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Peak Oil Review - September 24th, 2007

ASPO-6 last week; ASPO-Houston next month (Oct 17-20)

Last week in Cork, Ireland, some 300 attendees at ASPO-6 heard former U.S. Energy Secretary James Schlesinger say, “Conceptually the battle is over—the peakists have won.” Shell’s former Chairman Lord Ron Oxburgh stated unambiguously, “today the era of cheap energy is over; a move away from fossil fuels is urgently needed.” CIBC’s Jeff Rubin’s highlighted the coming problem with declining oil exports, pointing out a key example: “in 10 years, Mexico could become an Indonesia—a former oil exporter that is now a oil importer."

ASPO-Houston, with over 325 already registered and the peak sign-up period here how, will hear speakers echo the above points during Oct 17-20th at the Hilton-Americas. One speaker will point to a European petroleum institute that now expects world oil production to plateau by 2010. Another will highlight the reality of shrinking exports. Now that oil has reached $80/barrel well before T. Boone Pickens 80th birthday, he’ll share his updated views on oil prices. A conference’s highlight will be Thursday evening, when six panelists will explore common ground plus share differing perspectives from groups such as the National Petroleum Council, the Congressional GAO, the American Association of Petroleum Geologists, ASPO-USA, ASPO-Ireland, and more. This may be the first such effort since a 2005 National Academy of Sciences workshop on peak oil. For ASPO-Houston conference details, go to www.aspousa.org.

1. Production and Prices

The US Federal Reserve’s half percent cut in its benchmark interest rate on Tuesday had widespread repercussions in the energy markets. In the wake of the cut, stock markets surged on hopes that the subprime liquidity crisis would soon be under control. Oil prices too surged on the idea that the demand for oil would stay high. By Thursday, oil touched at a new all-time high of $83.90. The surge in oil prices was aided by the Wednesday stocks report showing US crude inventories falling by another 3.8 million barrels and by the approach of a tropical storm in the Gulf which led to the shutdown of 360,000 b/d of oil production for a short time.

Oil prices ended the week $2.52 higher, but the October contract rose $4.22 before expiring on Thursday. Gasoline prices have so far held steady or even fallen despite the oil rally that set new records for eight straight trading sessions on the New York Mercantile Exchange. Relatively low gas prices should be ending soon, however. Retail gasoline in the US currently is selling at an average of $2.79 a gallon – down from $3.22 in May. Last week gasoline futures climbed by 7.8 cents.

Most analysts are expecting further increases in oil prices over the next month or so. The world oil market remains tight and US imports continue to run behind the level needed to maintain inventories. 

2. Iran

After several quiescent months, the Iranian nuclear situation seems to be heating up again. The week began with the French Foreign Minister saying that the world should prepare for war over Iran’s nuclear program. Iranian President Ahmadinejad replied that he does not take the threat seriously. He suggested that Washington would not dare to strike Iran while the fighting in Iraq and Afghanistan continues. Russian Foreign Minister Sergei Lavrov warned that any attempt to wage war on Iran could disrupt the flow of oil to Western countries and prompt a flow of refugees from Iran into Russia.

“Serious and constructive” talks about new sanctions on Iran were held at the UN last week and France has begun talks with the UK and Germany about EU-wide sanctions against Iran if the UN Security Council resolutions do not prove effective.

Over the weekend, Tehran staged a military parade complete with a new missile; threats to the US and Israel; and bombastic statements from Ayatollah Ali Khamenei. However, in an interview with 60 Minutes taped on Tuesday Ahmadinejad sounded more conciliatory insisting that Iran did not need nuclear weapons and that a war with the US was not imminent.

3. The Dollar Falls

The decline of the US dollar to a 15-year low in the wake of the US interest rate cut is raising concerns about its stability. After the US interest rate cut, the Saudis announced that they will not follow suit. This action could break the dollar currency peg and risks setting off a stampede out of the dollar across the Middle East.

The danger is that the yield gap between the US and the rest of the world will leave America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850 billion this year. Inflation in Saudi Arabia has increased to 4 percent and in the United Arab Emirates to 9.3 percent, a 20-year high. In Qatar it has reached 13 percent. Some see the biggest danger is that falling US rates will at some point trigger a reversal of the yen "carry trade," causing massive capital flows from the US back to Japan.

The flight from US bonds could push up the long-term yields thus driving the mortgage market into even deeper crisis. All this suggests that hard economic times are just ahead and that there will be more upward pressure on oil prices.

4. Energy Briefs

  • OPEC has cut Venezuela's production allocation from 3.22 million barrels a day to 2.47 million b/d, far below the output level claimed by the oil-rich country. The latest ceiling cut suggests that OPEC has adjusted the ceiling in line with the production figures that Venezuela's oil industry critics say are the real ones.
  • A former CEO of Venezuela’s PdVSA said it is "impossible" to accomplish President Hugo Chávez' plans to take domestic oil output to 5 million bpd by 2011. "With 130 operational rigs -which do not exist at the present time- and sustained investment of US $6-7 billion, production could be increased by only some 200,000 bpd on a yearly basis."
  • The possible head of the Movement for the Emancipation of the Niger Delta, Jomo Gbomo, has been arrested in Angola while negotiating an arms deal. The MEND is already threatening more attacks on oil installations.
  • The Abu Dhabi National Oil Co confirmed that scheduled maintenance at three major offshore oil fields will reduce crude production by 600,000 barrels a day from November.
  • The Asia Development Bank upgraded its developing Asia’s 2007 growth forecast to 8.3 percent. China and India, which together account for 55.3% of the total gross domestic product in developing Asia, recorded their fastest growth in 13 years in the first half of 2007.
  • Demand from China is expected to rise 5.9%, or 422,000 barrels a day, in 2007 to 7.58 million barrels a day. In 2006, China's consumption grew by 464,000 barrels a day, or 6.9%, according to IEA data. Its rate of growth will slow further in 2008, to 5.3%.
  • TengizChevroil plans to nearly double their oil production in Kazakhstan next year to 550,000 barrels a day, after building a $5.5 billion gas-processing plant and gas-injection system for oil extraction.
  • China’s top economic planning agency has launched its "Top-1,000 Enterprise Energy Efficiency Action Plan". Under the program China's 1,000 largest domestic enterprises—which consume one-third of China’s primary energy—are required to meet higher energy efficiency requirements and take the lead domestically.
  • Shell and Saudi Arabia agreed to spend $7 billion to more than double the size of their Motiva refinery in Texas to 600,000 b/d in the biggest expansion the U.S. has seen for three decades. Last year, the cost was estimated at more than $3 billion. One of the reasons for the increase is the addition of upgrading equipment to make higher-quality fuels from lower-quality crudes.
  • Gold rose to its highest in nearly three decades on Friday as a struggling U.S. dollar lifted gold’s safe-haven appeal.
  • Iraq's northern oil export pipeline to Turkey was badly damaged in a sabotage attack on Tuesday, reported Reuters. Attacks have largely shut down the pipeline from the northern Kirkuk oilfields since the US led invasion in March 2003.
  • Forecasters say temperatures in much of the Northeast U.S. - the world's largest heating oil market - will be above normal from October to January.
  • The University of Tennessee will partner with Mascoma Corporation to build a $40-million cellulosic ethanol refinery with a production capacity of 5 million gallons per year (326 barrels/day).
  • Robert Shiller, a Yale university economist, told a US congressional panel that he feared “the collapse of home prices might turn out to be the most severe since the Great Depression”.
  • The eurozone economy has suffered its biggest jolt since the aftermath of the September 2001 terrorist attacks. The unexpectedly steep drop in the purchasing managers’ index – the third consecutive monthly drop – could knock policymakers’ previous confidence that the 13-country eurozone economy would escape largely unscathed from the US subprime mortgage crisis.
  • PEMEX announced that the passage of Hurricane Dean through its main oil producing region shut in 10.8 million barrels of crude oil, lowering average output in August to 2.84 million barrels a day from 3.17 million barrels a day in July.

Quote of the Week

“The present PDVSa is a company seriously wounded that lacks capacity. You could take some 15-18 years to take output back up to 3.5 million bpd."
      — Luis Giusti, former CEO of PDVSA

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