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Peak oil review - Dec 31

Published by ASPO-USA on 2013-01-02
Original article: by Tom Whipple

1. Oil and the Global Economy

This week the oil markets have been dominated by the course of negotiations in Washington over the fiscal cliff. Prices surged on Wednesday following news that President Obama was returning from vacation in an attempt to revive the stalled negotiations. By Friday’s close NY oil prices were up about 2.4 percent for the week to settle at $90.80 with London oil settling at $110.62. The fiscal cliff negotiations continued over the weekend and it will probably be late Monday before we know the outcome which is likely to be a quick fix that will continue unemployment payments and prevent an across-the-board tax increase.

The weekly stocks report which was released on Friday showed a 600,000 barrel drop in crude inventories, but a 3.8 million barrel jump in gasoline inventories and a 2.4 million barrel jump in distillate stocks. Total US petroleum product consumption fell 5.5 percent last week to 18.9 million b/d, the biggest drop since August. Stockpiles at Cushing, Okla., the center of the mid-west oil glut, grew nearly 5 percent last week to 49.2 million barrels.

The fiscal cliff, which we are due to fall over on Tuesday unless there is some meaningful Congressional intervention, is only one of several possible “cliffs” which could do grave economic damage to the US economy. Among these are the debt ceiling which could put some of the US debt in default and the continuing budget resolution which is due to expire in March, once again leaving the country without a budget. Some observers believe the results of the November elections will simply harden the political gridlock in the next Congress and that there will be little progress in the immediate future.

Forecasters are saying that world benchmark Brent crude will likely trade above $100 a barrel in 2013 for the third straight year, unless there is a major economic downturn.

Natural gas futures, which have been trading in a narrow range since mid-December, climbed a little late last week on prospects for colder than normal temperatures in the Northeast and Mid-Atlantic states.

2. Iraq

Of the numerous threats to stable or growing oil exports from the Middle East, the situation in Iraq seems to be moving to the top of the list. Baghdad’s Shiite rulers are engaged in a two-front dispute with its semiautonomous province of Kurdistan and with its indigenous Sunnis who say they are being persecuted by the Shiite majority now that US forces have pulled out. Either or both of these situations could easily get out of hand in the near future, damaging the plans for major increases in Iraqi oil production in the next few years.

Last week Exxon announced plans to begin drilling in the Kurdistan/Iraq disputed zone despite warnings from Baghdad that this move could result in civil war. During the week, the Kurds completely halted oil exports via Baghdad’s northern export pipeline. This has been and on and off arrangement under which Kurdistan’s revenues go to Baghdad which is supposed to forward them to the Kurds. Baghdad says the Kurds have not been shipping the required volumes of oil and has halted payment. Underlying this dispute are the 50 or so deals that the Kurds have made with foreign oil companies. Baghdad fears the Kurds will soon build their own pipeline to Turkey, allowing them to collect oil revenues directly from foreign buyers and eventually realize a long-held dream of breaking away from Iraq, while taking an estimated 40 billion barrels of oil that the rest of Iraq considers to be its oil with them.

A more serious problem, however, could turn out to be the growing discord between Iraq’s Shiites and Sunnis. Although the Sunnis are estimated to be about 35 percent of Iraq’s population they used to have total control of the country under the Hussein government and haven’t forgotten it. Most of the bombings and other violence taking place in Iraq these days is perpetrated by Sunni insurgents against Shiite security forces. Protests against the arrest of Iraq’s Sunni finance minister’s bodyguards have been taking place all week in Sunni- dominated cities. The protestors which sometimes have numbered in the thousands have begun to chant the words of Arab Spring: “The people want the downfall of the regime.”

The Sunnis say they will continue demonstrating until they are accorded their rights and unwarranted arrests of Shiites stop. The origins of this dispute, of course, go back about 1400 years so we can’t expect a resolution soon. The best estimate is that 80 to 90 percent of the world’s Muslims are Sunni leaving much room for outside support for the Iraqi Sunni cause.

3. Syria

As has been the case for many weeks now, the government’s position continues to deteriorate. Assad is said to be afraid to venture outdoors, his armed forces have little offensive capability, and the government continues to slaughter civilians by aerial bombardment and artillery fire in retaliation for rebel advances. Moscow has abandoned Assad, and the UN’s negotiator, Brahimi, says the country will descend into hell unless a solution is found soon. As those still loyal to Assad are literally fighting for their lives, this increasingly tragic situation could go on for weeks or months.

Speculation as to what a post-Assad Middle East might look like is rife; however, it is clear that Sunni-Shiite relations in the region have taken a major turn for the worse and Tehran is suffering a serious blow to its foreign policy aspirations. Should the hatreds that have arisen during the Syrian uprising feed over in to the Iraqi unrest, the region could easily go off on a new round of troubles.

4. Elsewhere in the Middle East

It was a relatively quiet week in the nuclear standoff. Tehran conducted yet another naval exercise in the Straits of Hormuz – largely to boost civilian moral which is suffering from the economic sanctions and to distract attention from Syria where 30 years of Iranian foreign policy is going down the tubes. The Sunni dominated Gulf Cooperation Council issued a statement calling on Iran to stop interference in Gulf Arab affairs. Tehran naturally rejected the statement calling it an irresponsible move that only heightened regional tensions.

The Egyptian Prime Minister signed the controversial new constitution amid protests by the opposition. The constitution was reported as gaining 64 percent of the vote which was only 33 percent of the registered voters. If these number are for real it would seem that only about 20 percent of the Egyptians actively support the measure suggesting that there may be more difficulties ahead.

Egypt’s next problem is its economy. With tourism down to a trickle, and foreign exchange nearly gone, the country is going to need a steady stream of loans to import the food and fuel it needs for its population. Last week two Egyptian cabinet ministers resigned in protest over unpopular austerity measures. While Egypt is not an oil exporter, its economic collapse would have serious repercussions across the region.

In a new development, security forces in the United Arab Emirates arrested a terrorist cell of Saudi militants who were planning attacks in the UAE and Saudi Arabia. Although it receives little attention, the UAE has arrested some 60 Islamists this year on suspicion of terrorist links.

Quotes of the week

“Representatives from The Association for the Study of Peak Oil and Gas USA met for two hours on December 17 with EIA Administrator Adam Sieminski and EIA staff to discuss concerns laid out in an October letter...” - Platts

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