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Peak Oil Review -- March 17th, 2008

1. Production and Prices
2. Climate Change
3. Have We Reached the Breaking Point?
4. Energy Briefs 

1. Production and Prices

Another week, another record. This time crude rose to $111 a barrel. Average national gasoline prices got up $3.28 a gallon and diesel went up even faster to a national average of $3.94 a gallon.

Surging prices continue to fuel the supply vs. speculation vs. the falling dollar debate. OPEC, which naturally wants to avoid blame for damaging the world economy, has been issuing a steady stream of pronouncements pointing to speculators and interest rate cuts. The organization maintains that in this environment, production increases will no longer reduce oil prices. Despite the announcement of $200 billion plus in Federal Reserve loans to prop up failing financial institutions last week, the markets are fully expecting another 0.5 to 1 percent cut in interest rates on March 18th.

Unless this week’s rate cut does not happen or is lower than expected, recent history suggests there will be a weaker dollar and higher oil prices next week. Some analysts are saying that for each percent the dollar falls, oil prices are increasing by three percent.
Traditional oil traders say that market fundamentals point to a decrease in prices soon and are expressing dismay at the way investors fleeing the equity markets are driving up prices. Some maintain that the supply/demand balance is only supporting $80 oil and not $110.

Reduced prospects for OECD economic growth has led the IEA to reduce its forecast for 2008 demand to 87.54 million b/d, a two percent increase over 2007. The IEA estimates that worldwide production increased by 185,000 b/d in February.

2. Climate Change

The global warming debate picked up last week with interested parties all over the world chiming in with new threats and pronouncements. The argument is between economic growth-as-cheaply-as possible, most prominently manifested by the current administrations in Washington and Beijing, and those who fear that greenhouse gas emissions at anything approaching the current rate will do serious damage to life on earth.

Last week, Ministers of the Group of Eight industrialized nations and representatives from 12 other countries discussed how to finance efforts to tackle climate change, and the basis for a successor to the Kyoto Protocol that expires in 2012. U.S. emissions of greenhouse gases total 20 tons a year per person, twice as much as in Europe and Japan. A series of new studies suggest that the world's average emission level may need to fall to near zero by 2050.

In a colossal game of “chicken,” Beijing last week reiterated the inalienable right of 1.3 billion Chinese to continue emitting more and more greenhouse gases until they are as rich as the OECD nations or the US makes major reductions in its emissions. The irony in all this is that China is likely to be among the first to suffer debilitating consequences from the lack of attention to environmental matters.

In the US Congress new bills are in the works to seriously restrict emissions from new coal-powered electric plants. Given the political changes that are likely to take place in Washington this fall, it seems likely that at least some restrictions on emissions will be in place within the next year or so.

Industry sources are already warning of electricity shortages and much higher natural gas prices should any new emissions control laws be enacted. In Canada the Federal government is taking a hard look at the emissions from tar sand processing in Alberta.

From a peak oil perspective, efforts to reduce emissions will likely be measured in years or decades, while the threat of reduced oil flows or supply/demand imbalances is likely to be measured in months or years. It is clear that concern about climate change in increasing and the prospects of decisive action are getting better. 

3. Have We Reached the Breaking Point?

For the first time, widespread fears are being expressed that the unprecedented oil and gas prices will do serious damage to the US economy. The immediate concern is diesel, as some 69 percent of goods shipments by weight in the US are moved by truck. Although reduced economic activity may have some impact on shipments, it is being overshadowed by the damage $4 diesel is doing to the trucking industry.

According to calculations by Deutsche Bank, every penny increase in gasoline prices costs the US economy $1 billion per year. Numbers like this will devour most of the stimulus package passed by Congress.

Unless some new phenomenon intervenes, gas and diesel prices are likely to continue rising for the next two months with nationwide diesel prices peaking well over $4 a gallon and gasoline somewhere above $3.50. Jet fuel reached a record of $3.47 last Friday. Two airlines have already increased fairs by $50 per round trip to cover fuel costs; others are likely to follow suit.

Some observers are busy pointing out that the average American consumer is better off than he was during the fuel shortages 30 years ago and can probably handle another couple of dollars a gallon before serious economic disruptions set in. This, of course, ignores the lifestyle changes of the last 30 years – longer commutes, two wage-earners, more cars per family, and much less fat in industrial use of energy.

Unless the current price spiral slows or stops before summer, we are almost certain to have much higher inflation and a precipitate drop in consumer spending and all that implies to compensate for price of gasoline and diesel.

4. Energy Briefs

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

  • OPEC said Friday it believed the world would need less oil from its 13-member group this year than in 2007 because global oil supply growth was set to outpace demand growth, particularly given signs that the U.S. was on "the brink of recession." (2/15, #8)
  • The South China Morning Post said we are entering, or are close to, the peak oil period, when production will level off. “Despite intensive exploration, discoveries have been dwindling in most regions of the world since the 1960s, even as demand for oil continues to rise. After worldwide oil production reaches this peak period, probably before 2010 according to many analysts, oil production will eventually begin to decline. There will be some fluctuations, but the longer-term decline is inevitable, and irreversible.” (3/11, #17)
  • Disappointing oil exploration results in the Gulf of Mexico are upsetting the hopes of US oil majors for big new findings. Wood MacKenzie said in a new report that new discoveries in the Gulf in 2007 were the lowest of the past decade. (3/10, #12)
  • Record oil company profits, gasoline prices over $3 a gallon and the threat of a U.S. recession are increasing Democrats' prospects for taxing oil and gas producers to pay for wind, solar and conservation programs. (3/10, #11)
  • Mass transit: The number of Americans hopping buses and grabbing subway straps has climbed to the highest level in half a century as soaring gasoline costs push more commuters to take mass transit. (3/12, #14)
  • The White House says soaring oil prices are "not going to be solved overnight" and that "it would be wrong" of President George W. Bush to promise otherwise. (3/12, #13)
  • Fires, accidents, and unplanned maintenance shutdowns have become commonplace at Venezuela’s refineries. The outages force PDVSA to import gasoline at high prices. Meanwhile, domestic consumption of gasoline shows no sign of slowing down, largely due to the fact that subsidized Venezuelan gasoline is some of the world’s cheapest. (3/15, #6)
  • China’s sales of passenger vehicles increased 21.86 percent to 6.3 million units nationwide during 2007. (3/15, #7)
  • Newfoundland & Labrador Refining Corp., the company proposing Canada's first new refinery in more than two decades, said it may slow the project because of diminished financing availability. (3/15, #11)
  • Gazprom's CEO said on Friday that the average price for natural gas for Europe in 2008 could reach $400 per 1,000 cubic meters, 13% more than previously expected. (3/15, #14)
  • Crude oil production by OPEC members hit 32.33 million barrels a day in February from 32.25 million in January, according to a Platts survey released Thursday. (3/14, #5)
  • Nigeria’s president has called for the creation of an international marine force to protect the offshore oil industry in the Gulf of Guinea. (3/14, #10)
  • James Schlesinger, the nation's first secretary of energy, predicted at a National Academy of Sciences meeting last Thursday that energy prices would continue to rise and declared that the United States would never see energy independence as long as it depended on the internal combustion engine.
  • Researchers at Oak Ridge National Laboratory concluded that supporting a 25% market share of light-duty (cars and SUVs) plug-in hybrid electric cars and trucks in 2030 could require either up to 162 new power generation plants (if recharged during the day) or no new power plants at all, if recharged after 10 p.m. (3/14, #21)
  • US LNG imports of 16.2 million tons in 2007 will increase by more than 400% to 70 million tons/year contracted into the US by 2012, according to Martin Houston, a VP with BG PLC Group. He says that excess production capacity is unlikely to emerge in the system any time soon (3/13, #6)
  • The risk of renewed violence in Nigeria's oil producing Niger Delta is increasing because militants are frustrated by a lack of concrete results from peace talks, a key negotiator said on Wednesday. (3/13, #7)
  • Venezuela plans a new tax on foreign oil companies of 20%-25% on what it deems to be "sudden gains" from strong fluctuations in world oil prices. (3/13, #9)
  • China's crude oil imports rose 18% on year in February to 3.61 million b/d, likely due to the need to cover lower output from domestic oil fields following heavy snowfalls in January, and traders taking advantage of temporary lower prices. Refineries maximizing output of diesel and gasoline to ease a domestic shortage would also have triggered higher demand for crude shipments. (3/11,#9)
  • China, the world's second-biggest oil user, plans to set up a ``high-level'' National Energy Commission to oversee security issues and develop strategy. (3/11, #8)
  • India, recently a net exporter of petroproducts, is facing the prospect of becoming dependent on product imports to make up for shortfalls, at least for diesel. (3/11, #12)
  • Zymetis, a start-up spun-off from the University of Maryland, is targeting the pre-processing of cellulosic biomass for ethanol production using an enzyme mixture derived from a bacterium found in the Chesapeake Bay that can break down almost any source of biomass into the component sugars for fermentation into ethanol. (3/11, #18)
  • Natural gas: Countries holding almost half the world's gas are curbing shipments to meet growing domestic use, hurting importers from the U.S. to Japan. Prices for the heating fuel may rise 50% within five years on the NYMEX as a result. (3/10, #5)
  • Falkland Islands: After 10 years of delays since oil fields containing an undetermined amount of oil [many billion barrels?] were discovered off the islands, oil companies are planning to start drilling within the next 12 months. (3/10, #7)
  • Iran will sign a final agreement to export gas via pipeline to Pakistan in April, an official from the National Iranian Gas Co. said. The pipeline will have a capacity to carry 110 million cubic meters of gas a day to Pakistan, The $7.4 billion project, known as the ``Peace Pipeline,'' will carry gas from Iran to Pakistan and India.(3/11, #3)
  • The Iraqi government might soon deploy Iraqi Army troops to seize control of the vital port of Basra from politically connected militias known more for corruption and inciting terrorism than for their skill in moving freight. (3/14, #8)
  • Pakistan may face a fuel crisis in the coming months as the oil marketing companies have informed the government of their inability to book import orders for the POL products due to financial constraints. (3/14, #7)
  • At least one-third, and possibly much more, of the fuel from Iraq’s largest refinery is diverted to the black market, according to American military officials. Tankers are hijacked, drivers are bribed, papers are forged and meters are manipulated — and some of the earnings go to insurgents who are still killing more than 100 Iraqis a week. “It’s the money pit of the insurgency.” (3/16,#4)

Quote of the Week

"If we know about anything with the Canadian oil sands, it's that, as a general rule, it costs twice as much and takes twice as long.”
      —Jeff Rubin, chief economist with CIBC World Markets

Editorial Notes: Original article is mistakenly headlined "2007." (Thanks David M.)

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