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Peak Oil Review - May 28, 2007

1. Gasoline

2. The Nigerian Inauguration

3. Impact on Developing Countries

4. Energy Briefs 

1. Gasoline

Last week’s news did little to clarify the US gasoline situation for the summer driving season. Wholesale gasoline prices dropped 10 cents per gallon prior to the Wednesday stocks report, based on analysts’ expectations that the stockpile situation would improve. Gasoline production did increase last week while imports dropped a bit. Despite the high prices, however, demand for gasoline continues to run more than 100,000 b/d above the same week last year. The net result was that total US gasoline stocks rose by 1.43 million barrels vs. the week before last, though well below the increase necessary to alleviate concerns about the adequacy of stocks for the summer driving and hurricane seasons. Gasoline stocks are particularly low in the upper Midwest and along the East Coast.

After the report was digested, wholesale gasoline gained back the 10 cents it had lost earlier to close unchanged. Many are skeptical that US refineries can produce enough gasoline to keep up with increases in demand this summer; much less cope with the aftermath of a possible hurricane strike along the gulf coast.

The major news of the week, however, was the continuing increase in gasoline prices, to a national average of more than $3.20 a gallon – up nearly 40 percent since the beginning of the year. Citing a much different figure than they shared in March ($2.75 gasoline for the summer), the EIA opined that the run-up still had a ways to go, but that prices should start dropping in June. On Capitol Hill, there was much fulminating and talk about breaking up the oil companies.

US demand for gasoline is starting to be felt abroad. In Germany, gasoline reached $7.10 a gallon last week and the British expect that petrol will soon hit £1 per liter. The EIA still maintains we can import enough gasoline to get through the driving season and to lower prices later this summer. Consider us skeptical.

2. The Nigerian inauguration

It was a relatively quiet week in Nigeria. Some oil production came back online but seven oil workers, including three Americans and four Britons, were taken hostage and hauled off into the swamps. A nationwide oil workers strike protesting the sale of the Port Harcourt refinery was settled after the government agreed to a 15 percent wage increase for oil workers.

This week a coalition of labor and civic groups are planning two days of nationwide strikes and demonstrations to protest the inauguration of the new President after what they see as a fraudulent election. The government has responded by declaring a holiday and threatening to crush demonstrations by force. It is unclear just how the situation will develop. The unions, who last week demonstrated their ability to stop oil production, have said they do not want to destroy Nigeria’s economy, but want to send a clear message they are unhappy about the manner of the new President’s election.

Another important factor will be the actions of the main insurgent group, the MEND, who recently announced they were through with kidnappings of foreigners and were about to embark on a program to destroy more of the country’s oil infrastructure. These attacks are supposed to coincide with the inauguration of the new president on Tuesday. It could be a bad week for oil exports.

3. Impact on developing countries

A combination of droughts, high oil prices, and shortages is causing economic hardships in an increasing number of countries. In many places, power outages are becoming a normal part of daily life. Blackouts range from an hour or so to many hours a day, depending on where one lives. Short outages are merely annoyances, but as they lengthen, vital services such as refrigeration and water supplies are threatened as well as economic development.
Last week an emergency government loan allowed Senegal’s power company to purchase enough fuel to avert a total shutdown of the country’s power grid. In Uganda, the government asked the parliament for $300 million to deal with the current electricity, gasoline and diesel shortages. Ghana’s GDP will drop by $1.4 billion this year due to electricity shortages. The country began “load-shedding” last September. Many countries are importing large diesel generators as a quick way to increase generating capacity. These, however, are relatively inefficient and will require the purchase of increasingly expensive diesel fuel.

In India, Pakistan, and Bangladesh the blackouts are now commonplace and there is no end in sight. The problem is complicated by the need to keep irrigation pumps operating in order to insure food supplies. Despite optimistic talk of importing LNG, pipelines, nuclear and hydro plants, these solutions are many years or decades away if they happen at all. For the immediate future, the shortages are likely to increase.

4. Energy Briefs

  • Mexico’s trade deficit widened in April as lower oil exports reduced overall export growth and imports expanded at a steady pace. The actual deficit--$781 million—was nearly double the $381 million median estimate in a Dow Jones survey.
  • Pemex announced that it produced 3.18 million b/d oil in April, unchanged from March but down from 3.37 million b/d from April 2006. Pemex exported 1.68 million b/d last month compared with 1.78 million b/d in March, and 1.83 b/d in April 2006. About 80% of Pemex's crude exports go to the U.S.
  • The EIA now projects a fall in Mexico's output to 3 million barrels a day from a current production of around 3.2 million. That compares with last year's projection by the EIA for an increase to 4 million barrels a day. The EIA particularly pointed to a 14% annual rate of decline in production at Pemex's largest oil field at Cantarell.
  • Kuwait unshackled its dinar from the US dollar and switched the exchange rate mechanism to a basket of currencies, throwing plans for currency union with other Gulf Arab oil producers into disarray.
  • As oil companies working in the Gulf of Mexico prepare for an active hurricane season, experts say more drilling in deeper waters farther out to sea has made the U.S. more vulnerable to energy disruptions. The GOM is the source of 30% of U.S. domestic oil production and 20% of its natural gas output.
  • Dozens of new ethanol plants are planned in the US thanks to federal subsidies and grants. These investments should more than double the annual production of ethanol to 734,000 b/d of gasoline equivalent. Ethanol producers recognize that it is not clear how an additional 20 billion gallons/year of ethanol (President Bush’s goal) would be produced from cellulose or biomass.
  • Analysts fear any conflict between Iran and the U.S. could result in the closure of the Strait of Hormuz, through which tankers ship carry about 17 million barrels of crude oil a day — 20% of the world’s daily consumption.
  • Sue OPEC? A bill approved by the House last Tuesday would allow our government to sue OPEC members. The bill, which also has strong support in the Senate, would amend antitrust laws to make it illegal for foreign governments to curb oil and natural gas production or control energy prices. [Ed. note: we’re dumbfounded by this bill.]
  • Widespread drought in Australia is causing electricity prices to soar as hydroelectric water-storage levels plummet and coal-fired power stations cut output due to lack of water for cooling.
  • The Kurdistan Regional Government will block the draft hydrocarbons law in parliament, raising the stakes in a row with the Baghdad government over control of Iraq's oil reserves.
  • A subsidiary of Russian-British TNK-BP Holdings could lose its license for the massive Kovykta gas field in Siberia before June 1, a top Russian environmental official warned.
  • Iran wants to develop previously untapped oil fields shared with neighboring Iraq, a move that will benefit the two countries, an Iranian oil official said on Saturday. "We hope to start working together. Both countries stand to gain. We would strengthen investment and make the best use of our shared fields."
  • Iran is making substantial advances in uranium enrichment in defiance of world demands, U.N. monitors said on Wednesday, opening the way to harsher sanctions against Tehran over fears it is seeking atom bombs.
  • Iran is to introduce gasoline rationing in two weeks in a move that threatens to trigger a popular backlash against its president. The country's motorists - used to some of the cheapest fuel in the world - will be restricted to three liters a day under a scheme to cut fuel consumption and reduce the burden of providing subsidized gasoline.

Quote of the Week

“These executives [82% of 553 financial executives surveyed from oil and gas companies] are deeply concerned about declining oil reserves, a situation they see as irreversible and worsening.”

            Bill Kimble, w/ audit, tax and advisory firm KPMG LLP

ASPO-USA is a nonpartisan, proactive effort to encourage prudent energy management, constructive community transformation, and cooperative initiatives during an era of depleting petroleum resources. ASPO-USA will hold its 2007 World Oil Conference, October 17-20, at the Hilton Americas in downtown Houston, Texas.

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