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Peak Oil Review - July 30th, 2007

1. Crude Oil and Gasoline
2. $100 Oil?
3. U.S. Energy Policy
4. Energy Briefs 

1. Crude and gasoline

It was an unusually volatile week for oil. Prices fell for two sessions on expectations of higher US refinery production and remarks by an OPEC official that the cartel stands ready to pump more oil if needed to save the world from an economic slump.

On Wednesday the US stockpile report showed that US refineries were doing a little better but that a record 1.7 million b/d of gasoline imports had resulted in an 800,000 barrel increase in US gasoline stockpiles despite near-record consumption. After the report was issued, analysts noted that US crude stockpiles had declined for the third consecutive week; that imports were about the same; and that the improving refining situation suggested the US would continue to draw down stocks. This resulted in US crude surging to the highest level since last August.

A shrinking US stockpile at the NYMEX delivery depot in Cushing, Oklahoma led to prices for US WTI crude catching up with those of the UK’s Brent crude for the first time in months.
When the stock market began to fall on Thursday, oil joined in on the premise that a weaker US economy would use less oil. On Friday however, when it was reported that the GDP had grown by an unexpected 3.4 percent in the second quarter, oil surged again and closed at $77.02, one cent short of the record close set on July 14, 2006.

The volatility of the market however resulted in oil ending up only $1.45 higher last week despite having increased by over $2 a barrel on two separate days.

Average US retail gasoline prices have now fallen to $2.92 a gallon on the improving refining and import situations after having reached $3.22 in late May.

2. $100 Oil?

The debate is sharpening between those who believe we could see $100 oil before the year is out, and those who say oil is way overpriced and due to sink back to $60 a barrel. While OPEC has cut production by about 1 million barrels per day since last summer, Chinese imports continue to surge, US demand moves steadily upward, and the world’s poorer nations continue to cut imports of unaffordable oil.

Although US crude stockpiles are above the average range, the total OECD stockpile (including that of the US) is near the bottom of the range. With the world’s economy continuing to grow, the IEA is forecasting an increase in demand for the second half of 2007. This forecast has resulted in an increase in speculative interest in the futures markets and technical indicators are pointing to higher prices ahead.

Given this situation, almost any kind of bullish headline ---hurricane, Iran, Iraq, Nigeria – will cause oil prices to go higher. Should nothing untoward for oil production happen in the next six months, the controlling factors become the level of Saudi oil production and economic growth.

Currently, no decisions about OPEC production levels are due to be made until September 11th, although almost any kind of statement by an OPEC official seems to give the oil market some sort of a jolt. Some remain skeptical that the Saudi’s, who hold the key to higher OPEC production, either can or see it in their interests to significantly increase production as long as world economic growth is doing well and it is only poor countries that are suffering.

Last week’s drop in stock prices, however, serves as a reminder that numerous potential economic problems are bubbling just out of sight and could come into play. Many analysts are worried that record high oil prices have thus far done little to dampen demand in the developed world and growing economies.

The bottom line in all this seems to be that, as opposed to last year, oil production is down a million b/d and oil demand is up a million b/d. Something will have to give.

3. US energy policy

As the congressional summer recess approaches, it is looking less likely that meaningful legislation will be passed this year. The American public, US corporations, and consequently their elected representatives have so little understanding of the world energy situation and the looming dangers from oil depletion and climate change, that they are content to fight minor, traditional battles over shares of pie rather than carving out bold new initiatives.

Currently the Congress is fixated with giving subsidies to any form of domestically produced energy source under the rubric of “Energy Security”, no matter what the longer term consequences. Corn-based ethanol and increased coal production are the obvious cases in point. The only real effort to encourage efficiency is the fight over car gas mileage. At a time when crash programs to achieve improvements of 50 or more mpg in the next few years are obviously called for, Congress is settling for compromises that soon will be overtaken by events.

It is becoming clear that in the current Congress, there are too few who understand the problem and that it will take a serious energy shock – much higher prices, shortages, economic recession—or a change of administration election fought over real energy problems before the US can formulate meaningful new policies.

4. Energy Briefs 

  • China imported 14.12 million metric tons of crude in June, equivalent to 3.45 million barrels a day. Imports were 19.7% higher than a year earlier. For the first six months they totaled 81.54 million tons, or 3.3 million barrels a day, up 11.1% from a year earlier, according to the data. China imported 2.32 million mt (568,000 b/d) of crude from Iran in June, making Tehran the largest supplier of crude to Beijing.
  • Coal consumption by China's power companies increased nearly 18% in the first half of this year from a year ago, Chinese utilities burned a total of 591 million tons of coal in January-June.
  • Tibet is warming up faster than anywhere else in the world--0.3 degrees Celsius every 10 years,. Chinese scientists have long warned that rising temperatures on the Qinghai-Tibet plateau will melt glaciers, dry up major Chinese rivers and trigger more droughts, sandstorms and desertification.
  • A major new scientific study revealed that the heavier rainfall in Great Britain is being caused by climate change. More intense rainstorms across parts of the northern hemisphere are being generated by global warming, an effect which has long been predicted but never before proved.
  • Iraq's crude shipments to the US in May fell to the second lowest monthly level in almost four years. Iraq exported 341,000 barrels of crude oil a day to the U.S. market in May, down 39 percent from the month before.
  • China plans to build four levels of crude oil reserves made up of two parts - the government reserve and “enterprise storage.” The government reserve will be at two levels, a strategic crude oil reserve base by the central government, and an oil reserve base by local governments. The enterprise storage will also be at two levels, commercial oil reserve by the largest oil companies and oil storage by the medium and small ones.
  • Alaska North Slope oil and gas production declined 12.5 percent last year, according to an analysis by the state Department of Revenue. North Slope average daily production in fiscal year 2007 was 738,000 barrels per day, down 13 percent from an average of 844,000 barrels per day in the previous year.
  • An acute shortage of liquefied petroleum (cooking) gas has hit major towns in Kenya. A survey showed that some dealers had not received fresh supplies for the past three months and customers interviewed complained of difficulty in getting the commodity.
  • Toyota announced it has developed a plug-in hybrid vehicle certified for use on public roads in Japan. The plug-in HV uses a NiMH battery pack and has an all-electric range of 13 kilometers (8 miles) with a maximum speed of 100 km/h (62 mph).
  • A study indicates that Pakistan is going to have gas shortages from 2007 onward and the imbalance will increase every year to touch the highest level in 2025, when the shortage will be 11,092 MMCFD against total 13,259 MMCFD of production.
  • Two weeks after Canada announced plans to assert itself more vigorously in the Arctic, a Russian expedition sailed for the North Pole, where it plans to send a mini-submarine crew to plant a flag on the seabed and symbolically claim the Arctic. The mission is part of a race to assert rights over the Lomonosov Ridge, an energy-rich wasteland that scientists estimate holds 10 billion tons of gas and oil deposits.
  • Canada's oil pipelines to the US will begin to face capacity bottlenecks this fall, according to the National Energy Board. The shipping could be restricted for up to 18 months if no significant capacity is added before 2009.
  • Cuba is producing nearly 50% of the oil and gas it consumes, according to a member of the country's Politburo. Operations in 2007 produced an additional 85,000 tons of oil and 98 million cu m of gas compared with 2006, surpassing the government's production plans.
  • According to a new report, the costs of crude oil and natural gas reserve replacement worldwide reached a record level of $14.53 a barrel of oil equivalent in 2006, a 25-per-cent rise from 2005 and a staggering 255-per-cent increase since 1999.
  • Ecuador wants wealthy nations to pay it $350 million a year in exchange for leaving an estimated 1 billion barrels of oil under the ground in the pristine Yasuni rainforest.
  • The US Justice Department is conducting a criminal inquiry of nearly a dozen oil and oil-services companies, focusing on potentially illegal payments to customs agents who provided freight forwarding and other services in Nigeria.
  • Independent petroleum geologist Jeffrey Brown has predicted that Russia, Saudi Arabia and Norway--three countries responsible for 40% of the oil available for export in the world--are about to experience a sharp decline in oil exports as their internal consumption soaks up more of their slowing or declining production.
  • Offshore drilling contractors Transocean Inc. and GlobalSantaFe Corp. have agreed to a merger of equals, creating a company valued at about $53 billion.
  • Indonesia's oil imports are predicted to increase to 700,000 barrels per day within three years, placing the country at risk of social and political unrest, Xinhua reported.
  • Mexico’s gasoline imports increased 92% to 357,000 b/d in June. The rise is attributed to a lack of domestic refining capacity and decreased oil production. Average gasoline imports were up five-fold over 2001. No new refineries have been built in 20 years.
  • Iran will continue to ration gasoline until at least 2009. Launched last month, rationing has already cut consumption to 60 million liters a day from about 80 million liters. A further decline in consumption is expected once the peak summer season is over in mid-September.
  • Chevron posted a 24 percent increase in second-quarter net income, the best among the world's biggest oil companies. A drop in production hurt ExxonMobil’s results for the period, but ExxonMobil's net income of $10.26 billion was still off only slightly from the $10.36 billion it earned in the second quarter of 2006. ConocoPhillips said a $4.5 billion charge in the second quarter to write off its assets in Venezuela sliced net income by 94 percent. Without that charge, operating earnings topped Wall Street expectations.

Quote of the Week

The two past days were the happiest for drivers in Baghdad. Waiting time at filling stations has been reduced to two hours instead of eight.
       — Ali Al-Mawsawi, Azzaman

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