Jason's Energy Presentation June 0705

Global Energy Markets and Domestic Energy Choices

Global Interdependence Center June 7, 2005

Jason Schenker Energy Economist 704.383.3695 jason.schenker@wachovia.com

The Global Economy: All Ships Are Rising…Almost

World GDP Based on U.S. Dollar Purchasing-Power-Parity

U.S. 21%

Non-G8 54%

Global GDP

Japan 7% Germany 4% France U.K. 3% Italy Russia 3% Canada 3% 2%

3%

REAL GDP

Bar - Compound Annual Rate, Line - Yr/Yr % Change

8%

8%

6%

6%

4%

Real U.S. GDP

4%

2%

2%

0%

0% 1st Quarter 2005 @ 3.5% Yr/Yr % Change @ 3.7%

-2% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 -2%

CHINESE REAL GDP GROWTH 16%

Year-over-Year Percent Change

14% 12% 10%

China GDP

8% 6% 4% 2%

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Chinese Real GDP Growth (Year-on-Year Rate)

12%

12%

10%

10%

8%

8% China Q/Q GDP

6%

6%

4%

4%

2%

2%

0%

99

00

01

02

03

04

0%

"REAL" U.K. GDP GROWTH Bar - Annualized Rate, Line - Yr/Yr % Change

6%

6%

1st Quarter 2005 @ 2.2% Yr/Yr % Change @ 2.8%

5%

5%

4%

4% U.K. Growth

3%

3%

2%

2%

1%

1%

0%

2000

2001

2002

2003

2004

2005

0%

Global Growth Growth is Everywhere •U.S. •China •U.K.

Although…

•Germany •Japan •Italy •France

Real German GDP GROWTH Quarter-over-Quarter Change

1.5%

1.5%

1st Quarter 2005 @ 1.0%

1.0%

1.0%

German Real GDP

0.5%

0.5%

0.0%

-0.5%

0.0%

2000

2001

2002

2003

2004

2005

-0.5%

"Real" Japanese GDP Growth

Bar - Quarter-over-Quarter Annual Rate, Line - Yr/Yr % Change

6%

6%

4%

4%

2%

2% Japanese Real GDP

0% -2%

1st Quarter 2005 @ 5.3%

-4% -6%

0%

Yr/Yr % Change @ 1.2%

2000

2001

2002

2003

2004

2005

-2% -4% -6%

Growth Engenders Higher Demand

Global Oil Usage in 2004 (IEA) Africa & M.E. 10%

FSU 5%

L.A. 6%

Global Demand for Crude in 2004

North America 30%

Other Asia 10%

China 8%

Europe 20% OECD Pacific 11%

*FSU = Former Soviet Union *OECD Pacific = Aus, NZ, Japan, Korea

Global Demand in millions of barrels per day 88

88

86

86

84

84 Global IEA Demand Forecast

82

82

80

80

78

78

76

76

74

2003

2004 Source: International Energy Agency

2005

74

U.S. Total Petroleum Imports in Millions of Barrels

16

16

May 27, 2005 14 12

14

U.S. Total Imports

12

10

10

8

8

6

1999 2000 2001 2002 2003 2004 2005 6

U.S. Crude Oil Imports in Millions of Barrels

12

12

May 27, 2005 11

11

10

10

9

U.S. Crude Imports

9

8

8

7

7

6

1999 2000 2001 2002 2003 2004 2005 6

U.S. Petroleum Product Imports in Millions of Barrels

4.0

4.0

May 27, 2005 3.5

3.5

3.0

3.0

2.5

U.S. Product Imports

2.5

2.0

2.0

1.5

1.5

1.0

1999 2000 2001 2002 2003 2004 2005 1.0

Chinese Crude Oil Imports in Millions of Tons

14

14

May 27, 2005

12 10 8

12 10

Chinese Imports

8

6

6

4

4

2

2

0

1999 2000 2001 2002 2003 2004 2005 0

U. K. Petroleum Surplus/Deficits in 2004 (in millions of tonnes) 2.5 2 1.5

U.K. Total Imports

1 0.5

-1

Ap r M ay Ju n Ju l Au g Se p Oc t No v De c

M ar

Ja n

-0.5

Fe b

0

Energy Prices On The Rise

Price of Crude Oil

Price per Barrel since January 2000 $60

$60

$50

$50

$40

$40

Crude Prices Since 2000

$30

$30

$20

$10

$20

June 3, 2005 2000

2001

2002

2003

2004

2005

$10

Price of Heating Oil

Price per Contract since January 2000 $180

$180

$160

$160

$140

$140 Heating Oil Prices Since 2000

$120

$120

$100

$100

$80

$80

$60 $40

$60

June 3, 2005 2000

2001

2002

2003

2004

2005

$40

Price of Gasoline Contract Price per 100 Gallons since January 2000

$180

$180

$160

$160

$140

$140 Gasoline Prices Since 2000

$120

$120

$100

$100

$80

$80

June 3, 2005

$60 $40

2000

2001

2002

2003

2004

$60

2005

$40

U.S. Jet Fuel Price Dollars per 100 Gallon Contract (NY)

$180

$180

June 3, 2005

$160

$160

$140

$140

$120

$120

Jet Fuel Prices Since 2000

$100

$100

$80

$80

$60

$60

$40

00

01

02

03

04

05

$40

Price of Uranium

Price per Pound since January 2000 $30

$30

$25

$25

June 3, 2005 Uranium Since 2000

$20

$20

$15

$15

$10

$10

$5

2000

2001

2002

2003

2004

2005

$5

Price of Natural Gas per Million British Thermal Units (BTUs) since January 2004 $9

$8

$7

$9

Natural Gas 60-day Moving Avg 100-day Moving Avg

$8

$7

Natural Gas Prices

$6

$5

$6

June 3, 2005

$5

$4 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun $4

Price of Big Sandy Barge Coal Price per Short Ton since January 2000

$70

$70

$60

$60

$50

$50

Big Sandy Barge Coal Since 2000

$40

$40

$30

$30

June 3, 2005

$20 $10

2000

2001

2002

2003

2004

$20

2005

$10

Price of Pennsylvania Rail Coal Price per Short Ton since January 2000

$60

$60

$50

$50

Penn Rail Coal Since 2000

$40

$40

$30

$30

$20

$10

$20

June 3, 2005 2000

2001

2002

2003

2004

2005

$10

UTILITY PRODUCTION

120

110

Index, Both Series are 3 Month Moving Averages Bold Line = Electric Power Generation Thin Line = Natural Gas Distribution

100

120

110

100

Utilities

90

90

Mar 80

70

80

87

89

91

93

95

97

99

01

03

05

70

Correlations‌The Proof

Prices of Natural Gas and Crude Oil Prices Since January 2005

$60

$8.00

June 3, 2005 $7.50

$55

$7.00

NGCL

$50 $6.50 $45

$40

Natural Gas, Right Axis WTI Oil, Left Axis

Jan

Feb

Mar

Apr

May

$6.00

Jun

$5.50

Prices of Gasoline and Heating Oil Price per Gallons since January 2005

$1.80

$1.80

June 3, 2005 $1.60

$1.60

HOHU

$1.40

$1.40

$1.20

$1.00

$1.20

Gasoline Heating Oil

Jan

Feb

Mar

Apr

May

Jun

$1.00

Price of Coal vs Oil

Price per Short Ton vs Price per Barrel since January 1999 $70

$70 Big Sandy Barge Coal Sweet WTI Cushing

$60

$60

$50

$50 Crude and Coal Prices Since 1999

$40

$40

$30

$30

$20

$20

June 3, 2005

$10 $0

1999

2000

2001

2002

2003

2004

$10 2005

$0

Price of Coal vs Steel

Price per Short Ton since January 1999 $70

$700 Big Sandy Barge Coal (Left Axis) U.S. Hot Rolled Coil (Right Axis)

$60 $50

$600 $500

Steel and Coal Prices Since 1999

$40

$400

$30

$300

June 3, 2005

$20 $10

1999

2000

2001

2002

2003

2004

$200

2005

$100

But‌Higher Sulfur is Cheaper

Price of Crude Oil

Price per Barrel since January 2000 $60

$60 Sweet WTI Cushing Sour WTI Midland

$50

$40

$50

$40

Sweet- Sour

$30

$30

$20

$10

$20

June 3, 2005 2000

2001

2002

2003

2004

2005

$10

Sweet-Sour Crude Oil Spread Price per Barrel since January 2000

$10

$10

June 3, 2005 $8

$8

$6

$6

Sweet- Sour Oil Spread

$4

$4

$2

$2

$0

2000

2001

2002

2003

2004

2005

$0

Price of Sweet Crude and Sweet-Sour Crude Spread Price per Barrel since January 2000

$60

$10

June 3, 2005 $50

$8

Sweet-vsSpread

$40

$6

$30

$4

$20

$2

$10

2000

2001

2002

2003

2004

2005

$0

As for Coal…

Price of Illinois High Sulfur Coal Price per Short Ton since January 2000

$35

$35

$30

$30 High Sulfur Illinois Coal Since 2000

$25

$25

$20

$20

June 3, 2005 $15

2000

2001

2002

2003

2004

2005

$15

Price of Powder River 8800 Coal Price per Short Ton since January 2000

$14

$14

$12

$12

$10

$10

Powder River Coal Since 2000

$8

$8

$6

$6

June 3, 2005

$4 $2

2000

2001

2002

2003

2004

$4

2005

$2

140

U.S. Railroad Carloads - Coal

140

135

135

130

130

125

Rail Costs Usage have driven up Costs Crude Prices Since 2000

March 4 @ 133

120

125 120

Series is a 52 Week Moving Average

115 94 95 96 97 98 99 00 01 02 03 04 05 115

Gasoline and Diesel Prices U.S. Dept of Energy Avg. Prices

$2.60 $2.40

$2.60 $2.40

May 16, 2005

$2.20

$2.20

$2.00

Crude Prices Since 2000

$1.80 $1.60

$1.80

Unleaded Gasoline Diesel

$1.40 $1.20

$2.00

Fuel Costs

2003

2004

2005

$1.60 $1.40 $1.20

Energy is Typical Commodity Story

Price of Gold

U.S. Dollars per Troy Ounce $500

$500

$450

$450

$400

$400 Gold

$350

$350

$300

$300

$250 $200

$250

June 1, 2005 2000

2001

2002

2003

2004

2005

$200

Price of Copper

Dollars per Metric Ton: London Metals Exchange $3500

$3500

$3000

$3000

Copper

$2500

$2500

$2000

$2000

$1500

$1500

June 1, 2005 $1000

2000

2001

2002

2003

2004

2005

$1000

Price of Aluminum

Dollars per Metric Ton: London Metals Exchange $2200

$2200

June 1, 2005 $2000

$2000

Aluminum

$1800

$1800

$1600

$1600

$1400

$1400

$1200

2000

2001

2002

2003

2004

2005

$1200

Price of Nickel

U.S. Dollars per Metric Ton: London Metals Exchange $18000

$18000

$16000

$16000

$14000

$14000

$12000

$12000

Nickel

$10000

$10000

$8000

$8000

$6000

$6000

June 1, 2005

$4000 $2000

2000

2001

2002

2003

2004

$4000 2005

$2000

Price of Tin

U.S. Dollars per Metric Ton: London Metals Exchange $10000

$10000

$9000

$9000

$8000

$8000 Tin

$7000

$7000

$6000

$6000

$5000

$5000

$4000

$4000

$3000

June 1, 2005 2000

2001

2002

2003

2004

2005

$3000

Price of Lumber

Chicago Mercantile Exchange $500

$500

$450

$450

$400

$400 Lumber

$350

$350

$300

$300

$250

$250

$200 $150

$200

June 1, 2005 2000

2001

2002

2003

2004

2005

$150

The Soy Cycle

Price of Soybeans

No. 1 Yellow Soybeans: Dollars per Bushel $11

$11

$10

$10

$9

$9

$8

$8

Soy

$7

$7

$6

$6

$5

$5

June 1, 2005

$4 $3

2000

2001

2002

2003

$4 2004

2005

$3

Supplies Are Increasing

Coal Total Production Data Millions of Short Tons since January 2000

22.5

22.5

May 27, 2005

22.0

21.5

22.0

21.5

Coal Production

21.0

21.0

20.5

20.5

20.0

2000

2001

2002 2003 52 Week Moving Average

2004

2005

20.0

BAKER-HUGHES RIG COUNT 1400

Active RIGS in Operation

1400

May '05 Up 12.9 % from May '04

1200 1000

Thin Line is Monthly Lev el. @ 1,320

1200

Bold Line is 12 mo. Mov . Av g. @ 1,260

1000

Natural Gas Rigs

800 600 400

800 May '05

95 96 97 98 99 00 01 02 03 04 05

600 400

Natural Gas Storage

Reported Weekly by the DOE: in Trillions of Cubic Feet

4.0

4.0 May 27, 2005 @ 1.78 TCF

3.0

3.0 Natural Gas Inventories

2.0

2.0

1.0

1.0

20.6 % Above 5-year Average 0.0 1999 2000 2001 2002 2003 2004 2005 0.0

Supply of Oil

OPEC QUOTAS

in Millions of Barrels per Day 28

28

27

27

26

26 OPEC Quota

25

25

24

24

23

23

22

22

21

2000

2001

2002

2003

2004

2005

21

Global Oil Supply in millions of barrels per day 86

86

84

84

April @ 84.9

82

82

Global EIG Supply

80

80

78

78

76

76

74

74

72

2000

2001

2002 2003 2004 Source: Energy Intelligence Group

2005

72

Total Petroleum Inventories in millions of barrels

720

720 May 27, 2005

700 680 660 640

700 680

Total Inventories Since 1999

660 640

620

620

600

600

580

580

560

1999 2000 2001 2002 2003 2004 2005 560

Total Distillate Inventories in millions of barrels

160

160 May 27, 2005

140

120

100

80

140 Distillate Inventories Since 1999

120

100

1999 2000 2001 2002 2003 2004 2005 80

Crude Inventories in millions of barrels

360

360 May 2005

340 320

Crude Inventories Since 1999

340 320

300

300

280

280

260

1999 2000 2001 2002 2003 2004 2005 260

U.S. Gasoline Inventories Monthly Averages in Millions of Barrels

230

230 May 2005

220 210

220

Gasoline Inventories Since 1999

210

200

200

190

190

180

1999 2000 2001 2002 2003 2004 2005 180

Watch The Crack Spreads

U.S. Refinery Capacity

Reported Weekly by the DOE: 12 Week Moving Average

100%

100%

95%

95%

90%

90%

Capacity

85%

85% May 27,2005

80%

80%

75% 1999 2000 2001 2002 2003 2004 2005 75%

Gasoline and Heating Oil Crack Spreads Dollars Per Barrel Since 2003

$20

$20 Gasoline Crack Spread Heating Oil Crack Spread

$15

$15

June 3, 2005 Heating Oil and Gasoline Crack Spreads

$10

$10

$5

$0

$5

2003

2004

2005

$0

Gasoline - Oil Crack Spread Prices since 2000

$20

$20 Crack Spread 100-day Moving Avg 30-day Moving Avg

$15

$15

Gasoline Crack Spreads

$10

$10

$5

$5

June 3, 2005 $0

2000

2001

2002

2003

2004

2005

$0

Heating Oil - Crude Crack Spread Price per Barrel since January 2002

$15

$15

June 3, 2005 $10

$10

Heating Oil Crack Spreads

$5

$5

Crack Spread 100-day Moving Avg 30-day Moving Avg

$0

$-5

2002

2003 2004 Shaded Boxes Include Nov.- Feb.

2005

$0

$-5

European Demand Closes ‘ The Arb’

Transatlantic Arbitrage Price per Barrel since January 2000

$2

$2

$1

$1

$0

$0

Transatlantic Arbitrage Closed

$-1

$-1

June 3, 2005

$-2

$-3

2000

2001 2002 2003 2004 Series is a 30 Day Moving Average

$-2

2005

$-3

Price of Natural Gas per Million British Thermal Units (BTUs) since January 2004 $9

$8

$7

$9

Natural Gas 60-day Moving Avg 100-day Moving Avg

$8

$7

Natural Gas Prices

$6

$5

$4

$6

June 3, 2005

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

$5

$4

Future Energy Expectations?

Risksof Higher Energy Prices

•Supply Disruption Premium (Iraq, Russia, Iran, OPEC) •Inability of U.S. to maintain Gasoline Inventories •Inability of U.S. to build Heating Oil Inventories •Increasing Global Demand (Especially non-OECD) •Price Increases are Long-Run Trends

Price of Crude Oil and Geopolitical Events Price per Barrel since January 2004

$60 $55

$60

June 3, 2005

$55

$50 $45

$50 Supply Disruption Premium

$45

$40

$40 Thin Line is 100 Day Moving Average

$35 $30

$35

Red Lines Indicate Important Geopolitical Events

$30

$25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun $25 Events (From Left): Iraqi Transfer of Power, Olympics, U.S. Elections, Iraqi Elections, Iran OPEC Meeting

Yearly Averages of the Price of Crude Oil in Dollars per Barrel $55 $50 $45 Crude Forecast 50

$40 $35 $30 $25 $20 2002

2003

2004

2005

FORECASTS

2004

2005

2006

Sweet Crude (Cushing WTI)

$41

$50

$53

Sour Crude (Midland WTI)

$37.50

$46

$48

Brent Crude

$38

$48

$52

Natural Gas (Henry Hub)

$5.90

$6.70

$6.95

BSB Coal

$54

$62

$64

Uranium

$18

$23

$25

Forecasts

Price of Crude Oil and The Dollar Since September 11, 2001

$60

30

Crude Oil, Dollars Per Barrel

$45

60

Dollar and Oil

$30

90

Near Contract Crude, Left Axis The Dollar Index, Right Axis (Inverted) $15

2002

2003

2004

2005

120

Dollar Index, September 11, 2001 = 100

June 3, 2005

Euro and Dollar Prices per Barrel of Oil Index: September 2001 = 100 250

250

May 2005 200

200 Oil Euro Dollar

150

150

100

100 Index of Dollars per Barrel Index of Euros per Barrel

50

2000

2001

2002

2003

2004

2005

50

$ per gallon of regular unleaded U. Es S. to Gr nia ee ce Sp Sl ain ov ak Ire ia lan Au d s Po tria rtu Sw gal ed en Ge Ital rm y an N Ne or y th wa er y lan ds

Gasoline Prices in the U.S. and Europe

7 6 5 4 3 2 1 0

Gasoline Prices

The Actual and Predicted Price of Crude $60.00 $55.00 $50.00 $45.00 $40.00 Dollar Adjusted Floor Price of Crude

$35.00 $30.00 $25.00 $20.00 $15.00 9/11/01

3/11/02

9/11/02

3/11/03

Actual Price of Crude Source: Wachovia Corp.

9/11/03

3/11/04

Predicted Price of Crude

9/11/04

3/11/05

Dollar Index NYBOT Spot 80 82 84 86 88 90

Implied Crude Floor Price Near Contract NYMEX WTI $ 45.96 $ 44.59 $ 43.23 $ 41.86 $ 40.50 $ 39.13 Floor Prices

Price of Crude Oil

Price per Barrel since January 2004 $60

$60

$55

$55

$50 $45

WTI Crude Price 100-day Moving Avg 30-day Moving Avg

$50

Crude Technical

$45

$40

$40

$35

$35

$30

June 3, 2005

$30

$25 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun $25

The Impact of High Energy Prices

Year-over-Year Change in the CPI Energy Component vs. The Price of WTI Crude

30%

$60

U.S. CPI EnergyComponent, Left Axis Price of WTI Crude, Right Axis

20%

$50

10%

$40

CPI Energy

0%

$30

-10%

$20

March 2005 -20%

00

01

02

03

04

05

$10

IMPORT PRICES FOR PETROLEUM AND PETROLEUM PRODUCTS INDEX FIGURES

180 160

180

Month to Month Change = 3.1% Year to Year Increase = 43.1%

160

140

140

120

120

Import Prices

100

100

80

80

60

60

April

40 20

40 96

97

98

99

00

01

02

03

04

05

20

U.S. Trade Deficit

-350

Twelve Month Moving Sum in Billions of Dollars

-350

-400

-400

-450

-450 Negative Trade Balance

-500

-500

-550

-600

-550

-600

March 2005 @ -$652.3 B

-650

-700

-650

2001

2002

2003

2004

2005

-700

Price of Crude Oil and The Dollar Since September 11, 2001

$60

30

Crude Oil, Dollars Per Barrel

$45

60

Dollar and Oil

$30

90

Near Contract Crude, Left Axis The Dollar Index, Right Axis (Inverted) $15

2002

2003

2004

2005

120

Dollar Index, September 11, 2001 = 100

June 3, 2005

Future Energy Expectations?

Risksof Lower Energy Prices

•Slower Growth Globally •SDP Falling Off (Democratic Gains in M.E.) •U.S. Inventories Continue to Build