1. Production and Prices
2. Recession
3. Mexico
4. In the Congress
5. Energy Briefs

1. Production and prices

Oil prices rose to a new high of over $80/barrel last week on a combination of a generally tight market, expectations of increased demand in the next few months, a large drop in the US crude stockpile, and a pop-up hurricane that temporarily shut down three Texas coastal refineries.

While the Tuesday OPEC meeting in Vienna unexpectedly increased production by 500,000 b/d starting in November, most observers concluded that the increase was only a “token” and would do little to meet the demand for more oil this winter. Of the 522,000 b/d production increase, Saudi Arabia is to supply 327,000 b/d and Kuwait 85,000 b/d. Projected increases of 112,000 b/d from Venezuela, 18,000 b/d from Nigeria and 26,000 b/d from Indonesia do not give rise to optimism that the goal will be met.

The Wednesday US petroleum status report showed US refinery production falling back to 90.5 percent of capacity and US crude imports down by 674,000 b/d to 9.6 million. Over the last month, crude imports have been averaging 464,000 b/d less than last year, while demand has held the same at 21.1 million b/d. This resulted in an unusually large decline in US crude stockpiles which are now down close to the average range for this time of year. Gasoline stockpiles fell by 700,000 b/d the week before last. Given the hurricane-related refinery outages last week it is likely that gasoline stocks will continue to fall in next week’s report and that we may be getting very close to spot shortages.

Currently all signs point to increasingly tight markets this winter and to higher prices ahead. Secretary Bodman welcomed OPEC’s decision to increase production, but called crude prices above $80 a barrel troublesome.

2. Recession

The threat of a recession still hangs over world oil production so that whenever there is no bullish news to push the oil markets higher, traders dwell on the possibility of a recession reducing the demand for oil. In the US, Wall Street is convinced that the Federal Reserve will cut interest rates this week and thereby ward off economic troubles.

This fixation with the Fed’s interest rate cuts seems to shut out other news such as the reduction in US retail sales that was reported last week. US credit card debt is at a record $907 billion and now that home equity loans that have bank-rolled the economy for the last five years are slowing, tougher times seem to be ahead. A number of senior Wall Street economists are now saying that the probability of a recession has increased markedly.

Last week, however, in its Monthly Oil Market Report, the International Energy Agency said, “There are no indications that oil demand is poised to contract dramatically in the U.S. and neither in emerging economies, which account for the bulk of oil demand growth.” The Agency, however, did cut its oil demand forecast for 2008 from 88.18 million b/d to 88.02 million. The IEA added that “The turmoil from the U.S. subprime mortgage market remains at the heart of every musing on oil markets.”

3. Mexico

No sooner had the Mexicans restored production in the Bay of Campeche after the passage of hurricane Dean than a rebel group blew up four pipelines supplying 10 states with natural gas and an oil line supplying crude to two refineries. The blast cut off 25 percent of Mexico’s natural gas supply, forcing the closing of 1000’s of factories and causing losses running into hundreds of millions of dollars a day. This was the third attack on Mexican pipelines since June.

Production was slowed at two major refineries due to the shortage of crude while PEMEX sought to import 300,000 barrels of oil products to make up for the losses. Exports were not affected by the blasts, and the damage is expected to be repaired shortly. Additional imports of petroleum products may eventually show up as a reduction in US inventories. The rebel group responsible for the explosions vowed to continue the attacks.

4. In the Congress.

The energy legislation situation in the Congress has become so muddled that it is becoming unlikely that any new bills will be passed soon. While the Senate and House have each passed an energy bill, they are so dissimilar that they simply cannot be reconciled by committee. The House is currently preparing a new bill that hopefully will be close enough to what passed the Senate that an attempt at reconciliation can be made.

Although energy was declared to be a top issue in the new Congress last January, so many opinions and conflicting interests have arisen that a bill addressing the real issues of increasing oil prices and tight supplies has not yet emerged. Responses to global warming and support for constituents such as corn farmers, coal miners, and automobile unions are all jumbled together forming inconsistent policies. Moreover, President Bush is threatening to veto legislation that takes away subsidies from the oil industry.

In many ways the energy situation is much like the Iraqi war in that the problem seems so intractable that there is no unifying solution yet in sight. It is becoming apparent that meaningful energy legislation will have to await either a new Congress with a markedly different composition, or a major economic shock such as gasoline shortages, much higher oil prices, or even a major recession.

5. Energy Briefs

  • Zambia closed down the Indeni oil refinery on Sept.1 due to crude shortages. The country is currently importing products from South Africa, Mozambique and Tanzania to make up for the shortages. Most of the diesel produced by the refinery is used to run Zambia’s vast copper mines, the country’s economic lifeblood.
  • The government of Queensland, Australia has prepared a report warning of massive social dislocation, rising food prices and infrastructure problems because of rising oil costs. The report on the looming “peak oil” crisis concludes that we will have to re-think the way we live and travel in the next few years as cheap liquid fuels fade away.
  • Kazakhstan said ENI’s budget for developing the Kashagan oil field is “unacceptable,” citing delays that would harm the country’s economic growth and could cut revenue from the project. The Kazakh parliament has initiated a bill to allow the government to pull out of the Kashagan contract.
  • The Nigerian government says it will stop a US plan to establish a military base in the Gulf of Guinea.
  • Exxon has filed a request for arbitration with the International Centre for Settlement of Investment Disputes, an arbitration forum closely linked with the World Bank, over Venezuela’s nationalization of the Cerro Negro heavy oil project.
  • OPEC has sent a team to Venezuela to sort out the difference between the 3 million b/d of oil that the government claims to be producing and the roughly 2 million b/d that outside observers say the country is producing.
  • A natural gas industry group in the U.S. has released a report claiming that the US has enough natural gas left to continue current rates of production for the next 80 years.
  • BP will pull back from several big projects in the Gulf of Mexico and will focus instead on bringing on the Atlantis and Thunder Horse platforms into production. A BP spokesman was quoted as saying, “Like other operators, we are adjusting our project plans in the face of resource constraints and significant inflation in the oil field service sector.”
  • Norway said crude production in August decreased 7.3 percent. Output averaged 2.111 million barrels a day, compared with 2.277 million barrels a day in July.
  • The compromise draft law governing Iraq’s oil fields that was agreed to in February appears to have collapsed. Senior Iraqi negotiators met last week in an attempt to salvage the original compromise, but the meeting broke up in the face of increasing disagreements between the Oil Minister and the Kurds.
  • Saudi Arabia has invited firms to bid for a contract to build a security fence on its border with Iraq at a cost of up to $1.07 billion. Among the Saudi firms bidding on the contract is the Binladin Group.
  • China plans to boost its strategic oil reserves to 95 million barrels by 2010. This will give the country roughly a one-month supply. By 2020, China expects to have the three months of reserves recommended by the International Energy Agency.
  • Crude production at Prudhoe Bay has dropped by 120,000 barrels a day since Sept. 4. The decline was attributed to “normal field variability and planned maintenance activity.”
  • A gasoline shortage in China has led to the import of gasoline to meet peak season demand. In August, 300,000 barrels were imported and another 200,000 are scheduled for September. Because of price controls, PetroChina is forced to sell the gasoline at a considerable loss.
  • In its Annual Review, Saudi Aramco said that in 2006 the company’s crude oil production declined 1.7 percent, while exports declined 3.1 percent compared with the previous year. Crude oil production in 2006 averaged 8.9 million b/d and exports 6.9 million b/d.

Quote of the Week

“And once you see oil prices in excess of $100 or $150 a barrel the alternatives simply become more attractive on price grounds if on no others.”