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ODAC Newsletter - Mar 14

Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.

Another week, yet another oil price record. This time crude futures touched $111 per barrel before easing, prompting the IEA to convene a meeting next Monday with oil companies and financial regulators to discuss whether the price surge reflects ‘fundamentals’. OPEC officials continue to insist that the market is well supplied and prices driven by speculation, while fresh research from Goldman Sachs argues strongly that the causes are structural.

Three years ago Goldman Sachs predicted oil might hit $105 in the event of geopolitical turmoil. In their latest batch of reports (two of which can be found here), they note that the oil price has reached that level without any major political crisis, and in spite of the gathering US recession. The soaring price has produced “no meaningful supply response” and they now foresee the “great flattening of non-OPEC supply” as a “distinct possibility within the next decade”. This is a curiously coy way to describe the non-OPEC peak that is widely expected around 2010, but it seems to be what they mean.

Meanwhile, Goldman says demand growth in China and India is ‘structural’ because prices are regulated at below-market levels, meaning the international price of oil will have to rise further to secure the necessary cut in demand in the US, Europe and Japan. Their price forecast has now risen to $95 for 2008 and $110 for 2010, and they warn that any “rebound in US growth or a major supply disruption could lead to $150-200/bbl oil.”

Goldman’s argument provides a persuasive explanation of why the oil price continues to rise stubbornly despite alarming indications that a deep US recession is imminent, including extreme volatility in the financial markets, and increasingly panicky responses from the Federal Reserve.

There is plenty of evidence this week of the ruinous impact of the oil price surge on the food supply, in combination with growing demand, inadequate harvests and competition from biofuels. This week UN Secretary General Ban Ki-moon and the British government’s new chief scientific advisor Professor John Beddington joined the growing chorus of dire warnings on hunger.

In this context Alistair Darling’s maiden budget was deeply disappointing. There were a number of welcome measures: doubling the vehicle excise duty on gas guzzlers; raising aviation tax by 10%; studies on congestion charging and whether to raise the UK’s carbon emissions reduction target from 60% to 80% by 2050. But there was also a distinct whiff of cowardice as the chancellor deferred a 2p-per-litre rise in fuel duty until October, and shelved action to force energy suppliers to do more for those in fuel poverty. Overall it was a collection of penny-ante micro measures. In the face of peak oil and climate change, once again British energy policy failed miserably to square up the enormity of the challenge.

The good news is that the recent gas standoff between Russia and Ukraine has officially been resolved. The bad news, according this week’s guest commentary, is that the issue is likely to flare up again next year when Ukraine faces much higher gas prices.

Oil
Oil Drops From Record in New York on Concern Demand May Decline
Oil watchdog to analyse record highs
IEA sees slower oil demand, cheap crude era dead
Aramco man points finger at estimates
Oil spike to last through 2008: OPEC president
Tougher rules out for new oil sands plants, coal-fired power plants
Iraq vows to block oil contracts signed by Kurds

Gas
Russia and Ukraine end gas stand-off
Guest Commentary: Pavel Kushnir & Olga Danilenko
From a research note by Deutsche Bank analysts issued on 14th March 2008.

Gazprom has announced that it has signed a new set of agreements with Naftogaz of Ukraine:

- In March-December 2008, Ukraine will receive 49.8bcm of Central Asian gas at USD179.5/mcm. Natural gas is to be contracted by Naftogaz of Ukraine.
- The 5.2bcm of natural gas delivered in January-February 2008 is to be paid based on the contracts signed with RosUkrEnergo and Ukrgaz-Energo.
- Gas of Russian origin delivered in January-February 2008 to Ukraine (c. 1.4bcm) will be paid for at USD315/mcm. That gas, however, may be returned to Gazprom.
- Starting in April 2008, Gazprom will sell at least 7.5bcma directly to Ukraine (this is about 10% of the Ukrainian gas market).
- The gas price for Ukraine for 2009 and beyond will be based on the price of imported gas from Central Asia.

The principal drawback of the above agreements is the ability – or, rather, the inability – of Ukraine to pay the market price for gas. The fact that Central Asian gas will be priced based on European levels has no material impact on Gazprom but it will directly affect the price of gas to Ukraine. We believe that the price of gas for Ukraine may exceed USD250/mcm next year, and cause problems for the Ukrainian economy.

On the other hand, Ukraine is the most important transit country for Gazprom's European gas deliveries and the country’s unhappiness with the level of gas prices may translate into nonpayments, gas supply reductions and disruptions of Russian gas exports to Europe. Some of these problems have already been seen this year. We do not believe, therefore, that the issue of Russia-Ukraine gas relations has been settled.
Russian Morning Comment, Deutsche Bank

Gazprom: Central Asia to sell gas at European prices in 2009
Ofgem review paves way for big shake-up

Coal
Ministers challenged over backing for coal-fired power station

Climate
Climate ‘threatens’ European security
Queen tells Commonwealth: Rich nations must help poor in tackling global warming

Economy
Darling plays it safe amid turmoil
Central banks make $250bn move to ease the credit crisis
Fresh fears hammer US markets
Trichet signals alarm at euro’s rise

Food
The New Face Of Hunger
Hunger is set to grow as global food stocks fall
Food crisis will take hold before climate change, warns chief scientist
Snowstorms send food prices in China to 'unbearable' highs
Arab world must address food crisis, says PM
Price rises feed through to your shopping basket

Transport
Gas-guzzlers hit with higher taxes
Mass transit use hits 50-year high on pump prices
Environment Agency joins Heathrow third runway critics
Lufthansa Raises Fuel Fee 21% as Oil Price Increases
Oil price casts a dark cloud over BA profit
EasyJet fears damage to airlines from rising oil price

Editorial Notes: UPDATE: The original at at the ODAC site has links and more commentary. -BA

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