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Peak oil review - Jan 7

Published by ASPO-USA on 2013-01-07
Original article: by Tom Whipple

1. Oil and the Global Economy

Oil trading was dominated last week by machinations in the US Congress and the prospects for the US economy. During the week, however, NY futures sustained the biggest weekly gain in three months on the euphoria surrounding the settlement of the fiscal cliff. NY oil closed Friday at $93.09 while Brent closed at $111.31. As several Gulf States tax crude in storage on January 1st, oil refiners lowered their inventories by 11 million barrels the week before last by delaying purchases and turning crude into products. Gasoline and diesel inventories rose by 7 million barrels largely offsetting the decline in crude stocks.

The glut at Cushing, Okla. continued climbing to a record 49.8 million barrels. The Seaway pipeline which will drain oil from Cushing to Gulf Coast refineries will double its capacity by using more powerful pumps shortly, hopefully reducing the excess inventory. In 2014 the capacity of the Seaway pipeline is expected to double again, solving the problem and perhaps reducing the WTI-Brent spread to normal. 

The major financial firms expect Brent crude to continue trading around the $110 level where it has been for the past 18 months during 2013. The forecasters, however, recognize the growing number of problems in the Middle East and the relatively low level of spare capacity, suggesting that higher prices could ensue should there be limitations on exports during the year.

On Friday, oil prices increased a few cents a barrel on slightly better US employment numbers, but for the next few months, or perhaps years, the rancor in Washington over the debt ceiling and federal budgets are likely to dominate the economic news.

OPEC production slipped 110,000 b/d in December to an average of 31.4 million b/d, as demand to fulfill the needs of the winter heating season draws to a close. It has been unusually cold in the eastern hemisphere this year with average temperatures in China hitting 30-year lows.

China’s economy ended the year in better condition. With the EU’s economy contracting and US imports far from robust, the big question of 2013 will be whether China can sustain the high level of growth it has become accustomed to with lower exports and greater internal demand.

US natural gas futures fell for three days last week on forecasts of warmer weather across much of the US for the next two weeks. On Friday, however, the weekly inventory report showed higher-than-expected withdrawals. Inventories, however, remain about 12 percent higher than normal for this time of year. One of the key questions for 2013 is whether natural gas production, from fracked wells, will remain high as many believe these wells deplete very rapidly and the economics of fracked gas production has markedly reduced new drilling.

2. The Middle East in turmoil

Iraq: Anti-government protests increased last week as the demands for the ouster of the al-Maliki, Shiite-dominated, government continue to grow. According to protest organizers, the government is holding some 40-50,000 Sunnis, numbers which the government denies. Calls for the prime minister’s resignation also grew last week including some by the prime minister’s Shiite rivals. Among the more bizarre calls for resignation came from the current head of Hussein’s Baath party who has been hiding out, with a price on his head, since the US invasion 10 years ago. Demonstrators have been blocking the major trade route to Syria which could be enough to force elections unless the government resorts to violence to clear the protesters.

For now, the protesters are calling for release of Sunni women held on terrorism charges and the repeal of parts of the terrorism code that Sunnis see as being used against them; however voices calling for new elections are increasing.

The situation is further complicated by what many see as growing Iranian influence on the Iraqi government, the standoff with the Kurds over exploitation of northern oil fields, and the situation in Syria which could easily spill over into Iraq.

Although Iraq’s oil exports expanded during the past year, they dropped by 10 percent in December as the Kurds refused to continue exporting through the northern pipeline and the general level of turmoil across the country increased. With western oil companies decamping for Kurdistan where the security situation and the opportunity to earn a profit is better, the prospects for multi-million b/d increases in Iraq’s oil production over the next decade do not look that good.

Syria: There was little change in the past week. Government forces continued efforts to push back rebels from the Damascus suburbs and continue bombing civilian districts considered hostile. Rebel forces continued efforts to overrun government-held airfields to stop the bombing and cut off outside aid. For now neither side is making much progress and the fighting seems as if it could drag on for some time. Over the weekend President Assad made a “peace offer” that amounted to little more than calling on the rebels to give up and go home.

Assad’s remaining strength comes from the disorganization of the rebels. Although nearly all the government’s supporters realize the end is near, they can see no clear way of defecting to the rebel forces that does not put their lives and future welfare in even more danger than remaining in place.

Israel is becoming more concerned about the possibilities of prolonged chaos in Syria and is talking about building a 43-mile fortified fence along its border with Syria in the Golan. The Israelis say government forces have abandoned decades-old positions along the border in favor of Jihadists who are more interested in attacking Israel than fighting Assad. This just one more indication of the many problems that are likely to follow the collapse of the Syrian government.

Iran: There was little news on the nuclear standoff from Tehran last week. Iranian armed forces held a naval exercise in the Straits of Hormuz and shot off some missiles to emphasize just how easily it could block the straits. Tehran is mostly concerned with the end game in Syria these days and whether it has continued its support for Assad government too long to play any meaningful role in a post-Assad Syria. Iran’s main concern is losing its direct access to Lebanon and Hezbollah which would be a major setback in the confrontation with Israel. Tehran is making a major effort to cut access to subversive web sites on the internet while at the same time keeping enough of the internet to ensure that its economy can continue to function.

Sanctions on Iran continue which means Tehran has to get by on around 50 percent of normal export earnings. President Obama signed yet another bill further tightening sanctions.

Egypt: Foreign currency reserves now stand at $15 billion, enough to cover imports of oil, food, and other vital goods for another three months. On Sunday, the government reshuffled its cabinet to give the Islamists more direct control over key ministries. Currently pending is a $5 billion IMF loan that is seen a crucial to keeping the government solvent for a while longer. The loan however comes with important strings attached such as a major reduction of government subsidies for food and fuel.

The Egyptian pound fell 7 percent against the dollar during December increasing the costs of everything imported. Egypt’s government is currently the world’s largest importer of wheat which it sells to millions of its poor at subsidized prices.

Egypt’s oil industry is caught in a downward spiral. Crude is being used to pay off foreign debts while oil companies must import finished products to keep the economy functioning. Foreign creditors are not being paid and are unlikely to be extending the state oil company much more credit. The country produces about 700,000 b/d about the same as its consumption. However, some of its crude must go to foreign oil companies under production sharing agreements.

Efforts to lower or remove fuel subsides elsewhere have usually backfired as rioters took to the streets protesting the price increases. Egypt is currently spending about $9.7 billion a year to import oil products, about $2.8 million more than it was spending a year ago.

The whole economic situation is clearly unstable. Foreign tourism has never recovered since the Arab Spring uprising. The opposition says the government has about six months before a complete economic collapse will occur. Some of the richer Gulf states will likely step in with assistance, possibly in the form of cheaper crude, but Egypt is a big country in a lot of trouble.

Quotes of the week

"Each new gas field discovered in America is as rich in promise as it is in hydrocarbons. But if the country allows the potential benefits to dazzle or delude -- if it lets them lull the country into complacency about the other major challenges it faces -- we could find them providing not so much a shot of energy to U.S. growth as a shot of morphine to America's body politic, hiding the pain and clouding its vision as to what is truly necessary to take advantage of this potentially great moment in American history."

- David Rothkopf, Foreign Policy

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