1. Production and Prices.

A week that started with oil prices slumping to a 5-week low of $87.47 finished nearly the same despite much bullish news. The prior week most analysts expected that the OPEC meeting in Abu Dhabi would increase production by 500,000 b/d. This expectation led to a $12 per barrel decline from an all-time high of $99.29 on November 21st.

Despite pressure on the Saudis from the EU and US to increase production, OPEC kept its production cap at the current level. To reassure consuming countries, anonymous spokesmen kept leaking stories to the press about how hard Saudis were arguing for a production increase.

Despite dire predictions that a decision not to increase production would lead to $100 oil, the markets, after a small spike, settled back below $90. Even an unusually large 8 million barrel drop in the US crude inventory reported later in the day did not push prices higher. Traders dismissed the drop as a temporary delay in imports due to fog in the Gulf and pointed to a 4 million barrel increase in gasoline and a 1.4 million barrel increase in distillate stocks as offsetting the drop in crude.

Despite the lack of a formal OPEC production increase, there are signs that more oil may be coming on the market in December from Angola, Iraq, and the return of 600,000 b/d from the UAE that was shut-in for maintenance. For now, the possibility of an economic slowdown that would reduce the demand for oil appears to be dominating the markets.

2. Peak Exports

In the wake of the Wall Street Journal’s report that demand for oil may be outstripping supply, the New York Times yesterday published a story that world oil exports may decline due to increasing consumption in producing countries . While neither of these papers seems prepared to recognize that a peak and plateau for world oil production is imminent, both seemed impelled to warn their readers that serious troubles, and higher oil prices, are just ahead.

The Times starts off by warning that “several of the world’s most important suppliers may need to start importing oil within a decade” and that “within five years Mexico, the No. 2 source of foreign oil for the United States” may stop exporting. They even go so far as to say that “rising internal demand may offset 40 percent of the increase in Saudi oil production between now and 2010.” Their key point is that “internal oil consumption by the five biggest oil exporters — Saudi Arabia, Russia, Norway, Iran and the United Arab Emirates — grew 5.9 percent in 2006 over 2005” and “ Exports declined more than 3 percent.”

To offset all this pessimism, the Times offers its readers a touch of hope by saying “the trend, though increasingly important, does not necessarily mean there will be oil shortages …. Unconventional sources like Canadian tar sands [are] becoming more important … and there is likely to be more pressure to open areas now closed to oil production…. Increased drilling in some important oil states, notably Iraq, Iran and Venezuela, could help.”

While it does not connect all the dots, this story is clearly an important step forward in the media’s appreciation that world oil production is going to be of major importance in the next few years. Already a number of wire services around the world are repeating the story.

3. China’s Fuel Shortage

China is still scrambling to alleviate the self-induced diesel shortage that arose when it tried to maintain retail price caps on diesel and gasoline as world crude prices rose into the $90s. Chinese refiners say that after their cost of crude passed $60 a barrel, they started to lose money. To deal with the shortages, China raised the prices of gasoline, diesel and aviation kerosene by almost 10 percent on November 1st and directed the state-owned oil companies to produce as much diesel as possible.

So far these actions seemed to have improved the situation, but shortages still exist which are doing serious harm to China’s economy as most materials move by truck. Last week the government, still fearful of deregulating prices, offered subsidies to refiners and scrapped oil import duties.

Diesel imports have been rising rapidly from 2 million barrels in November; they are projected to climb to 3 million in December and 3.7 million in January.

The underlying cause of these shortages is not going away. China’s economy is still growing in excess of 11 percent a year and sales of passenger cars increased by 23 percent in the first 11 months of 2007 to 5.66 million. Since 2000 sales of heavy-duty trucks have increased six fold. The total number of cars and trucks on the road is estimated at between 45 and 50 million today.

4. Energy Briefs

  • Democratic leaders in the U.S. Senate are planning a vote on a retooled energy bill late this week after they failed to muster enough support to prevent a filibuster of legislation passed by the House on Thursday. A new version of the bill will probably scale back elements of the House’s package and jettison a requirement that electric utilities use renewable energy for 15 percent of their power generation.
  • Iran and China will sign a final multi-billion dollar agreement for the development of the Yadavaran onshore oil field, the Iranian oil minister said. The agreement also involves China’s purchase of an annual 10 million tons of Iranian liquefied natural gas for a 25-year period starting in 2009.
  • Insurgents exploded a bomb last week under a key oil pipeline in northern Iraq, but oil continues to flow through the damaged pipe, and on to Turkey. A significant part of the recent increase in OPEC exports is attributed to the reopening of the Kirkuk-Ceyhan pipeline which has only been open sporadically since 2003.
  • Japan pledged ¥30 million for a study by the IEA on the impact of short-term speculative money on the oil market. Analysts say speculators are believed to have fled from risky home loan securities to oil for quick profits.
  • ExxonMobil and BP will comply with production restrictions set by Angola after it was given an output cap by OPEC last week.
  • Cuba has invited Russian oil and gas companies to undertake exploration in Cuban waters in the Gulf of Mexico.
  • Belarus and Venezuela will begin producing 50,000 barrels of oil a day in Venezuela within the next few years according to President Chavez. The two countries also signed agreements today to share military technology and deepen trade ties.
  • The IEA said inviting Chinese and Indian delegates to its so-called “committee week” has moved relations with the two countries to a new level.
  • Kazakhstan’s president said his country wants compensation or an increased stake in the Eni-led consortium that is developing the giant Kashagan oil field as a way to resolve the dispute over rising costs and delays in production. He defended his government’s right to intervene in natural resources contracts if investors violate their terms or try to sell their resources business.
  • A key rebel leader in Sudan’s troubled Darfur region has singled out oil companies as military targets, particularly from China, posing a threat to the Asian nation’s crude imports and adding to the mounting challenges it faces over its involvement in Africa.
  • Nicaragua’s President Daniel Ortega has instructed his cabinet to come up with a plan to nationalize the importation of oil, a responsibility now largely held by the U.S.-owned Esso Standard Oil.
  • France announced a feebate system based on CO2 emissions for new vehicle purchases. Under the plan, a bonus will be paid to buyers of new cars emitting less than 130 g CO2/km (about 30% of sales). Conversely, buyers of new vehicles that emit more than 160 g CO2/km (about 25% of sales) will pay a penalty. Buyers of vehicles emitting between 130-160g CO2 (about 45% of sales) will not receive a bonus nor will they pay a tax.
  • EU member states must adopt binding national targets for final use of renewable power and renewable heating and cooling to help meet the EU’s 2020 renewables target, according to a draft of the forthcoming EU renewables law.
  • South Korean workers using skimmers and containment fences are battling to clean up the worst oil spill in the country’s history as the slick washed ashore along 11 miles of the west coast. Total costs to clean up the spill and pay reparations are estimated at $9.5 billion. The leak raises the possibility that single-hull oil tankers may be banned in some places thus increasing the costs of shipping oil.
  • The Economist’s food-price index is now at its highest since it began in 1845, having risen by one-third in the past year.
  • Iraq’s Oil Minister Shahristani said ‘irreconcilable’ differences among various groups in the country’s parliament have killed any chance of the much delayed oil law being passed in the near future. The law is seen as critical to attracting significant foreign investment into the country and a draft was drawn up in February. Al Shahristani also said Iraq was now exporting 2m barrels of oil per day.
  • Greenpeace warned that BP will be involved in the “greatest climate crime” in history by backing tar sands in Alberta and is likely to face direct action. The warning followed BP’s announcement that it was buying into the tar sands through a deal with Husky Oil, reversing a decision by former CEO Browne to stay away from the oil sands.
  • Nigerians may spend the coming holidays in darkness due to a nationwide blackout caused by the cutoff of gas supplies to power stations and lack of maintenance. The Egbin Thermal Power Station, a few miles outside Lagos, is Nigeria’s largest generating plant, with a capacity of 1,320 megawatts. It has six units, but two have been cannibalized to repair the remaining four, and at peak hours only two turbines are functioning.
  • Nigeria has halted about 900,000 b/d of crude output as a result of unrest in the Niger Delta and oilfield closures. Oil companies operating in Nigeria are complained about government plans to start fining them for flaring gas next year, saying the deadline is unrealistic and the economic damage would be immense.
  • Russia and Ukraine have agreed on a natural gas supply deal, under which Ukraine will raise its payments to Russia by 38 percent in 2008. This agreement removes the anxiety over a possible natural gas shortage in Europe.
  • Russia has approved a 25 percent increase in wholesale gasoline prices in 2008. The decision, taken despite rising inflationary pressures, will raise gas prices for industry and consumers. State-capped gas prices in Russia are much lower than world prices.
  • BP said it has started up the world’s deepest subsea multiphase pump project at its King oil field in the Gulf of Mexico (which produces 27,000 b/day). The pumps will enhance production from the field by 20 percent and extend its life by five years. BP said the news was “a breakthrough in application of a technology with the potential to increase recovery of oil from deepwater fields.”
  • Australian Labor Party leader Rudd became prime minister Monday and immediately began dismantling the former government’s policies by ratifying the Kyoto Protocol on climate change. Rudd had pledged to commit Australia to the landmark United Nations treaty on greenhouse gas emissions as his first priority.

Quote of the Week

“The tendency with new technology is always to minimize the downside.”
     —Fran Recht of the Pacific States Marine Fisheries Commission, commenting on the  prospects for wave energy in Oregon