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Peak Oil Review -- March 10th, 2008

1. Production and Prices
2. Natural Gas
3. $100 Oil and the Economy
4. $57 Oil?
5. Energy Briefs

1. Production and Prices

Oil reached yet another record of $106.54 a barrel last week. Everyone agrees that prices have now surpassed the previous inflation-adjusted high set in April 1980. The squabble over just what is forcing prices higher continues, with OPEC blaming speculators and US mismanagement of its economy for the triple-digit prices. The average US gasoline price continues to climb, reaching $3.19 last week just a few cents shy of last May’s $3.22 record.

Last week US Energy Secretary Bodman joined the debate by saying that low world crude inventories and not speculators are behind the price increases. Goldman Sachs then weighed in, maintaining that it was fundamentals and the high costs of finding and producing new oil that were causing the trouble. Some analysts note that spot prices for oil as well as futures have been rising lately giving support to the “fundamentals” position.

On Wednesday the OPEC vote to maintain production at current levels and the US stocks report which showed a decline in the US crude inventory for the first time in many weeks contributed to the new high. Demand for oil normally slows in the 2nd quarter as the need for heating oil subsides, so many are predicting increasing inventories and drops in prices during the coming weeks. Others point out that as OPEC is currently producing above quota, it is free to quietly slow production without causing a political stir.

The EIA reported on Friday that world crude and condensate production increased to 74.3 million b/d in December, but was still slightly below the May 2005 all-time production high. On an annual basis, production in 2005 was well ahead of 2007 production.

Preliminary numbers show oil output about the same in January and slightly lower in February. Of interest are recent reports that Russian production in February was 9.79 million b/d, almost unchanged from January’s 9.78 million. Russian pipeline exports to Europe, however, fell markedly in February to 3.99 mmb/d from 4.28 mmb/d in January due to higher export duties.

2. Natural Gas

Last week natural gas prices rose above $10 per million BTUs for the first time since January 2006. In December 2005, natural gas briefly hit $15.78 per million BTUs after hurricanes Katrina and Rita cut production in the Gulf of Mexico. Natural gas prices have risen by 31 percent thus far in 2008, substantially more than the 10 percent increase in oil prices.

Colder weather in the northern states and a growing interest in commodities as a safe haven from falling equity prices are behind the recent surge.

The US natural gas stockpile was 1.48 trillion cubic feet or 63 billion cubic feet above the five year average at the end of the February. The recent bout of cold weather, which is forecast to continue through the middle of March, may leave the stockpiles as low as 1.25 trillion cubic feet at the end of the heating season or about 300 billion less than had been anticipated. Countries holding almost half the world's gas are curbing shipments to meet growing domestic use. Prices for natural gas may rise rapidly in the next few years.

The rapid increase in grain prices and production is also helping drive up the price of natural gas which is a key component in fertilizer production. As natural gas is now the third largest fuel for electricity production, there are fears that a hot summer could drive prices still higher.

3. $100 Oil and the Economy

As oil prices marched inexorably upwards from $20 to $100+ a barrel, every $10 increment was accompanied by a flurry of press stories asking whether the world economy would be done in by such an unbelievably high oil price. A few weeks after each $10 milestone, the economists and business journalists looked around and indeed, very little seemed to have happened. The stock market was still climbing. People were still finding jobs. Core inflation was low and GDPs seemed to be growing. Explanations were sought and all decided that we were using oil much more efficiently than we did in the 1970’s and now that we were all so rich, gasoline prices were a smaller piece of the family budget. Not to worry.

In the last few weeks there has been a noticeable change in tone. Wall Street, which for the last 8 months has been seized by the mortgage and liquidity crises, has finally noticed that $100 oil and the prospects of $4 gasoline might just become a real problem. A growing number of economists are becoming concerned that the Federal Reserve, which has been cutting rates in hopes of reinvigorating the economy, will be forced to stop because of more expensive energy. All the money from the “stimulus package” we will get this summer may end up going into gas pumps. In short, further increases in oil prices could trump anything in the government’s arsenal to aid the economy.

The recent run-up of oil to $106 a barrel, without the aid of a natural disaster or geopolitical crisis, has Wall Street starting to think about the future course of oil prices. The famous “price spike” to $105 that was considered so outlandish three years ago is now replaced with talk of a $200 price spike should some untoward event take place. Of even more importance is the realization that if oil goes up another $10 or $15 a barrel this spring, the prospects for short, mild recession are not good and the future becomes very cloudy indeed.

4. $57 Oil?

Last week the Director of the Energy Information Administration went up to Capitol Hill to testify before the Senate Energy and Natural Resources Committee on the EIA’s annual Energy Outlook for 2008. This outlook,updated each year, attempts to take into account all known trends and projections and come up with estimates of the US’s energy posture 22 years from now. Of all the EIA’s efforts, this one has long been the most controversial and this year is no exception. What is most disheartening is that the EIA claims to have considered: “(1) growth in world liquids consumption, (2) the outlook for conventional oil production in countries outside the Organization of the Petroleum Exporting Countries (OPEC), (3) growth in unconventional liquids production, and (4) OPEC behavior” in developing their projections

The head-line grabber from the presentation is that something called “real world” crude oil will decline from its current $105 a barrel to $57 by 2016. Even in the EIA’s worst imaginable case, oil gets all the way to $115 by 2030.

Needless to say nearly all the other projections are equally optimistic: US oil production will increase; US consumption will climb to 22.8 million b/d; ethanol production will increase from 5.6 billion gallons to 24.3 billion; domestic natural gas production will increase from 18.6 trillion cubic feet to 20.1 trillion by 2022. Optimistic numbers concerning just about everything roll on and on with nary a dark cloud anywhere in the energy skies.

Now anyone who has even a passing acquaintance with the world’s current energy situation recognizes that these projections are so wildly optimistic as to be meaningless. Over the years, the EIA, which claims to be untainted by political influence, has built an elaborate series of models to do its long range projecting and these numbers are what have fallen out of the computers. Until a decade ago, this may have been a reasonable approach to long-range forecasting and the numbers may have had some relation to reality. Given the magnitude of the recent changes in the worldwide energy situation, it is obvious that that the Annual Energy Outlook is so far out of touch with reality that the whole approach needs to be changed.

5. Energy Briefs

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

  • Saudi Arabian Oil Minister Ali al-Naimi said crude prices are unlikely to fall below $60 a barrel because of rising costs to develop tar sands and alternative fuels. Naimi believes that his country will have production capacity of 12.5 million barrels/day by the end of 2009, from 11.0 million bpd currently, with spare capacity of 1.5-2.0 million bpd. (3/3, #7, #8)
  • OPEC's decision to maintain oil output at current levels will lead to a bigger-than-average increase in inventories in the second quarter as demand weakens, according to Dresdner Kleinwort Group Ltd. (3/7, #2)
  • As Mexican oil production wanes, a heated debate is emerging over how to drill deep in the Gulf for new reserves to slow declining exports. A former Pemex chief said that it takes twice as long and 10 times as much money to develop oil prospects in deep waters. (3/8, #7)
  • Pemex profits declined by $1.5 billion during 2007 from a profit of $4.26 billion in 2006. Officials blamed the loss on purchases of imports such as gasoline, natural gas, LPG, and petrochemicals. These imports were up because fuel demand was higher and domestic production lower. Pemex also paid $63.15 billion in taxes to the government. (3/7, #8)
  • Iraqi Oil Minister Hussein Sharistani said Iraq intends to almost double its oil production over the next two years, to 4.5 mln barrels per day. [Editor’s note: we’ve heard this before.] China National Petroleum Corporation (CNPC) has agreed to start developing Iraq’s Ahdab oil field with proven reserves estimated at 1.4 billion barrels. (3/7, #3, #4)
  • Australia is importing gasoline from Europe to cover for the unplanned outage of Royal Dutch Shell's Clyde refinery in southeast Australia. "Australia is so tight now with the refinery shutdowns that it's profitable to send cargoes from anywhere in the world," a Singapore based trader said. (3/7, #9)
  • Pakistan's state-run utility said it had cut power supplies to Karachi, a city of 13 million, because the city's power company had not paid its bills. (3/7, #10)
  • Last year saw the smallest discovery of oil and gas reserves in the deepwater US Gulf of Mexico in a decade, the Wood Mackenzie consulting firm said Wednesday. (3/7, #11)
  • The US government is suspending a major loan program for coal-fired power plants in rural communities, saying the uncertainties of climate change and rising construction costs make the loans too risky. (3/7, #12)
  • Esso and Shell stations across Alberta’s prairies are running low on gasoline and face rotating outages for the next few weeks, due to unusual problems at refineries (3/7, #13,#14)
  • Gazprom began reducing deliveries to Ukraine by 50% at 8 p.m. Moscow time last Tuesday. (3/5, #11) While the immediate problem was solved and gas is flowing again, the company sees more conflicts with Ukraine over gas supplies and payments in the future, and puts the blame on Ukraine's politicians for lack of consistency. (3/7, #15)
  • Russia, thanks to high prices for its oil and gas commodities, has wiped out its international debt and built up foreign currency reserves of $480 billion, the third largest in the world after China and Japan. (3/4, #18)
  • The immediate reasons for the spike in world coal prices are soaring demand, inadequate infrastructure and bad weather. There are also gnawing concerns that global coal production may face fundamental geological constraints, or "peak coal" within the next few decades. A clutch of reports in 2007 suggest that coal reserves may be hugely inflated. (3/7, #17)
  • NAFTA led to a massive increase in energy exports to the US. Canada now exports 63 per cent of its oil and 56 per cent of its natural gas to the U.S. Because of NAFTA's proportionality clause, Canada is legally obliged to continue exporting the same proportion to the US forever even if shortages develop. (3/7, #18)
  • The world's largest wind-turbine maker officially opened its first North American manufacturing plant Wednesday on Colorado's northern plains, where it expects to produce blades for 600 turbines a year. (3/7, #21)
  • Nigeria has charged Henry Okah, suspected leader of the Movement for the Emancipation of the Niger Delta, with treason and he risks the death penalty, the country's top prosecutor said on Wednesday. (3/6, #6)
  • China will collect a fuel oil consumption tax of $14.3/mt effective March 5, up from the current $4.30/mt. The government does not explain the reason for the increased tax, but industry sources say the move is aimed at controlling and regulating energy use and narrowing the gap between rich and poor. (3/5, #10)
  • President Bush said the US must "get off oil" and urged automakers to build fully electric vehicles like the concept Chevrolet Volt. "We want our city people driving not on gasoline but on electricity. And the goal, the short-term goal, is to have vehicles that are capable of driving the first 40 miles on electricity." (3/6, #12)
  • ExxonMobil’s revised business plan includes sharply higher capital spending through 2012 ($25-$30 billion a year) but expects less impressive production growth. After a 1% decline in 2007 output compared with 2006, Exxon projects production growing from 4.2 million barrels of oil-equivalent per day in 2007 to about 4.6 million barrels in 2012, a comparable figure to its March 2006 projections of about 5 million b/d equivalent in 2010. (3/6, #14)
  • Saudi Arabia said on Monday it had arrested 28 people suspected of seeking to regroup al Qaeda in the oil-exporting kingdom to carry out a “terror campaign.” (3/4, #4)
  • Early last week, Venezuela, Ecuador and Colombia were threatening a war over a border incident involving an incursion by Colombian forces into Ecuador. By week’s end, the matter was settled. (3/4, #7)
  • Australian oil production is set to drop 8 percent this fiscal year as shutdowns of wells in offshore fields cancel out the effect of new project start-ups according to the Australian Bureau of Agricultural and Resource Economics. (3/4, #8)
  • There were 438 nuclear reactors operating worldwide in 2007, with 46 more in the pipeline, according to the World Nuclear Association. Russia plans to build up to three nuclear power units per year to bring nuclear's share in its electricity supply from today's 15.4% to 23% by 2020. (3/4, #23)
  • Production from Saudi Arabia's 500,000 bpd Khursaniyah oilfield may be delayed beyond the first half of this year. "The oilfield may start pumping limited quantities in May but it will not be able to meet the announced production capacity ...” (3/3,#9)

Quote of the Week

“I generally try to avoid both extreme viewpoints [global threat “doomers and anti-doomers”]. To me, all that matters in the final analysis is whether awareness leads to effective action that actually reduces the risk of worst-case scenarios materializing.”
      —Richard Heinberg, author of numerous books, including Peak Everything

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