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Peak Oil Review - October 15th, 2007

1. New Record Prices
2. The International Energy Agency's Monthly Report
3. Canadian Natural Gas
4. Energy Briefs

1. New record prices

The week started with predictions that oil prices would soon fall as US oil inventories were forecast to start building again. Many analysts believed a slowing US economy and relatively low gasoline prices do not support oil above $80. Oil has fallen in the fourth quarter during 13 of the past 20 years after peak summer demand was over.

On Tuesday, however, prices started to rise on concerns that there will be a big shortfall during the Northern Hemisphere heating season this winter. For the next four days, oil  continued to rise until it hit an all-time peak of $84.05 on Friday and closed at a record $83.69.

Two reports issued on Thursday were the key reasons behind the price increases. In its monthly Oil Market Report, the IEA in Paris stated that crude oil stocks in the OECD countries around the world continued to fall in September at a time when they typically increase in preparation for the winter heating season. This report was followed a few hours later by the weekly US stockpiles report which showed US commercial crude oil stockpiles dropping by 1.7 million barrels as compared to analysts’ predictions that there would be a 1 million barrel increase. While US stockpiles are still above average for this time of year, they have dropped by 10 percent since June.

Last week also saw renewed threats by Turkey to launch military operations against Kurdish
insurgents in Iraq. Most analysts believe that the state of OECD inventories, which have  now fallen below five year averages, is more important than geopolitical factors in the recent price increases.

On Friday, Energy Secretary Bodman told reporters that high prices are being driven by
fundamental supply and demand imbalances and not speculative investing. The head of the
EIA, Guy Caruso, told a conference last week that he foresees that gasoline prices will continue to climb in 2008.

2. The International Energy Agency’s monthly report

As the world approaches peak oil production, the IEA’s Oil Market Report that is released
around the middle of each month is becoming a key document in understanding the
supply/demand situation. In this month’s report, the Agency still sees “falling US, European and Japanese crude and product stocks, and expectations are that tighter conditions will be seen in the fourth quarter.” OECD stockpiles are estimated to have dropped by 21 million barrels in August and another 27.4 million in September which implies a counter-seasonal 360,000 b/d drawdown during the 3rd quarter.

Although world demand for oil is seen as slowing a bit due to high prices, the financial crisis,
and slowing economic growth, the Agency still believes that world demand for oil in the 4th
quarter will increase by 2 million b/d over last year and will increase to 88 million b/d next year.

The IEA calculates that world oil production increased by 415,000 b/d in September to 85.1
million b/d. Although OPEC is still on record as planning to increase production by 500,000 b/d on 1 November, many remain skeptical that world production will increase as rapidly as required to meet demand. The price increases of this past week may be a reflection of this imbalance.

3. Canadian Natural Gas

Last year Canada sold more than half its daily output to natural gas to buyers in the US. Imports from Canada amount to about 17 percent of US natural gas consumption.

However the outlook for continued imports at this level is not favorable. Canada’s National
Energy Board forecasts that production from conventional gas fields in Western Canada will fall from 16.2 billion cubic feet at day in 2006 to 13.7 billion by 2009. Higher labor costs, competition for investment money from oil-sands projects and smaller finds in mature gas fields are contributing to the decline. The number of gas wells drilled this year may fall to about 11,900, a 28 percent drop from 2006.

The province of Alberta, which produces 80 percent of Canada’s natural gas, is threatening to increase royalties on oil and gas extraction, and in return major production companies say they will cut investment further. As production from the oil sands continues to grow, the domestic demand for natural gas which is used in the extraction process will likely increase.

All this suggests that in a few years, there will be a significant reduction in the amount of natural gas imported into the US from Canada.

4. Energy Briefs 

  • The US National Oceanic and Atmospheric Administration forecasts that this winter will be 1.3 percent colder than last winter. US consumers will pay 10 percent more to warm their homes, with the seasonal cost for all heating fuels averaging $997, or $88 more than last year.
  • OPEC oil exports, excluding Angola, will jump 670,000 b/d in the four weeks to Oct. 27, marking the biggest rise so far this year. The increase could be due to an increase in demand for winter heating oil. The UAE has announced that it will be shutting down much of its production for maintenance in November so that the surge in exports could be an effort to fulfill commitments in advance of the shutdown.
  • Asian liquefied petroleum gas rose to a record on gains in crude oil and higher demand. This situation may be due to Saudi Arabia reducing shipments from its LPG export terminal by 30 to 50 percent during November for maintenance.
  • For the nine months ended September 30, China’s crude imports are up 13.6% from a year earlier. The September volume, however, was 2.7% less than August’s. China’s monthly crude oil imports have been on a downtrend after reaching an all-time high in July.
  • The US Environmental Protection Agency plans to develop regulations for underground sequestration of carbon dioxide deep into the earth for permanent storage.
  • In their upcoming World Energy Outlook, the IEA will apparently say that they don’t believe the Alberta oil sands will make anything more than "an important dent" in the global oil market - this from an IEA official who did not want to be named ahead of the report's publication.
  • Shell’s Utorogu Gas Plant in Nigeria has been shut down following a vandal-caused fire that gutted a condensate pipeline. The shut down of the gas plant has halted some 300 million cubic feet of gas per day which could result in power outages nationwide.
  • The recent surge in crude oil prices came at a bad time for US refiners, causing profits to slump. Higher oil prices not only drove up the costs of making gasoline and other fuels, they came during a period of weaker demand for those fuels, when refiners' ability to pass on added costs was limited.
  • Delays in launching Kazakhstan’s massive Kashagan field means that production will be 13 percent less oil than expected by 2015, removing 400,000 barrels per day from forecast global supply. Oil output is to reach 130 million tons by 2015, down from a previous estimate of 150 million. However output is supposed to reach 80 million tons in 2010, up from the current 65 million estimate.
  • The leaders of Venezuela and Colombia have inaugurated a natural gas pipeline between their countries and promised to push ahead with ambitious plans to boost regional energy ties. The 224km undersea pipeline will initially carry between 5.7 million and 8.5 million cubic meters of gas daily from Colombia to Venezuela.
  • US House Speaker Pelosi said she is determined to move ahead on energy legislation with or without a conference with the Senate. "As you know, this is a flagship issue with me, the energy security and global warming bill…. And I stand ready to go to conference in terms of what it does for those two ends, energy security and reversing global warming."
  • The US Department of Energy's announced it plans to solicit additional royalty-in-kind supplies to inject into the nation's Strategic Petroleum Reserve next year. US Energy Secretary Bodman said this action will not "materially raise" oil prices as US oil consumption totals between 21 million and 22 million b/d, and expected injection rates into the SPR will average about 70,000 b/d. Some analysts are skeptical of this claim.
  • Total will shut down its refinery in Feyzin, France, for about seven weeks of maintenance starting Oct. 19. The closure is part of a five-yearly maintenance cycle. A second hydro-desulfurization unit will be built on the site at a cost of 70 million euros to meet European Union environmental regulations due be introduced in 2009.
  • The International Energy Agency raised its estimate of Venezuelan oil production by 20,000 b/d to 2.38 million b/d in September. The figures include Orinoco heavy-oil production. Last week Venezuelans formed long lines to buy gasoline in a major provincial city after outages at a refinery prompted rare worries of supply shortages.
  • Colorado has lost out on more than $1 billion from oil and gas development because of "bargain basement" taxes on the industry in comparison with neighboring states according to a report by the nonprofit Carbondale- based Community Office for Resource Efficiency.
  • Ministers from five eastern European countries signed a deal to build an oil pipeline linking the Black and Baltic seas — a project aimed at improving regional energy security and reducing dependence on Russian crude.
  • Zambia is rationing fuel following a shortage caused by the closure of its only oil refinery. Long queues of motorists are becoming common amid panic buying across the country.
  • Paraguay's Department of Public Transportation came close to shutting down operations last week due to a lack of fuel in the country.

Quote of the Week

 “[Oil] stocks are clearly tighter than they have been for some time, but what is driving market expectations and therefore prices is the lack of confidence that they will be replenished.”
       — The International Energy Agency 

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