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Peak Oil Review - November 5th, 2007

1. Production and Prices
2. Storms Close Down Mexican Production and Exports
3. Sadad Al-Husseini Gives an Interview
4. China -- Shortages, a Price Hike and a New ASPO
5. Energy Briefs 

1. Production and Prices

When the Wednesday morning stocks report showed that contrary to expectations US crude inventories had actually fallen by 3.9 million barrels the previous week, oil prices rose by more than $5 to an all-time high of $96.24. After reaching the high, oil slumped a bit amidst the now familiar concerns about economic growth, the credit squeeze, the falling dollar, the Kurds, and Iranian nuclear sanctions.

While US crude oil stockpiles are still in the middle of the average range, they are currently at the lowest level since recovering from the October 2005 hurricanes. They have been dropping steadily since last July and we are now well into the time of year when they should be building, thus suggesting that something different is happening this year.

Gasoline inventories did increase by 1.3 million barrels last week thanks to surprisingly-large imports. The price of gasoline has risen 19 cents a gallon since mid-October so that the national average is now $2.94 a gallon. This is well below the national average of $3.22 reached last May during the conversion to summer gasoline blends.

A Reuter’s survey conducted last week suggests that OPEC increased production during October by 180,000 b/d over September with 100,000 b/d of the increase coming from Saudi Arabia. An OPEC source told Reuters that Saudi output in November is to increase by 200,000 b/d to about 9 million b/d.

Many in the West remain concerned that a few hundred thousand b/d production increase will not be sufficient to meet growing world demand during this winter’s heating season. France’s Finance Minister issued a call for OPEC to increase production and the head of the US’s Energy Information Administration told a meeting that “we are in a very tight situation.” Various OPEC spokesmen continue to reiterate that the markets are well supplied and that there is little they can do to slow price increases.

This week will likely bring more volatility. Industry analysts are now saying that US inventories probably dropped last week because of the storms affecting Mexican exports. Gold is at a 28-year high above $800 and the dollar reached a new low of $1.45 against the Euro. Many are expecting additional credit market troubles to be revealed shortly and the Federal Reserve is becoming more concerned about inflation than supporting economic growth. Most analysts are now saying that $100 oil is a virtual certainty in the very near future.

2. Storms close down Mexican production and exports

Pemex has had a very bad month. The week before last a Gulf storm with 80mph winds and 25’ waves drove a drilling rig into a production platform. Eighty-six PEMEX workers were forced to abandon the platform and 21 died in the stormy seas. The accident caused natural gas and oil to leak into the Gulf.

On Sunday Oct. 28 when another storm came along, PEMEX closed its three major export terminals and was forced to shut down about 1.2 million b/d of production because of lack of storage space. On Sunday Oct. 28, 200,000 b/d were shut-in, followed by 400,000 b/d on Oct. 29 and another 500,000 b/d on Oct. 30. Operations resumed around noon on Oct. 30 from two oil ports and by day’s end approximately 800,000 b/d of production had been reopened.

On Thursday PEMEX announced that 11 million barrels of production had been lost during the outages. Whether full production has been restored is unclear for severe flooding has occurred in the State of Tabasco, resulting in nearly 1 million people being driven from their homes. On Friday Mexico’s President said, “The storms have forced the closure of three of Mexico's main oil ports, preventing almost all exports and halting a fifth of the country's oil production."

As the US imports about 1.3 million b/d from Mexico, some drops should begin showing up in US imports and stockpile numbers in the next couple of weeks.

3. Sadad Al-Husseini gives an interview

Prior to last week’s Oil and Money Conference in London, author David Strahan had the opportunity to interview Sadad al-Husseini, former head of exploration and production at Saudi Aramco. As one of the few senior Saudis to speak candidly on where world oil production might be going, the interview, available at www.lastoilshock.com, is of considerable interest.

Al-Husseini believes that world production has reached a “structural ceiling” determined by geology, but that it should be able to sustain current production levels on what he refers to as a “plateau” – he does not like the word “peak” – for the next 10 or 15 years. After that production will decline. He rejects the idea that world oil production can increase significantly. As world demand will continue to increase with GNP growth, the floor under oil prices will rise steadily at about $12 per barrel each year. Only a global recession would change this outlook. Rich countries will be able to afford these increasing prices; the others will not. He does not see there is sufficient investment underway in alternative forms of energy to make much of a difference.

As for the future of Saudi production Al-Husseini notes that the kingdom has an $80 billion program underway to increase productive capacity to 12 million b/d – “an achievable number.” The next few years will show if the Saudi oil reservoirs will respond to this investment. He warns that the world should not bank on the Saudis producing ever increasing amounts of oil beyond a possible 12 million b/d.

Also of interest was his remark that some 300 billion barrels of claimed oil reserves may not exist. This is likely a reference to the 300 billion barrel increase in reserves claimed by the Gulf states in the 1980’s to bolster their OPEC quotas.

4. China - shortages, a price hike, and a new ASPO

China's worst diesel shortages in two years broke out last week as record oil prices combined with retail price caps slowed output from independent refineries while the major state-owned refiners did not increase imports quickly enough. By Wednesday the crisis spread to the capital and other inland areas. One man was killed in a brawl at a petrol station queue. Diesel shortages in China's political heart, which escaped previous supply crunches unscathed, highlighted tensions between the government and its increasingly independent oil firms about who should pay for the country's generous fuel subsidies. Diesel costs about 64 cents a liter at the pump in Beijing, versus around $1 in Singapore and $2 in Britain.

Beijing worries that more costly energy will push up already-high inflation or spark social unrest and therefore force refiners and retailers to subsidize state-set prices. After China's last major fuel crisis in the summer of 2005, queues stretched for hours. At that time, Beijing cracked down on a flow of exports firms were using to slow losses by rescinding tax breaks, among other things. Most plants only break even when crude is around $65 a barrel or lower, so $95 crude forces many independents out of the market.

As the crisis worsened, Beijing announced a 10 percent increase in fuel prices and a doubling of diesel imports. The price increase is a reversal of one announced in September and is expected to add half a percent to China’s 6.2 percent inflation rate. Outside observers expect it may take weeks to solve these shortages. In the meantime, truck transport across China has slowed.

In the meantime, a workshop was held in Beijing on peak oil. Attendees included representatives of three major Chinese oil companies, the Vice Director of China’s Energy Office, as well as various academics. ASPO-China was formed, and the chancellor of the China Petroleum University of Beijing was elected as its new president.

5. Energy Briefs

  • Last week Connecticut became the first state to hold legislative hearings on peak oil. Organized by a newly formed peak oil caucus, some 25 members of the legislature and a number of representatives from key state agencies attended most of the session. They heard briefings describing a range of risks, possible impacts and optional responses linked to the peaking of world oil production.
  • Consuming nations are likely to face a tight market going into winter due to a lack of sufficient spare oil production capacity and average to low levels of crude and products inventories, the head of the US EIA said last week.
  • Christophe de Margerie, CEO of Total, last week that the IEA’s oil production forecasts—both 103 and 116 million b/day--are unrealistic. De Margerie explained that oil production was unlikely ever to reach that level due to a combination of geopolitics and geology.
  • France has released 285,000 metric tons of crude oil from its strategic petroleum reserve. The country has taken action as a result of a short-term scarcity of crude oil and products. Cold weather, a hike in consumption and "tensions" in the crude oil and heating oil markets drove the government to release stocks.
  • The current spot shortages in Nigeria’s power supply may soon result in a total black out, as the Nigeria Gas Company (NGC) has shut down gas supply to three power stations due to pipeline leaks.
  • Alaska’s Gov. Sarah Palin wants 25% off the top of all profits the companies make in the state, up from 22.5% and the second hike in as many years.
  • Last week, four airlines boosted fares by an average of $20 to help blunt the impact of recent fuel cost increases that have totaled 51 percent this year. The boost begun by American Airlines is at least the seventh by a major carrier since Sept. 1. Fuel has passed labor as the top cost at some carriers.
  • Record world prices for food staples have led to 18% food price inflation in China, 13% in Indonesia and Pakistan, and 10% or more in Latin America, Russia and India, according to the UN’s Food and Agricultural Organization (FAO). "If you combine the increase of the oil prices and the increase of food prices then you have the elements of a very serious [social] crisis in the future," said the head of the FAO.
  • North Dakota, being the farthest point north on the product distribution pipeline, has historically had shortages lasting a few days, but in the past two months outages have lasted weeks. Some tanker drivers have waited 30 to 40 hours for supplies to arrive.
  • Drilling in Western Canada's appears unlikely ever to return to its 2005 peak, according to an industry association, and that raises concern that the region's boom in conventional oil and gas may be over. Drilling will likely drop 40% from 2006 to 2008.
  • Britain faces the prospect of power shortages and soaring prices this winter after the National Grid warned of a shortfall in electricity-generating capacity. The alert coincides with a surge in gas prices, which are now 40% higher than on the continent.
  • China will see domestic oil production peak as early as 2015 with an annual output of 190 million tons, while gas production is expected to peak sometime around 2035 with an annual output of 120 billion cubic meters, a leading energy scholar said last week.

Quote of the Week

"The competition for grain between the world's 800-million motorists, who want to maintain their mobility, and its two billion poorest people, who are simply trying to survive, is emerging as an epic issue."

       — Lester Brown, President of Earth Policy Institute

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