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Peak oil review - July 1

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

1. Oil and the Global Economy

Oil prices rose slowly last week, reaching nearly $97.63 in New York and 103.50 in London before falling back to close at $96.56 in NY and $102.13 on profit-taking Friday. Driving the market higher last week were flooding in Alberta which slowed the flow of oil coming into the US from Canada and a growing consensus that the Federal Reserve will not slow quantitative easing in the near future. Turmoil in the Middle East and growing US involvement in Syria continues to support oil prices, as well as tentative indications that the US economy may be strengthening. A stronger dollar, however, helped keep NY oil futures from topping $100 during the recent rally.

The EIA reported that US crude production for April was up by 17 percent over last year to 7.35 million b/d. The 1 million b/d increase over the past year has led to a 10 percent drop in oil imports which were at their lowest for April since 1995.

The EIA also says that OPEC production for June was down by 300,000 b/d on unrest in Libya and Nigeria. OPEC exports are expected to increase, however, by 450,000 b/d in the next few weeks as the summer demand for driving fuels hits a peak around the world.

US gasoline prices continued to fall last week with the US national average now at $3.49, down from $3.57 the week before. Prices in the Midwest fell nearly 20 cents a gallon after falling 13 cents the week before last on news that the refineries are coming out of maintenance and inventories are rebuilding. The advent of the summer driving season has stimulated the demand for gasoline. Refinery utilization last week reached 90.2 percent, the highest level of the year. Although the demand for gasoline in the US is lackluster with the AAA predicting slightly less traffic on the road for the 4th of July holiday, the demand for diesel exports continues to be strong.

Natural gas prices fell sharply last week and are now down 20 percent from the highs reached in April. At the close on Friday, futures were at $3.57 per million BTUs which is getting into the price range where natural gas becomes more economical than coal for power plant operators who can switch fuels. The use of natural gas in power plants in April was down 22% from last year, however, as prices rose well above the $3.50 coal-gas switch point.

Cooler weather in the Eastern US and higher-than-expected injections into storage caverns were responsible for the decline. Weather forecasts for the first two weeks of July call for milder temperatures in the East while in the Southwest record highs are expected.

2. The Middle East and North Africa

Syria: The peace talks proposed by Russia and the US seem to be going nowhere and are unlikely to be held in the foreseeable future. For now both sides only want to discuss the surrender of the other so there seems to be nothing to talk about. The government’s offensive against Homs and Aleppo continues with Damascus reporting some progress. The debate over arming the rebels continued. Most of the discussion focuses on the possibility of shoulder-fired surface to air missiles falling into the hands of radical groups where they could someday be used to shoot down civilian aircraft. While the US has been very careful in delivering weapons to the rebels, the Gulf Arab states have been less so. The US, however, seems to be in the process of supplying modern anti-tank weapons to selected rebel groups. Given enough time, and adequate training, these weapons could neutralize the government’s advantage in armor forces, but this is still months away.

With Syria’s economy all but gone and under heavy western sanctions, Moscow, Beijing, and Tehran have stepped in to keep the government functioning. They are delivering $500 million a month in oil and are extending credit lines for whatever the government needs. It is this financial support that has given the government the confidence to go on the offensive against the rebels.

Rhetoric concerning the Syrian war is increasing. Gulf Arab governments are outraged at the Iran/Hezbollah intervention against the Sunni rebels and are supplying increased aid to the rebels. Tehran is warning the west that by supplying arms to Syria, it will turn the nation into a safe haven for al Qaeda.

It was a bad week for Lebanon which now hosts some 600,000 Syrian refugees including many requiring medical treatment. The country is a major source of supplies and manpower for both sides. Sporadic fighting between Sunnis and Shiites continues and last week 12 government soldiers were killed in a battle with a Sunni group. Lebanon too, seems on the verge of coming apart.

Iraq: Terrorist bombs continue to go off daily killing dozens each week while the political deadlocks between Baghdad and the Kurds/Sunnis continue. The government announced its new energy strategy which calls for the investment of $620 billion over the next 17 years to develop its oil fields. Baghdad hopes to bring in $6 trillion in revenue during the period and to have oil production increase to 10-12 million b/d from the current 3.2 million b/d. Many are skeptical as the country shows every sign of breaking apart, and cannot even agree on new oil laws after nearly a decade of trying. Iraq’s exports in May declined to 2.48 million b/d from 2.62 in April. Bad weather and attacks on the northern export pipeline were blamed for the decline.

In the meantime, Kurdistan’s regional government is planning to get its exports up to 1 million b/d by 2015 which is a more realistic target given the relative political stability of the region.

Iran: Iran’s President-elect says his election was a vote for change and constructive interaction with the outside world. He has promised to lower the rhetoric and find areas of compromise on the nuclear issue while preserving Iran’s right to enrich uranium. It is too early to tell about how this will turn out as it is wrapped up with the Syrian situation. There may be room for optimism, however, as the hardest of the hardliners were soundly defeated in the election.

In the meantime, the oil sanctions continue with mixed results. India and South Korea have pledged to make substantial cutbacks, while exports to Japan doubled in May from a year earlier although Japanese imports since January are down 17 percent since last year. Japan is concerned about the possibility of US sanctions so is unlikely to let its imports rise substantially.

Chinese imports from Iran of heavy fuel oil used in power plants and small oil refineries climbed to a five-year high. China imported 2.4 million tons of crude from Iran in May, up 4 percent from a year earlier.

Egypt: Numerous massive demonstrations, some numbering in the hundreds of thousands took place in Cairo and many other Egyptian cities over the weekend with the aim of driving President Morsi from power. At the root of the confrontation is the crumbling Egyptian economy which now has 50 percent of the population below the poverty level of $2 per day.

The motor fuel situation in Egypt remains critical and has worsened in the past week despite government denials there is a problem. Long lines formed at gas stations out of fear that shortages will only get worse. There are reports that Egypt’s petroleum minister told a Turkish newspaper that the country will be out of fuel reserves shortly.

The government now says that the fuel control system it plans to introduce in July for diesel and August for gasoline using smart cards will not be a “rationing” system as announced in March. The new plan seems to be one where vehicle owners obtain a “smart” card that will entitle them to about 475 gallons of subsidized fuel annually after which they will have to buy fuel at market rates. Owners of diesel powered vehicles are to go to designated distribution points to pick up a card, while gasoline powered vehicle owners will have to register at an online website for a card.

The government hopes to save millions of dollars through restrictions on subsidized fuel; the success of all this may depend on whether there is fuel available to sell in the quantities demanded. In the meantime the food and fuel shortages, and the ongoing political crisis, are threatening to turn Egypt into a “failed state” with unknown but obviously serious consequences for the region.

3. China

Concerns are growing that all might not be as well with China’s economy as its 7.7 percent growth rate in the 1st quarter would seem to indicate. At the root of the problem is the $2.5 trillion worth of economic stimulation that Beijing used to keep its economy growing in the wake of the 2008 economic slowdown and export slump. Most of this spending went to economically dubious projects such as high-speed rail lines paralleling regular tracks, bridges, airport terminals and condo buildings that still stand empty. The loans for these projects undertaken by local authorities are still on the books and may never be paid back. A recent book points out that China’s economy may really be growing at closer to 2-3 percent when you strip out all the empty condos and redundant rail lines.

The most reliable indicator of Chinese economic growth is electricity consumption which only increased by 2.9 percent in the first quarter. As GDP growth usually runs at 85 percent of electricity growth China may in reality have only grown on the order of 2.5 percent in the 1st quarter.

Beyond its outsized debt, China has the problem of near-lethal pollution to deal with. The new government is pledging to improve environmental quality and there are hints that it may be willing to adopt an absolute cap on CO2 emissions in the near future rather than simply cutting emissions per unit of economic growth without regards to what actually goes into the air. The goal of cleaner air will require reductions in the consumption of coal, which will likely lead to less power generation, less growth, and ultimately less demand for imported oil.

The recent Chinese interest rate spike may only be a symptom of more problems ahead despite statements from the Central Bank that all is well. From a peak oil perspective, China’s oil consumption may not continue to grow by 500,000 or so barrels per day every year for the indefinite future.

Quote of the Week

“I am sure China will have a total emission target during the 13th Five-Year Plan.” [ Ed. The move could enable an achievement that has eluded the world’s major nations for years: a binding international agreement on carbon caps that includes both the developed economies of West and East Asia and rising economic powers like China and India.] --Jiang Kejun, National Development and Reform Commission, China

5. The Briefs

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