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Peak oil review - Jan 28

Published by ASPO-USA on 2013-01-28
Original article: by Tom Whipple

1. Oil and the Global Economy

New York oil futures fluctuated around $96 dollars a barrel last week, at one point nearly touching $97, closing on Friday at $95.87. This was the seventh weekly gain in a row for NY futures and the longest run of weekly price gains since 2009. Brent crude which now is up $4 a barrel in the last two weeks, and up $10 a barrel since early November, closed at $113.28.

Numerous factors were seen as shaping the markets last week. There is optimism among traders that the US, Chinese, Japanese, and German economies are doing better. The Euro strengthened a bit. US jobless claims were down. The China’s purchasing managers index was up.

Countering this bullish news was the continued growth in US crude inventories by 2.8 million barrels and some bad data on US home sales and US manufacturing. The US pushed its debt crisis down the road a couple of months, the North Koreans are blustering about war against the south and even talking about attacking the US with nuclear-tipped ICBMs which they hope to develop some day.

Among the more interesting stories of the week was that the Seaway pipeline from Oklahoma to Houston which recently had its capacity increased to 400,000 b/d had to be slowed. This action forced NY oil futures down as the slower rate of flow hurt hopes that the great Cushing oil glut would be drained away to coastal refineries in the near future. The pipeline company is being circumspect, but it seems that the terminal at the Houston end of the pipeline was suddenly receiving more oil than it could handle so the flow had to be reduced. By week’s end, however, some of the oil was being directed to another nearby terminal which at least partly solved the problem.

The steady increase in the price of benchmark Brent crude in recent weeks suggests that the global market may be tightening as the IEA feared in its last monthly report. Saudi oil production was down to 9.3 million b/d in December from the nearly 10 million b/d it maintained throughout much of 2012; Iraqi exports are slipping due to the feud with the Kurds; Syria, Sudan, and now Yemen are not exporting due to various disputes; Iran is down to about one million b/d; Libya announced that it is producing 1.1 million b/d not the 1.4-1.6 million generally thought; and to top it all off Beijing seems to have stepped up imports in December.

US natural gas prices fell last week to close at $3.44 per million BTUs on forecasts of warmer temperatures in the Northeast this week. Long range forecasts, however, are calling for colder weather in February, but much warmer temperatures in the Midwest and Northeast in March. The $3.60 per million level is thought to be about the point where coal becomes cheaper than gas for some utility companies which will switch back to coal at this price point.

US gasoline stockpiles fell by 1.7 million barrels the week before last, and gasoline futures in New York have been rising lately and are now up 35 cents a gallon since early November.

2. Middle East & North Africa

Political stability continues to deteriorate across the region. In Egypt mobs are back in the streets protesting the lack of economic progress and the fairness of the Morsi government. The government has called a monthlong state of emergency in three cities after some 50 demonstrators were killed in clashes with police.

Syria: The death toll continues to climb and some observers believe it may now be above 100,000 with 2-3 million displaced from their homes and food production less than half normal. There was little movement in the civil war last week and some believe it will continue for an indefinite period. Government forces continue to bomb and shell towns and suburbs that are no longer considered friendly to the government. There are reports that the rebels do not have enough weapons and munitions to make further headway against wellarmed government forces. The international debate over whether the diffuse rebel coalition could do more than preside over chaos in a post-Assad era continues.

Moscow continues to express its support for the Assad regime. A handful of Russian citizens were bussed out of the country to Lebanon as the airports are no longer safe for civilian aircraft. Moscow says that the bulk of the thousands of Russians living in Syria want to remain there with their families.

In the wake of the elections that are seen as a setback for the Netanyahu government, Israel is expressing strong concerns about Syria’s large stock of chemical weapons falling into the hands of anti-Israeli jihadists and is warning that it will use military force to secure the weapons. Tehran in the meantime is warning that any attack on Syria will be an attack on Iran.

It is easy to see how all this could deteriorate into a general mideastern conflagration somewhere along the line. The only good news of the week is hints that Israel has shelved any plans to attack Iran’s nuclear facilities for the time being.

Iraq: The Sunni-Shiite standoff north of Baghdad worsened on Friday when the Iraqi army tried to dislodge protestors from blocking highways in predominately Sunni areas around Fallujah. Stones flew, shots were fired, and five protestors died. During the now-familiar funeral processions following the incident, two Iraqi soldiers were killed by snipers and several kidnapped. Sunni leaders then threatened to launch attacks against the Iraqi Army leading the government to pull its forces back from Fallujah. In the midst of all this turmoil, the parliament voted that Prime Minister Maliki could not run for a third term – a vote he will probably ignore.

Bombings and shootings continue across the country. One particularly egregious incident was a suicide bombing in a tent crowded with high-level Turkmen mourners which killed 35 and wounded 117 in a volatile region claimed by Kurds, Turkmen and Arabs. This incident came a day after 24 were killed in sectarian shootings and bombings around the country. While violence in Iraq is still well below the troubles of 2006- 2007, the efforts by mostly Sunni jihadists to reignite a civil war between sects continues unabated.

The confrontation between Baghdad and the Kurds deepened as the government continued to negotiate with BP to rejuvenate production in an oil field claimed by both Baghdad and the Kurds. Production from this field has fallen to 260,000 b/d from 900,000 ten years ago. Baghdad is threatening to cut the funds the Kurdish province receives from the central government as a way of making the Kurds behave. Turkey’s Genel oil company says it is making good progress in developing its Kurdish oil fields. The company is already producing 100,000 b/d and hopes to reach 200,000 soon. For now some of the oil is being taken to Turkey by tanker truck, but construction of a new pipeline is under consideration.

In the midst of this turmoil, the CEO of Exxon, Rex Tillerson, showed up in Baghdad to meet with Prime Minister Maliki over Exxon’s situation in which it hopes to continue doing business with both Baghdad and Kurdistan.

It still remains hard to see just how Iraq will be producing 5-8 million b/d of crude by the end of the decade as all the optimistic forecasts are counting on.

North Africa: The attack on the Algerian natural gas facility at In Amenas in the Sahara desert, which resulted in the death of 37 foreign oil workers, has changed the outlook for oil and natural gas production in the region. As many of the attackers in Algerian were thought to be Libyan, the incident has set off concerns about follow-up attacks on remote oil facilities across Libya and Algeria. Concern was heightened when warnings were issued that all foreigners should leave Benghazi and that there was credible information than an attack on a Libyan oil installation was imminent.

Most observers believe the Algerian government can provide adequate security at remote sites, but Libya, with a weak central government, is a different situation. BP announced last week that it was reviewing plans to increase drilling in Libya later this year. Hundreds of foreign workers are reported to have been evacuated from Saharan oil fields already and hundreds more are said to be leaving soon. While this exodus may delay new projects, it is not expected to hurt production in the near term.

With the French army, backed by the US, driving into northern Mali, this situation has a long way to play itself out. The region, which produces some 3-4 million b/d and a large share of Europe’s natural gas supply, will always be vulnerable to jihadist terrorists in isolated areas where security is very expensive.

3. Climate change

While climate scientists have been warning of the dangers of carbon emissions into the earth’s atmosphere for over 20 years, the mantra of continuous growth in many key countries has been enough to overcome the warnings and there has been little progress in reducing emissions. It has become obvious that little will happen until the consequences of climate change become so bad that a critical mass agrees that something must be done no matter what the cost to economic growth.

In recent days there have been developments suggesting that at least a glimmer of serious action to reduce emissions may be somewhere ahead. The first development was the killer smog that settled over northern China, driving air quality meters off the scale and forcing China’s growth-obsessed government to promise action. Beijing’s initial reaction was a promise to reduce air pollution by 2 percent this year through measures such as junking 180,000 old vehicles and shutting down 44,000 small coal-fired boilers. Beijing will also reduce coal consumption by 1.8 million tons in the Beijing area. For a country that is on course to increase its coal consumption by 970 million tons between 2010 and 2015, reaching a total coal consumption of 4.3 billion tons, the newly announced measures are unlikely to have much impact.

A recent estimate by Deutsche says that China could increase its demand for crude by nearly 5 percent this year or 468,000 b/d. Given increases of this magnitude in fossil fuel consumption, smogs and other weather-related disasters are likely to continue across China and indeed much of the world in the immediate future. There is huge inertia in China’s system of government and economic management in which giant state run corporations with imbedded interests in continuing economic growth will likely continue to hold sway against environmental concerns. What is new is that Beijing’s smog is now so bad the government has been forced by the obvious to take official note and promise change.

In Washington, President Obama made action on climate change one of the top priorities of his second term and promised more details in his State of the Union address. Although the majority of the Congress still remains skeptical that carbon emissions are related to severe weather events, the costs of remediation such as the $60 billion spent on Superstorm Sandy in the NY region and the billions spent on last year’s Midwestern drought may eventually force a change of heart. For the immediate future, however, the administration is likely to rely on changes that can be made under existing clean air regulations that do not require Congressional approval.

Quote of the week

"The path towards sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition; we must lead it. We cannot cede to other nations the technology that will power new jobs and new industries – we must claim its promise. That is how we will maintain our economic vitality and our national treasure." - President Barack Obama

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