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Peak Oil Review - September 10th, 2007

1. Production and Prices
2. Recession
3. Energy Briefs

1. Production and Prices 

For the last few weeks the price of oil and the stock market have been moving up and down in tandem on the theory that should a credit-crisis induced recession occur, it would have a major impact on the demand for oil. Last Friday however, the pattern was broken as oil prices reached an intra-day high over $77 a barrel while the Dow dropped 250 points.

A pair of US government reports --- one showing that US inventories of crude and gasoline are continuing to drop by unexpectedly large amounts and the other suggesting that problems in the housing industry are spreading to the economy as a whole – caused the shift. The latter report raised new fears that a recession is imminent.

Thus far, the preponderance of statements by OPEC officials suggests that the cartel will not increase production quotas at the meeting in Vienna this week. Over the weekend, however, a report surfaced that the Saudis were rethinking this position because of the continuing fall in US crude inventories and the price increases of the past few days which are approaching record highs.

Gasoline inventories in the US continued to decline, this time by 1.5 million barrels to 191.1 million. Considering the pace at which US motorists are consuming gasoline, stockpiles are at record lows. Now that the summer driving season is over, consumption usually drops by several hundred thousand barrels a day which may be enough to arrest the current decline.

Gasoline production from aging US refineries has been erratic all year and gasoline imports have been too low to make up the difference in recent weeks. The next month or so should determine whether chronic shortages accompanied by higher gasoline prices will become normal or whether we will scrape through yet another winter.

Should a large hurricane get into the Gulf oil facilities in the next two months, the gasoline stockpile situation makes it highly likely there will be at least spot shortages.

2. Recession

Despite much optimism on Wall Street that a couple of good interest rates cuts is all that it will take to prevent a recession from occurring in the near future, skepticism is increasing. The Labor Department report last Friday that the US workforce declined by 4,000 jobs in August and that job increases previously reported for June and July were too high came as a shock. Numerous Wall Street luminaries are now being quoted as saying a recession seems inevitable.

Last week, the OECD joined the debate with concerns that market turmoil and the problems in the US mortgage market will crimp world economic growth. While maintaining projections that the world’s seven largest economies will grow by 2.2 percent next year, the organization warned that it is too early to assess whether the problems of the financial markets will reduce economic activity.

If the world economy does start to slide, a lot of conventional wisdom regarding oil consumption and prices will be challenged. As oil prices rose in recent years many proclaimed that if oil got to $40, $50, $60 or $70 a barrel, economic stagnation would ensue. As this did not happen, at least in the developed world, a certain complacency set in that the leading economies -- particularly that of the US -- were now too strong to be hurt by high oil prices.

OPEC officials, seemingly obsessed by the prospects of a global recession, are seizing on the possibility as a principal reason to forego production increases at this time. In the past, economic downturns have resulted in demand and price drops. For the next recession however, the situation may be different.

The world supply/demand situation is tighter than it has ever been before. Much of the demand is for highly inelastic motor fuels which in the OECD countries clearly have to reach much higher prices before significant demand destruction sets in. Surging Chinese demand for oil is another new factor in the question of how oil prices will behave in a recession.

Finally we have the issue of an economic recession masking the peaking of world oil production. Should the demand for and price of oil drop markedly in the next few years, there is a good chance that this will coincide with what would otherwise have been unmistakable indications that world oil production had peaked.

In such a situation many fear that there would be so much confusion as to just what was happening that action to mitigate peaking of oil production and transitioning to a post oil age world would be delayed and become much more difficult.

3. Energy Briefs

  • Iraq has halted crude oil production at a key southern oil field as local tribesmen seeking jobs have blocked access to the area. According to an official in Basra, "Crude oil production from Majnoon oil field which produces 50,000 b/d has been suspended for more than four weeks."
  • The chief executive of Norway's Statoil predicted that production of conventional oil in OECD countries will peak as soon as in 2010, increasing the world's dependence on OPEC and Russia, and continuing the rush to non-conventional deposits.
  • A top official at state oil company Saudi Aramco said his country is on schedule to boost its crude oil production capacity to 12.5 million barrels per day by 2009, despite rising costs.
  • Argentina is facing shortages of gasoline and diesel because of the government's closure of a 100,000 b/d refinery run by Shell. The refinery which produces about 15 percent of Argentina's fuel was ordered to shutdown because of leaks and for removing 4.8 million gallons of water an hour from rivers without a permit. Loss of the diesel production may hinder crop planting which starts soon.
  • The shutdown of Japan’s Kashiwazaki-Kariwa nuclear power plant which was damaged by an earthquake in July will strain Asian LNG and oil markets. Tokyo Electric will have to buy 1.3 million tons more LNG in the current fiscal year and 87,900 b/d more fuel oil to compensate for the loss of the nuclear power.
  • Negotiations continue between ConocoPhillips, ExxonMobil and Venezuela over compensation for investments in the Orinoco heavy oil projects that were taken over by the government in June. The size of the compensation and whether it will be paid in cash or oil are the major issues. So far little progress has been reported.
  • Despite the severe oil rig shortage, Venezuela will not relax its demands on oil service companies seeking business in the country. The government will continue to insist that these oil companies devote money to “social investments” in Venezuela.
  • ExxonMobil plans to more than quadruple its production of natural gas in northwest Colorado. The company plans to increase production in the area to 250 million cubic feet per day from 55 million cubic feet per day.
  • Costs for the troubled Mackenzie gas pipeline could top the last cost estimate of C$16.2 billion. Rapid cost inflation has been hiking up project costs while the pipeline has been in regulatory limbo.
  • Shell is developing Great White, a massive oil project sitting in 8,700 feet of water eight miles north of the Mexican border. Experts say Great White and other deepwater projects in the US waters could drain Mexican oil as reservoir pressure could push oil and natural gas into Shell's wells. Great White, two other Shell projects and a Total project are set to begin production in 2010, long before Mexico could get a project started in its own waters.
  • Last week, oil workers were striking in Basra, Iraq’s oil hub, and the government was threatening to arrest the strike leaders. So far there is no word on whether the strike is affecting Iraqi oil production or exports.
  • Increases in US ethanol supply over the next six months is expected to have a impact on gasoline prices. More than 30 new ethanol plants are scheduled to come on-stream in the U.S. by the end of this year, raising the total capacity by about 2.7 billion gal to about 9 billion gal/yr [Ed. note: 587,000 barrels/day or 2.8% of U.S. petroleum liquids]. The falling price of ethanol and the switch to winter-gasoline specs in September will make it attractive for blenders to use more ethanol in place of the more expensive gasoline.
  • Kazakhstan's prime minister says state-owned Kazmunaigas should share the role of project operator for Kashagan oil-field project. Eni, currently the sole Kashagan operator, will meet with the Prime Minister this week and is willing to examine all issues involved in the project's development.
  • The Director-General of the UN’s Food and Agriculture Organization, warned that surging prices for basic food imports such as wheat, corn and milk had the “potential for social tension, leading to social reactions and eventually political problems”. He added that food prices would continue to increase because of strong demand from developing countries; a rising global population; more frequent floods and droughts caused by climate change; and the biofuels industry’s appetite for grains.
  • Iraq's oil minister said 300,000 to 400,000 barrels a day of Kirkuk crude is now being pumped to the Turkish export terminal of Ceyhan. The pipeline is usually closed because of sabotage. Two weeks ago, Iraq agreed with Syria to repair and reopen the 550-mile-long pipeline connecting Kirkuk and the Syrian port of Baniyas.
  • A “Grand Alliance” of Niger Delta militant groups, has threatened oil and gas companies in the Delta with reprisal attacks, should their ultimatum expire without any positive action. At a conference in Port Harcourt the group referred to a letter they wrote to oil and gas companies saying that if by September 7, 2007 their youth have not been employed, they will strike at the companies.
  • Chesapeake Energy, one of the largest US gas suppliers, said for the second year in a row it would cut drilling and production in response to falling natural gas prices. Questar, Ultra and Shell have shut-in about 230 million cubic feet a day in the Rockies due to low natural gas prices, which hit $5.60 at a key trading hub.
  • Russian oil deliveries to Germany through the Druzhba pipeline fell abruptly in August by some 30%. Lukoil is mainly responsible for the deliberate reduction. Shortfalls began in July on a small scale, before the abrupt August drop. Germany imports some 160 million barrels of Russian oil annually through the Druzhba pipeline. Of these, Lukoil delivers approximately 51 million barrels.
  • The price of fuel oil is rising faster than gasoline, jet fuel and diesel, increasing the cost of ocean freight and electricity. Demand for the residual oil used in marine engines and power plants is accelerating because the world shipping fleet is growing and refiners are upgrading their plants so they can produce more gasoline and diesel which brings more profit.
  • Using the new Channel Tunnel Rail Link, Eurostar ran an inaugural passenger-carrying train from Paris to London in only 2 hours 3 minutes and 38 seconds.
  • President Ahmadinejad announced that Iran is running more than 3,000 centrifuges used to enrich uranium and is installing more every week. However, an International Atomic Energy Agency report said Iran remained well short of 3,000 centrifuges and that its rate of enrichment was still far below capacity.

Quote of the Week

“The world's demand for oil is going to levels that cannot be met by global production. The longer we wait, the worse the consequences will be. I can't but wonder how many people will be saying over the next decade, ‘We should have done something about this years ago.’"
       —Keith Kohl, Energy and Capital

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