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Peak Oil Review – Dec 2

Published by ASPO-USA on 2013-12-02
Original article: by Tom Whipple

 1.  Oil and the Global Economy
New York oil prices continued to fall last week closing on Friday at $92.72 down from $106 three months ago -- the longest losing streak in five years. Increasing US production, tepid domestic demand, and imports of 7.7 million b/d (even though they are at a 13 year low) have resulted in US commercial crude inventories which are approaching the 400 million barrel level, up from 275 million at this time last year.  We are currently in the time of year when crude inventories usually build so if trends continue we could see a stockpile of 425 million barrels next spring.
US exports of petroleum products have been unusually strong in recent years. In addition to the excess capacity caused by weak domestic demand, cheap natural gas which is used to fuel their refineries has given US refiners a major advantage in comparison with their foreign competitors. While output from US refineries is running some 5-6 percent above this time last year, much of this is going to export.
With US domestic production climbing from 6.8 million b/d at this time last year to 8 million b/d the week before last, many are expecting this trend to continue with US production rising above 9 million b/d in 2014 and possibly above 10 million by the end of 2015 which would result in major dislocations to the oil markets. US tight oil production has risen faster in the past two years than many observers had expected as producers concentrated their drilling in a limited number of “sweet spots” -- where new wells are far more productive than the average for the region.  Obviously, these “sweet spots” are relatively small and finite so at some point there will be no more places to drill new wells and depletion will overtake production.
Although independent analysts were saying that production of US tight oil would peak somewhere around 2017, the rapid exploitation of the “sweet spots” could mean the places to drill for tight oil that can be produced economically could run out before then.  Overall shale oil production may be profitable, perhaps only marginally, but the day will come when these multi-million dollar wells are not covering the high costs of drilling, fracking, and washing out salt buildup.
In the rest of the world, however, things are not going as well as in he US which is why London prices continue to be strong.  After touching a low of $103 in early November, Brent crude climbed steadily last month; traded around $111 for most of last week; and then fell to a Friday close of $109.69 after the European Central Bank cut its financing rate thereby weakening the euro and London oil futures.
A survey taken late last week suggests that OPEC’s November crude production fell to a two year low of just above 30 million b/d, down about 245,000 b/d from October. The troubles in Libya and Iraq are well known, but Nigeria’s production slipped by 100,000 b/d due to unrest in the Niger Delta, and even the Saudis, who pumped a 40-year record 10 million b/d in September, slipped back to an estimated 9.65 million b/d last month. 
Despite much talk of increased Iranian exports, the recent agreement will only free up Iran’s finances a little and should still hold a lid on its oil exports. For now the increased US production of tight oil from Texas and North Dakota seems to be balancing off weaker OPEC production resulting in lower oil prices in the US and higher prices for the international markets.
US natural gas prices climbed steadily from $3.50 per million BTUs in early November to $3.95 on Friday due to colder weather in much of the country. These low temperatures are forecast to moderate this week.
2.  The Middle East & North Africa
Iran: Most news about Iran last week focused on the long-range implications of a rapprochement between Tehran and the West.  A deal that would implicitly recognize Iran’s right to enrich; restore normal trade relations; open Iran to unlimited investment; and allow Tehran to export as much oil as it can has many implications for the future of the Middle East.  Some states such as the Saudis are already taking the de-demonizing of the Iranians rather hard. There is talk of more nuclear proliferation in the region even if Iran’s nuclear programs remain under strict IAEA inspection.
The opening of Iran to unlimited western investment would likely speed the development of Iran’s giant Pars natural gas field which could become a major source of gas for the region and Europe. The Pars field could become a major competitor for Israel should it get into the natural gas export business.
Iran’s possible return to exporting more oil has already set off a row within OPEC as to whether other countries should cut production to accommodate Tehran’s return.  Some exporters, such as Venezuela, fear that world prices will be driven lower by a comprehensive nuclear agreement.  Negotiations over the next stage of the agreement begin this week.
Iraq: Violence is reaching levels not seen in the last six or seven years as the Shiites begin to retaliate for the rain of truck and suicide bombings that Sunni radicals have showered on their markets, cafes, and mosques. Rather than random blowing up of civilians and the occasional security installation, the Shiite terrorists seem to prefer targeted kidnappings and summary executions of prominent Sunnis not surrounded by phalanxes of body guards.  On Friday 50 people were taken, some from their homes, by armed men and executed. They join the 6,000 already killed by terrorists in Iraq this year.
Exxon continued its retreat from Iraq proper to Iraqi Kurdistan last week by reducing its stake in the 9 billion barrel West Qurna oilfield from 60 to 25 percent. As could be expected the Chinese were only too happy, to take over a substantial piece of Exxon’s share. The field now produces 500,000 b/d but many believe it has the potential of reaching 3 million, placing it among the world’s largest producing fields. Baghdad had been warning Exxon to choose between West Qurna and doing business with the Kurds, or risk expulsion, but has recently toned down its rhetoric realizing that Exxon’s precipitous departure would only slow plans for increased production.
Iraqi Kurdistan and Turkey signed a multi-billion dollar energy deal last week which has infuriated Baghdad as it claims sole authority to manage oil production from anywhere in Iraq.  Neither the Turks nor the Kurds are officially acknowledging the deal in hopes they can get Baghdad to accept the situation, perhaps for a cut of the revenue. Turkey is currently spending $60 billion a year on energy to support its growing economy and Ankara hopes that the Kurdish deal will enable it to reduce its heavy dependence on Russia and Iran.
Libya:  There was no break in the standoff between the government and a hodge-podge of militias, unions, separatists, and tribes that are preventing most of Libya’s oil from flowing to  export terminals. So far the government has been unable to negotiate a settlement. Over the weekend Libya’s fledging army issued a strongly worded ultimatum to the protestors to release the oil or the country would collapse, but few believe the army has the strength to back up its demands.  Last week however, after fierce fighting, an army unit in Benghazi succeeded in driving a powerful local militia from its headquarters and forced it to scatter.
With oil exports in the vicinity of 250,000 b/d, the government is only receiving 20 percent of the revenue that it was earlier this year. Soon the government will have no money to pay its employees, its Army, or the tens of thousands of militiamen that are on the government payroll as “security.”  There is some talk of the US offering training to the armed forces, but other than this there is nothing on the horizon that might stabilize the situation and return oil flows to normal.
Egypt: The military government is becoming more autocratic all the time in its efforts to suppress the Islamists.  Last week it sentenced a group of female protesters to 11 years in prison for participating in a pro-Morsi demonstration in the face of a new ban on public protests. Other demonstrations for human rights at the University of Cairo were broken up violently by riot police.  Cairo currently is running on large loans from the Gulf Arab states in the hopes that its economy eventually will revive. If it does not, and the loans run out, we can expect more turmoil.
Syria: As the uprising drags on, disillusionment is growing in the rebel ranks as government forces with the help of Hezbollah appear to be making progress in regaining ground. Scattered fighting is continuing among the various rebel and tribal groups that make up the insurgency.  Some insurgent groups and their leadership have turned into little more than criminal enterprises, selling oil from captured fields and smuggling goods into the country. Some rebel leaders seem more interested in hanging on to the power and wealth they have garnered by taking part in the uprising than in overthrowing the Assad government.
Things are not well for the government either, which has little economy left and is dependent on Moscow and Tehran for financial and logistical support. Insurgent attacks on the refinery in Homs and heavy fighting along the Damascus – Homs highway have resulted in a severe gasoline shortage in the capital. The government announced recently that its oil production has fallen from 380,000 b/d in March to 20,000 b/d.
Peace talks are now scheduled for January 22nd in Geneva.  With both sides only interested in the unconditional surrender of the other, it is difficult to see that anything will be accomplished.  In the meantime, the refugee crisis and the movement of insurgents across borders gets worse, threatening the stability of Lebanon, Iraq, and Jordan, and perhaps one day, the Gulf Arab states.
3.  China
The big news from Beijing last week was the announcement of a new policy aimed at shutting down the country’s thousands of small, inefficient coal producers or forcing them to consolidate with the giant state-owned coal companies. These produce the bulk of the 4 billion tons of coal China consumes each year.  The industry currently produces some 70 percent of China’s energy at the cost of many lives as well as a burgeoning pollution problem that could eventually slow or even halt economic growth.
Beijing clearly realizes that it cannot cut back on coal production without harming economic growth. It can, however, move coal burning out of its megacities where pollution is already at dangerous levels and take similar actions to reduce pollution. It would seem that the new policies are aimed at gaining more centralized control over the coal industry. Efforts to do this before have had little success as local governments derive revenue from taxing small private mines and they provide large sources of employment. The best estimate is that China’s coal consumption will continue to grow at its accustomed pace of nearly 10 percent a year for the immediate future.
For those keeping score, China continues to buy up foreign sources of oil and gas at a frenetic pace. Last week there were reports concerning recent deals from Iraq, Ecuador, British Columbia, and Egypt.
4. Quote of the Week

           -- Financial Times (11/26)
5. The Briefs


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