Truth About Oil Gasoline Primer

Americas Oil and Natural Gas Industry
The Truth About Oil and Gasoline: An API Primer
April 10, 2008

Please visit www.api.org/aboutoilgas for updates of this report
America is in a global struggle for energy security and many Americans lack a full understanding of the oil and natural gas industry. Consumers and policymakers alike need fact-based information. API has assembled this oil and gasoline primer to encourage a constructive public policy debate on meeting the growing energy needs of consumers and industry.
Table of Contents
Future Global Energy Demand The Myth of Big Oil 2006 Largest Oil and Gas Companies Diesel, Gasoline and Crude Prices Average Price Increases Key Factors Affecting Markets World Oil Consumption OPEC Surplus Production Capacity EIA Price Forecast Commodity Performance WTI in Dollars and Euros/Yen What Consumers Are Paying Return on Investment Earnings by Industry Who Owns the Oil Companies? Stock Repurchases Income Taxes Paid Taxes Paid by Oil Versus Manufacturing Companies Capital Spending: Where Funds Go New Investments Increasing Refinery Capacity Expands Projected Refining Capacity Environmental Expenditures U.S. Crude Oil Resources U.S. Natural Gas Resources Energy Efficiency Future U.S. Energy Demand Ethanol in Brazil U.S. Corn Use Technology Investments Emerging Energy Investments Ensuring Our Energy Security Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32
Future Global Energy Demand
Source: IEA, World Energy Outlook, 2007
Mtoe
Recent concern about crude oil and gasoline prices underscores the link between energy and the economy. Most energy analysts agree that sustaining even modest economic growth worldwide for the next several decades will require massive new investments in oil and natural gas. This also presents a great opportunity for the renewable fuels that will be an important part of the future fuel mix.
Recent forecasts by the International Energy Agency (IEA) estimate that sustaining a 3.6 percent rate of annual growth in the global economy to 2030 will require an expansion of 33 million barrels per day in global oil supplies. That is an increase of 40 percent. The growth in demand for natural gas worldwide is expected to be even larger, increasing by 68 percent by 2030. Despite significant growth of renewables and improvements in energy efficiency, more than half of the worlds energy demand will be met in 2030 by oil and natural gas, as is the case today.

Page 1
The Myth of Big Oil (As a Percent of Proven Reserves)
Source: J. Robinson West, Chairman, PFC Energy, 9/21/05
It is also important to understand how the energy world has changed. Forty years ago, world oil reserves were largely the domain of the investorowned, international oil companies (IOC), based principally in the United States. Most people today assume that international oil companies are little changed from decades ago, still sitting astride the bulk of these world oil reserves. That is no longer the case. Today, world oil reserves are 80 percent owned by the national oil companies of foreign governments, many formed during the past 30 years. Only 6 percent of world-wide oil reserves are now held by investor-owned oil companies.
Faced with such competition, the investor-owned oil companies have scaled up within this new worldprincipally through mergers and acquisitionsby creating ever larger efficiencies, greater technological and project management prowess, and substantially broader competitive access to capital markets.

Page 2
2006 Largest Oil and Gas Companies (percent of worldwide reserves)
Source: World reserves of 1. 3 trillion barrels as of January 1, 2007 according to Oil and Gas Journal December 24, 2007 Leading companies: Oil and Gas Journal September 17, 2007
Even the largest U.S. based international investor owned company accounts for just a small fraction of the worlds oil reserves and production.
2006 Largest Oil and Gas Companies (percent of worldwide production)
Source: Estimated world total of 72.4 million barrels a day in 2007 according to Oil and Gas Journal December 24, 2007 Leading companies: Oil and Gas Journal September 17, 2007

Page 3
Diesel, Gasoline and Crude Prices
Source: NYMEX (WTI crude oil) and AAA (gasoline and diesel)
Until recently, gasoline and diesel fuel prices closely tracked the cost of crude oil. But over the last year the supply and demand picture has changed. Demand for gasoline has been met with strong supply fed by record refinery production and high levels of imports. By contrast, the market for diesel is much tighter. While production has been strong, supplies have been limited by weaker imports. The Europeans are exporting less to the United States, because they are keeping more diesel for domestic consumption.
Diesel prices also are higher today, because it is a more advanced, low-sulfur fuel. Such fuels help improve air quality but they are more expensive to refine. Todays diesel contains less than 15 parts per million of sulfur, compared with 500 parts prior to 2006.

Page 4
Average Price Increases Year to Date (cents per gallon) January 1 to April 8
Source: NYMEX (WTI crude oil) and AAA (gasoline and diesel)
The price of West Texas Intermediate crude oil has increased by 95 cents per gallon for the period from January 1 through April 8th
of this year compared to the same period last year. Diesel prices are averaging 97 cents more per gallon and gasoline 74 cents per gallon more.

Page 5
Key Factors Affecting Markets
Weather
Iran
Iraq Insurgency Value of U.S. Dollar
Nigerian Civil Strife
OPEC Decisions Venezuela
Economists like to say that it all boils down to supply and demand. But there are many factors affecting the tried-and-true laws of economics and those factors have contributed to todays high-demand, tight-supply world energy market. For starters, demand is very strong, coming from mature economies like the United States and Europe plus the developing economies of countries like China and India. And as per capita income rises in those developing countries, the demand for energy is expected to continue growing.
Tight supplies have been aggravated by political instability, resource mismanagement and weather. The Iraq insurgency, civil unrest in Nigeria and political uncertainty in Venezuela are among the examples. And hurricanes in the Gulf of Mexico have affected operations in both the United States and Mexico. Finally, the decline in the value of the U.S. dollar against other countries has put American consumers at a disadvantage. American consumers must now pay more for crude oil than countries with stronger currencies.

Page 6
World Oil Consumption
Source: EIA, Short-Term Energy Outlook, April 2008
The worlds demand for oil has increased sharply in recent years, rising from 77 million barrels per day in 2001 to 85 million barrels per day in 2007. The U.S. Energy Information Administration expects world oil consumption to grow by 1.2 million barrels a day in 2008 and by 1.3 million barrels a day in 2009.
Non-OECD countries are projected to account for 1.1 million barrels per day of world consumption growth in 2008, with gains concentrated in China, the Middle East oil-producing countries, India, and other Asian countries.

Page 7
OPEC Surplus Crude Oil Production Capacity
The amount of surplus crude oil capacity to meet surges in demand or disruptions in supply has declined sharply in recent years. Just a few years ago OPEC spare capacity stood at nearly 6 million barrels per day. Today it is at about 2 million barrels per day. This illustrates that tight fundamentals are at work in the marketplace, increasing the potential for volatility in energy markets.
Although the U.S. Energy Information Administration is calling for a decline in OPEC spare capacity in 2008, they see the potential for improvement in 2009.

Page 8
EIA Price Forecast

Year 2006 2007 2008 2009 2006-2007 Percent Change 2007-2008 2008-2009
WTI Crudea
($/barrel)
66.02 2.58
72.32 2.81
100.61 3.36
92.5 3.24
9.5 8.9
39.1 19.8
-8.1 -3.7
Gasolineb
($/gallon)
Dieselc
($/gallon)
2.70
2.88
3.62
3.39
6.6
25.7
-6.5
Heating Oild
($/gallon)
2.48
2.72
3.46
3.30
9.4
27.4
-4.7
Natural Gasd
($/mcf)
13.75
13.00
13.83
c
14.15
-5.4
d
6.3
2.3
West Texas Intermediate
Average Regular Pump Price
On-Highway Retail
Residential Average
Looking ahead, the Energy Information Administration projects the annual price of WTI crude will increase from an average of $72 per barrel in 2007 to $100 per barrel this year. But some easing of the oil market by 2009 is expected due to increased production outside of OPEC and planned additions to OPEC capacity.
EIA expects the projected higher costs for crude oil will be passed on to all petroleum product prices with retail gasoline prices expected to average 55 cents per gallon more in 2008.

Page 9
Commodity performance year to date, January 1 through March 31 (2008)
Source: Deutsche Bank Global Markets Research, Bloomberg
In addition to the rising cost of energy materials, there has been a worldwide increase in the cost of other commodities because of strong demand created by economic growth. When crude oil (e.g.
WTI and Brent) and refined products like gasoline are compared with other commodities, the price increases experienced with energy related commodities are about average.

Page 10
Percentage of Change of West Texas Intermediate Crude (WTI) in Dollars and Euros (January 2007 - April 2008)
Percentage of Change of West Texas Intermediate Crude (WTI) in Dollars and Yen (January 2007 - April 2008)
Source: Federal Reserve Bank of St. Louis, EIA, NYMEX
During the last year, the depreciation of the U.S. dollar against other countries around the world has accelerated. For American consumers it means they are more affected by rising crude oil prices than the citizens of other countries that
use currencies like Euros or Yen. Conversely, as oil prices have gone up all around the world, the price increase has been less for countries who have a strong currency other than the U.S. dollar.

Page 11
What consumers are paying for at the gasoline pump
58%
17%
10% 15%
Crude Oil
Refining
Retailing
Taxes
8.3% Earnings*
Source: Average of gasoline components from January through December 2007 as reported by EIA. *Earnings differ by company. Figure represents average 2007 industry earnings for every dollar of sales calculated from data reported by Oil Daily.
The biggest single component of retail gasoline prices is the cost of the raw material used to produce gasolinecrude oil. For example in 2007, crude oil alone makes up 58 percent of pump prices. Refining the crude oil into gasoline
accounted for 17 percent of the retail price. Retailing added another 10 percent to the retail price of gasoline. Taxes accounted for 15 percent of the price of gasoline.

Page 12
Return on Investment (net income/net investment in place)

S&P Industrials U.S. Oil and Natural Gas
Source: EIA, Performance Profiles of Major Energy Producers, various issues and 2006 S&P figure compiled by PWC from Compustat data.
Where our investments are going
Because the oil and natural gas industry is massive and requires huge investments, its earnings contribute greatly to the American economy and way of life. They allow companies to reinvest in the facilities, infrastructure and new technologies that keep America going strong well into the future while generating returns that meet shareholder expectations. The oil and natural gas industry is probably one of the worlds largest industries. Its revenues are large, but so are its costs of providing consumers with the energy they need. Among those are the cost of finding and producing
oil and natural gas and the costs of refining, distributing and marketing it. These costs remain huge, regardless of whether earnings are high or lowas was the case throughout most of the 1990s and during other industry bust periods. It is only in recent years that the return on investment (net income/net investment in place) for the industry has matched or exceeded the returns for the S&P Industrials.

Page 13
2007 Earnings by Industry (net income/sales)
Sources: Based on company filings with the federal government as reported by U.S. Census Bureau and Oil Daily.
It may seem surprising that oil and natural gas earnings are typically in line with the average of other major U.S. manufacturing industries. This fact is not well-understood, however, in part because reports usually focus on only half the storythe profits earned. Profits reflect the size of an industry, but theyre not necessarily a good reflection of financial performance.
Profit margins, or earnings per dollar of sales (measured as net income divided by sales), provides one useful way to compare financial performance among industries of all sizes. The latest published data for 2007 shows the oil and natural gas industry earned 8.3 cents for every dollar of sales compared to 7.3 cents for all U.S. manufacturing and 8.9 cents for U.S. manufacturing, excluding the financially challenged auto industry.

Page 14
Who Owns Big Oil? (Holdings of Oil Stocks, 2007) 5.0% Other Institutional Investors 1.5% Corporate Insiders
14.0% IRAs
29.5% Mutual Funds and Other Firms
23.0% Individual Investors
27.0% Pension Funds
Source: SONECON, The Distribution of Ownership of U.S. Oil and Natural Gas Companies, September 2007
Contrary to popular belief, and what some politicians might say, Americas oil companies arent owned just by a small group of insiders. Only 1.5 percent of industry shares are owned by company executives. The rest is owned by tens of millions of Americans, many of them middle class. If youre wondering who owns Big Oil, chances are good the answer is you do. If you have a mutual fund account, and 55 million U.S. households do, theres a good chance it invests
in oil and natural gas stocks. If you have an IRA or personal retirement account, and 45 million U.S. households do, theres a good chance it invests in energy stocks. When politicians talk about taxing Big Oil or taking their record profits, they should think about who would really be hurt.

Page 15
Stock Repurchases as a Share of Net Income

S&P Industrials Oil and Natural Gas
Source: EIA, Performance Profiles of Major Energy Producers
The oil and natural gas industry is very capital intensive and devotes the largest share of its earnings to add new property, plant and equipment to its upstream and downstream operations. When companies repurchase stock, they are supporting the equity value of the company. This in turn helps the owners of the companies retirees, future retirees and millions of Americans who have invested their earnings in a secure future.
It is the responsibility of company officials to build value for shareholders; one way to do this is through stock repurchases. Earnings are also used for paying dividends which additionally benefit shareholders. While the share of stock repurchases in the oil and gas industry has increased in recent years, it is less than half of that for the S&P industrial group. For the last 11 years, the oil and gas industry spent 21 percent of net income on stock repurchases while the rate for the S&P industrials was 52 percent.

Page 16
Current income taxes paid by oil companies1 (billions of dollars)

$81.5 $66.9
$44.8
$24.0 $14.5
$26.3
2001
2002
2003
2004
2005
2006
Source: EIA, Performance Profiles of Major Energy Producers, Table B12.
According to publicly available data on the top 27 energy companies tracked by the EIA, the total current income taxes paid worldwide by these companies nearly doubled between 2004 and 2006, increasing from $44.8 billion to $81.5 billion. The average effective tax rate (current taxes) of the top 27 energy companies was 37.1 percent in 2006. This indicates that taxes took up 37.1 cents of every dollar of pre-tax income. In 2 comparison, according to the Tax Foundation, the effective tax rate for the market as a whole is 32.3 percent, or 4.8 percent less than the top energy companies.
Imposing additional taxes on the U.S. oil and natural gas industry is contrary to the goal of providing stable and cost-effective supplies of energy for American consumers and discourages the tremendous capital investments needed to meet the nations growing energy needs. Repeal of tax provisions designed to encourage investment in the United States will discourage new domestic oil production and refinery investments, threaten American jobs, and make it less economic to produce domestic energy resources thereby increasing our dependence on imported crude oil and gasoline.
1 Energy Information Administration, 2006 Performance Profiles of Major Energy Producers, December 2007. These 27 companies accounted for about 44 percent of the total U.S. crude and NGL production, 43 percent of natural gas production, 81 percent of U.S. refining capacity and 3 percent of U.S electricity. These companies include: Amerada Hess, Anadarko Petroleum, Apache, BP America, Burlington
Resources, Chesapeake Energy, Chevron, CITGO Petroleum, ConocoPhillips Petroleum, Devon Energy, Dominion Resources, El Paso, EOG Resources, Equitable Resources, ExxonMobil, Kerr-McGee, Lyondell Chemical, Marathon Oil, Motiva Enterprises, Occidental Petroleum, Shell Oil, Sunoco, Tesoro Petroleum, Total Holdings USA, Valero Energy, The Williams Companies, XTO Energy
2 Tax Foundation, Large Oil Industry Tax Payments Undercut Case for Windfall Profits Tax, January 2006.

Page 17
Income Taxes as Share of Net Income Before Income Taxes
Source: EIA, Performance Profiles of Major Energy Producers
An important part of the revenue earned by U.S. oil and natural gas companies goes to taxes. U.S. oil and natural gas companies pay considerably more in taxes than do manufacturing companies. According to
the U.S. Energy Information Administration, their 2006 income taxes (both current and deferred), as a share of net income before income taxes averaged 40.7 percent, compared to 22.1 percent for U.S. manufacturing companies.
1 Energy Information Administration, 2006 Performance Profiles of Major Energy Producers, December 2007. These 27 companies accounted for about 44 percent of the total U.S. crude and NGL production, 43 percent of natural gas production, 81 percent of U.S. refining capacity and 3 percent of U.S electricity. These companies include: Amerada Hess, Anadarko Petroleum, Apache, BP America, Burlington
Resources, Chesapeake Energy, Chevron, CITGO Petroleum, ConocoPhillips Petroleum, Devon Energy, Dominion Resources, El Paso, EOG Resources, Equitable Resources, ExxonMobil, Kerr-McGee, Lyondell Chemical, Marathon Oil, Motiva Enterprises, Occidental Petroleum, Shell Oil, Sunoco, Tesoro Petroleum, Total Holdings USA, Valero Energy, The Williams Companies, XTO Energy

Page 18
Capital Spending
Source: Oil and Gas Journal, April 2, 2007
To understand the oil and natural gas industry one must recognize it as an industry characterized by long lead times, massive capital requirements and returns realized only decades later in the face of very real investment risks. Significant oil and gas discoveries that are announced today often result from investments begun by companies as far back as a decade or more ago. Planning and investment cannot be turned on and off like a spigot, without entailing huge, potentially non-recoverable costs and delaying urgently needed projects.
Because the industry must plan and operate under these long lead times, it is hypersensitive to minimizing risk over the course of its investments. It is crucial for an industry that must manage such huge risks that government provide an energy policy and tax framework that encourages investment, rather than discourage. To meet the continued, growing demand for oil and natural gas, our industry has continued to invest heavily. New investment in 2006 reached more than $176 billionmore than a 30 percent increase over 2005. Investment in 2007 grew another 4 percent to $183 billion.

Page 19
Oil and Natural Gas New Investments

New Investments Earnings
Source: Ernst & Young
Todays earnings are reinvested for tomorrows energy needs. The energy Americans consume today comes from industry investments made years or even decades ago.
The U.S. oil and natural gas industry invested more than $1.25 trillion in a range of long-term energy initiatives between 1992 and 2006.

Page 20
Number of refineries declines but capacity expands
Source: DOE
Investments in new capacity and improved technologies have enabled U.S. refiners to produce record amounts of fuels for consumers. However, for many years, the rate of return on investment in U.S. refining lagged behind the returns for the S&P Industrial average. It is only in recent years that refiners have enjoyed higher average earnings. Refiners need to continually invest, and do so even when earnings are lower. While no new refineries have been built since 1976, the industry has added the equivalent of one new average-sized refinery each year over the last decade.
Since 1985, refining capacity has increased by 20 percent even though we have 57 fewer refineries because it has been more efficient to expand at existing refineries. The infrastructure to bring crude in and get products out is in place, the permitting process is quicker, and it is more cost-effective to add on to a refinery versus building a new one. In addition, the elimination of subsidies under the government price and allocation controls in 1981 led to closure of many smaller, less efficient refineries through the 1980s and 1990s. Capacity has increased while at the same time, industry invested $50 billion to make the cleanest burning fuels in the world. Much of the investments were in technologies and investments to meet stringent clean air standards set by the Clean Air Act of 1990.

Page 21
EIA Projected Capacity Expansion
Source: EIA
Energy legislation enacted in 2005 made a positive contribution by permitting accelerated depreciation for certain U.S. refinery investments placed in service before 2012; this helped to make U.S. refinery investments more attractive economically. According to the U.S. Energy Information Administration, current domestic
refinery expansion plans will boost domestic refining capacity by about one million barrels per day by 2012, the equivalent of five new refineries. Moreover, a number of refinery modifications or expansions have been announced to handle increased processing of heavier crude oils from Canadian oil sands.

Page 22
Environmental Expenditures since 1990
Source: API Statistics
The U.S. oil and natural gas industry has invested more than $148 billion since 1990 toward improving the environmental performance of its products, facilities and operations; $504 for every man, woman and child in the United States1.
In the year 2005 alone, $10.7 billion was spent implementing new technologies, creating cleaner fuels and funding ongoing environmental initiatives. An additional $1.7 billion went toward research and development, corporate environmental programs and spill remediation efforts.
1 Based on U.S. population estimate of 296.6 million by U.S. Census Bureau.

Page 23
U.S. Crude Oil Resources (Undiscovered Technically Recoverable Federal Resources)
Pacific Offshore 10.5 Bbl
Lower 48, Onshore 7 Bbl Atlantic Offshore 3.8 Bbl
Alaska Onshore, 18 Bbl Alaska Offshore, 26.6 Bbl
Gulf Offshore/Deepwater 44.9 Bbl 112 billion barrels is enough oil to power over 60 million cars for 60 years.
Source: MMS, USGS, and API calculations
Our nations energy security requires policies that do not disadvantage the investor-owned oil companies, but rather enable them to be competitive in the global marketplace. Our nation needs policies that promote greater supplies of oil and natural gas, not policies that hinder our industrys ability to provide American consumers the energy they demand and need. We have
abundant volumes of oil and natural gas resources beneath federal lands and coastal waters, but the bulk of these resources have been placed off-limits to development. For example, according to federal government estimates, there is enough oil in these areas to power more than 60 million cars for 60 years.

Page 24
U.S. Natural Gas Resources (Undiscovered Technically Recoverable Federal Resources)
Pacific Offshore 18.3 Tcf
Lower 48, Onshore 167 Tcf Atlantic Offshore 37 Tcf
Alaska Onshore, 69 Tcf Alaska Offshore, 132 Tcf
Gulf Offshore 232.5 Tcf 656 trillion cubic feet is enough natural gas to heat 60 million homes for 160 years.
Source: MMS, USGS, and API calculations
There is enough natural gas to heat an additional 60 million homes for another 160 years. However, more than 85 percent of the coastal waters adjacent to the lower-48 states, and which extend up to 200 miles from our
shores, are off-limits to oil and natural gas exploration. And, 75 percent of the most prospective, technically available U.S. onshore areas are off-limits or accessible only with significant restrictions.

Page 25
Future U.S. Energy Demand per Dollar of GDP
Source: EIA, AEO 2007
The greatest new energy source available to use is the reduced demand brought about by greater energy efficiency and conservation. Significant progress has been made in the past and more is expected in the future. We use about half as much energy today for every dollar of Gross Domestic Product as we did back in 1980. Looking forward, our nation must take energy efficiency more seriously. Our industry is doing its part. Through such technologies as combined heat and power, also known as cogenerationthe re-use of excess heat from refinery processes to
produce additional energyrefiners are becoming more efficient, reducing both energy use and emissions. API member companies have also pledged to improve aggregate energy efficiency by 10 percent at refineries between 2002 and 2012, and we are making progress in meeting that goal. In fact, in 2006 alone, U.S. refiners saved the energy equivalent of taking 528,000 cars off the road. Additionally, all of APIs larger companies are active participants in EPAs Natural Gas Star program.

Page 26
Future U.S. Energy Demand
Quadrillion BTU
Oil* excludes ethanol and other biofuels, they are counted in biomass and renewables
The U.S. Energy Information Administration recently revised its forecast of future energy demand to include the impact of the Energy Independence and Security Act of 2007 enacted in late December 2007. The results call for total primary energy consumption to grow by 19 percent between 2006 and 2030. Although the share of non-fossil fuels is growing rapidly, fossil fuelsoil, natural gas and coalwill continue to play the leading roles through 2030.

Page 27
Ethanol in Brazil
Brazilian Ethanol (Sugar Cane Derived) Ethanol meets 45% of Brazils Gasoline Demand Lowest Ethanol production costs in the world Climate, Geography and Labor costs conducive to sugar production Brazilian model not applicable to U.S. in terms of scale/cost U.S. tariff to imported ethanol is $0.54/gallon
Some argue that the U.S. should learn from Brazils success with its biofuels industry, and its ability to achieve energy independence. However, the lessons to be learned from Brazil are not exactly what some might think. Though ethanol production in Brazil has been a factor in its attainment of energy independence, the principal factor has been a significant ramp up in off-shore crude oil production. Likewise, the U.S. could significantly improve its energy security by allowing access to oil and gas resources currently off limits.
Due to differences in scale between the U.S. and Brazilian motor fuel markets as seen in the figure, ethanol penetration in the U.S. gasoline market on a percentage basis can be expected to remain far below that in Brazil.

Page 28
U.S. Corn Use 2007-2008 (13 Billion Bushels)

Cereals and Other 2%
Beef 12%
Exports 19%
Exports 19%
Beverage and Alcohol 1% Starch 2% Glucose and Dextrose 2%
Pork 12%
Direct Feed and Residual* 45%
Poultry 16%
Food, Seed and Industrial 36%
High Fructose Corn Syrup 4%
Milk 5%
Fuel Alcohol* 25%

*Distillers Grain is in addition to this figure.
Source: Based on USDA/GCAU Data
Ethanol production is now taking roughly 25 percent of the U.S. corn crop. This percentage is expected to increase over the next several years due to a significant ramp-up in the renewable fuels mandate included in the 2007 Energy Bill enacted by Congress.
The Federal Reserve Banks February 2008 Monetary Policy Report to Congress reports that: Last years increase in the PCE price index for food and beverages, at 4 percent, was the largest in nearly two decades. Food prices accelerated in response to strong world demand and high demand for corn for the production of ethanol.

Page 29
TechnologyOur Industrys Investments (2000-2005)
Source: IER and CEE
The U.S. oil and natural gas industry invested an estimated $98 billion between 2000 and 2005 in emerging energy technologies including renewables, frontier hydrocarbons, such as shale and oil sands, and end-use technologies, such as fuel cells.
This investment represents almost 75 percent of the total $135 billion spent by all of industry and the federal government combined on emerging energy technologies during this time period, according to a May 2006 study by the Institute for Energy Research (IER) and the Center for Energy Economics (CEE).

Page 30
Leading Emerging Energy Investments by U.S. Firms (2000-2005)
End Use: 2000-2005 $31 Billion Other Private Companies $20 Billion
Non-hydrocarbons: 2000-2005 $15 Billion Other Private Companies $12 Billion
Oil and Gas Companies $1.2 Billion
63% 35%
81% 8%
Oil and Gas Companies $11 Billion Federal Government $0.8 Billion
11%
Federal Government $1.6 Billion
3%
Source: IER and CEE
The U.S. oil and gas industry invested $11 billion in the North American market over the 20002005 period for advanced end-use technologies, mostly for efficiency improvements through combined heat and power (cogeneration) and for advanced-technology vehicles using fuel-cell technology. Significantly, this $11 billion investment in end-use technologies represents 35% of the estimated total amount ($31 billion) spent by U.S. companies and the Federal government in this area. Publicly announced non-hydrocarbon investment by the U.S. oil and gas industry is estimated at $1.2 billion, representing 8% of the total investment of approximately $15 billion. The industrys top investment is in wind with expenditures also made in solar, geothermal, and landfill digester gas.
Total U.S. oil and gas industry end use and non-hydrocarbon investments are estimated to total $12.2 billion over the 2000-2005 period, or more than five times the $2.4 billion invested by the Federal government.

Page 31
Policy Choices Needed to Ensure Future Energy Security
Encourage Energy Efficiency. Encourage investment in long-term energy initiatives

and advanced technologies.
Reduce barriers to increasing domestic supplies. Rely on market forces to allocate products. Refrain from new taxes that make it more expensive
to develop our domestic supplies.
Support the need to participate actively in global energy

markets rather than isolate the U.S.
What is needed today are policy choices to increase, not decrease, energy production. Barriers to oil and natural gas production only contribute to volatile energy prices, slower economic growth, and lost American jobs. An economic study undertaken for API last year by CRA International found that nearly 5 million jobs could have been lost by the year 2030 had harmful energy proposals in Congress been enacted. Fortunately, most of these proposals did not survive. But they remain very real threats this year in Congressparticularly punitive taxes. Our nations past history is replete with short-term energy fixes and searches for silver bullets to solve our nations energy problems. Price controls, allocation schemes, limitations on natural gas, picking winners and losers among fuels, and punitive taxes have all been tried by government and none have worked to benefit the consumer.
We should learn from the past and take some positive steps to ensure we meet Americas energy needs in the decades ahead. As a society, we cannot remain passive to energy, nor to the environment, nor to economic growth. Each will fall short of its fullest promise, absent constructive industry/government partnerships committed to providing our nation with a workable energy security policy. What we need is a public policy framework to ensure future energy security for our nation. We need elected and appointed officials who understand the energy challenges we face. We need a greater commitment to increased energy efficiency. We need to diversify our energy resources, drawing upon the full range of energy sources, including alternatives. We also need to increase and diversify our oil and natural gas supplies, both within this country and abroad. And, we need to enhance energy technologies, remaining on the cutting edge of advanced technology. We need to get it right on energy. Too much is at stake for our nation to do otherwise.

Page 32
FOR MORE INFORMATION PLEASE VISIT
www.energytomorrow.org www.api.org

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Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

April 10, 2008

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Future Global Energy Demand

Source: IEA, World Energy Outlook, 2007

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

The Myth of Big Oil (As a Percent of Proven Reserves)

Source: J. Robinson West, Chairman, PFC Energy, 9/21/05

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

2006 Largest Oil and Gas Companies (percent of worldwide reserves)

2006 Largest Oil and Gas Companies (percent of worldwide production)

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Diesel, Gasoline and Crude Prices

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Key Factors Affecting Markets

Iraq Insurgency Value of U.S. Dollar

Nigerian Civil Strife

OPEC Decisions Venezuela

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

World Oil Consumption

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

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

OPEC Surplus Crude Oil Production Capacity

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

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

EIA Price Forecast

West Texas Intermediate

Average Regular Pump Price

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

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Commodity performance year to date, January 1 through March 31 (2008)

Source: Deutsche Bank Global Markets Research, Bloomberg

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Source: Federal Reserve Bank of St. Louis, EIA, NYMEX

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

What consumers are paying for at the gasoline pump

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

Return on Investment (net income/net investment in place)

Where our investments are going

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

2007 Earnings by Industry (net income/sales)

Americas Oil and Natural Gas Industry

The Truth About Oil and Gasoline: An API Primer

29.5% Mutual Funds and Other Firms