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Peak Oil Review - January 21st, 2008

1. Production and Prices
2. Peak Oil — Pro and Con
3. Kashagan
4. Food versus Fuel Again
5. Energy Briefs

1. Production and Prices

With a deluge of bad economic reports, a sagging stock market, and little supportive news, oil prices fell 2.3 percent last week to close on Friday at $90.57. Prices rose briefly when President Bush announced a $140 billion stimulus package, but then fell after the equities markets decided that proposed tax breaks would probably not be effective. The weekly US oil stocks report showed a 4.3 million barrel increase in crude--the first such increase in nine weeks--a 2.2 million barrel increase in gasoline and a 1.2 million barrel increase in distillate stocks.

While traveling in the Middle East, President Bush met with Saudi King Abdullah. After the meeting the White House announced that the King was worried about high oil prices, but a Saudi spokesman continued to maintain there is no need for a production increase at this time. A senior OPEC official said that it was unlikely there will be a change at the February meeting and that there could even be a production cut in March when the heating season is over and demand drops.

The International Energy Agency’s monthly report says global market conditions continue to tighten, with OECD crude oil stock levels dropping by 38 million barrels in November and probably another 30 million in December. The Agency reports that world liquids supply averaged 87.0 million b/d in December, up 870,000 b/d from November on production increases in the OPEC-10, North America, the FSU, Brazil and China.

While oil consumption is expected to rise rapidly in China and the Middle East during 2008, the big unknown is what will happen to world demand if the US economic situation deteriorates. The IEA is still forecasting a 2.3 percent growth in demand to 87.8 million b/d in 2008 but warns there could be changes.

2. Peak Oil  — Pro and Con

Last week saw a number of new pronouncements as to whether world oil production is going to peak in the near future.

In one of its periodic press releases on behalf of the oil industry, Cambridge Energy Research Associates issued a report saying that they had just determined that worldwide oil depletion was only 4.5 percent a year and new projects would more than offset the decline. (See Commentary below.)

Over in London, the former chief economist and current special economic advisor for British Petroleum rejected the “so-called peak oil theory” saying “an imminent peak in production has been repeatedly and wrongly predicted.”

On a more pessimistic note was EU Energy Commissioner Piebalgs who warned the Swiss Energy Congress about the “overlooked” issue of dwindling oil reserves coupled with rapidly
growing and unprecedented global demand. He noted that global energy demand is expected to more than double by 2030, and questioned whether oil production can "keep up" with demand. The Commission is set to release a series of proposals designed to help the EU realize its commitment of reducing CO2 emissions by 20% by 2020. Piebalgs argued that while tackling climate change is crucial, policymakers should not lose sight of the issue of fossil fuel supply.

The most intriguing utterance of the week came from President Bush during an interview with ABC news. When asked what he might say to the King of Saudi Arabia to lower oil prices, the President responded, "If they don't have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do." This suggests that the President may have a better insight into the true state of Saudi capacity to increase oil production than has been acknowledged.

3. Kashagan

Located in Kazakh waters in the northeastern Caspian Sea, Kashagan is the biggest oilfield discovery since the 1960s. With reserves of between 9 and 13 billion barrels of oil, its development is encountering unprecedented technical difficulties and has been plagued by delays and cost overruns. When the consortium led by Italy’s Eni presented a revised development plan last year to the Kazakh government, delaying first production by two years until 2010 and doubling the first phase costs to $20 billion, Kazakhstan demanded major contract revisions. The government claims that the real cost of Kashagan’s development has ballooned to $136 billion.

After six months of negotiations, the consortium – which includes ExxonMobil , Royal Dutch Shell and Total – agreed to pay Kazakhstan $2.5 - $4.5 billion in compensation for the project’s late start and will double the stake of Kazakhstan’s national oil company to 16.8 percent. The variation in compensation is tied to the price of oil, with $4.5 billion being paid if oil remains above $85 and $2.5 billion if oil slips to $55.

Depending on one’s viewpoint, this settlement is either one more in the wave of resource nationalism that has swept oil producing states, or is a just change to the 1997 contract signed when Kazakhstan was broke and had little negotiating leverage. The increasing costs of this project meant that Kazakhstan would have had to wait for as long as 11 years before earning revenue from Kashagan while their fellow oil producing states raked in the billions. In today’s world, this is simply unacceptable and is another indication of the difficulties the international oil companies are facing.

4. Food versus Fuel Again

The UN’s food price index, based on export prices for internationally traded foodstuffs, climbed 37 percent last year. That was on top of a 14 percent increase in 2006, and the trend has accelerated this winter. During recent months, food riots have erupted in Guinea, Mauritania, Mexico, Italy, Morocco, Senegal, Uzbekistan, Pakistan, and Yemen. “The urban poor, the rural landless, and marginal farmers stand to lose,” said the FAO’s chief representative for Asia and the Pacific. Many of the hardest-hit victims of rising food prices live in the vast slums that surround cities in poorer Asian nations.

World grain inventories slipped last year to a new low of just 53 days of demand compared with the 70 days of grain stocks many food experts consider normal. In addition to a developing grain shortage, a world wide shortage of cooking oil seems to be developing.

Some shortages are due to bad weather, the growing demand for more meat from newly affluent peoples, and the substitution of palm oil for trans-fats. Most of the problem, however, can be traced to high fuel prices which have not only increased the costs of transporting food, but have spawned a huge biofuels industry that is consuming an ever increasing share of the world’s food supply. Biofuels accounted for almost half the increase in worldwide demand for vegetable oils last year, and represented 7 percent of total consumption of these oils.

American farmers have been planting more corn and less soy because demand for corn-based ethanol has pushed up corn prices to record highs. American soybean acreage decreased 19 percent last year, producing a drop in soybean oil output and inventories. The new US energy bill mandates a four-fold increase in ethanol consumption during the next 15 years

Rapidly rising food prices obviously result in political instability across the world as more and more people become desperate in their search for affordable food. Such sufferings are unlikely to carry much weight in the Congress where “independence from foreign oil” and the agricultural lobby still holds sway. Food prices are rising rapidly in the US, however, and it is only a matter of time before the Congress realizes that there are far more people eating food than growing it.

5. Energy Briefs

(clips from recent Peak Oil News dailies are indicated by date and item #)

  • Oil companies have warned Pakistan’s government of a serious diesel supply crisis this coming March-April because of their inability to order fresh shipments. Sources said the ministries of petroleum and finance had been informed that the companies could not place tenders for diesel import because of cash problems. (1/17, #16)
  • In Pakistan, electrical outages of up to 18 hours a day, particularly in rural areas, have disabled gas pumps, disrupted businesses, sabotaged efforts by students to study for exams and left millions of Pakistanis complaining in the dark. Rolling outages threaten to stem economic growth as industries slow production. (1/16, #9)
  • A global boom in the cost of commodities is entering its sixth year. Futures prices of crude oil, gold, silver, lead, uranium, cattle, cocoa and corn are all at or near records. Many economists argue that demand overseas would keep prices high even with a recession in the United States. (1/15, #3)
  • The third quarter of 2007 marked the sixth consecutive decline in California’s gasoline consumption. Consumption was down 12,200 b/d compared to the same period in 2006. (Platts, 1/17)
  • The American Petroleum Institute’s chief economist said the unusual increase in US production of crude oil --up 1.1 percent in 2007 – is the first annual increase since 1991. The 5.16 million b/d average for 2007 still ranks with the levels of the late 1940s before US production rose to a peak in 1970. (Platts, 1/17)
  • The cessation of Turkish exports of electricity to Iraq and a lack of fuel for power stations is blamed for the blackouts hitting Iraq's northern oil fields. The power cuts have forced Iraq to stop pumping crude oil along its northern pipeline to Turkey, knocked out its largest refinery (at Baiji), and have left many freezing in the dark during the coldest winter in memory(1/19, #5)
  • New reports on Iraq’s oil production find it may be decreasing. Iraq produced an average 2.3 million b/d in December, 100,000 bpd less than in November, according to a Platts report. (1/17, #12)
  • Kenyan riot police continue to patrol the capital after 23 people were killed in three days of protests over a disputed election. About 650 have been killed since the riots began on Dec. 27. Business remains at a virtual standstill, the rail line from Mombasa to Kampala has been cut, and oil shipments to neighboring countries remain sporadic. (1/19 #7)
  • Mexico's new interior minister said parties in Congress are ready to enter "final talks" on an energy reform that is expected to free up more cash for the state oil firm and give private investment a larger role. (1/18, #12)
  • China's economic growth may ease to 10.5 percent in 2008 from the estimated 11.5 percent in 2007 as the government’s “cooling steps” take effect. (1/18, #13)
  • According to a university study, natural gas distributed throughout the Marcellus shale in northern Appalachia could boost proven U.S. reserves by trillions of cubic feet if gas production companies employ horizontal drilling techniques. (1/18, #16)
  • Russia and Bulgaria agreed to build a gas pipeline that will strengthen Russia's grip on Europe's energy markets. The new pipeline will carry Russian gas through Bulgarian territory and on to western European markets. (1/18, #17)
  • In the first 11 months of 2007, EIA data indicates that U.S. crude oil imports from Saudi Arabia inched up by 1%, to 1.432 million barrels a day, while imports from Mexico skidded 11.3%, to 1.426 million barrels a day, a drop of more than 180,000 barrels a day from a year ago. (1/17, #14)
  • On December 25th, Brazil’s Petrobras set a production record when it lifted 2,000,238 barrels. The average oil production in domestic fields in 2007 was 1,792,000 barrels/day, 0.7% more than a year ago. (1/16, #11)
  • China used more coal than it produced in 2007 and will have to import coal at least until 2010. Beijing has shut down more than 6 percent of the power generating capacity in its southern provinces because of a coal shortage, as the region braces for the worst electricity shortage in at least five years. (1/16, #15, #16)
  • China's installed electricity generating capacity grew 17%, reaching over 700 gigawatts at the end of 2007, second only to the US’s 900+ gigawatts. (1/15, #14)
  • Royal Dutch Shell said Monday it had declared force majeure on oil exports from Nigeria's Forcados terminal for January and February, following an attack last week. In October last year, the Anglo-Dutch major had lifted force majeure as it managed to resume some deliveries from the terminal 380,000 b/d terminal. (1/15, #10)
  • A special commission is urging the US government to raise federal gasoline taxes by as much as 40 cents per gallon over five years as part of a sweeping overhaul designed to ease traffic congestion and repair the nation's decaying bridges and roads. (1/15, #16)
  • Toyota announced on January 13th that it would build its first plug-in hybrid by 2010. The vehicle will rely on lithium-ion batteries. (1/14, #17)

Quote of the Week 

“If they [Saudi Arabia] don't have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do.”
      — President George W. Bush, from a clip on Wednesday Nightline from ABC

Note on ASPO-USA DVDs

DVDs of the ASPO-USA 2007 Houston World Oil Conference can now be ordered on our website. (www.aspousa.org ). Shipping started January 18th, about one month later than planned. (Our apologies for the delay to those who ordered earlier.) The professionally recorded and edited set of 12 DVDs covers over 20 hours of the conference. All of the plenary sessions are included, along with several of the double-track sessions such as Saturday morning’s session, Smart Money and Peak Oil with Charles Maxwell and others. The presentations have the power-points integrated into the DVDs for easy viewing, rather than just the camera view. Cost is $85.00 (US), including shipping and handling to most countries. Please direct all inquires concerning orders or problems to Rick Block at or 856-981-0671. Orders will now be shipped within 10 days of receipt. Contact Rick at [see original article for email] or visit the ASPO-USA website to place your order.

  ASPO-USA is a nonpartisan, proactive effort to encourage prudent energy management, constructive community transformation, and cooperative initiatives during an era of depleting petroleum resources.

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