1. Production and Prices
2. The CIBC Exports Study
3. Iran
4. The Ethanol Boom
5. Energy Briefs

1. Production and prices

Oil prices gyrated between $79 and $81 a barrel last week as the oil market digested conflicting reports of slowing economic growth, the credit crunch, a falling dollar, higher OPEC production, rising equity markets, optimism about future interest rate cuts, and mixed stockpile reports. Oil prices rose on Wednesday on concerns that there might be supply shortfalls this winter. When the US stockpiles report showed a 1.2 million barrel growth in crude stocks the market fell, but then rebounded when the market focused on distillate and gasoline stocks which fell by 1.2 million barrels. By week’s end, NY oil was back above $81 on concerns that crude stockpiles may be inadequate for the winter heating season.

In commenting on the good news about US employment one consultant noted last week, “we’re in a weird situation where good news sends oil prices lower.” The fear is the good economic news will stop the Federal Reserve from making further interest cuts so that the dollar will rebound thereby forcing down oil prices. A survey of oil analysts shows most believe oil prices will fall in the immediate future because of increased OPEC production and reduced demand as refineries close for pre-winter maintenance. As we get deeper in October, the threat that Gulf hurricane will damage oil production is receding.

2. The CIBC exports study

In peak oil circles, the likelihood that world oil exports will peak and then decline faster than world oil production has been discussed, tracked, and generally accepted for some time now. Last week the notion that peak exports may well be near at hand hit the mainstream when Jeffrey Rubin, the chief economist of the Canadian investment bank CIBC, released a report on declining oil exports and began briefing Wall Street groups about his findings.

With the headline grabbing “$100 oil by the end of 2008”, Rubin reported that rising demand in oil exporting countries such as Mexico, Venezuela and Saudi Arabia will put pressure on global oil prices in the coming years. He expects exports from OPEC countries, Russia, and Mexico will likely decline by about 3 million barrels per day over the next five years with the biggest drop coming from Mexico, a key U.S. supplier. Rubin believes that of a potential drop in exports of 3 million b/d, 2 million will directly affect US imports. This coupled with very expensive new production such as deep-water and Alberta sands production will lead to $90 oil during 2008 and $100 oil by the end of the year. Thereafter, oil prices will remain in triple digits.

Rubin posits that as one of the few sources of oil still open to private investment, Alberta will gain an increasing share of US oil imports.

3. Iran

The Iranian nuclear enrichment and support of Iraqi insurgents flared up again week with the French Foreign Minister stating that Iran was close to mastering uranium enrichment and calling on the EU to expand sanctions against Tehran. UN and EU sanctions against Iraq are still on hold awaiting reports from nuclear specialists; additional action is unlikely to be taken soon.

In Iraq, General Petraeus accused the Iranians of stoking violence and providing weapons that were killing US troops. All this tough talk is raising concerns in the Middle East that some type of military action against Iran, either for refusal to halt nuclear enrichment or for supporting Shia insurgents in Iraq, is under active consideration in Washington. Western press stories discussing the possibility of such an attack are replayed in Middle Eastern media.

Last week Dubai, speaking for the UAE political establishment, warned the West that their relations with the Gulf Arab states would suffer if they launch a military strike on Iran. The Gulf states are naturally concerned that passage of oil through the Straits of Hormouz could be restricted should hostilities begin. Should this happen, considerable damage could be done to their economies as well as those of oil importers.

4. The ethanol boom

The ethanol boom which has brought frenzied building of new distilleries, record corn and food prices and new hopes for America’s farmers may be fading. So many new distilleries have been built that the ethanol market is now faced with a glut which has driven down prices by 30 percent in the last few months.

Surplus biofuels production in the US is raising alarms in Europe where surplus subsidized US biofuels are flooding the market, damaging local production. The volumes of US imports are so large that they may account for more than 50% of biodiesel consumption in the EU. European producers are demanding that their governments take action to stop the US imports.

5. Energy Briefs

  • Soaring food prices will hurt the world’s poor and increase the risks of political upheaval according to a senior UN food agency official. He said surging grain prices were caused by falling stocks, rising production costs due to higher energy prices, adverse weather, faster economic growth, and increasing biofuels demand.
  • Secretary Bodman said the US Energy Department has no “immediate plans” to go into the market to purchase oil for refilling the nation’s Strategic Petroleum Reserve.
  • The CEO of ConocoPhillips said the US should consider a surcharge on less fuel-efficient vehicles and a rebate on more fuel-efficient models. The auto industry has traditionally opposed this measure, which is known as a “feebate.”
  • Power-station coal prices at the Newcastle Australia shipping port rose for a third week after cuts in loading quotas, worsening a shortage of the fuel in Asia.
  • Stock buybacks are the rage in the cash-laden oil industry. ExxonMobil is buying back about $30 billion of its shares each year. If the trend continues, Exxon will have repurchased all its stock by about 2024.
  • North Dakota farmers and truck drivers are feeling the pinch of low diesel supplies and high prices. Diesel hit a record-high in Grand Forks last week at about $3.42 per gallon.
  • The Iraqi government in Baghdad is considering blacklisting foreign oil companies that sign contracts with the Kurdistan Regional Government after four new contracts surfaced last week.
  • Output from the North Sea fell for the fifth month in a row in July, despite record oil prices. Gas production fell 15% in the month, down 20.7% on the year. Oil production was down 6.5% on the month and 15.7% on the year.
  • Ukraine is expected to pay $1.3 billion it owes Gazprom for natural gas under an agreement reached Oct. 3 to avoid cuts in gas supplies.
  • The House Committee on Energy and Commerce released a paper intended to focus the Committee’s discussion as it develops climate change legislation. The report says the US should reduce its greenhouse gas emissions by between 60 and 80% by 2050 and that the central component of an emissions reduction program should be cap-and-trade.
  • The Task Force on Strategic Unconventional Fuels has completed a strategy and program plan to accelerate the commercial development of strategic unconventional fuels within the US including oil shale and tar sands, heavy oil, enhanced oil recovery, and coal-derived liquids.
  • OPEC raised production 0.9 percent in September according to a Bloomberg News Survey. The cartel pumped an average 30.615 million barrels a day last month, up 270,000 barrels from August.
  • Saudi oil exports this year may fall as much as 12 percent from last year’s record to $165 billion. Average production may fall as much as 6 percent to 8.65 million b/d while the average price of Saudi crude could be $59 per barrel, close to last year’s record of $60.50.
  • Russian oil exports soared in September, despite lower output, as oil firms rushed to export crude before the introduction of higher oil export duty.
  • First production at Kazakhstan’s giant Kashagan oilfield is scheduled for the second half of 2010 with production levels of up to 1.5 million b/d, according to AGIP’s Managing Director. ENI’s CEO said he remains optimistic about a resolution to the stalemate with the Kazakh government over the project.
  • Chevron Corp.’s Kazakh venture will dispute a $610 million environmental fine the government is seeking to impose for “excessive” stockpiles of sulfur from oil production. The regional court has not yet ruled on the claim.
  • Portugal is poised to open what will be the world’s first commercial “wave farm” as a source of electricity.
  • According to Qatar’s Oil Minister, more crude supply from OPEC would do little to ease $80 oil as speculative investment flowing into the market from other assets is boosting the prices.
  • The president of Dallas’ Federal Reserve Bank has cautioned against ignoring inflation represented by rising food and energy prices, revealing a continuing debate inside the US central bank over how best to evaluate price pressures.
  • Oil and gas production projects worldwide are likely to continue to suffer delays owing to an expanding shortfall of qualified project engineering resources. There could be a potential 10 to 15 percent “people deficit” by 2010, according to a new analysis by Cambridge Energy Research Associates.
  • Rising drilling and rig costs, combined with shortages of skilled staff and equipment, are affecting projects throughout the Middle East, with some being delayed and other contracts being renegotiated.
  • The world’s airlines expect to spend $132 billion for jet fuel this year, up from $40 billion in 2002. The industry estimates that the share of operating costs devoted to fuel has doubled in six years.
  • Ecuador surprised oil companies last week by unveiling dramatic plans to tighten its grip on the oil sector. The moves by Ecuador’s government appear similar to the steps taken by Correa’s regional ally, President Hugo Chavez, to take control of Venezuela’s oil sector.
  • The North Slope accounts for about 14 percent of US domestic oil production. Its 740,000 b/d is declining about 6 percent a year. One concern of producers is managing the decline of conventional oil production so that there is enough light oil to mix with increasing volumes of heavy oil suitable for shipping through the pipeline.
  • BP will begin a heavy oil production test on the North Slope next summer. They will use a technology called cold heavy oil production with sand, or CHOPS, that is being adapted from techniques used with similar heavy oil deposits in Canada. Heavy oil could provide an additional 2 billion barrels from the North Slope.

Quote of The Week

“Wishcasting is not a phenomenon unique to weather [and hurricane] forecasts. It is merely one example of a very widespread human tendency to interpret evidence and information according to an already existing intellectual and emotional structure. In other words, wishcasting describes an analysis governed more by a desire for something to be true than a humble appraisal of what is true.”
       — Sam Norton (UK) in an essay on peak oil