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‘Slow motion’ oil shock

William Pesek Jr. Bloomberg News
The conventional wisdom that bombs and geopolitical risks are boosting oil prices and shaking up stock and bond markets is only half right. The other catalyst is one that won’t soon go away: Asia’s economic boom.

“While we recognize the risks associated with a supply shock in the oil patch, we believe investors should be just as concerned about the slow-motion demand shock evolving from Asia,” said Joseph Quinlan, New York-based chief market strategist at Bank of America.

Asia, after all, is home to about 3 billion people edging toward simultaneous booms in industry, urbanization and demand for automobiles and air travel. And at the moment, Quinlan said, “Asia’s energy resources are grossly inadequate.” The growing disconnect between Asian supply and demand alone could keep energy prices high in the years ahead.

…Billions of Asians getting richer by the day may leave prices with nowhere to go but up.
(23 July 2006)

Soaring bills ‘pushing millions into fuel poverty’

Charlotte Moore, Guardian
Huge rises in household utility bills over recent years are having a dramatic impact on Britain’s poorest families, a report claimed today.

UK households with the lowest incomes could be spending as much as a tenth of their incomes on gas and electricity, the price comparison website said.

Analysis of government data showed that during 2004-05, the poorest 10% of households – around 2.4m homes – spent 5.7% of their annual expenditure on gas and electricity. The average proportion for all households was 3.1%.

But the rapid recent rise in the cost of wholesale energy – which has pushed up the average gas bill by two-thirds and the cost of electricity by a half in the last three years – means that the poorest households could now be paying as much as 10% of their incomes on fuel, according to MoneyExpert. This would qualify them to be classified as “fuel poor” according to government criteria.

This latest warning comes hard on the heels of two previous reports this month from National Energy Action and the National Right to Fuel Campaign, which claimed that up to 2m households in England will face fuel poverty by 2009.
(25 July 2006)
Demand destruction at work. -BA

Is There An Oil ‘Bubble’

Robert J. Samuelson, Washington Post
Could there be an oil “bubble”? Well, yes. In early 2002 oil sold for roughly $20 a barrel; now it’s close to $75. The main cause lies in tightening supply and demand — and the fact that supply (as the present Middle East fighting reminds us) could be interrupted at any time. Old-fashioned speculation may also have played a role, and that raises the possibility of a bubble. But any bubble would be a peculiar beast, and if it burst and prices dropped significantly, we shouldn’t delude ourselves into thinking that this might signal a new era of comfortable abundance. It wouldn’t.

… Whatever happens, we should avoid the easy conclusion that speculators have artificially increased oil prices. In truth, they are speculating against real risks — the risk that oil from the Persian Gulf could be cut off; that hurricanes in the Gulf of Mexico could damage U.S. oil rigs and refineries; that political events elsewhere (in Russia, Nigeria, Venezuela) could curtail supplies. High prices reflect genuine uncertainties.

Oil is essential and insecure. A sensible country would minimize this insecurity by economizing on oil’s use (through taxes and tougher fuel regulations) and developing its own resources. We should have redoubled our efforts years ago; we should do so now.
(25 July 2006)
Douglas Low write in the ODAC News, “An excellent discussion of the role of speculators and oil storage in the current high price of oil. Points out that there is effectively no spare oil capacity”

Russia’s Yukos Oil Company Declared Insolvent

Russia’s former oil giant Yukos was Tuesday declared insolvent by a Moscow court, heralding the bankruptcy of the company built up by the now jailed tycoon Mikhail Khodorkovsky…

Yukos management values the company at more than 37 billion dollars.

Its Russian creditors, which are mainly drawn from tax authorities and the state oil company Rosneft, agreed to the initiation of bankruptcy proceedings.

The company’s downfall is widely seen as Kremlin retribution for Khodorkovsky’s business and political ambitions. Formerly Russia’s richest man, he was arrested in 2004 and jailed last year.

Rosneft later bought Yukos’ main production unit Yuganskneftegaz from a shadowy shell company after it was sold at compulsory auction to cover billions in tax debts.

The acquisition was termed “the scam of the year” by Russian President Vladimir Putin’s ex-economic adviser Andrei Illarionov.
(25 July 2006)

Poor countries bear up under oil price strain – IMF

The sharp rise in oil prices over the past three years has had little impact on the economies of the International Monetary Fund’s poorest borrowers, according to research by IMF economists on Tuesday.

As oil prices rose, these borrowers also had little need for additional IMF funding, the economists said, attributing this to strong global economic conditions.

They said any negative impact from the higher prices would have been evident through requests by countries for increased access under existing IMF programs.

“While IMF programs over this period have likely been designed with the impact of the oil shock in mind, there has not been an increase in waivers in IMF programs as a result of financial targets being missed due to the oil shock,” the economists said.
(26 July 2006)
I suspect that with trade becoming more expensive and grain harvests falling, within a few years a widespread debt-default movement might take place. This may be the only way countries trapped in World Bank / IMF debt cycles can rip up the cash crops of tobacco and coffee and begin feeding themselves. -AF