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Peak Oil Review - December 31st, 2007

1. Production and Prices
2. US Petroleum Inventories
3. Policies Shifting in China
4. Energy Briefs

1. Production and Prices

Oil prices rose during light holiday trading last week, reaching a high of $97.92 on Friday before closing lower on year-end profit taking and forecasts of warmer weather in the US. The increase was sparked by the assassination of Pakistani opposition leader Bhutto, another Turkish air strike on the Kurdish villages in Iraq, and a larger than expected drawdown in US crude stockpiles.

Prices have risen 57 percent this year, primarily on forecasts for continuing tight supplies. Crude futures hit an intraday record of $99.29 a barrel Nov. 21. Open interest in oil futures contracts continue to climb, indicating that traders are expecting still higher prices in the New Year.

2. US Petroleum Inventories

Crude inventories in the US fell by 3.3 million barrels last week as demand continued to edge up and imports remained below the roughly 10 million b/d needed to support domestic consumption. US crude stocks have declined by 60 million barrels in the last six months and are now below the 5-year average of 300 million barrels for this time of year. Total US commercial stockpiles for crude and products have dropped by roughly about 59 million barrels during 2007.

While gasoline stockpiles appear adequate for the time being, US distillate stocks dropped by 2.8 million barrels last week as imports dropped to 143,000 barrels per day. Distillate stocks are now down 11 percent for the year and are at the bottom of the 5-year average range for December.

Net US crude and product imports during 2007 are down by 93 million barrels (2 percent) over 2006. Total US consumption of petroleum products, however, increased by a modest 17 million barrels over the year. The situation for distillates, which are currently much in demand by China, is worse with US stockpiles dropping by 16 million barrels or 11 percent during 2007.

Some are beginning to ask if a major turning point was reached about 6 months ago. World oil production has been flat for the past three years. US and European consumption has been flat while consumption by India, China, and the oil producers have been increasing rapidly. The shortfalls largely have been made up by reduced consumption in poor countries that cannot afford to import oil at current prices. The poorer countries, however, can only cut back imports by so much before they reach an irreducible minimum.

If that minimum has been reached, then the OECD countries are living off stockpiles. When the minimum operating level for these stockpiles is reached and shortages start to occur, the bidding war for imports will shift into high gear, and much higher prices will ensue. 

3. Policies shifting in China

Chinese energy policies appear headed for changes as rapid growth collides with inflation-fighting efforts and environmental degradation. Last week Beijing announced a proposal to set up a high-level body to oversee energy issues. The goal of this organization is to improve the efficiency of energy production and utilization.

The shortage of diesel fuel that has been troublesome in recent months now appears to be spreading to gasoline. In November Chinese oil consumption increased by an unusually low one percent. Despite a recent price increase, government mandated price caps that are far below costs of acquisition and refining are causing refiners to take massive losses.

In an attempt to remedy this situation China imported 2 million barrels of diesel fuel in November, another 3 million in December and plans to import 3.6 million barrels in January. Increases at this pace are bound to distort the world distillate market causing higher prices in the coming year.

If current trends continue, by 2010 China will be importing half of its petroleum requirements. In preparation for this the State Council issued a report saying that China wants to eliminate dependence on spot purchases and will seek to sign more long-term bi-lateral contracts guaranteeing its imported oil supply.

Environmental issues stemming from rapid growth continue. There are plans to phase in cleaner motor fuels in and around Beijing in an effort to clean up smoggy skies prior to the Olympic Games. Another report issued by the State Council says China will give top priority to developing renewable energy. The reports goes on to say, however, that rapid economic growth will require increased consumption of coal and the report does not embrace binding limits on green house gases. All this suggests that Beijing understands there soon will be limits on its ability to produce and import petroleum and is looking to a future based on greater energy efficiency, more coal, and ultimately renewables.

4. Energy Briefs

  • Oil shipments through the pipeline from Iraq's Kirkuk oil fields into the Turkish Mediterranean export terminal at Ceyhan halted Thursday night according to a local shipping agent.
  • The IEA has admitted that it has been paying insufficient attention to supply bottlenecks as evidence mounts that oil is being discovered more slowly than once expected. The Agency has started work on a new study to be published next year that will rework its long-term projections for global oil reserves.
  • There may have been a breakthrough in the standoff between Kazakhstan and the foreign oil companies developing the massive Kashagan oil field. Kazakh President Nazarbayev has called the heads of the six foreign oil firms to the Kazakh capital for a meeting on Jan. 11, a signal that the two sides could be close to a deal.
  • Iraq ends 2007 with oil production at 2.4 million b/d, a level not seen since before the war. There could be troubles ahead in 2008 however. With Turkey bombing Kurdish villages inside Iraq it is only a question of time before the export pipeline to Turkey is closed. A national oil law has yet to be passed and trouble is brewing between Baghdad and the Kurds over oil leases to foreign countries. The British have pulled out of the key export terminal at Basra, leaving the city largely in the hands of warring militias.
  • The Central Bank of Sudan will deal only in the euro beginning in 2008 and advised local commercial banks to opt for convertible currencies other than the U.S. dollar.
  • The Nigerian government granted the request of multinational oil companies to shift the deadline for halting gas flaring from 1 January 2008 to 31 December 2008. This action has led to protests from around the world. The deadline for gas flaring has been extended several times before by the Federal Government.
  • India imported 6.5 percent more crude in November than a year earlier as domestic demand continued to grow. Petrol sales during the month were up 17.1 percent year on year, while diesel sales, which account for nearly a third of domestic consumption, rose 10.3 percent.
  • Rising energy costs triggered the biggest jump in Japanese consumer prices in almost a decade while industrial production slumped. The Bank of Japan is expected to keep interest rates unchanged for some time, even as energy-fueled inflation accelerates. The nationwide core consumer price index, which excludes volatile fresh food prices, jumped 0.4 percent in November.
  • Edinburgh is set to become one of the first UK cities to actively try to reduce its dependency on oil. The “Transition City” initiative confronts the dual problem of "peak oil" and climate change, which is when there is not enough oil to keep the economy running, combined with a need to cut carbon levels.
  • An uneasy calm returned to the oil-rich Persian Gulf island nation of Bahrain on Wednesday after a week of clashes between Shiite Muslim opposition groups and forces of the Sunni-dominated government.
  • Earlier this year, Toyota forecast group-wide sales of 10.4 million vehicles in 2009, possibly becoming the first automaker to reach the 10 million-unit annual sales milestone. 2007 vehicle sales should come close to 9 million.
  • South Korea is set to overhaul its energy sector in 2008 under a new president who has made privatizing state-owned energy companies and securing massive investments to ensure stable oil supplies his top priorities.
  • Iran signed a multi-billion dollar deal with Malaysia on Wednesday to develop two offshore Iranian gas fields, boasting that the planned investment was the biggest ever in the country.
  • Gasoline could average $3.75 a gallon across the U.S. in a few months, pushing the price in California up and over the $4 mark according to energy analysts. They cite several factors including persistently strong crude prices and the fact that the traditional December drop in pump prices didn't materialize.
  • The Iraqi government announcement that monthly food rations will be cut by half, due to a doubling in the cost of food, has left many Iraqis asking how they can survive. Many fear the food ration cuts can spark unrest.
  • Iran has stopped most exports of natural gas to Turkey just as consumption reaches record levels during winter. Iran blamed the shortfall on a malfunctioning compressor station, and the two sides are in talks to resolve the issue, the officials said.
  • Tokyo Electric Power Co. will delay construction of a nuclear plant by a year to incorporate new earthquake-resistance features following a quake in July that damaged and shut its biggest atomic power facility.
  • EV Energy Co., the battery-making joint venture between Toyota and Matsushita, has begun studies at its Omori factory geared to the mass production of lithium-ion batteries.
  • The Middle East's share of Japan's crude imports fell to 84.3% in November from 89.4% a year ago, with crude imports from Russia and Vietnam increasing.
  • The latest federal figures show US coal production dipped slightly this year. The 1.4% decline hit Appalachian states such as Virginia and Kentucky the hardest, while production in the West is essentially flat.
  • Cuba will produce nearly 3 million metric tons of crude oil and more than 1.2 billion cubic meters of natural gas for the year, enough to meet almost half the island's fuel needs, state media reported Wednesday.
  • Basra, where most of Iraq’s oil exports originate, is in the throes of a power struggle in which militia rivals compete with provincial police forces and central government authorities. The head of the provincial council says security committees the government has set up in Basra refuse to cooperate with the provincial police forces.
  • Iran will soon announce an international tender for building 19 nuclear power plants, a week after Russia said it had begun fuel deliveries to the Islamic state's first such facility. A spokesman for parliament's national security and foreign policy committee said each power plant would have a capacity of 1,000 megawatt of electricity.
  • Russia will increase its tax on oil exports by at least 18 percent on Feb.1, a Finance Ministry official said.

Quote of the Week

This week's quote is a piece of peak oil history: Confidential Memo, from M. King Hubbert (to file), Sept 25, 1975; “Visit from Richard P. Sheldon, Chief Geologist, USGS”.

Background: Hubbert’s views on the size of US oil resources, contained in his 1974 report to the Senate Interior Committee, conflicted sharply with the official views of the USGS expressed from 1961 through 1975. In brief, Hubbert viewed the US’s ultimately recoverable oil resource as being one-third the size of the USGS’s official figures. Hearings, write-ups such as “USGS Circular 725” and presentations during recent months had essentially vindicated Hubbert’s viewpoint. But the final chapter—acceptance of lower resource estimates by the USGS—was still far from written. Here are Hubbert’s views of a notable meeting.

“…[Sheldon] came in with a news item from a Denver paper [Rocky Mountain News; 9/16/75] evidently pertaining to my lecture at the University of Colorado at Boulder on the evening of September 9th. He charged that I had been going around ‘running down’ the Geological Survey…

“I told him that the Survey was in trouble solely because of its own faults. For the last 15 years the Survey had been putting out estimates on oil and gas to the government and the country which could not be justified by any known data of the petroleum industry, and it had been repudiated by the evolution of circumstances. For this reason the Survey had got itself into very hot water. It had not been my doing. In fact my principal objective throughout had been to uphold the scientific integrity of the Survey, and at that I had had some degree of success.

“At one point Sheldon said, ‘I hereby give you orders not to involve yourself in any matters of policy.’ I replied that I was unaware of dealing with policy. In fact, I am not sure that I know what ‘matters of policy’ are. What I have been doing is making the most accurate estimates of energy resources of which I am capable. These have been published and my invited lectures have been based upon these publications.

“In my analyses I have had to deal with historical data, and these have unavoidably involved former estimates by the Geological Survey. He said, “But you work for the Geological Survey.”

“I replied that I also used to work for Shell but my [National Academy of Sciences] report of 1962 was not a Shell report. In fact no one in Shell ever saw the report until it was released by the President. Similarly, none of my subsequent writings have ever been Geological Survey reports…My 1974 report was a staff report requested by the Chairman of the Senate Interior and Insular Affairs Committee, with approval of the Office of the Secretary of the Interior.

“With regard to his order to desist, Sheldon said that he would give it to me in writing. I told him that that would be agreeable to me, and that I would give it appropriate consideration. I added, ‘I am not entirely helpless, you know.’

“Somewhere in the conversation he got onto the subject of Survey review of reports. I remarked that I had found it disturbing that the text of Circular 725 had been ‘doctored’ without the authors’ approval. He said that all Survey reports were subject to such treatment….

“There were other details, such as my wasting Survey time and money by accepting lecture invitations. I told him that my first loyalty was to the American taxpayer, and that I did not feel that I had wasted any taxpayer’s money. In fact, I thought that I had also upheld the honor and integrity of the Survey as well.

“At one point, Sheldon asked whether the Survey had ever tried to censor my work. I told him that it definitely had. When I was about to begin work for the Senate Committee the first official obstructive act of the Survey was to take my secretary away from me, and it took about three letters and several summonses to the Director of the U.S.G.S. from the Senate Committee to break it up.

“He said that was all the work of _____ ____. I assured [Sheldon] that I know that the trouble came from ‘on high.’ I also point out that my wife had had to type every word of my Senate report at home.

“At 3:00 p.m. Sheldon left for a conference with the Director. The next chapter is awaited with interest. During the conversation Sheldon also stated that hereafter the Survey intended to have a monitor present every time I gave a lecture to a public audience.”

This process grew rancorous, petty and personal. Here’s hoping politics and infighting don’t impact scientific assessments of world oil resources today.

Thanks to Chris Kuykendall, long-time Hubbert bibliographer and researcher, for locating this memo in the University of Wyoming Hubbert Archives this past fall and sharing it with us.

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