Peak Oil Review – June 18, 2007

1. Crude and Gasoline
2. The IEA Forecast
3. Nigeria at a Crossroads?
4. Peak oil in the media
5. Energy Bills
6. Oil exports
7. Energy Briefs

1. Crude and gasoline

Oil prices touched a 10-month high on Friday sparked by worries of low US fuel supplies and an upsurge of violence in the Middle East. The Wednesday oil stocks report showed US refinery utilization dropping to 89.2 percent rather than increasing as analysts had expected. Most observers believe US refinery utilization should be above 95 percent in order to prepare for the increased demand during July and August. Imports dropped to 1.1 million from the 1.5-1.6 million in the two preceding weeks. Several weeks ago Reuters surveyed European gasoline exporters and forecast that shipments to the US during June would drop from the pace observed in May. While analysts had predicted that US gasoline stockpiles would increase by 1.5 to 2 million barrels, they were reported as remaining the same.

Most of the current US gasoline shortage now is along the east coast, probably the result of the late May 5-day shutdown of a major pipeline which delivers gasoline from the Gulf refineries to east coast depots. The gasoline stockpile deficit in the east coast petroleum district is now on the order of 10 million barrels which makes the region vulnerable to shortages this summer — especially if hurricanes cause evacuations or other disruptions.

2. The IEA forecast

In its monthly Oil Market Report, the IEA reported that world oil supply fell by 565,000 b/d in
May to 84.9 million b/d, primarily because of a drop in Nigerian production. The Agency also
revised world demand for 2007 upwards by 1.7 million b/d to 86.1 million b/d. The widening gap between forecast supply and demand prompted the IEA to once again call on OPEC to increase production, warning that otherwise prices will increase significantly in the second half of this year. Once again OPEC reiterated that the oil market is fully supplied and that it will not consider raising output until September.

3. Nigeria at a crossroads?

In response to a call for negotiations from the newly inaugurated Nigerian President, a coalition of militant groups announced a cessation of attacks until the end of June and released 13 foreign hostages as a gesture of good will. In return, the government released militant leader Dokubo-Asari who it had been holding on treason charges. Returning to a hero’s welcome, Dokubo announced that he was opposed to hostage taking, but would continue to fight for a fairer distribution of oil revenues.

In the meantime, the situation on the ground continues to deteriorate. Kidnap-for-ransom gangs seized another group of foreign workers; government forces killed a boatload of militants; the UK advised its nationals to leave the Niger Delta; Shell is planning to cut costs $110 million by letting go local staff; fuel-tanker owners have stopped delivering gasoline and cooking kerosene in many areas; and finally a general strike to protest a variety of government policies is due to start this week.

The key question is whether the new President has the will and power to channel more of the oil revenues to the Niger villages or whether he is simply a captive of the elites that put him in office. The IEA noted this week that at times during May as much as 1 million b/d of Nigerian oil production was shut-in due to the unrest. The next few months may determine whether the social/political situation has gone over a tipping point that will result in further decreases in oil production or whether conditions will stabilize.

4. Peak oil in the media

In response to BP’s assertion last week in the Statistical Review of World Energy 2007 that the world has enough oil to continue producing at current rates for another 40 years, a major British newspaper, The Independent, ran a front page story entitled “A World Without Oil”. The story says “scientists led by the London-based Oil Depletion Analysis Centre say that global production of oil is set to peak in the next four years before entering a steepening decline which will have massive consequences for the world economy and the way that we live our lives.” The Independent’s story was rerun in numerous British Commonwealth newspapers, and in the US even got a link in the Drudge Report.

In a similar development, the US Weekly Business Week, which has been a firm disbeliever in the concept of peak oil, ran a guest column beginning “with global oil production virtually stalled in recent years, controversial predictions that the world is fast approaching maximum petroleum output are looking a bit less controversial.” Business Week ran the usual  disclaimer that views are solely those of the contributor.

5. Energy bills

The battle in both houses of Congress over the shape of energy legislation continued last week. In general the majority of the Democratic majority favors increased fuel economy, renewable fuels, energy efficiency, carbon capture, and as a sop to the voters, an anti-price gouging law. Opposition to these principles, however, is everywhere. Detroit is dead set against increased fuel efficiency, claiming it will cost an additional $6,000 per car and has brought along many Democrats from industrial states.

In general, Republicans oppose increased government regulation of fuel efficiency and will
support “renewable” fuels only if nuclear power and “clean” coal are included. The White House is threatening a veto over the price-gouging issue. There is also a mid-west/south (ethanol and cars) vs. the coasts (clean air, global warming) split shaping up.

So far the debate is framed mainly in terms of a response to global warming with a touch of
“energy security” thrown in. There seems to be almost no sense that a major response to
declining world oil supplies will be needed shortly, so the Congress continues to adhere to the perceived interests of its constituents and party ideology.

Given the current situation, it seems unlikely that meaningful legislation to reduce oil
consumption will come out of this year’s Congress. In the house there are only 144 co-sponsors for a bill that will require 218 votes to pass. It seems that only much higher gasoline prices and shortages will drive home the message that there is a major problem just over the horizon.

6. Oil Exports

There is a growing recognition that exports from oil producers to importing countries may
decline more rapidly than actual production due to a larger share of production being absorbed by internal markets. This is obviously a topic of vital interest to countries such as the US that imports nearly two-thirds of its petroleum. Last week Rembrandt Koppelaar of ASPO-Netherlands published a new study of oil exports.

Kopplaar concluded that:

1. Total world exports of all fuel liquids have been on a plateau since the end of 2004, and declined slightly in the last year, despite production increases.
2. Liquids exports from non-OPEC countries as a whole have declined since the beginning of 2004.
3. OPEC liquids exports increased until the end of 2005, followed by a short plateau after which a slow decline set in, mainly due to declining production in Saudi Arabia.

 7. Energy Briefs

• Chinese oil imports rose by 11.5 percent in the first five months of 2007. Beijing announced it will build more oil tankers in order to reduce reliance on foreign carriers. Domestic production of crude oil rose to near its two-year high as marginal new fields came on stream. Beijing Electric Power Corporation forecasts that peak demand for electricity will climb 20 percent above last year’s peak demand.
• In its annual Statistical Review of World Energy (see the Commentary), BP reported that growth in world energy consumption slowed in 2006 as compared to 2005. China continued to account for the majority of the growth in global energy consumption with an 8.4 percent increase, while North American consumption fell by 0.5 percent. BP also cut its estimate of world oil reserves for the first time in 16 years, but maintained that there were still sufficient reserves to maintain current production levels for the next 40 years.
• The US Energy Information Administration reported that US demand for oil during the second quarter is expected to grow by 1.1 percent over last year to 20.74 million b/d; full 2007 demand is expected to grow by 1.5 percent. US gasoline demand during the summer driving season is expected to average 9.57 million b/d.
• Insurgent damage to Baghdad’s bridges and refining capacity has resulted in as little as 25 percent of the city’s daily requirement for gasoline reaching the capitol’s gas stations. Lines approaching 1000 cars are common and purchases are being restricted to 50 liters.
• Iran isn’t willing to suspend its nuclear program, calling itself a “master” of enrichment technology. Meanwhile the New York Times reports on a debate within the Bush administration on whether to continue to push for sanctions or consider military strikes on Iranian nuclear facilities.
• Venezuela is still trying to complete repairs on its largest oil refinery that has a 600,000 b/d capacity. The Amuay refinery that has been shutdown since last March accounts for nearly half of Venezuela’s refining capacity.
• Construction of the first Russia to China oil pipeline is going well and is expected to be completed by next year. The pipeline will initially supply China 10 million tons of oil annually and will gradually increase to 30 million tons. The feasibility of three more gas pipelines from Russia to China is also being discussed.
• Chevron reports that deepwater exploration in the US Gulf of Mexico is being held back by a lack of rigs. “The tight rig market for deepwater rigs is a real throttle on the capability of the entire industry in the Gulf of Mexico.” Chevron factored rig availability into its plan to drill a second appraisal well at its ultra-deepwater Jack prospect, scheduled for later this year or early 2008.
• The Alberta Energy and Utilities Board says in its annual report it “has concluded that natural gas production in the province peaked in 2001.” Natural gas production has entered a decline that will continue no matter how much drilling is done.
• Saudi Aramco has informed the South Koreans it will cut crude oil allocations for heavier grades in July by 9.5% from contracted volumes. Earlier, two Japanese importers said they received notices of 9.5-10% cuts from Aramco, including lighter grades.
• A permit to start work on a federal oil shale research lease in Colorado was withdrawn by Shell to allow more time to iron out wrinkles in the frost-wall. According to Shell, despite some setbacks the company still plans to pursue its longtime efforts to mine shale oil.
• The U.S. energy industry has sharply reduced its production of heating oil in favor of cleaner, higher-profit fuels like diesel — a move that could see the nation relying more heavily on imports next winter heating season, analysts said Wednesday.
• More US workers than ever are driving alone to work, balking at carpools and mass transit. Regardless of fuel prices, housing and work patterns make it hard for suburban commuters to change their ways. From 2000 to 2005, the share of people driving alone to work increased slightly to 77 percent.
• Almost a third of the U.S. corn crop will be used in five years to produce fuel ethanol, possibly raising animal feed costs for farmers and meat prices for consumers, a new government report warned Monday. About 27 percent of this year’s corn crop will be used to make ethanol, according to the Agriculture Department.
• The price of gasoline in OECD countries ranges between $4 and $7.75, with an average price close to $6. At $3.10, the US price is closer to the subsidized price of several oil exporting countries than that of its OECD colleagues.
• In the past 10 years, refining capacity in the U.S. has increased by about 2 million barrels per day, which is the equivalent of about 10 good-sized refineries. Existing refineries can be expanded at 60% of the per barrel cost of building a new refinery.

Stat of the Week: Gasoline reserves on the US east coast

• Last week’s petroleum status report shows that reserves in the US’s east coast
  petroleum district fell by another 1.7 million barrels to 449.8 million. This is at least 10
  million barrels lower than normal for this time of year.

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.