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Peak oil review - Dec 30

Published by ASPO-USA on 2013-12-30
Original article: by Tom Whipple

1.  Oil and the Global Economy
Oil prices rose modestly during four holiday-week trading sessions. At week’s end, NY oil was up about $1.50 a barrel to close at $100.32 and London was up to $112.18 at the close although it had traded as high as $112.80 on Friday. At Friday’s high, London oil was less than a dollar below the contract-high seen during the Libyan uprising in 2011.  Behind the price increases were the production outages in Libya and South Sudan; a refinery strike in France which has now been settled; and increases in US refinery output – much of which is being exported to make up for shortages in Europe.
The weekly stocks report which was not released until Friday showed unexpectedly large declines in US crude, gasoline, and distillate inventories. Most of the decline in crude inventories took place along the Gulf Coast where crude which is in stock on January 1st is subject to taxation by local authorities. To avoid these taxes refiners traditionally cut back imports to these refineries until after the first of the year. This phenomenon may be responsible for the recent build up of crude at Cushing, Okla.
The stocks report showed that US crude production grew by another 53,000 b/d to 8.11 million the week before last; US refining is running at a record pace for this time of year with gasoline production up to a record 9.72 million b/d, the highest since record-keeping began 30 years ago. The “demand” for US crude products is running about 1.7 million b/d above last year; gasoline prices are 20 cents a gallon lower than last summer; and the US economy seems to be doing modestly better – if for no other reason than we are importing a lot less oil.  
US crude is costing US refiners about $12 a barrel less than refiners are paying in Europe and cheap natural gas is used to run refinery oil heaters. Even when the large amounts of imported crude are averaged in, US refiners enjoy a major cost advantage over those in Europe despite the transportation costs. The US government does not track exports on a current basis but estimates that the week before last the US exported 3.58 million b/d of oil products as compared to 2.90 million in December 2012. It may be several months before we get more accurate export figures.
US gasoline futures climbed last Monday and hovered around $2.83 a gallon for the rest of the week on increasing demand. Futures prices are now within 10 cents a gallon of highs last seen in the spring of 2011 and are up 30 cents a gallon since early November. Retail prices were up about 6 cents in the last week. All this suggests the supply shortages in the Middle East and large US exports are starting to be felt at American gas pumps.
The EIA also reported last week that US propane stocks are now 31 percent lower than a year ago due to cold weather and increasing export demand. US export propane capacity has been increased in the past year so that in September, the most recent month available, US exports reached 335,000 b/d, up from 187,000 b/d in September 2012.  Propane is widely used across the world as the only source of cooking fuel available to millions in urban areas.
US natural gas futures topped $4.50 per million last week – up nearly $1 in the past two months on colder weather. As more businesses switch to natural gas due to air regulations, fears are starting to grow that the age of cheap natural gas may be drawing to a close. The cold weather has brought unexpectedly large drawdowns in US inventories which are now 13 percent below the five-year average for this time of year.
2.  The Middle East & North Africa
Syria- Lebanon:  As the Syrian uprising drags on, neither side seems able to muster the strength for a decisive blow. In the meantime humanitarian concerns continue to grow with refugee suffering getting worse each day. The Assad government is stepping up its use of “barrel bombs” against unfriendly civilians and has killed over 500 of them including 150 women and children in the last two weeks.
Questions are starting to arise as to whether the national states, such as Syria, Lebanon, and Iraq which were set up by Britain and France in the wake of the collapse of the Ottoman Empire nearly 100 years ago, can survive. A new report says that Shiite-dominated Iraq is playing an important role in smuggling oil to the Assad government through Egypt. About the only good news from Syria is that the neutralization of the government’s chemical weapon stockpile seems to be moving along fairly well – even Moscow is helping out by sending armored trucks to transport the gas to the sea coast.
In the past week most of the news has come from Lebanon, where a senior Sunni politician, Mohamad Chatah, who was opposed to the Assad government and Hezbollah’s intervention into Syria, was assassinated.  Chatah was described as the “brains” of Sunni opposition to the intervention in Syria and likely was killed by Hezbollah in a sophisticated bombing attack that blew up his car and many others unfortunate enough to be passing by. This adds another yet another twist to the turmoil brought on by the Syrian uprising which clearly is destined to continue for a long time.
Iraq: It was the Christians’ turn to take a hit last week in Baghdad with some 40 being killed during bombings near Christmas services. A major gun battle erupted when the government’s police tried to arrest a Sunni member of parliament who has been leading the opposition demonstrations against the Maliki government. The lawmaker’s brother and five of his body guards died in the attack while 12 other bodyguards and members of his family including his wife were wounded as he was hauled off to be tried for terrorism against the government. The arrest came as the government launched a general offensive against protestors in Sunni-majority provinces.  The moderate Sunnis say they are being driven in the arms of Al Qaeda, and it is only a question of time before these hatreds morph into an open civil war which is bound to impact oil production.
Despite the rising body count, the Financial Times reports there is a resurgence of western companies setting up shop in Iraq in hopes of getting a piece of the opportunities provided by growing oil production.
Libya:  The government announced that oil production in December was up slightly to 250,000 b/d from the 224,000 b/d being produced at the end of November.  As more than half of Libya’s current production goes to domestic consumption, exports remain about 110,000 b/d, down from 1 million in July.
Libya briefly held four US military personnel last week after they ran afoul of a local militia’s road block. The security situation is tenuous and little progress seems to have been made on the oil embargo issue, despite the damage it is doing to the country. Dissolution of the Libyan state seems the most promising way to revive oil production.
South Sudan: Oil production was halted last week after workers fled the oilfields in the wake of heavy fighting in the towns. The UN says 120,000, out of a population of 11 million, have been displaced. Another 5,000 UN peacekeepers have been sent to the country raising the total to 13,800.  This is another African tribal bloodbath with the government being ethnic Dinka and the opposition ethnic Neur. Casualties could already be in the tens of thousands. For what it is worth, the Dinka President of South Sudan, Salva Kiir, is always seen in a black cowboy hat given him by George W. Bush.
For now the Dinka government, which spends most of its revenue on an oversized army, seems to have the upper hand by taking back a pair of important towns overrun by the Neur. Before the partition, both Sudans produced about 500,000 barrels of oil per day with about 350,000 b/d coming from the south. After partition, oil exports dropped markedly after a dispute over pipeline fees. Given the carnage of the last two weeks, it is doubtful that we will be seeing much of 350,000 b/d going to export for the immediate future.
Egypt: Violence is on the upswing with bombings of police stations and a bus taking place last week. The government’s crackdown on the Muslim Brotherhood is in full swing with the Brotherhood being designated a terrorist group and arrests of its leaders taking place.  The Brotherhood’s supporters are defying the crackdown and protests, some violent, are taking place across the country. Two buildings at the University of Cairo were set on fire by the protestors. The situation seems to be turning into a giant existential fight to the end between the military government and the Brotherhood.
About the only good news was that Cairo made a partial payment on the $6.4 billion it owes international oil companies for previous oil deliveries. The money probably came from loans made by the Gulf Arab states which see it in their interest to keep Egypt afloat rather than chancing millions of Egyptian refugees swarming across their borders. If the energy debt is repaid, Egypt can expect to normalize commercial relations with the oil companies.
3.  Quote of the Week

                         -- Jadwa, an investment company based in Saudi Arabia, from a recent study (Dec 23)
4.  The Briefs


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