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Peak oil review - Feb 4

Published by ASPO-USA on 2013-02-04
Original article: by Tom Whipple

1. Oil and the Global Economy

Oil prices continued to rise last week with Brent crude closing at $116.76 on Friday, only a few dollars below the highs set in the spring of 2011 and 2012. New York crude, which is still held down by the glut of tight oil and Canadian crude in the Midwest along with seasonal refinery maintenance, closed at $97.89 on Friday, up $1.89 for the week as compared to the $3.84 increase in the price of Brent.

Optimism over growth in the US, Chinese, and Germany economies, coupled with concerns about the deteriorating situation in several Middle Eastern countries, is behind the move. Prices were helped by a stronger Euro and the Federal Reserve’s announcement that it will continue purchasing $85 billion a month worth of securities in an effort to stimulate the economy. Unlike all the concern over higher taxes that would ensue if the US went over the “fiscal cliff” last month, the prospect of large automatic cuts in federal spending on March 1st seems to be generating little concern in the Congress.

After falling precipitously from the short-lived 2008 price spike of over $140 a barrel, Brent fell to nearly $60 a barrel in the winter of 2009. It then climbed slowly over the next two years to a high of about $117 in the spring of 2011 and has traded in a range of $95-$118 since then. As prices once again approach the high end of the recent trading range, commentators are opining about where we go from here. Most are talking about a pull-back in prices, citing various technical resistance points. These people, of course, realize that as oil prices move higher, economic damage is likely to hurt the prospects for growth in the near future. Most major financial institutions remain hopeful that oil will not rise much further and this is reflected in forecasts talking of little change in average oil prices during the coming year. Pessimists, looking at the growing chaos across much of the Middle East, are expecting oil to eventually move to new highs, with the possibility of it hitting $150 a barrel in the next six months.

Gasoline and distillate prices continue to rise along the US coasts while remaining relatively low in much of the midsection of the country. Most of this is due to refinery outages and other disruptions. NY gasoline futures closed at $3.05 on Friday, well above the highs seen in the spring of 2011 and 2012. Nationwide gasoline prices are up 20 cents a gallon in the last month to an average of $3.50 for regular and once again pushing $4 a gallon in high-cost states.

US natural gas prices halted a six-session decline on Wednesday on new forecasts of colder weather ahead.

2. Middle East

Week by week turmoil across the Middle East is increasing, bringing us ever closer to the time when there could be significant reductions in oil exports from the region. Iraq seems on the brink of civil war; the situation in Syria continues to deteriorate; in the Maghreb, al-Qaeda is threatening more attacks on oil and gas facilities; and Libya seems to be on the verge of breaking apart.

Iraq: Last week the situations surrounding the multiple confrontations going on in Iraq continued to deteriorate. Prime Minister al-Maliki is simultaneously confronting the Kurds who want the right to exploit what they consider their own oil without interference from Baghdad and the Sunnis – about 35 percent of Iraq’s population -- who believe they are being discriminated against by the al-Maliki Shiite government and have been conducting demonstrations for the past three weeks. Add to this Iraq’s branch of al-Qaeda who continues to blow up government buildings and security forces at a steady pace – they claim 82 attacks in the last few months; the Iranian government who is seeking to dominate the Shiite-run country; international oil companies eager to make money; the waning remnants of US influence; and a dysfunctional parliament. The whole place would be a joke, except the place has large untapped oil reserves, aspirations to become the next Saudi Arabia of OPEC, and is seen as the backbone of OPEC oil exports well into the next decade.

Last week the Sunni-Baghdad confrontation took a serious turn when government troops fired on Sunni demonstrators blocking highways through Sunni provinces killing five demonstrators. This action increased the number of Sunni demonstrators from thousands to tens of thousands and led to an al-Qaeda call for the Sunnis to take up arms against the government. On Sunday suicide bombers blew up police headquarters in Kirkuk, killing dozens and wounding more than 80, mostly police officers.

For now the government has pulled back its forces from the Sunni demonstrators to avoid further confrontations, but in the longer run al-Maliki has few good options to satisfy Sunni demands and many are saying the country could be drifting towards civil war with serious consequences for oil production.

In the confrontation with the Kurds, Baghdad is continuing to work on a deal to have BP rehabilitate the declining oil fields in the disputed area around Kirkuk. The Kurds, who have significant military forces, have warned BP not to drill for Baghdad in the Kirkuk oil fields until a settlement is reached. In the meantime, Baghdad has warned Exxon that it can’t have it both ways and must either stop working for the Kurds or stop working in Iraq’s southern oil fields.

The Kurds say they are producing some 400,000 barrels of oil per day and after local refining needs are met, have some 250,000 b/d available for export. They were exporting 200,000 b/d via the Baghdad-controlled northern pipeline, but this was halted over a dispute about payments late last year. Some oil currently is being trucked out of Kurdistan to Turkey and Erbil is talking about resuming exports of about 35,000 b/d through the northern pipeline. Baghdad is expected to start legal efforts soon to halt the Kurds direct oil exports to Turkey.

Iran: There was little movement in the nuclear confrontation last week. Both sides continue in accuse the other of intransigence. US Vice-President Biden has raised the possibility of direct Washington-Tehran talks to settle a range of issues between Iran and the West. On Sunday Iran’s foreign minister said Tehran was ready for direct talks provided the West had serious proposals. Some see such direct talks as the only path to progress on the nuclear issues and believe that for now Iran is only stalling for time in the current negotiations overseen by the EU.

Tehran told the UN nuclear inspectors last week that it plans to install more sophisticated equipment at its principal uranium enrichment plant enabling it to speed up production of enriched uranium several fold -- a move that will cause much consternation in Israel and the West.

Iranian oil exports had a good month in December as the Chinese increased their imports of Iranian oil. However, most observers believe this was a one-time jump and that Iranian exports will continue to drop in the months ahead. Some note that the increasing price of crude is helping Tehran weather the sanctions.

At the minute, Tehran has a lot on its plate. Not only is it trying to cope with the deteriorating position of its allies in Syria and Lebanon, last week Iran was caught trying to smuggle portable surface to air missiles to Yemeni insurgents – a major escalation in the Middle Eastern situation as these missiles can easily be used to shoot down civilian airliners.

Egypt: Although Egypt no longer exports oil or natural gas, its control of the Suez Canal and the parallel Su-Med oil pipeline means that it could have a major impact on world oil supplies and prices should these vital arteries be closed due to civil unrest. As the largest country in the Arab world, the fate of Egypt will have a major impact on the whole region. Last week Egypt’s President declared a state of emergency in three cities along the canal in the wake of rioting over deaths in a soccer riot last year. By mid-week large demonstrations had spread across the country and the Army’s Chief of Staff was saying that the political strife was pushing the country towards the brink of collapse.

The demonstrations in which at least 50 protestors died continued for most of last week amid calls for President Morsi to step down. Behind the continued protests, however, is a deteriorating economic situation which means the confrontations could continue indefinitely.

Despite the turmoil, traffic through the 120 mile Suez Canal, which handles some 18,000 ships a year, about 8 percent of world trade, and earns Egypt $5 billion in tolls annually, seems to be moving normally as the canal is under the supervision of the Egyptian Army. Strikes at the canal’s piers which provision transiting ships are causing some disruptions however. There is no end in sight to Egypt’s troubles which seem likely to increase as the political and economic situation deteriorates.

Syria: Another step towards a wider Middle East war took place last week when Syria attempted to send a convoy of weapons, possibly surface to air missiles, to Hezbollah in Lebanon. This action crossed an Israeli “red line” and Tel Aviv promptly bombed the convoy inside Syria. As nobody really wants to take on the Israelis right now, Damascus, Tehran, Moscow, and Hezbollah retaliated with a storm of denunciations and threats of retaliation at a later date. Tel Aviv deployed at least one “iron dome” missile defense system in northern Israel as protection against rockets fired from Lebanon.

Washington warned last week that Tehran is stepping up its support for Assad by sending “more personnel” to train and advise Syria’s army and security forces. Tehran has made it clear for some time that keeping Assad in power is one of its highest priorities.

In the meantime, the civil war continues to go badly for the Assad government with slow but steady rebel gains in several regions. The food situation is getting worse, millions have been forced from their homes and at least 700,000 refugees are huddled in tents just beyond Syria’s borders. To their credit a number of the richer Arab states are coming up with enough money to feed many of the refugees. Although Moscow continues to send money and probably arms to Syria, even Prime Minister Medvedev is beginning to sound pessimistic about Assad’s prospects.

Concern over the shape of a post-Assad government continues to grow. With dozens of groups of all political stripes involved in the uprising, the prospects for formation a stable government for Syria do not appear good. Summary executions of captured opponents by both sides seem to be on the rise, indicating that the animosities growing out of this war are likely to last for decades and spill into other countries.

Algeria: In the aftermath of the insurgent attack on the natural gas plant two weeks ago, it now seems that the insurgent goal was to blow up the facility in a giant fireball with all the foreign employees inside as a warning. As the plant had been shut down as soon as the first warnings were given and the insurgents did not have the technical expertise to blow up such a large facility, little damage was done. It now seems as if one or more former employees of the facility took part in the attack.

Last week a new attack against another pipeline, this time in northern Algeria, resulted in the killing and wounding of several guards, but did little damage to the pipeline.

The attacks are already having repercussions across the oil industry with foreign oil companies becoming increasingly concerned about sending their employees to poorly guarded desert oil and gas facilities. Norway’s Statoil lost five of the 17 employees it had at the facility. The attack in southern Algeria took place only 30 miles from the Libyan border where there has been little law and order since the overthrow of the government. In the long run exploiting oil from remote sites in the Sahara is likely to be slower and more costly as foreign experts will be more difficult to attract and the costs of their security will be much higher.

Libya: In the wake of the assassination of the US ambassador in Benghazi last September the security situation there has deteriorated markedly. Amid a rising tide of assassinations, kidnappings, and bombings of security officials, several western countries have warned their nationals to stay away from the city. Many former anti-Gaddafi rebels have joined the numerous militias that now have more manpower and firepower than the government’s police forces.

As the city becomes more estranged from the central government in Tripoli, talk of another revolution is increasing. The people of Benghazi would like to see some benefit from the oil money which they believe is largely staying in Tripoli. They would also like the headquarters of Libya’s national oil company returned to the city where it was before Gaddafi moved it 600 to Tripoli.

Libya’s oil minister recently put the country’s oil production at 1.1 million b/d, down from 1.6 before the revolution. Although the minister has plans for higher production in the future, the current security situation and the political mood in the country suggest that further gains may be difficult to obtain.

Quote of the week

"The United States spent roughly $430 billion dollars on foreign oil in 2012. This is a direct wealth transfer out of our country. Many billions more are spent to keep oil shipping lanes open and oil geo-politics add considerable additional burdens. Although our oil imports are projected to fall to a 25 year low next year, we still pay a heavy economic, national security and human cost for our oil addiction." - U.S. Energy Secretary Steven Chu

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