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Peak Oil Review -- March 3rd, 2008

1. Production and Prices
2. Canada
3. $4 Gasoline
4. Energy Briefs

1. Production and Prices

Oil prices rose above $103 a barrel for the first time on Friday as a weak US dollar and the prospect of lower interest rates attracted money to the oil market. The increase was triggered by comments on Thursday from Federal Reserve Chairman Bernanke who said the American economy is not immediately threatened with stagflation. Investors interpreted the comments as confirmation that the Fed will continue cutting interest rates which in turn are likely to further weaken the dollar and drive up oil prices.

Many analysts continue to maintain that the 19 percent increase in oil prices during the past month is not supported by fundamentals and is largely driven by speculators fleeing the sagging equities markets. The weekly US stockpiles report showed that US inventories of crude and gasoline continue to grow while distillates continue to drop as cold weather engulfs New England.

OPEC officials point to the increase in crude stockpiles as evidence that the markets are “well supplied” and there is no need for a production increase at the March 5th OPEC meeting. The consensus of analysts and pre-meeting comments by OPEC officials is that official production quotas will be left alone for the time being. Many note that an official production cut would immediately send prices higher, possibly leading to serious consequences in an already precarious world economy,

Tanker-tracker Petrologistics says that OPEC cut exports by 250,000 b/d during February in anticipation of reduced demand in the second quarter after the winter heating season. Demand for Asia, however, continues to be strong. India and Japan are reporting healthy increases in imports and there are persistent reports of serious electric power shortages in China. In the past the Chinese have compensated for electrical shortage by increased oil imports to keep factories running on emergency generators.

2. Canada

Last week there were a number of developments in Canada that could ultimately impact the 2.4 million b/d of oil and products that the US imports from there.

For the first time, major oil producers are calling on Alberta to introduce a partial moratorium on oil sands development. Nine energy companies, including Petro-Canada, Suncor and Shell Canada, joined with Environment Canada and the environmental group Pembina Institute, to sign a letter asking the province to freeze land-lease licenses until 2011. Some see oil company support for the proposal as a public relations ploy in the face of increasing public sentiment against environmental degradation. The area they are proposing for a freeze contains low-grade bitumen and the large companies have their plates full for many years developing the leases they already have.

Ottawa was quick to respond last week when both candidates in the Democratic presidential primaries started saying that the 14 year North American Trade Agreement either should be renegotiated to help unemployed workers in the US or Washington should opt out. Canada's Trade Minister hinted that if NAFTA were revisited, a provision giving US priority access to Canadian oil would be on the table.

Currently the agreement effectively prohibits discriminatory export controls, but many voices in Canada are already questioning the wisdom of exporting so much of a vital natural resource to the US.

A third issue arose last week when it was revealed that Ottawa is quietly urging the Bush administration to exempt Alberta's oil sands from newly enacted US climate change legislation. The Energy Independence and Security Act of 2007 prohibits US government agencies from buying alternative fuels which generate more pollution than conventional oil. Fuel extracted from the Alberta sands clearly falls under this enjoinder. As could be expected, Canadian environmentalists are outraged by the disclosure while the oil industry supports the government’s position.

3. $4 Gasoline

The sharp increases in crude, gasoline and diesel prices in recent weeks has brought forth a spate of news stories speculating on the likelihood of nationwide gasoline prices averaging $4 a gallon later this year. Last week the EIA weighed into the issue with what might be termed the “conventional” analysis of the situation. They noted that one year ago US gasoline prices were about 75 cents a gallon lower than they are now and that during 12 consecutive weeks between February and April 2007 US gasoline stockpiles were drawn down by 34 million barrels due to a combination of low imports, increased demand, and refinery outages. This situation coupled with difficulties in distributing and blending ethanol into gasoline supplies led to an 84cent per gallon increase to a national average high of $3.22 cents per gallon May 21st 2007.

The EIA is not so pessimistic this year. They note that US gasoline stocks have now risen to well above average for this time of year. Gasoline imports are doing well, the demand for gasoline is down about one percent over last year, and our refineries seem to be doing better.

The downside, however, is that crude is now selling for $40 a barrel or 95 cents a gallon more than it was at this time last year. This suggests that just the crude component of gasoline prices could force the price 20 cents a gallon higher than it is currently. With all factors taken into consideration, the EIA is expecting the average price of gasoline will reach a high of around $3.40 this spring.

The big unknown in all this is crude vs. US interest rates. Many are pointing to increasing inventories plus the expectation that additional production will come on stream during the year to predict that oil prices are in for a large drop. The new factor, however, is the steady cut in US interest rates which have led to a lower dollar and higher oil prices. As the US economic situation continues to deteriorate, the Federal Reserve seems likely to continue reducing interest rates for at least the next few months. Many are attributing the most recent $30 a barrel increase in crude prices to the rate cuts we have had so far and are anticipating that further cuts will lead to a still weaker dollar and still higher oil prices. If this proves to be the case, the EIA s estimate of an additional 30 cent increase this spring is likely to be low and $4 gasoline a distinct possibility.

Energy Briefs

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

  • Russian oil exports slumped in February to the lowest level since 2004 as record-high crude export duties forced oil firms to re-route crude to domestic refineries, while output stagnated for a second month in a row. February oil production was 9.79 million barrels per day, almost unchanged from 9.78 million bpd in January, while pipeline exports to Europe fell to 3.99 million bpd from 4.28 million in January. (3/3, #13)
  • With Iraq's draft oil law stalled in Parliament, the national government and Kurdistan Regional Government are moving forward with their own deals. Each calls the other’s deals unconstitutional. Meanwhile, Iraq's oil production is stalled at just more than 2 million barrels per day. (2/29, #4)
  • Oil production in Cuba has fallen steadily over the last half decade from a high of nearly 65,000 barrels per day in 2003 to about 51,300 bpd today. (2/29, #8)
  • Ukraine's President Yushchenko said Wednesday that Ukraine has paid off its "entire debt" to Russia for gas supplies. Gazprom cut gas deliveries to Ukraine by 25% the morning of March 3, pursuing the earlier threat. (2,27-#17; 3/1 #14)
  • Crude oil production from Eni’s Brass River terminal in Nigeria has been cut by around 50,000 barrels a day, traders of West African crude said Thursday. (2/29, #5)
  • Deutsche Bank’s oil team is arguing that steep decline rates in existing oil fields will make it all but impossible for producers to get beyond a 100 million-barrel-a-day ceiling. Their analysis puts the bank among those who see the world hitting a production plateau of 100 million barrels a day within seven or eight years. The bank says that supply constraints could push the price of oil to $150 a barrel by 2010. The big question will be whether prices at that level will finally lead to a sharp break in demand, something that $100-a-barrel oil has yet to do. (2/28, #2)
  • Venezuela and Eni have agreed to spend $10 billion to develop a field in the Orinoco Belt. The joint-venture agreement, which was signed Friday, comes a week after Eni and PdVSa ended their disagreement over the 2006 nationalization of another Orinoco field. The Italian company agreed to $700 million compensation, a much lower figure than it had originally sought. (3/1, #10)
  • A landslide has cut off Ecuador's main export oil pipeline which can move 400,000 b/d from the Amazon jungle to the Pacific Ocean. Officials say exports could be delayed by three to six days, depending on when the nation's main pipeline resumes operations. (3/1, #6)
  • Japan, the world's third-largest oil consumer, said crude oil imports rose for a fourth consecutive month in January, gaining 8.6 percent from a year earlier. (2/29, #12)
  • Trucks began transporting fuel to Katmandu Friday along with much-needed food and other supplies after ethnic-rights groups in southern Nepal ended a paralyzing strike. (2/29, #13)
  • Sudden blackouts on two key Indonesian islands last week may be just the start of a spiraling power crisis that could stymie economic growth, curtail resource exports and trigger social unrest. (2/29, #14)
  • Plans for as many as 50 new ethanol plants have been shelved in recent months, as Wall Street pulls back from financing them. High corn prices which have soared from below $2 a bushel in 2006 to over $5.25 a bushel today is given as the reason. (2/29, #19)
  • Libya signed final accords granting new exploration and production rights to Exxon. Libya wants to increase oil production to 3 million barrels a day by 2013, from 1.74 million barrels a day now, and gas output from 2.7 billion cubic feet a day currently to 3.8 billion cubic feet a day in 2015. (2/28, #4)
  • The US House of Representatives brushed aside threats of a White House veto and voted 236 to 182 in favor of an $18 billion tax package that would rescind a tax break for the five biggest oil companies and use the revenue to boost incentives for wind and solar energy and energy efficiency. (2/28, #14)
  • Pemex reported a 2007 net loss of $1.48 billion despite record oil prices. The company attributed the losses to an increase in fuel imports as domestic fuel production fell amid rising demand. (2/28, #10) Because investment has not been made in refineries, Mexico now imports 40 percent of its domestic fuel consumption. (2/27, #6)
  • Pemex’s Exploration and Production Director said output at the Cantarell field will range from 1.2 to 1.3 million barrels a day this year, compared with an average of 1.5 million in 2007. In January Cantarell's output had already slipped to 1.27 million barrels a day, down from 1.6 million barrels a day in the year-ago month. (2/28, #8)
  • China's shortage of thermal coal could lead to a serious power shortage this year state media reported on Monday, citing an official from the China Electricity Council. (2/26, #9) The Pearl River Delta, a center of “made in China,” is in the midst of a severe power shortage. In some areas factories can only run four days a week. The Guangdong government has declared that the province is undergoing the most serious power supply crunch since 1978. (3/1, #4)
  • Angola is now producing 1.9 million barrels of crude oil per day, thus moving from the previous 1.7 million high at the end of 2007. Estimates indicate that by the end of this year production should reach 2 million barrels a day. (2/26, #6)
  • Chevron and Weyerhaeuser have created a 50-50 joint venture company focused on developing the next generation of renewable transportation fuels from non-food sources. The joint venture, Catchlight Energy, will research and develop technology for converting cellulose-based biomass from a variety of sources into economical, low-carbon biofuels. (3/1, #21)
  • Utilities are increasingly turning to solar thermal power, a comparatively low-tech alternative to photovoltaic panels that convert sunlight directly into electricity. This month, Spanish solar-plant developer Abengoa Solar and Arizona Public Service announced a 280-megawatt solar thermal project in Arizona. By contrast, the world's largest installations of photovoltaics generate only 20 megawatts of power. (3/1, #22)
  • Dmitry Medvedev, the man expected to win Russia's presidential election yesterday, visited Serbia last Monday to sign a multibillion-dollar pipeline agreement -a trip that underscored Moscow's close ties with Belgrade. (2/25, #14)
  • Indian refiners imported 10 million tons or 2.36 million barrels a day of crude in January, an increase of 7.4% over January 2007, (2/25, #9)
  • China National Nuclear Corp. told Xinhua on Wednesday that it had verified the largest uranium ore deposit in the Ordos Basin in Inner Mongolia. The company did not disclose the proven uranium ore reserve amount. "The newly proven uranium amount each year in China is larger than the country's demand, so it is not only sufficient to meet current demand but also lays a solid foundation for Chinese nuclear power development for the long run.” (2/27, #11)

Quote of the Week

“The growth in the demand for grain by ethanol grain distilleries now exceeds all growth in demand for feed grain in the world. We’re seeing a dramatic tightening that will become worse before it gets better. I don't know how the world will cope.”
      —Lester Brown, Earth Policy Institute (3/1, #19)

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