Peak oil review - 11 April

1. Oil and the Global Economy
NY oil hovered around $108 a barrel from Monday through Wednesday last week and then surged on Thursday and Friday to close the week at $112.79. In London Brent crude moved even higher closing out the week at $126.65, the highest close since July 2008 and only $17 below the all-time high. There were many reasons for the sharp price increase, most of which seem destined to be factors for some time to come.

Higher interest rates in Europe depressed the dollar thereby moving oil prices higher. The prospects of further supply interruptions in the Middle East and Africa increased last week as there was violence in Syria, Yemen, Egypt, and Gaza. In Libya Gadhafi’s forces began destroying oil production facilities to prevent the pro-democracy rebels from selling the oil abroad. Government forces also advanced against the rebels despite NATO air attacks although over the weekend they were driven back. All this suggests that a stalemate is emerging in Libya and that it will be a long time before much Libyan oil returns to the world markets.

Despite another round of reassurance by Saudi officials, concern remains that increased oil production by the Saudis, Kuwait, and the UAE will not be enough to offset the loss of 1.3 million b/d of Libyan oil exports, given the increased demand from Japan and what still appears to be robust Chinese demand. Retail oil and gas prices in China are still lagging well behind the rapid jump in international oil prices, raising the possibility that Chinese refiners will slow unprofitable refining operations as they did in 2007-2008.

Elsewhere, the Nigerian elections are finally underway and with them the possibility that their outcome could lead to renewed unrest and interruptions in oil exports. Japan’s troubles continue with aftershocks again temporarily shutting down numerous power plants. The prospects increase that closing down the Fukushima nuclear reactors will go on for many years and that there may be additional even more serious radiation leaks. Iraqi oil exports were down 2 percent in March due to bad weather and yet another attack on the oil export pipeline.

Retail gasoline prices in the US continue to spiral upwards. In some areas they are already approaching levels seen in July 2008 when oil spiked to $147 a barrel. The AAA says the average cost of regular gasoline in the US is now $3.77 a gallon and $4.16 in California, up 22 cents in the last month. In NY gasoline futures jumped by 7.5 cents on Friday alone indicating that retail gasoline prices in the US will climb further this week.

2. Conflict in the Middle East and North Africa
Dissent and violence picked up across the Middle East and North Africa last week suggesting that the threat of additional disruptions of oil exports continues to grow. Events took a turn for the worse last week in Syria and Yemen with government forces shooting down protesters in the streets. The Syrian protests are thought to be the largest to date, suggesting that the anti-government protesters are reaching new levels of coordination.

Although they are rather minor players in the oil export markets, Syria produces about 368,000 b/d and exports 148,000 and Yemen produces about 300,000 b/d and exports about 150,000. An overthrow of either or both of these governments would have important implications for the regimes in Oman, Bahrain and ultimately Saudi Arabia. The situation in Egypt also deteriorated last week with Egyptian army troops clashing with demonstrators.

In Gaza there were was more trouble after the Palestinians fired rockets into Israel and the Israelis retaliated with airstrikes. The situation was quieter than usual in Bahrain last week, but there are reports that some 800 Shiite activists have been arrested and that some have died while being interrogated.

US Defense Secretary Gates met with the Saudi king in an attempt to reassure the Saudis that US remains a friend despite US support for pro-democracy revolutions. While visiting Iraq, Gates suggested that American troops could remain in Iraq for years which led to tens of thousands of supporters of the anti-American radical Shiite Moktada al-Sadr taking to the streets demanding an American withdrawal.

In Libya, the departure of the first tanker loaded with Libyan oil in 18 days from the pro-democracy-held port of Tobruk raised hopes that Libyan oil would soon be reaching he market in increasing quantities. This hope was dashed when Gadhafi’s forces sabotaged the oil fields supplying oil to the rebel-held ports. While Gadhafi’s forces in the East have abandoned much of their heavy military equipment and are moving around in civilian vehicles to avoid NATO airstrikes, they are making progress in pushing back the disorganized mob of ill-equipped but enthusiastic pro-democracy fighters that oppose them along the coastal highway. Over the weekend this strategy broke down when NATO aircraft located and destroyed 25 of Gadhafi’s tanks engaging the opposition forces.

So far NATO intervention has not been sufficient to enable the pro-democracy forces to drive Gadhafi forces out of Eastern Libya, but has been enough to keep government troops out of Benghazi and possibly Misrata. Over the long run, NATO airstrikes will gradually weaken the offensive capabilities of Gadhafi’s forces and western humanitarian assistance of food and medical supplies will sustain rebel controlled areas. All this is going to take a while and the likelihood that Libya’s capability to export significant quantities of oil anytime in the future is not good.

3. Japan
The implications of Japan’s earthquake, tsunami, and nuclear radiation leaks still have many years if not decades to run. For the immediate future, the Japanese will be importing increased quantities of fossil fuels and will be exporting fewer finished products due to power shortages and the efforts to clean up after the tsunami. Dealing with the leaking reactors could take a large share of Japan’s industrial strength if the situation gets much worse and more evacuations are necessary.

Last week US and UN nuclear specialists warned after visiting Japan that the situation at Fukushima could get much worse before it gets better as the Japanese continue to pour water into the facility in an effort to cool the damaged reactors and spent fuel pools. If large amounts of radiation are released, the Japanese may be forced to enlarge the evacuation zone around the plant. The area around the plant has already been declared unfit for agriculture and the increasing amounts of radiation being released into the sea is already raising concerns, both in Japan and China, about the safety of seafood.

On Friday Tokyo announced that its economy was in a “severe” condition as much industrial production has been slowed by power and parts shortages. A reduction in the export of Japanese parts and finished products is already having worldwide implications for economic growth. Some observers are worried that the economic situation will get worse this summer as power-hungry air conditioning comes online.

The broader implications of Japan’s nuclear disaster center on the dangers of using nuclear power at all. Despite a stream of reassurances that “it can’t happen here”, “we don’t have tsunamis”, an undercurrent seems to be developing that nuclear power generation, at least in its present form, is not worth the risks. Much will depend on the success the Japanese have in working themselves out of the current predicament over the next year or so. Should there be still larger releases of radioactivity requiring evacuations; Japan’s economy could be set back for years if not decades. This would give other nations with ambitions to expand their nuclear programs much to think about.

4. The fear factor
As oil prices move higher and with no end in sight, journalists are beginning to address the question of just what is in store for the US and global economies. Optimists, mostly associated with the financial services industry and its publications, continue to talk about how the price increases will end soon. They maintain that some $15–20 of oil’s current price comes from the market’s fear that unrest in the Middle East will spread to major oil exporters and that shortages will develop. The loose Federal Reserve lending policies are cited as contributing to the problem by allowing bankers to borrow money for speculation at little to no cost. In general, however, they liken the current situation to that of 2008 when oil prices quickly rose to $147 a barrel and then collapsed even more quickly by some $100 a barrel as demand for oil waned.

Implicit in these scenarios is that oil prices will rise and fall again so quickly that there will be not be time for any real economic damage to occur. In the last few weeks, these commentators have begun pointing to a small decline in US gasoline consumption as evidence that prices will be falling soon.

Others are not so sure that the recent price increases are mostly speculation. Unlike three years ago, there currently is some degree of domestic unrest across most Middle Eastern oil-producing states which shows no sign of subsiding. The cessation of Libyan oil exports has used up a large piece of OPEC’s spare capacity leaving the cartel with little room to increase production should another oil exporter fall prey to domestic unrest.

In short there would seem to be little similarity between events today and those of 2008. There is, of course, a speculative component in current oil prices and given the global political and economic situation it would seem to be justified. Given the size and vigor of the demand for oil in the world today, the likely reduction in the consumption of gasoline by US motorists from the current already reduced level is unlikely to be significant.

Quote of the week
“More aggressive clean energy policies are required, including the removal of fossil fuel subsidies and implementation of transparent, predictable and adaptive incentives for cleaner, more efficient energy options.”
— The International Energy Agency’s Clean Energy Progress Report

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

The IEA called for scrapping $312 billion in fuel subsidies in a bid to promote clean energy sources. Both developed developing countries and countries must cut their carbon dioxide emissions, according to its Clean Energy Progress Report. Renewables are gaining traction, but fossil-fuel demand is growing faster. (4/7, #10)
The IMF warns that a significant strain on oil supply could have a detrimental effect on world growth. But a slowdown in production over the next 20 years may not be a “major constraint” on global economic growth provided it is “moderate.” A new analysis says market tensions are increasing between growing demand for oil from fast growing emerging market economies like China and production constraints due to maturing oil fields. (4/8, #5, 6, 7)
Japan’s government has told businesses and domestic users to cut power usage by 20–25% from July–September. Industry had suggested alternatives such as “rotational output suspension” and a cap on power usage by companies. (4/9, #19)
Serious unrest in Saudi Arabia could push oil prices as high as $300 a barrel, says former Saudi oil minister Yamani. Recent spending by King Abdullah will not defuse potential trouble at home, according to an energy consultant advising foreign oil firms in the region. (4/6, #5)
Saudi Arabia aims to pursue renewable and nuclear energy to help reduce by half the crude and natural gas it burns now to generate electricity. The country expects domestic power demand to triple in the next 20 years. Energy other than oil, gas, and other fossil fuels may account for more than half of the kingdom’s supply by 2030. (4/5, #32)
Iran says three explosions have hit gas pipelines near the country’s holy city of Qom, in the same area where simultaneous blasts took place two months ago. The explosions cut the gas flow but power plants switched to oil for electricity production. (4/8, #11)
Iran gasoline exports are on hold for the near term due to a difference in Iran-produced gasoline as compared with market demand. Iran refiner NIORDC’s gas has octane below 90 RON, whereas the market seeks 90 or above. (4/5, #12)
An oil-payments deal involving Germany, India, and Iran is stopped after intervention by the German chancellor and complaints that the deal may breach UN sanctions. India, under US pressure to break direct commercial links with the Islamic republic, intended to place money for its Iranian oil imports in the Bundesbank, which would then transfer the annual $12.8 billion to the European-Iranian Trade Bank, based in the Hamburg. (4/5, #11; 4/6, #9)
India may have to underutilize or idle some electricity generation plants, affecting 22 GW this fiscal year. Capacity was 171.93 GW as of end-February. (4/6, #17)
In Israel, recent giant gas discoveries off its northern coastline could spark the next war with Lebanon’s Shiite Hizballah. The maritime border between Israel and Lebanon is not delineated and it is unknown if the fields stretch into Lebanon’s territorial waters. (4/6, #12)
Uganda is planning an oil fund to handle all revenues from the oil and gas sector in a bid to promote transparency and accountability. The government will fast-track the construction of an oil refinery. According to Tullow Oil, Uganda will commence production next year; output is expected to hit 200,000 b/d by 2016. (4/7, #22)
Russia’s new pipeline to China may lock in a $797-million decline at Novorossiysk, the country’s biggest oil port. The pipeline is to carry 1 million b/d across Siberia by end-2014, which may divert 10% of Russia’s oil output from Europe. (4/6, #24)
China has raised retail fuel prices for the 2nd time this year. Prices rose by as much as 5.8 percent. China’s central bank has raised key interest rates by a quarter-point in the fourth rise since October, taking the one-year deposit and lending rates to 3.25% and 6.31% respectively. (4/5, #21; 4/7, #24)
Norway expects more drilling in its Arctic waters after Statoil’s announcement last week of the first commercial find in the Barents Sea in over 10 years. Norway estimates the sea may have 5.9 billion barrels of undiscovered oil and gas. Statoil and partner Eni, at their Skrugard find, plan for a record development time of less than six years. (4/6, #22)
“We, in 2009, reached the peak in oil production,” says French PM Fillon. “… Fukushima will necessarily affect investments in the nuclear world, and … renewables have a very high cost and therefore we are facing [a] trend of increased energy costs,” Fillon says. (4/8, #8)
Total is in talks to sell 800 UK gas stations, 10% of the market and potentially valued at $645 million, to an investment group. (4/4, #9)
Centrica, the UK’s biggest energy supplier, is building a 270-MW sea-based wind farm near Skegness. The $1.2-billion farm should begin producing power by the end of next year. Siemens is providing 75 turbines of 3.6 MW each for the project, with all of the electricity produced going to the National Grid. (4/5, #31)
Blackouts hit most of Venezuela last Thursday, April 7, affecting an oil refinery and the Caracas metro. The 146,000 b/d El Palito refinery had to be restarted after the failure and the capital’s metro transit system ground to a halt. The electricity minister said power was restored quickly in most of the 17 states and the capital but warned many regions would be cut off again for brief periods during the evening. (4/8, #13)
Production of natural gas at the largest discovery in Venezuela is scheduled for 2013, Italy’s according to Eni. The Perla field which holds an estimated 14 trillion cu. ft. of natural gas; gas makes up 34% of the hydrocarbons available in Venezuela. (4/8, #12)
PDVSA has signed a term fuel oil and diesel supply contract with Argentina to begin shipping 12 million barrels a year next month. (4/5, #16)
Plans by Mexico’s Pemex to redevelop mature and abandoned fields in Tabasco State face potential hazards: poor technical prospects, possible conflict of interest, farmer/fisherman shutdowns of drilling operations, and security risks associated with kidnapping. There could be 200 million recoverable barrels in 6 fields. (4/5, #17)
Pemex will tender contracts for a crude-oil recovery system using electric-centrifuge pumping worth about $1 billion. The recovery system is used to pump hydrocarbons from the bottom of a well to the surface; Pemex aims to install the recovery system in more than 100 wells, using above-water and submerged equipment for optimal recovery. (4/7, #23)
Offshore drilling regulators from the US and Mexico met last Monday, April 4, to strengthen standards governing oil and gas exploration throughout the Gulf of Mexico. Meanwhile Cuba has announced plans to drill five deepwater oil wells in the Gulf beginning this summer. Wells are to be drilled in waters ranging between a quarter-mile and 1.6 miles deep. Which foreign countries will work with Havana on the project has not been specified. (4/6, #13, 14)
Canada has extended the review of PetroChina’s $5.4 billion purchase of shale assets from Encana by 30 days. The move beyond the initial 45-day review period was expected due to the campaign for the May 2 federal election. The review is to determine if the deal has a net benefit to Canada. (4/9, #23)
Alberta intends to set new environmental standards, including those for water contamination, in areas affected by oil-sands production. The province’s development plan also sets aside 7,700 sq. miles for conservation. The move requires the cancellation of 10 oil-sands leases. Output of oil-sands, now half of the 1.9 million b/d exported to the US, is expected to double this decade depending on the industry’s defense of its environmental record. (4/6, #21)
The US needs to respond to the increase in Chinese energy demand continuing to impact the global marketplace in order to remain competitive, US House lawmakers say. They add that China has become the largest manufacturer of wind turbines and solar panels, and the global clean energy market will be worth $2.3 trillion over the next decade. (4/5, #20)
The US Department of Transportation calls for tougher regulation of oil and natural gas pipelines as explosions have killed 14 people in California and Pennsylvania over the past seven months. (4/5, #23)
BP lacks an agreement with the US to resume drilling in Gulf of Mexico deep waters, Interior Secretary Salazar says. BP has a 47.5 percent stake in the Noble-operated Santiago prospect, the first to win Interior’s approval to resume operations on Feb. 28. (4/5, #22)
The new federal permitting process is strangling small independent oil drillers, analysts and industry leaders say. Pisces’s ST-204B oil-and-gas platform in the Gulf of Mexico once bustled: Over a dozen workers toiled round-the-clock to move12,000 b/d of high-grade crude. Today, six workers periodically check on pumps and diesel engines while only 6–7 b/d trickle in. (4/8, #21)
Pacific Gas & Electric, the big California utility, is seeking a 20-year license extension for its two reactors at Diablo Canyon, a nuclear power plant near San Luis Obispo. Diablo Canyon sits in a high-risk seismic area on the edge of the Pacific Ocean. (4/9, #21)
The US Department of Agriculture will soon offer grants and loan guarantees to gas stations to install new “blender pumps” that can dispense fuel with higher ethanol content, USDA Sec. Vilsack says. There are 8.2 million E85 vehicles now versus 6.1 million in 2008; only 2,350 fueling stations out of 110,000 offer E85 pumps. (4/9, #22)
World food prices fell in March 2.9% from a record peak in February but remained 37% above the same time last year, according to the UN. The oil and fat index fell 7% on month; sugar dropped 10%; and cereal fell 2.6%. But wheat prices have risen more than 25% from March lows and corn futures hit a record high last week. (4/7, #11)
A Dutch team has made what appears to be the first attempt to model all the factors leading to regional variations in sea-level rise. New York is a major loser and Reykjavik a winner in the new forecasts. (4/9, #7)
A global effort to raise $100 billion to tackle climate change and cut emissions in developing countries could be raised if the right balance is struck between public funding, funding raised from carbon markets, and private funds, the European Commission says. (4/9, #9)
Global Thermostat and two competitors say they can use waste heat from power plants to capture atmospheric carbon dioxide. The greenhouse gas may then be fed to algae to enhance production of ethanol, or pumped into oil wells to boost production. (4/7, #36)