

WTI Crude($/bbl)

66.02 72.32 109.53 103.17 9.5 51.5 -5.1

Gasoline($/gallon)

2.58 2.81 3.52 3.44 8.9 25.4 -2.2

Diesel($/gallon)

2.70 2.88 3.94 3.39 6.6 36.6 -6.7

U.S. Oil Consumption(million bbls/day)

20.69 20.70 20.51 20.71 0.05 -0.9 1.0

China Oil Consumption(million bbls/day)

7.20 7.58 8.00 8.39 5.3 5.5 4.9

World Oil Consumption(million bbls/day)

84.61 85.40 86.61 87.95 0.9 1.4 1.5

Source: Energy Information Administration, Short-Term Energy Outlook, May 2008

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EIA Long-Term Oil Outlook

2006(million bbls/day)

2030(million bbls/day)

Annual Rate of Growth, 2006 -2030

(Percent)

Consumption

U.S. 20.7 22.1 0.3%

China 7.3 15.7 3.3%

India 2.5 4.4 2.4%

Middle East 6.2 9.8 2.0%

World 84.7 113.3 1.2%

Production

Conventional Oil 81.9 99.3 0.8%

Unconventional Oil 2.8 14.0 7.0%

Total Production 84.7 113.3 1.2%

Source: Energy Information Administration, Annual Energy Outlook 2008, March 2008 13

EIA, IEA, Exxon (Average of Long-Term Forecasts--2007)

Production reaches maximum in 2011 (CIBC 2008)

The Cone of Uncertainty: Divergent Views World Oil Production in 2030

25 mmb/d difference

My Current Outlook

• Short-Term relief in 2009 as new oil production capacity comes on stream

• Longer-Term: Production will reach a plateau without improved access/economics

• World oil demand will grow (but U.S. consumption will fall if the price remains high)

• Demand growth in the Middle East will reduce OPEC exports, adding further pressure on prices

• A rise in the value of the U.S. dollar would help to reduce the price of oil (and other commodities)

Unsolicited Advice to President-Elect __________ and Congress: A Full Court Press for Energy Policy

Oil and Natural Gas—Open more areas to drilling and development

LNG Terminals—Aside from new domestic production, our only source for new natural gas supplies

Clean Coal—The reality is that coal is here to stay Nuclear Power—Let’s get going! Energy Conservation—But how? Mandates? Government

Investment? Energy Taxes? Market Forces?? Ethanol—What happened to this promise? Solar and Wind—But beware of overly optimistic projections