Backstopping DA: Answers Page 1 of 11

Zack Voell Arx Axiom/Vector

Backstopping DA: Answers

Zack Voell

Index
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Zack Voell Arx Axiom/Vector

1. International Demand Solves

WSJ 08 - Even if OPEC floods the market, China will absorb/buy

all the oil
David Gaffen, “Oil Turns on China Decision”, Wall Street Journal, June 19, 2008,
http://blogs.wsj.com/marketbeat/2008/06/19/oil-turns-on-china-decision/, <accessed March 19,
2010>, (ZV)
“For ages the assumption among the oil bulls has been that the rapid industrial
growth in China would more-than-fill the void of demand declines in the U.S. and
Europe, and that’s in part what’s kept oil prices surging while gasoline consumption
declines here [in the US]. But that leg of the argument has been hobbled, and it’s having an
impact on crude, which is down by more than $4 in trading. China said it would raise domestic
gasoline and diesel prices by 17% to 18% by reducing its usage of subsidies, following moves
by other Asian nations, including India, Malaysia, and Indonesia.”

MSNBC 05 - Any excess oil supply is already being consumed

by China and India, and this will continue
John W. Schoen, [Senior producer], “OPEC says it has lost control of oil prices”, MSNBC, March
16, 2005, <accessed March 22, 2010>, http://www.msnbc.msn.com/id/7190109/, (ZV)
“And even as President Bush expressed concern Wednesday about rising oil prices, he cited
tight global supplies -- not OPEC policies -- for the price surge. “I think if you look at all the
statistics, demand is outracing supply and supplies are getting tight. And that’s why you’re
seeing the price reflected,” Bush said. OPEC's admission that has lost control of oil prices
hasn’t eased political pressure on the cartel. On Tuesday, several oil ministers said they had
received calls from U.S. Energy Secretary Sam Bodman. Sen. Ron Wyden (D Ore.) said Tuesday
he’s not convinced that OPEC’s hands are tied by global demand reaching the limits of
production capacity. “This is their claim,” said Wyden. “But the fact of the matter is that
nobody knows what their capacity is.” Though data on OPEC’s oil production capacity
have always been hard to come by, there’s little disagreement on the rapid growth of
global consumption -- especially in China and India. With worldwide demand this year
rising by roughly 2 million barrels per day, whatever excess capacity is out there will
be gone soon, according to Marshal Adkins, an oil industry analyst at Raymond James.”

NYT 08 - Even if US consumption goes down, the rest of the

world will fill the gap
JAD MOUAWAD “Amid High Oil Prices, Danger Signs in Production”, The New York Times, April
28, 2008, http://www.nytimes.com/2008/04/28/business/worldbusiness/28oil-WEB.html?
pagewanted=2, (ZV), brackets added
“At the same time, oil consumption keeps expanding at a faster clip than production.
Demand is forecast to increase this year by 1.2 million barrels a day, to 87.2 million
barrels a day. In the United States, the world’s most oil-thirsty nation, consumption
has actually fallen a bit because of the economic slowdown. But that drop is being
offset by growth in other countries. World consumption is projected to rise 35
percent, to around 115 million barrels a day, in the next two decades. Most of the
growth will come from China, India and oil-producing countries in the Middle East,
where retail fuel prices are subsidized, encouraging wasteful consumption. “What is disturbing
here is that things seem to get worse, not better,” an analyst at Goldman Sachs, David Greely,
said. “These high prices are not attracting meaningful new supplies.” Oil rose 23 cents Monday
to $118.75 on the New York Mercantile Exchange. Longer-term oil futures, dated for 2013,
now trade at $108 a barrel, a strong indication that investors see little cause for
prices to drop in the next five years — partly because of low expectations about
production growth.”
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Paavo Suni, Anthony de Carvalho - The Asian market’s demand
will continue to increase over 30% a year
Paavo Suni, [Professional Researcher], Anthony de Carvalho, [Professional Researcher], “Oil
Prices Have Risen Permanently, But Remain Unstable”, ETLA, <accessed March 23, 2010>, [no
original date], http://www.etla.fi/files/1490_FES_05_4_oil_prices_have_risen_permanently.pdf,
(ZV)
“Thanks to two decades of strong economic expansion, China has become a major player in
China’s share in world oil consumption was
the world economy.
nevertheless only 8.2 percent in 2004. That same year, however,
China’s share of world demand growth was as much as 29 percent.
Asia as a whole explained 40 percent of the increase in world demand.
For purposes of comparison, the U.S. share of growth was slightly smaller than China’s, even
though America’s share of consumption is around 25 percent. The strength of demand
for crude oil came as a surprise to the markets, which is visible in the
increase in crude oil futures price curves. Markets interpreted the
change as being permanent, since the quotations declined only slightly
over time. This reflects the IEA’s projections that, given current trends, significant oil-sector
investments particularly in the Middle East and northern Africa will have to be made in order to
raise crude oil supply. Earlier, futures prices tended to converge towards much lower levels.”
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2. Lack of Infrastructure Solves

USA Today 08 - Oil refineries can't keep pace with demand, and
especially if the market was flooded with new/cheap oil—No
new refinery has been built in the United States in the past 32
years
Richard Wolf and Paul Davidson, “Which way out of rising gasoline costs?”, USA Today, June
13, 2008, http://www.usatoday.com/money/industries/energy/2008-06-12-
gasolineprices_N.htm, (ZV)
“Oil refineries can't keep pace with demand No new refinery has been
built in the United States in the past 32 years. Capacity at existing
refineries has increased about 1% a year, failing to keep pace with
demand, says Aaron Brady, a Cambridge Energy Research Associates analyst. Until
recently, the tight supplies and surging demand allowed refiners, such as major oil companies,
to charge a premium of about $9 a barrel of oil, or 21 cents per gallon of gasoline, Brady says.
This year, however, high crude oil prices and lower U.S. demand have
forced refiners to live with razor-thin margins. That means if crude
prices fall, some of the drop could be offset by higher profits for
refiners. The good news: Refiners worldwide are sharply expanding capacity. Oil consortium
Motiva plans to double capacity at its Port Arthur, Texas, facility by 2010, creating the largest
U.S. refinery. Most of the new equipment is designed to process heavy
crude oil, which is more abundant and cheaper than light, sweet crude
but more expensive to refine. The bad news: Refining makes up just 10%
of the price of gas, so boosting capacity won't help much. "Adding
refining capacity is not going to have a significant impact on the price
of gasoline," says Kevin Lindemer of financial analysts Global Insight. And much of
that refining infrastructure will take three to five years to build, says
analyst Robert Linden of Pace Global Energy Services.”

NYT 08 - The biggest oil producing countries are having trouble

increasing output
JAD MOUAWAD “Amid High Oil Prices, Danger Signs in Production”, The New York Times, April
28, 2008, http://www.nytimes.com/2008/04/28/business/worldbusiness/28oil-WEB.html?
pagewanted=2, (ZV), brackets added
“A key reason that supply is not rising to meet demand is that producers outside of
the OPEC cartel — countries like Russia, Mexico and Norway — have been showing
troubling signs of sluggishness. Unlike the Organization of the Petroleum Exporting
Countries, whose explicit goal is to regulate supply to keep prices up, the other countries are
the free traders of the international market, with every incentive to produce flat-out at a time
of high prices. But for a variety of reasons, like sharply higher drilling costs and
nationalistic policies that restrict foreign investments, these countries are finding it
difficult, if not impossible, to increase output. They seem stuck at about 50 million
barrels of oil a day, or 60 percent of the world’s oil supplies, with few prospects for
growth. Countries that are not members of OPEC have been the main source of
production growth in the last three decades, as new fields were discovered in Alaska,
the North Sea or West Africa. After the collapse of the Soviet Union, new opportunities
emerged in Russia and the Caspian Sea. Analysts at Barclays Capital said last week that non-
OPEC supplies were “seemingly dead in the water.” Goldman Sachs raised similar concerns
last month, saying that growth in non-OPEC supplies “can no longer be taken for granted.”
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Paavo Suni, Anthony de Carvalho - Increasing oil production is
costly because demand continually increases the need for
expansions.
Paavo Suni, [Professional Researcher], Anthony de Carvalho, [Professional Researcher], “Oil
Prices Have Risen Permanently, But Remain Unstable”, ETLA, <accessed March 23, 2010>, [no
original date], http://www.etla.fi/files/1490_FES_05_4_oil_prices_have_risen_permanently.pdf,
(ZV)
“Indeed, a major problem plaguing the energy sector is the rapid pace of
demand growth, which, if it is to be met, requires massive capacity
expansions, since crude oil production, among others, is already running
near full capacity. It is difficult to imagine how demand growth could
slow significantly, especially since transportation is so dependent on
fossil raw materials. It is also difficult and expensive to switch quickly to alternative
energy sources. The problem with fossil fuels is that raising oil production
is difficult and costly and that they emit substantial carbon dioxide
when burned. Global warming has triggered efforts to contain growth
in carbon dioxide emissions. Coal, natural gas, nuclear power, and biomass energy
have seen their shares in total energy consumption rise since the oil crises of the 1970s.”

IMF 05 - Because of a lack of abundant refineries, the only

thing that will happen with oil prices is they will increase
Sam Ouliaris et al, [Senior Economist at the Research Department of the IMF] International
Monetary Fund, “The Structure of the Oil Market and Causes of High Prices”, September 21,
2005, http://www.imf.org/external/np/pp/eng/2005/092105o.htm, (ZV)
“Although many factors have contributed to higher crude oil prices, a combination of strong
(and somewhat unexpected) global demand for oil since 2003 and expectations of continuing
future tightness is the major cause. These demand/supply imbalances reflect robust global
activity, an apparent shift in the demand for oil by China2 and other emerging economies, and
limited investment in the oil sector in the past two decades. Naturally, given the tightness in
the oil market and uncertainties about demand and supply, factors such as geopolitical
developments, fears of potential supply disruptions, and speculation have also all played a part
in price movements, but largely through their impact on expectations regarding future
fundamentals. Refinery bottlenecks have put additional pressures on
petroleum product prices—as demonstrated by the significant rise in
gasoline prices following the 10 percent reduction in U.S. refinery
capacity caused by Hurricane Katrina.”

NYT 08 - Supply and demand curves and backstopping threats

no longer apply to oil
JAD MOUAWAD “Amid High Oil Prices, Danger Signs in Production”, The New York Times, April
28, 2008, http://www.nytimes.com/2008/04/28/business/worldbusiness/28oil-WEB.html?
pagewanted=2, (ZV), brackets added
“As oil prices soared to record levels in recent years, basic economics suggested that
consumption would fall and supply would rise as producers opened the taps to pump more. But
as prices flirt with $120 a barrel, many energy specialists are becoming worried that neither
seems to be happening. Higher prices have done little to attract new production or to
suppress global demand, and the resulting mismatch has sent oil prices spiraling
upward. “According to normal economic theory, and the history of oil, rising prices
have two major effects,” said Fatih Birol, the chief economist at the International
Energy Agency, which advises industrialized countries. “They reduce demand and they
induce oil supplies. Not this time.”
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3. Oil Reserves Prevent

Bloomberg 08 - OPEC's spare oil capacity is shrinking

Grant Smith, “IEA Says Lower OPEC Capacity to Keep Market `Tight' (Update2)”, Bloomberg
News, July 1, 2008, http://www.bloomberg.com/apps/news?
pid=20601086&sid=a5LCOJnfgLI4&refer=latin_america, (ZV)
“The International Energy Agency said a drop in OPEC spare capacity
and delays to production projects will keep the oil market `tight.''
Lower-than-expected output growth and a ``negligible'' OPEC supply
cushion may counter the impact of record prices on consumption. The
Paris-based adviser to 27 oil consuming nations cut more than 3 million barrels a day from its
2012 global demand forecast in its Medium-Term Oil Market Report today. ``With oil
prices hitting $140 we are clearly in the third oil shock, with prices
affecting economic growth,'' IEA Executive Director Nobuo Tanaka said
at the World Petroleum Congress in Madrid today. ``Truck drivers are going on strike.
Airlines are closing down.'' While the IEA expected its barrel-counting analysis would show
weaker demand, the ``surprise'' was that its supply forecast also needed to be cut, Tanaka
said. Growth in global supply capacity will peak at about 2.5 million barrels a day in 2010,
slowing to less than a million a day for the following three years, the report said. The oil
market will be ``tighter'' than previously expected because many
major oil projects are experiencing ``slippage'' of 12 to 15 months in
their completion time, he said.”

Reuters 08 - Saudi oil cannot sustain long term oil flooding

“OPEC's Ability to Tame Oil Prices Is Limited”, Reuters, January 9, 2008, <accessed March 24,
2010>, http://www.cnbc.com/id/22570967/, (ZV)
“Right now, Saudi Arabia has around 2.3 million bpd of spare capacity,"
a Saudi source said. "We could go to 11.3 million bpd and sustain it. That would not be just a
surge and would not need any extra effort. Our spare capacity has been tested before on many
occasions." The kingdom was pumping as much as 9.6 million bpd in November 2005, and cut
back to around 8.6 million bpd in March last year. Current output stands at around 9 million
bpd. But some experts, including a former senior official at Saudi
Aramco, the state oil company, question how long a big boost in supply
from mothballed capacity could be maintained. "The spare capacity
they say they have is all there, so bringing it on line is not a problem,"
said Sadad al-Husseini, a former top official at state oil giant Saudi Aramco. "The question
is how long can you sustain it?”

NYT 04 - OPEC is realizing that it doesn’t have the ability to

flood the market with cheap oil
JAD MOUAWAD, “OPEC Finds Few Options to Put a Lid on Oil Prices”, New York Times,
September 13, 2004, <accessed March 24, 2010>,
http://www.nytimes.com/2004/09/13/business/worldbusiness/13oil.html?_r=1, (ZV)
“With crude oil setting a price record almost daily in August, the cartel tried to persuade the
markets that it was working overtime to step up supply. But with most of its 11 members
already pumping at full capacity, the promise had a hollow ring; traders shrugged, and crude
prices climbed to within pennies of $50 a barrel in New York before slipping back into the mid-
$40's. Crude oil fell on Friday to $42.81 a barrel in New York, its lowest level since August.
Though it has a third of the world's oil production, half of oil exports and three-quarters of
known reserves, OPEC is finding that its ability to influence prices has
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largely been exhausted, at least when it comes to holding them down.
"Prices are moving independently from whatever OPEC decides," said Nordine Ait-Laoussine, a
former Algerian oil minister and OPEC president. "OPEC can't do anything more today." The
cartel's members are producing 30 million barrels a day, well beyond its formal ceiling of 26
million barrels and its highest total in 25 years. But it has not been enough to keep its
benchmark price within its target range of $22 to $28 a barrel. (The group's benchmark is an
average of seven grades of oil that typically runs a few dollars below the most widely followed
market price for light sweet crude.) With most members producing all the oil
they can, the oil ministers have few options to consider when they
meet in Vienna.”
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4. Political Instability

Reuters 08 - Political turmoil in some OPEC nations has

crimped the group's reserve production in recent years
“OPEC's Ability to Tame Oil Prices Is Limited”, Reuters, January 9, 2008, <accessed March 24,
2010>, http://www.cnbc.com/id/22570967/, (ZV)
“Political turmoil in some OPEC nations has crimped the group's
reserve production in recent years. Around 15 percent of Nigeria's
installed oil output capacity of around 3 million bpd is shut down
because of political violence in the country's volatile Delta region.
Insurgency and insecurity in Iraq, holder of the world's third-largest oil
reserves, have prevented the country from revamping its industry and
reaching ambitious production targets. And Venezuela, in the late 1990s an
OPEC member that pumped far beyond agreed levels, has lost over 500,000 bpd of
output that it never recovered after a strike that crippled the oil
industry in 2003. While some analysts still ascribe a small amount of spare capacity to
the country, others doubt that it would hold oil back with the price at $100.”
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5. OPEC has no control over oil prices

MSNBC 05 - OPEC has no control over oil prices anymore

John W. Schoen, [Senior producer], “OPEC says it has lost control of oil prices”, MSNBC, March
16, 2005, <accessed March 22, 2010>, http://www.msnbc.msn.com/id/7190109/, (ZV)
“Despite a pledge by OPEC ministers to increase oil production, don't expect much of a break
on oil prices. With crude oil prices hitting a record $56 a barrel Wednesday, OPEC ministers
meeting in Iran have been grappling with a problem they haven’t confronted in the cartel’s 45-
year history. In the past, OPEC tried to cool overheated prices by pumping
more when supplies got too tight. But most OPEC producers say
they’re already pumping as fast as they can. And despite the high cost
of a barrel of crude, world demand shows no signs of slowing. To help stop
the surge in prices, OPEC ministers agreed to pump an extra half million barrels of oil a day
beginning April 1. OPEC said it would consider pumping more later if the extra oil doesn't push
prices lower. But even before the decision was announced, some ministers had openly
expressed doubts that the move will do any good, saying they’ve run out of options
in trying to rein in the price of crude. Global oil demand has taken up
most of the slack in extra OPEC capacity. Consumption is now believed by many
analysts to be pressing up against the limits of what the world can produce. Saudi Arabia is the
only country believed to have any surplus production left, and even then the Saudis are
pumping close to 90 percent of capacity, according to the U.S. Department of Energy. "There is
not much we can do,” Algerian Oil Minister Chakib Khelil told reporters Tuesday in Isfahan,
Iran, the site of Wednesday’s meeting. "OPEC has done all it can do.” Qatar Oil
Minister Abdullah al-Attiyah said. “This is out of the control of OPEC." The oil
markets seem to agree. After word came that OPEC pledged to pump harder, oil prices surged
Wednesday on concerns about the latest weekly reports on inventories. Crude for April delivery rose $1.41 to settle at
$56.46 a barrel Wednesday, the highest price for the commodity on the New York Mercantile Exchange since it introduced
crude oil futures trading in March 1983. Crude prices soared after the EIA reported that domestic gasoline stocks in the
March 11 week fell 2.9 million barrels to 221.4 million barrels -- nearly three times the decline forecast by analysts. A year
ago, gasoline stocks stood at 202.4 million barrels. And even as President Bush expressed concern Wednesday about
rising oil prices, he cited tight global supplies -- not OPEC policies -- for the price surge. “I think if you look at all the
statistics, demand is outracing supply and supplies are getting tight. And that’s why you’re seeing the price reflected,”
Bush said. OPEC's admission that has lost control of oil prices hasn’t eased political pressure on the cartel. On Tuesday,
several oil ministers said they had received calls from U.S. Energy Secretary Sam Bodman. Sen. Ron Wyden (D Ore.) said
Tuesday he’s not convinced that OPEC’s hands are tied by global demand reaching the limits of production capacity. “This
is their claim,” said Wyden. “But the fact of the matter is that nobody knows what their capacity is.” Though data on
OPEC’s oil production capacity have always been hard to come by, there’s little disagreement on the rapid growth of
global consumption -- especially in China and India. With worldwide demand this year rising by roughly 2 million barrels
per day, whatever excess capacity is out there will be gone soon, according to Marshal Adkins, an oil industry analyst at
Raymond James “Maybe this year, but certainly in ‘06 there won’t be any excess capacity,” he said. “We haven’t been in
that kind of market in our lifetime. You’ve always have more capacity than demand.” That’s little solace to energy
consumers, who are watching rising crude oil prices push pump prices to record levels. Though U.S. economy has yet to
show signs of slowing and inflation remains low, a continued rise in oil prices will eventually slow growth, analysts say.
“We will find the price level that will slow demand,” said Adkins. “It may be $60; it may be $100. I think it’s fair to say its
going to be in that price band.” Analysts say OPEC typically eases back on production at this time of year because
demand slows as the winter heating season winds down and drivers haven’t yet hit the road for summer vacations. But
with prices nearly double levels just 18 months ago, production cutbacks are unlikely, say analysts. “OPEC’s only real
option is to maintain the status quo for now," said Smith Barney Citigroup oil analyst Doug Leggate in a recent research
Oil prices have also risen for a variety of other factors over which
report.

OPEC has no control, according to Adkins. Tanker prices haven jumped from $3 a barrel
to $10 a barrel during the recent run-up in crude prices. To increase output, Saudi Arabia has
been selling lower grade crude, which has boosted the price of more desirable light, sweet
crude. And the falling dollar has effectively cut the value of oil payments to OPEC producers.
“When were looking on our screens seeing $45 oil, Saudis are cashing checks for $25 oil,” he
said. “So in their mind -– their $25 price (target) -– that’s what they’re getting.” As rising
demand has approached the world’s production limits, OPEC’s decisions have less
impact on prices. In the past, the cartel has "controlled" oil prices (or tried to) by adding
or withholding production. By holding back oil, the market remained "tight" and prices stayed
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relatively high. The "oil shortages" of the 1970s were engineered by OPEC -- not the result of a
true lack of supply.”
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6. Turn: OPEC Won’t Flood the Market

TIME 08 - OPEC wont flood – they want to save reserves to

continue making money for decades
Vivienne Walt, “OPEC: Gas Prices Will Stay High”, TIME Magazine, April 11, 2008,
http://www.time.com/time/world/article/0,8599,1730117,00.html, <accessed March 24,
2010>, (ZV)
“Analysts don't absolve OPEC of blame for keeping prices sky-high. They have voted
three times since last fall against raising production, despite direct appeals for relief
to Naimi from President George W. Bush and Vice President Dick Cheney. That's partly
because they fear they could some day run dry of oil, leaving future generations
without the key source of Arab wealth. "It's understandable," says Fatih Birol, chief
economist of the International Energy Agency, a Paris-based watchdog organization for
big oil-consuming countries. "Oil-producing countries have policies not to run down their
reserves."