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Peak oil review - Jan 14

Published by ASPO-USA on 2013-01-14
Original article: by Tom Whipple

1. Oil and the Global Economy
After a quiet start to the week, crude futures climbed to a three-month high on Thursday after Beijing’s export data showed an increased demand for Chinese goods. On Friday, however, Beijing released data showing inflation rising, largely due to the impact of record cold weather on food prices, sending crude prices down again. Analysts feared that China would turn to fighting inflation rather than stimulating the economy, thus reducing the demand for oil. At week’s end NY futures were down to $93.56 a barrel, and London was down to $110.55.

There seems to be a growing consensus that there is plenty of oil around at the minute and that a price correction is coming. US production of tight oil is forecast to continue increasing while US motor fuel consumption continues flat. MasterCard reported last week that US gasoline consumption has slipped to the lowest level since tracking began in 2004. US oil imports have fallen to the lowest level in 25 years.

The Saudis announced last week that they had cut production by 5 percent to 9 million b/d in December and the Iranians admitted that their exports were down by 40 percent. Iraqi oil exports were down by 272,000 barrels in December.

In its Short-Term Energy Outlook issued last week, the EIA forecasts that for the next two years increases in global consumption of liquid fuels, about 900,000 b/d in 2013 and 1.3 million b/d in 2014, will be offset by increases in production, most of which will be from US tight oil fields and Canada’s tar sands. The EIA projects OECD consumption will decline by about 300,000 b/d in 2013 with US consumption remaining largely unchanged. US crude production is forecast as increasing from 6.4 million b/d in 2012 to 7.3 million b/d in 2013, and 7.9 million b/d in 2014. The rapid increase in US tight oil production will lead to a decline in net US fuel imports which will fall from an average of 7.5 million b/d in 2012 to 6 million b/d by 2014. The Administration also sees US natural gas production remaining flat at around 60 bcfd for the next two years.

The EIA paints a rather optimistic scenario for oil supply and demand during the next two years. US tight oil production is seen as increasing rapidly despite very high rates of depletion, high production costs, and a slowly declining number of drilling rigs active in the US. Although it is premature to talk about the US tight oil production peaking, the most recent numbers on Bakken tight oil production show a decline between October and November 2012 after years of steady growth interrupted only by the occasional harsh weather in January and February. Whether this decline is an aberration or the beginning of a trend will take another year or so to become apparent. Analysts who have looked closely at decline rates are skeptical that tight oil production can really be increased by another 1.5 million b/d in the next two years.

The other pillar of the EIA’s optimistic forecast is that there will be no major disruption of oil supplies from the Middle East during the next two years.

2. Middle East
Iraq: Kurdistan began symbolic exports of oil by tanker truck directly to Turkey last week, by-passing the Baghdad- controlled northern pipeline. Analysts believe that this move will be followed by the construction of a new pipeline which would allow the Kurds to export their oil to Turkey. Baghdad responded to the move by threatening lawsuits to seize oil and natural gas shipments leaving the country without its permission. Both sides have moved military units to the ill-defined demarcation line between Kurdistan and the rest of Iraq, but considering the troubles Baghdad is having with the Sunnis at the minute, it seems unlikely to attempt force against the ever-formidable and cohesive Kurds.

Baghdad’s dispute with its Sunnis continues to simmer with thousands of Sunni protestors blocking the roads from Baghdad to Syria and Jordan. The government retaliated last week by closing the border crossing station into Jordan, presumably to bring economic pressure on the Sunnis. By week’s end, the government had organized pro-al-Maliki demonstrations in Baghdad. Many analysts are talking about the al-Maliki government being pushed closer to the Iranians as it tries to deal with the Kurds, the Sunnis, and the Western oil companies which are less than enthusiastic about doing business in Iraq. As Syria descends into anarchy, the likelihood that some of the turmoil will spill over into Iraq’s Sunni-Shiite dispute continues to grow.

In December, Iraqi crude exports fell by 272,000 b/d to 2.0 million b/d. About 100,000 b/d of this decline was due to the Kurds refusing to export through the northern pipeline to Ceyhan, Turkey until Baghdad pays them for the oil. The rest of the reduction was attributed to bad weather; however, given the range of problems facing Baghdad, it would not be surprising to see some impact on oil exports in the near future. Whether the Iraqi’s can increase exports to the 3, 5, or 10 million b/d they keep talking about in the midst of so much sectarian strife remains an open question.

Syria: Cold weather and snow enveloped the region last week, slowing the fighting and increasing the misery of the hundreds of thousands of refugees living in camps along the border. The fighting seems to be settling into a stalemate for a while. The rebels overran a major airbase near Aleppo, while government forces seemed to have pushed the rebels away from the center of Damascus.

As the Assad government’s authority continues to shrink, Syria is beginning to look more like a failed state in which dozens of local warlords and Jihadist groups compete for power and a share of the spoils. The refugee crisis grows by the day and will only become worse as the struggle is prolonged. Moscow continues to call for compromise, a solution rejected by nearly all the rebel groups.

Iran: New US sanctions are now in place that are intended to increase the pressure on Tehran. The new measures are described as more akin to a trade embargo that would sanction any entity in the world doing business with Tehran and the US. Washington, however, is complaining that Tehran continues to find ways to bypass the sanctions by using various front organizations. Although the sanctions are slow to take hold, they do seem to be having an effect. Tehran says its oil revenues are down 45 percent. Prices for everything imported into Iran are going up and a crisis is developing as medicines have become prohibitively expensive. There is no end to all this anywhere in sight. Tehran continues to take a hard line on negotiations as the noose of sanctions keeps closing.

Egypt: Qatar doubled its financial aid to Cairo last week with a new gift/loan of $2.5 billion that should keep the country functioning for another few weeks. There is still no word on the IMF loan which comes with strings such as major reductions in food and fuel subsidies. The economy continues to crumble and social pressures are growing.

3. Climate Change
In recent months the number of extreme weather events around the world has been increasing steadily taking an ever increasing toll on the global economy. From $60 billion to repair the New York region, to new high and low temperature records, to snow storms across the Middle East, to dwindling stocks of food, every week seems to bring another disaster. Some are starting to wonder if the Arctic melting has so destabilized the north Atlantic region that Europe and possibly much of the northern hemisphere are no longer shielded from extreme conditions as they have been for millennia. Some reports are beginning to note that serious problems having to do with food and water supplies may be only a few decades rather than hundreds of years away. In the meantime, the argument over whether the burning of fossil fuels is the principal cause of climate change rolls on with little progress or give on either side. The environmentalists reiterate increasingly strident warnings that the earth will soon become uninhabitable while the skeptics maintain that the evidence is not strong enough to warrant the damage to the economy that would be wrought by major reductions in the use of fossil fuels.

Somewhere in the future, or perhaps it has happened already, there may or may not be a “tipping point,” after which it will be impossible to keep the global climate from going out of control. The point of all this is that while the frequency of abnormal weather is clearly increasing, events that will do abnormal damage are unpredictable and could occur in the coming year or years from now. The damage to food crops is cumulative. As food is grown all over the world, nearly every extreme weather event does some sort of damage to the global food inventory.

Last week the US Department of Agriculture issued a report saying that the US corn inventory will be at its lowest point in 17 years by the end of August and the current inventories are 17 percent lower than last year at this time. Obviously it is too early to say anything about the 2013 crops, but another year of bad weather could lead to much higher food prices. For now there is not yet a critical mass of political leaders that is willing to link fossil fuels to climate change. Given the pace at which the situation is changing, however, this may not be the case much longer.

4. Exporting Natural Gas
Attitudes towards exporting US natural gas as LNG is clearly on a roller coaster. Five years ago the US was facing a natural gas shortage and people were building LNG import terminals. Then the fracking boom took place – inventories soared, prices plummeted, utilities switched out of coal, and new drilling for gas stopped as gas companies started going broke.

Many people started seeing the advantages of what many see as a nearly limitless supply of cheap gas and started planning accordingly. Industries that use natural gas for energy or as a feedstock began planning for major new plants in the US where gas was cheap. Others noting the huge differential between US domestic gas and what it could bring at foreign ports began applying for LNG export licenses – 16 such applications are currently pending. Recently the US Energy Department put out a report concluding that the exporting of LNG would be a real plus for the US economy as it would create jobs and help the balance of payments.

A few weeks later, however, there are second thoughts. Natural gas prices which have been hovering just above $3 per million BTUs in recent days are still too low to make fracked natural gas profitable and drilling has fallen off considerably. Some analysts, of course, are saying the quantity of natural gas is far more limited than generally assumed, but the EIA is continuing to forecast growth in production.

Last week a group of major US manufacturers formed a coalition to lobby against what they call “unfettered” natural gas exports. Most of these companies are planning to build new facilities based on cheap domestic natural gas and fear that large exports would only drive prices so high that their new facilities would become uneconomical. The other side of the story is that as other countries race to exploit tight “shale” gas the differential between US and international prices will fall quickly. Some are saying the world prices may drop as much as 60 percent by the end of the decade, leaving multi-billion-dollar LNG export terminals unprofitable.

Quote of the week
"... Peak Oil is going to be pretty obviously disproven, because it is now a question of when, not if, fracking starts to get deployed in a significant fashion..."
- Seth Kleinman, Global Head of Energy Strategy at Citigroup

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