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Peak Oil Review - January 14th, 2008

1. Production and Prices
2. The Economic Slowdown
3. Troubles in Central Africa
4. Electricity Shortages
5. Energy Briefs

1. Production and Prices

Fears of recession dominated the week as oil prices dropped steadily from the previous week’s high of $100 a barrel to close at $92 a barrel. Even the mid-week US stockpiles report which showed US crude inventories dropping by another 6.8 million barrels was not enough to counter a steady stream of bad economic reports. The decline in crude stocks was partially offset by an unexpectedly large growth in US gasoline and distillate stocks as more US refining capacity came back into production. Non-OPEC Projected Growth While US distillate stocks increased by 1.5 million barrels last week, they are still very close to the bottom of the normal range and more cold weather is forecast for this week. Despite high prices, US domestic consumption of petroleum products is running 2.6 percent ahead of last year.

The Houston ship channel was closed for a time by fog last week slowing crude shipments to refineries at Houston, Galveston, Beaumont and Freeport. Any stockpile reduction from this closure will likely show up in this week’s report.

The US Department of Energy is predicting that 2008 will be a good year for petroleum with new production from projects around the world coming online and prices falling moderately later in the year. While growth in production is indeed possible, the world’s oil situation has become so complex that numerouother factors are likely to play an important role in determining the price and availability of oil in the coming year.

2. The Economic Slowdown

With nearly everyone now agreeing that the US, Europe, and perhaps even Asia are entering a recession, the search is on for pre-election fixes to forestall a serious economic slump. Last week Fed Chairman Bernanke strongly hinted that aggressive interest rate cuts were in the offing to supplement the three we have had in the last four months. Washington and the campaign trail are abuzz with talk of “stimulus packages” – rebates, spending and tax cuts – reaching the $100 billion level.

Some respected authorities are saying that it is too late to take effective remedial action against the mortgage problems which have burrowed deeply into our economic system and now seem to be affecting consumer credit and spending as well as housing. Unlike previous recessions, of course, the new and unprecedented factor is the tight oil market and associated high prices.

Based on what happened last fall, US interest rate cuts seem to translate into an immediate drop in the dollar and an increase in the price of oil and precious metals as investors seek assets that will hold their value. Last week gold hit a record high of just under $900 an ounce and the dollar held near a five-week low.

As interest rate cuts in the US are virtually assured this spring, there will clearly be upward pressure on oil prices. Despite trader fears that $90-100 oil will lead to a decrease in demand, so far there is little evidence that this is happening in the OECD countries and Asia. All evidence suggests that it will take considerably higher prices before consumers of petroleum products are forced to take significant conservation measures.

For the rest of 2008 it appears that oil prices will rise or fall on the conflict between modest increases in oil production and the possibility a major economic downturn vs. efforts to fight the recession. The latter have already demonstrated the ability to increase oil prices markedly.

3. Troubles in Central Africa

Riots and ethnic clashes have killed 500 people across Kenya since President Mwai Kibaki's re-election following the December 27 ballot. Tourism, Kenya’s main industry, has virtually dried up as images of machete wielding youths clashing with riot police flashed across the world’s televisions. The disturbances have slowed deliveries of fuel and other goods to a number of central African countries including Uganda, Rwanda, Burundi, and parts of Democratic Republic of the Congo. Reduced fuel shipments from depots in Western Kenya to these countries is causing a wide range of economic hardships including rapid inflation, shortages and the closure of numerous factories.

By week’s end, there was no end to the crisis in sight. The opposition was planning to resume nationwide protests which the government was preparing to suppress. Visits by foreign mediators urging a settlement of the dispute did not seem to be making much progress. Some fuel shipments did however seem to be getting through to neighboring states.

Across the continent, the situation in Nigeria deteriorated further last week as new militant attacks caused an as-yet undetermined amount of damage. Last week started with militants blowing up a pumping station and a water disposal pipeline. This was quickly followed by attacks on six oil service boats close to the major Bonny Island export terminal. The major attack of the week came when militants set off explosives inside a tanker unloading industrial oil at Port Harcourt. The fire lasted for several days but was limited to the ship.

The Movement for the Emancipation of the Niger Delta (MEND) immediately claimed credit for the attack, saying they were aided by sympathizers working inside the oil industry. A week earlier, the MEND had announced that they were resuming unrestricted warfare against Nigeria’s oil facilities with the aim of bringing exports to a complete halt.

While last week’s attacks did little to slow oil production, the specter of sabotage to tankers by Nigerian oil workers opens a new dimension to the ongoing struggle in the Niger Delta.

4. Electricity Shortages

A combination of drought, high oil prices and civil unrest are causing an unprecedented number of electricity shortages across the world. In Central Asia, abnormally low temperatures and drought have left many areas of Uzbekistan, Turkmenistan and Tajikistan with little or no power. In Iraq, the national grid is reported to have ground to a halt due to a combination of sabotage to electric towers, fuel shortages following a refinery fire, and a halt to Turkey’s export of the gas oil used to fuel several of Iraq’s major power stations. Turkey and Kuwait are reported to have halted exports of electricity to Iraq.

Among the more developed countries, the situation in Pakistan is probably the most acute. Textile and steel factories have been closed for the past two weeks and the government ordered drastic cuts in electricity consumption including the shutdown of markets at 7:30 pm. Numerous measures to conserve power and motor fuel went into effect. In Nepal, low reservoirs have forced authorities to cut electric power for six hours a day. Kabul, Afghanistan is only getting three hours of electricity a day.

In South America, Brazil's Energy Minister denied reports that a short supply of natural gas from Bolivia and a lack of rain might force Brazil, which relies heavily on hydroelectric power, to ration energy later this year. The government did order six thermo power plants fired with expensive fuel oil to be switched on. Reservoirs in many parts of the country are near critical levels due to scarce rainfall in recent months.

These problems will likely grow worse. In many areas, melting of glaciers is leading to permanent reductions in hydro power potential and the cost of oil for thermoelectric plants is going nowhere but up. While business and the rich will have portable generators for a while, it is likely to be many years before round the clock electricity is available again in many parts of the world.

5. Energy Briefs

(clips from this week’s daily Peak Oil News, by date and item #)

  • The World Bank took a position in the debate on where oil prices are headed by announcing in its Global Economic Prospects 2008 report that oil prices will fall gradually through 2009 to about $75, then fall toward $50 per barrel, in the longer-term. (1/10, #4)
  • The US’s monthly foreign oil bill climbed 16.3% to an all-time monthly high of $34.4 billion last November. The month’s total trade deficit was $63.1 billion. (1/12, #14)
  • Chinese oil demand in the current quarter is expected to average 7.83 million barrels a day, up 5.4% from a year earlier. For the full year 2008, Chinese oil demand is expected to average 8.12 million barrels a day, a 5.7% gain following a 5.6% rise in 2007. (1/9, #5)
  • Kazakhstan agreed to a deal with an Eni-led consortium on Sunday night to develop the Kashagan oilfield. The consortium – which includes ExxonMobil , Royal Dutch Shell and Total of France – agreed to pay Kazakhstan $2.5-$4.5 billion in compensation for the project’s late start. It will also sell shares to KazMunaigas , so the Kazakhstan national oil company’s stake can be doubled to 16.8 percent. (1/14, #6)
  • Iraqi oil production has been doing well in recent months as a result of improved security and repairs to the northern pipeline to Turkey. Platts reports that December production reached. 2.48 million b/d. Twenty one million barrels from last year are unaccounted for and were probably stolen. (1/12, #7)
  • Three of Argentina's four main fuel retailers agreed to roll back pump prices to October levels in exchange for an end to a fuel export freeze announced earlier last week. Some analysts say that government-controlled prices, well below $1/gallon, need to rise since Argentina faces the prospect of becoming a net oil importer by 2010. (1/12, #13)
  • US Energy Secretary Bodman will tour the Middle East next week, urging the energy-producing nations to make "robust investments" in energy production. . Bodman will meet with senior U.S. business leaders and government officials from Saudi Arabia, Qatar, United Arab Emirates, Jordan and Egypt. (1/11, #6)
  • ExxonMobil’s announcement that production has started at its latest offshore site in Angolapushes total national output close to its OPEC production cap. This raises questions about whether private oil companies operating in Angola might soon be forced to constrain production to stay within the quota. (1/11, #13)
  • China's crude imports rose 11 percent in December from a year earlier as refiners strained to end a diesel fuel shortage that has lasted for several months. Petroleum exports were cut 39 percent last year and the government ordered the two large state oil companies to supply crude to the smaller private refineries that had reduced production because of price caps. (1/11, #20)
  • Alaska has rejected the bid of ConocoPhillips to build a new pipeline to bring natural gas down from the North Slope. Conoco’s proposal was deemed to be outside of the state’s bid requirements and the company called its bid an alternative proposal. The state has already announced that TransCanada Alaska’ was the only bid of five that matched the state's requirements. (1/11, #23)
  • A comprehensive new USDA study says using switchgrass for ethanol production will deliver 540 percent of the energy used to produce it, compared with roughly 25 percent more energy returned by corn-based ethanol. This is the most optimistic study yet of the prospects for switchgrass-based ethanol. (1/9, #23)
  • The New York Times reports that the Tupi oil field discovered late last year—with an estimated 5 to 8 billion barrels of oil beneath 7000’ of water -- has the potential to transform Brazil into a sizable exporter that might join OPEC. (1/11, #15; consider us skeptical)
  • Cold weather affecting a wide region from Central Asia to the Balkans has caused a gas deficit. Turkey has halted the flow of Azerbaijani gas to Greece due to a suspension of gas supplies from Iran to Turkey. A reduction of gas shipped to Iran from Turkmenistan, probably over a cost dispute, is also playing a role. (1/11, #10)
  • The fire at Iraq’s largest refinery at Baiji north of Baghdad has taken out the country’s largest Liquefied Petroleum Gas processing unit. Iraq relies on LPG to power major electricity plants. LPG is also the main cooking fuel for Iraqi households. The blaze will exacerbate already acute shortages of gas in the country. (1/10, #6)
  • Saudi Aramco has said it plans to expand the capacity of its Ras Tanura refinery to 950,000 barrels per day by 2012 from 550,000 bpd to serve the Kingdom's surging demand for oil products in both the Eastern and Central provinces. (1/9, #8)
  • Citing concerns over a weaker US dollar, Venezuela is shortening the time foreign customers have to pay for shipments of crude and related products. (1/9, #11)
  • The EIA says US consumers will pay record prices for gasoline this spring, with national monthly pump costs peaking near $3.50 per gallon when the busy driving season begins. Demand in the latest four weeks averaged 1% above a year ago. (1/9, #16)
  • A landmark Gazprom pipeline project intended to bring new supplies of Siberian natural gas into Western Europe and, ultimately, Britain is suffering severe cost inflation and delays. The first gas was expected to flow through Nord Stream by 2010, but completion and testing of the 746-mile pipeline, which runs the length of the Baltic Sea, has been delayed until 2011 and costs are rising fast. (1/7, #18)
  • The oil flow from Kirkuk's northern fields to the Turkish port of Ceyhan was halted on Wednesday according to source form the North Oil Company, “The stoppage is due to Ceyhan's oil reservoirs being totally full with Iraqi crude. Before the stoppage oil was flowing at 480, 000 b/d,” he said. (1/11, #5)

Quote of the Week

"I believe strongly that this country has to get off oil ... The electrification of the automobile is inevitable.”

       — Bob Lutz, GM Vice-Chairman, in Newsweek magazine.

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