Released on January 9, 2008
(Next Release on January 16, 2008)

Suspicious Minds
Yesterday was the 73rd anniversary of the birth of Elvis Presley. One of his many hits was the song “Suspicious Minds.” On January 8, EIA released its latest Short-Term Energy Outlook (STEO), which includes our first short-term forecast for 2009. The STEO projects a moderate decline in oil prices, starting in late 2008 and extending into 2009. In part, the projected price decline is predicated on our forecast of substantial increases in non-OPEC oil production, which we expect to rise by 860,000 barrels per day (bbl/d) in 2008 and a further 1.55 million bbl/d in 2009, far more than the growth in recent years. Given the recent track record by many analysts, including EIA, of over-predicting non-OPEC oil production growth, some readers may be somewhat suspicious regarding this feature of our outlook. This edition of TWIP discusses our non-OPEC oil production forecast and identifies specific projects that help support our current view.

Most oil market analysts, including EIA, have pointed to the slow growth in non-OPEC production in recent years as a key cause of the current high oil price environment. The imbalance between growth in world oil consumption and non-OPEC oil production has led to greater reliance upon production by OPEC and a drawdown in OECD commercial inventories. These conditions have contributed to upward pressure on world oil prices in recent years (see Why Are Oil Prices So High?, supplement to November 2007 Short-Term Energy Outlook).

During 2008 and 2009, many new oil production projects are scheduled to come online (in some cases projects don’t come online until late 2009, so the bulk of their impact occurs 2010 and beyond). Production growth will likely be concentrated in a few countries, particularly Brazil, the United States, and Russia. EIA expects oil production in those three countries to grow by 1.61 million bbl/d during 2008-2009, representing two-thirds of total non-OPEC net production growth over that period (see Outlook Table 3b for more details ). A few large projects represent the majority of growth in these countries, including:

• Brazil: Golfinho II, Roncador P-52, Roncador P-54, Golfinho III, Marlim P-51, Marlim P-53, Frade, BC-10



• United States: Atlantis, Thunder Horse, Tahiti



• Russia: Sakhalin I, Sakhalin II, Vankorskoye, Yuzhno-Khylchuya

Non-OPEC supply growth includes new projects as well as the continued ramping up of production at fields that came online at the end of 2007. Not all non-OPEC producers are expected to see net production increases, In particular, oil production in the United Kingdom is expected to decline by 290,000 bbl/d during 2008-2009, while Mexico’s production is expected to decline by 240,000 during that period.

Because our non-OPEC production forecast depends on a relatively small number of key projects, it is very sensitive to any delays in project schedules and we will be watching these projects carefully. Our forecast does include allowances for project delays, but delays are difficult to predict with much accuracy. Certainly, high world oil prices provide a strong incentive to complete projects on schedule. Still, project delays can arise due to numerous factors, such as delays in procuring necessary materials. All else being equal, if non-OPEC production growth rates fall short of current expectations, then world oil prices would be higher than we currently project.

Residential Heating Fuel Prices Rise Again
Residential heating oil prices maintained their momentum with another gain for the period ending January 7, 2008. The average residential heating oil price increased by 5.4 cents last week to reach 339.5 cents per gallon, setting a fourth consecutive nominal high and showing an increase of 98.0 cents from this time last year. Wholesale heating oil prices increased by 3.5 cents, reaching 275.7 cents per gallon, which was an increase of 107.3 cents compared to the same period last year.

During the fourteenth week of the 2007/08 heating season, the average residential propane price rose for the fourteenth consecutive week, by 3.6 cents, reaching yet another nominal high at 256.0 cents per gallon. This was an increase of 57.4 cents compared to the 198.6 cents per gallon average for this same time last year. Wholesale propane prices decreased by 1.4 cents per gallon from 166.5 to 165.1 cents per gallon. This was a gain of 66.6 cents from the January 1, 2007 price of 98.5 cents per gallon.

U.S. Average Retail Gasoline Price Leaps Again
The highest January price ever was registered as the U.S. average retail price for regular gasoline shot up 5.6 cents to 310.9 cents per gallon as of January 7, 2008, 80.3 cents above a year ago. Prices were up throughout the country with the Midwest showing the largest regional increase of 6.9 cents to 310.1 cents per gallon, 89.1 cents per gallon more than last year. The East Coast rose 5.9 cents to 312.4 cents per gallon. The Gulf Coast jumped 5.7 cents to 297.7 cents per gallon. The Rocky Mountains gained 2.9 cents to settle at 295.0 cents per gallon, the lowest regional price. The West Coast continued as the highest regional price, rising 2.9 cents to 324.7 cents per gallon. The average price for regular grade in California climbed to 332.8 cents per gallon, 3 cents more than last week.

The retail diesel fuel price increased for a second straight week, to 337.6 cents per gallon, 3.1 cents over a week ago and 83.9 cents higher than last year. All regional prices were higher with the largest regional increase occurring on the East Coast, up by 3.7 cents to 343.6 cents per gallon. The New England sub-region is at 364.4 cents per gallon, over 97 cents more than a year ago. The Midwest rose 3.6 cents to 334.5 cents per gallon. The Gulf Coast price grew by 2.5 cents to 331.8 cents per gallon. The Rocky Mountain price moved up by 0.7 cent to 327.6 cents per gallon and is the lowest regional price. The West Coast added 2.3 cents to settle at 347.4 cents per gallon. California prices moved up 3.5 cents to 352.6 cents per gallon.

Propane Inventories Plunge Lower
Mixed weather over portions of the Nation and apparent restocking of secondary and tertiary supplies contributed to last week’s primary supplies of propane plunging lower by over 3.1 million barrels. As of January 4, 2008, propane inventories stood at an estimated 51.2 million barrels. Gulf Coast inventories accounted for most of the weekly drop with a 2.7 million-barrel decline that most likely reflected a major re-supply effort by primary stockholders ahead of the peak heating months of January and February. In other regions, East Coast inventories fell by nearly 0.3 million barrels, while inventories in the Midwest posted a small gain of 0.1 million barrels. Last week, the combined Rocky Mountain/West Coast region moved down by 0.3 million barrels. Propylene non-fuel use inventories posted a gain of 0.6 million barrels last week to account for a larger 4.4 percent share of total propane/propylene inventories, compared with 3.1 percent from the prior week.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.