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Peak Oil Review – Dec 16

Published by ASPO-USA on 2013-12-16
Original article: by Tom Whipple

1.  Oil and the Global Economy
New York oil prices topped out on Wednesday last week at just below $99 a barrel which was up nearly $7 a barrel since late November. When the weekly US stocks report showed an 11 million barrel buildup in US oil product stocks and weaker domestic oil product demand, prices began to fall.  Total US petroleum consumption now has dropped 7.1 percent since mid-October – likely due to the various cutbacks in federal spending which took place this fall.  On Friday NY oil futures fell 90 cents to close out at  $96.60 on fears that the Federal Reserve meeting this week will cut back on bond buying thereby forcing up the dollar and reducing foreign demand for oil.
In London oil futures fell steadily last week, down about $4 from early December on hopes that oil shipments from Eastern Libya would be resumed soon.
The EIA reported that US crude production climbed a bit last week to 8.08 million b/d; however, the spectacular rate at which US crude production has been increasing during the last three years seems to be easing. Newly released data from North Dakota shows that increases in crude production, mainly from the Bakken fields, was up by only 8,500 b/d in October. This contrasts with increases of 51,000 b/d in July; 37,000 b/d in August; and 20,000 b/d in September. Bad weather across the northern plains this winter is likely to hamper production increases still further. 
North Dakota completed 202 new oil wells in October while production was up less than 1 percent. This suggests that we may be nearing the day when it will take all the new wells that North Dakota can add each month simply to maintain its circa 1 million b/d rate of production.  There are other indications that the era of rapidly increasing tight oil production may be coming to an end. The number of wells that have been drilled and are awaiting fracking has fallen from 1000 last December to 460 at the end of October. The length of new wells and the amount of fracking taking place is on the rise suggesting that best drilling sites are being rapidly used up. North Dakota also reported that Bakken oil, which is very light and must be shipped to refineries by relatively expensive rail cars, is selling for about $20 a barrel less than West Texas Intermediate. This suggests that profits from drilling in Bakken may be falling.
2.  The Middle East & North Africa
Iran: Tehran’s delegation walked out of the technical talks on its nuclear programs last week to protest a new US blacklist of firms doing business with Iran. On Sunday, however, Iran’s Foreign Minister said his country would continue the negotiations despite the “unsuitable actions.” Iran’s immediate future is intimately linked with the ending of the sanctions, so political posturing that would slow negotiations is likely to be short-lived.
Iran cancelled its planned $500 million dollar loan to help finance the Pakistani leg of the Iran-Pakistan gas pipeline. Tehran noted that Pakistan has made no efforts to start construction on its part of the pipeline that is supposed to be completed by the end of 2014. The Iranians also noted that the sanctions had prevented it from accumulating hard currency for the project.
Tehran’s new natural gas pipeline to Iraq, which is already well under way, suffered a setback when masked terrorists, likely from Al Qaeda, showed up at a pipeline construction site and slaughtered some 18-25 construction workers and engineers, mostly Iranians, digging the trench. Tehran maintains the attack will not slow the project, but has called for the Iraqi Army to guard construction sites. The general lack of security in the region raise doubts that such a tempting target, which enhances the fortunes of the Shiite government in Baghdad, will ever deliver much natural gas.
Iraq: In addition to the killings of the pipeline workers in eastern Iraq, the usual round of bombings and shootings continued last week. Violence is now at the highest level since 2008. In another spectacular prison break, 22 suspected terrorists broke out of the al-Adela prison last week; Baghdad says most were caught or killed, but eight got away to fight another day.
The Iraq Oil Report says that oil from Kurdistan has already started to flow into Turkey through the province’s new independent pipeline. Realizing there is little they can do, Baghdad seems to be acquiescing in the deal and says that the Kurds must get world prices for the oil and funnel the revenues through the Iraq Development bank account in New York – an unlikely occurrence. Many observers fear that new oil revenues will allow the Kurds to form their own independent state setting off still more turmoil in the region.
Libya: The announcement by Libya’s Prime Minister that three eastern oil export terminals, with a combined export capacity of 600,000 - 900,000 b/d, would reopen soon appears to have been premature. A Libyan rebel leader said on Sunday that the ports would remain under control of local authorities and that exports would have to be negotiated with the Executive Office of the Cyrenaica Region.  London oil futures fell last week on expectations that larger Libyan exports would resume soon.  However, It now appears that oil production will remain in the vicinity of 200,000 b/d, half of which is going to domestic consumption, for the immediate future.
Tripoli’s gasoline shortage has entered its third week as the army deployed men to protect the city’s 22 gasoline stations which are dealing with mile-long lines of vehicles waiting to refuel. The price of gasoline on the black market is double that of the official price.
With the exports shutdown now entering its sixth month, the central government’s revenues are running low. It is already seeking foreign loans so it can keep paying its employees and the thousands of armed militiamen who are running around pretending to be “security.” The country is supposed to have $128 billion in foreign reserves, so there seems to immediate danger of financial collapse. However, there is no solution in sight to the fundamental question of who shares in the oil revenue.  It may be quite a while before we see Libyan exports back above 1 million b/d.
3. Mexico
It was an historic week in Mexico City when the Congress passed a bill changing the country’s constitution to end the government’s 75-year monopoly on oil and gas production in an effort to attract foreign investment and to restore economic growth. The bill has passed the Senate and House and will be sent to the states, half of which must approve any constitutional change. The move marks the end of an era in Mexican history beginning when the country threw out the British and American oil companies during a burst of nationalistic fervor. “Oil Expropriation Day” which dates to 1938 is still celebrated in many Mexican cities and towns.
As traditional sources of oil dried up and production sank, most Mexicans realized that it would take foreign technology to drill the deepwater wells and frack Mexico’s shale deposits. Mexican crude exports have fallen by a third since hitting 3.1 million b/d ten years ago. Mexican imports of US natural gas have doubled in the last few years and are due to increase rapidly as new pipelines are built and large quantities of refined oil products are being imported.  Mexico is becoming an energy deficit state and if current trends continue will soon be importing more oil than it exports.
Proponents of the constitutional change hope that foreign oil companies will invest heavily to get at the 29 billion barrels of deep water oil that are believed will be found in Mexico’s Gulf waters. They are also interested in exploiting the large quantities of shale gas believed to be under their country.
4. China
The news from Beijing last week mostly concerned the economy, air quality, and climate change. Newly released economic figures show that China’s economy is doing better in the 4th quarter than most analysts had expected so that Beijing’s growth goal of 7.5 percent GDP growth this year should be attainable. Industrial output in November was up 10 percent from November of 2012.
Thick smog settled in over parts of eastern China last week sending air quality monitors off the scale. In one province eight cities were fined a total of $9 million for allowing air quality to deteriorate badly -- showing that the central authorities are reacting to the people’s concerns about air quality. Shanghai registered the worst air conditions since record keeping began. Among Shanghai’s solution to dangerously high concentrations of air particles was to raise the threshold for triggering alerts.  While China is making efforts to shut or move large coal burning facilities, this conflicts with efforts to maintain economic  growth at 7.5 percent and is very difficult to achieve in a short period of time. We will undoubtedly be hearing more about this problem before the winter is over.  Among the quicker solutions is to increase the importation of LNG as a cleaner substitute for coal.
Beijing released its first nationwide blueprint for adapting to climate change. This document seems to take the position that cutting carbon emissions in an effort to reverse climate change would be too costly to economic growth so a better approach is to develop plans to deal with the floods, extreme storms, drought, and tidal surges as they come along. The plans include developing early warning systems for forecasting bad conditions, better disaster response plans, artificial rain and insurance for those whose livelihoods are destroyed by extreme weather conditions. The plan does recognize that China with a long low coastline is highly vulnerable to climate change, but for now Beijing is not willing to give up economic growth, even with the accompanying pollution, as its primary goal.
5. Quote of the Week

[Congress made most oil exports without a license illegal in the 1970s to conserve supplies at a time when OPEC oil embargoes produced long lines at gas stations and threatened the American economy.]

                -- Senator Edward J. Markey (D-Massachusetts)
[But over the last five years a frenzy of oil drilling in shale rock formations in Texas and North Dakota have produced a glut of crude in the Midwest and Gulf of Mexico states.]

                -- Energy Secretary Ernest Moniz

6. The Briefs


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