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Name Age Citizenship State Location Education Trading Experience Word Count

Talha 23 United States South Carolina Clemson University Beginner 1,141

Oil will trade at $5 per barrel before it trades at $250 per barrel by the year 2050. Discuss. Maximum word count = 2,000 words. Answers over 2,000 words will be automatically disqualified from the competition.

Oil is an important commodity used in various sectors of the economy and in the general population. Its uses include fuel for vehicles, production of food, an energy source and other uses vital for everyday survival. Oil will not trade at $5/barrel before rising to $250 nor will it trade at $250/barrel before the year 2050 due to moderate increase in demand and lessening supply of oil. This essay will first list the assumptions in this discussion, then present why oil will not trade at $5/barrel followed by a discussion of why oil prices will rise but not trade as high as $250/barrel in 2050. Assumptions: For the purposes of this analysis, the following assumptions will be made: 1) Any future prices discussed are not adjusted for inflation. 2) Only oil prices in the United States will be considered. 3) The average oil price for 2016 is $43/barrel in the US [6]. Any references made to falling or rising prices in the future will use the current oil price average for 2016. Oil Price at $5/barrel: The demand for oil in the near future (next 5-10 years) will still be prevalent as no major advances have been made in an energy source that can replace crude oil. Prices will likely stay about the same or increase within the time period. In addition to the demand of oil, supply of oil to the US will likely stay the same or decrease due to high production costs associated with the extraction of the oil from the exporting country. According to import data listed on United States Energy Information Administration’s (EIA) database, approximately 64% of oil imported into the US within the last 6 years has come from Non-OPEC countries, predominantly Canada due to market and physical access to the oil sands (approximately 61% increase) [4]. However, the current high production costs will result in higher costs for the end users until extraction and refining processes are improved. According to the Rystad Energy consulting group, a Norwegian based energy consulting firm that analyses energy costs and production, it costs Canada approximately $26 to produce one barrel of oil, 43% of the cost due solely to production related expenses [7]. The high production costs are due to the required machinery, transportation, storage and processing plants needed to supply the end consumers with usable oil. With the current technology and economic conditions, approximately 10% of the total oil sands can be extracted, refined and used by the end consumer. Unless major improvements can be made in the near future, the imported oil will be costly compared to traditional oil, only be in limited


supply and other sources will need to be considered. Regardless, the price of oil will not fall to $5/barrel anytime in the future because of continual demand increases as demonstrated by the United States’ shift in countries it imports oil from. The next paragraph will discuss the political instability of the countries from which the US imports the rest of the oil and why prices will not fall to $5/barrel. The remaining 36% of oil imported into the United States comes from either the Persian Gulf or OPEC member countries, predominantly in the Middle East [4]. Current political instability in the Middle East due to the rise of ISIS and other militant groups has hindered import of oil from that region. The continual warfare and regime changes in these regions yield fluctuating supplies and prices of oil. This leads to United States’ unwillingness to import an excessive amount of oil from this region, to provide stability to the oil import portfolio. The low supply due to political instability and uncertainty from these regions will also ensure that oil prices do not fall to $5/barrel anytime in the near future. This section has demonstrated why oil will not fall to $5/barrel before rising. The next section will discuss why oil prices will rise but not to $250/barrel. Oil Price at $250/barrel: Combustion of oil produces energy which is used in a variety of applications including electricity generation for residential, commercial and industrial sectors as well as power for transportation vehicles such as cars, trains, ships and airplanes. According to the United States Energy Information Administration (EIA) energy demands are projected to increase by 1.4%/year to 815 quadrillion BTU by 2040 [3, 5]. Assuming the same trend continues, energy demands will increase into 2050 also. From the same study, it is estimated that the industrial sector will account for approximately 50% of the world’s energy demands while other projections from the EIA also show an increase in the energy usage of the transportation sector and a decline of energy usage in the commercial (non-industrial) and residential sectors, due to advances in energy efficient technology and governmental policies aimed at reducing environmental impact that stems from the use of oil [3, 5]. This indicates that energy will have high demand predominantly within the industrial sector. According to the EIA Annual Energy Outlook 2016, the industrial sector is projected to consume 4.22 quads/year (or 4.22 x 1015 BTU) by 2040 in the form of crude oil, a growth of 2.3% from 2015 to 2040 [5]. This only comprises of approximately 10% of all energy resources used in the industrial sector [5]. Assuming the same trend continues into 2050, the projected rise in crude oil consumption, yet the relatively small portion of the energy portfolio used in the industrial sector is indicative of a modest increase in demand of oil which will result in only a modest increase of oil prices. Due to advances in energy efficient technologies in the residential, commercial (non-industrial) and even transportation sector, oil will be consumed less in these sectors in the future and will yield low demand. The industrial sector will be the predominant consumer of oil in the future and will be the reason for any increases in the demand of oil. The essay prompt states that oil prices will rise to $250/barrel but given the projections of energy demands, prices will rise overall but not to that high of a level. A modest estimate of oil prices in 2050, given current economic, social and political trends in addition to projections from the EIA, is $170/barrel. This estimate is due to the demand of oil only being predominant in one sector rather than in all 4 major sectors as it has been in the past. Conclusion: Oil prices will not fall to $5/barrel nor will prices rise to $250/barrel in 2050. The price will not fall to $5/barrel due to high production costs of obtaining and importing oil and political and social instability in countries that produce oil. In addition, prices will not rise to $250/barrel due to demand coming predominantly from the industrial sector. A modest price estimate for oil in 2050 is $170/barrel.


Work Cited [1]Alberta, Government Of. "Conventional Crude Oil and Oil Sands." Conventional Crude Oil and Oil Sands | Alberta Canada. Open Text Web Site Management, 21 July 2016. Web. 30 Dec. 2016. [2]Organization of the Petroleum Exporting Countries. 2016 OPEC World Oil Outlook. October 2016. Available from: http://www.opec.org. [3]Sieminski, Adam. International Energy Outlook 2016. Proc. of International Energy Outlook 2016, Center for Strategic and International Studies, Washington D.C. Energy Information Administration, 11 May 2016. Web. 27 Dec. 2016. [4]"U.S Imports by Country of Origin." Oil Imports. Energy Information Administration, 30 Dec. 2016. Web. 30 Dec. 2016. [5]United States of America. Department of Energy. Energy Information Administration. Annual Projections to 2040. EIA Database. Web. 27 Dec. 2016. [6]United States of America. Department of Energy. Energy Information Administration. Short Term Energy Outlook, 6 Dec. 2016. Web. 30 Dec. 2016 [7]WSJ News Graphic. "Barrel Breakdown." Wall Street Journal. Wall Street Journal, 15 Apr. 2016. Web. 28 Dec. 2016.


ITPM Response and Comments. This was a very methodical response Talha and well thought out with an easy to follow structure to the paper for the reader. I like how you have set out your view and the case immediately and then went about methodically supporting it. The structure and word count was helped greatly as well by the way you have organised your citations. You have clearly understood the statement and from your work disagree with it from the outset. Which is a great start to make i.e. state your intention. With respect to the $5 case. Your counter renewables stance is atypical to the consensus view of the vast majority of submitted responses and the supporting case of Canadian imports and the shifting U.S. supply chain dynamic as an argument for Oil not reaching $5 first before 2050 is sound logic. Moving onto the $250 case. I enjoyed how you cited EIA energy demand projections and looked at the big picture. It is a big picture question to ask can Oil go to $250 by 2050? ..., and it requires big picture thinking. I like how you simplify the big numbers and it is evident from this you are comfortable thinking in the big picture and I like the implication you get to from the EIA study that Industrial use could be the most important factor for the Oil price considering the $250 statement. Your conclusion is sound, to the point, consistent with your stated intention and view, and rest of the narrative of the paper. Overall the paper is well thought out, methodical and presented very well. However, although you were well organized and structured especially with citations and references I would have liked to have seen some more original work especially utilising descriptive statistics. The critical thinking and original thought you displayed in the paper came in the form of your Oil Sands discussion and the potential for the U.S. to shift the Supply curve to wherever fits best at the time. It’s not a discussion / consideration that ever really comes up and I liked it. Its original. A discussion in production costs is usually associated with interest rates and borrowing costs etc, so it would have been great to also see a paragraph on this too and tie it all together. This was a very good “academic” response and there is nothing wrong with that at all. It just lacked a bit of rawness, a bit of edge and originality. It was a bit of a “safe” submission with a dash of critical thinking and original thought. I can tell from the way it is structured that you have a very academic background. In Trading and Portfolio Management, it’s important to have conviction in your ideas and the way to have real conviction is to dig deeper. Really know why you have a position. You’re obviously a smart guy and I believe you are smarter than the 1,141-word count. What I mean by that is if you had the right training and Mentoring and then really applied yourself to this statement by dedicating more time to it, you would use the full word count, provide more original work and descriptive stats and hammer your points home with aggressive conviction. Raj and Ben will for sure help you loosen up a little, show you how to dig deeper, get higher conviction in your ideas and take risk. I enjoyed reading it due to the fresh perspective and methodological approach and it was one of the best submissions for sure. This is why we chose you. Now we will help you go those few steps further to become not just good but great!

Anton Kreil Managing Partner Institute of Trading and Portfolio Management

Florida Scholarship Winner Talha  
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