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Peak Oil Review -- March 31st, 2008

1. Production and Prices
2. Basra
3. China
4. Food Shortages
5. Energy Briefs

1. Production and Prices

Prices rose as high as $107.70 a barrel at mid-week when it was reported that a pipeline linking southern Iraqi oilfields with the export terminal at Basra had been cut. Prior to the report, concerns that a weakening US economy would cut demand had kept prices just above $100 per barrel. By Friday, however, reports that the damage had been repaired and that oil exports were back to normal led to prices closing the week at $105.62. Oil is now 65 percent higher than a year ago.

Prices were supported last week by the stocks report that showed US refineries operating at an unusually low 82.2 percent of capacity. Total US petroleum stocks decreased by 6.5 million barrels last week. US inventories except for distillates are still in good shape for this time of the year. Overall consumption of petroleum products in the US is now down by 2.2 percent from last year, except for gasoline consumption which is only down by 0.3 percent.

Tanker tracker Petrologistics reported that OPEC probably increased its production by 100,000 b/d during March with most of the increase coming from Iran which had weather-related delays in February. Of more significance was a statement by Russia’s Natural Resources Minister that Russia’s oil output may decline for the first time in a decade.

Prices in the coming week are likely to be driven by developments in Iraq and status of the US dollar which many are predicting will continue to decline next week as the US economic situation deteriorates.

2. Basra

Baghdad’s 30,000 man assault on militants in Basra on Tuesday may mark the beginning of a turning point in the Iraqi situation. As the Shiite militia forces loyal to cleric al-Sadr came under attack, demonstrations and fighting soon spread as far north as Baghdad. Prior to the attack, it was reported that Iraq has boosted exports to a post-invasion high of 400,000 b/d through the northern pipeline to Turkey, and that exports through Basra were holding steady at about 1.5 million b/d.

Initially the government announced that the fighting was having no impact on oil exports; however that changed when the largest crude pipeline to the export terminal was blown up, slowing exports by possibly as much as 800,000 b/d for two or three days. By the end of the week, the damage had been repaired, but many oil workers were trapped at home or at job sites by the fighting. Over the weekend, a ceasefire was arranged after it became clear that the government offensive had bogged down, that further fighting would only damage the Shiite cause and would likely reduce oil revenues to both sides.

Explanations abound as to why the Maliki government decided to upset the status quo by launching a military operation to reduce the power of the Mehdi forces operating in Basra. Most of these center on intra-Shiite power struggles and the extent of Iranian influence in Iraq’s future.

Since 2003, oil exports from Basra have only occurred with the consent of the local groups that share, officially or unofficially, in the revenues. Last week’s attack shows that the Maliki government does not have the military strength to dislodge the pro-Sadr forces from Basra and will have to acquiesce in the revenue and power sharing for the foreseeable future.

Tensions are still high in Baghdad and Basra. Many observers are worried that the increased fighting, curfews, as well as power, food, and water shortages, could threaten the Maliki government and the U.S. position in Iraq.

3. China

Reports from China make it clear that Beijing does not anticipate any significant problems from a slowing U.S. economy and expects that GDP growth in 2008 will be a robust 10.7 percent. If Beijing is correct that increasing domestic demand coupled with exports to affluent oil-exporters and other states will keep the economy humming, there are serious implications for worldwide demand for oil and coal over the rest of the year.

Chinese oil imports during January and February increased by 9.5 percent. Last week, renewed fuel shortages, the worst in three years, were spreading across China as the government struggled to overcome the problem of increased import prices vs. fixed retail prices. This situation has sparked rumors that have led to hoarding in anticipation of higher prices.

Government oil refineries, under orders to produce as much gasoline and diesel as possible, processed 407 million barrels of oil during the first two months of 2008, up 7.4 percent from 2007. Output of gasoline was up by 4.1 percent while diesel refining increased by 12.5 percent.

Despite increased imports and refining during the past winter, reports of widespread shortages in March suggest that increased imports and pressure on world markets are likely. PetroChina announced last week that it will be importing 1.7 million barrels of finished gasoline during April to help relieve the shortages. Given the importance Beijing places on having the Olympic Games run smoothly next August, it is likely the government will import as much fuel as necessary to overcome the shortages.

4. Food Shortages

Last week saw widespread reports of rapidly increasing food prices across the world that bring into question just how long government policies of increasing biofuel production will last. High food prices and shortages have already led to civil disturbances around the world and more troubles are expected.

The most serious problem is that the price of rice, which is the main food of nearly half the world’s population, has nearly doubled on the international markets in the last 3 months. Rice exporters such as Thailand, Vietnam, Egypt, India, and the Philippines are considering or have already restricted or halted rice exports.

In the U.S. a problem could be shaping up around the size of the US corn planting this spring. The problem is that soybeans are commanding historic high prices at more than $13 a bushel (compared with $5.50 a bushel for corn) and are much cheaper to produce. Observers say all signs point to a sharp decline in U.S. corn planting this spring which could spell a significant tightening of supplies impacting everyone from consumers to cattle feeders to ethanol producers.

5. Energy Briefs

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

  • Russian oil output may fall this year for the first time in a decade as the country struggles with rising costs and harder-to-reach fields, according to Natural Resources Minister Trutnev. A decline would end a 10-year, 58 percent surge in production. Trutnev's outlook contradicts that of the Energy Ministry, which expects an increase of 1.8 percent to 10 million barrels a day of crude and gas condensate. (3/29, #16)
  • Russia may cut the tax on oil extraction by $4.2 billion a year, the finance minister said. The reduction, which may start next year, is to spur investment and revive output (3/25, #18)
  • In South Africa, power supplier Eskom plans “pre-emptive” load shedding for 2.5-hour durations every second day for the next three months. The load shedding is needed to stabilize the country's electricity grid, run and maintain its power plants, and build its coal stockpile reserves. The load shedding will go on until the end of June, when a power-conservation program is to be tabled by the government. (3/28, #8)
  • The likelihood of massive worldwide crude oil shortages in the next few decades may mean that South Africans will have to develop alternatives. This was the warning sounded by the Dept. of Minerals and Energy on Tuesday on the "immediate" need to put in place legislation to regulate the generation of alternative and renewable forms of energy. (3/26, #6)
  • A global shortage of electric generating capacity is dramatically curbing world metal production, a trend expected to continue for years and result in sustained commodity price hikes, a report by Barclays Capital says. South Africa, Brazil, Chile, Indonesia and Thailand all have critically low levels of power reserves. (3/25, #8)
  • In India, delays in the Indo-US civil nuclear cooperation agreement have led to a shortage in fuel supplies that has resulted in most of India’s nuclear power plants showing a decline in production. This has led to a 10 per cent reduction in overall power generation. Mumbai's power shortfall has increased by 30 percent this year as its 16 million inhabitants use record disposable income and easier credit terms to pay for air-conditioners and refrigerators. (3/27, #11, #12)
  • In Bangladesh, fear is growing about a large shortage of electricity during the summer months. The projected supply is between 3500 and 4000 MW, whereas total demand is projected at between 5000 and 5500 MW. (3/25, #16)
  • In Mexico, the secretary of the Senate Energy Committee said there are no plans to set up joint-venture companies with outside firms for oil production. This leaves state-owned Pemex in charge of finding and developing new oil fields. (3/28, #9)
  • Mexico expects average oil production to be at least 50,000 barrels/day lower than the company's previous target for the year due to waning output at the country's main field. Output would average between 3.0 million barrels a day and 3.1 million barrels a day for this year. (3/27, #8)
  • Pemex is struggling to replace the oil it produces each year from the giant Cantarell offshore oil field that is suffering a steep decline. Last year, Pemex only found enough oil to replace half of what it produced during the year. Earlier last week, Pemex reported that its crude production fell by 6.9% year-on-year in February to 2.929 million b/d, while crude exports plummeted by 19.4% to 1.429 million b/d. (3/26, #8-9)
  • From US truckers and farmers to loggers, construction workers and fishermen, skyrocketing diesel prices are pushing what many consider the backbone of the American economy right up to the breaking point. Diesel prices have jumped 22 percent during the last two months to an average of $4.03. (3/28, #13)
  • Rice prices jumped 30 per cent to an all-time high on Thursday, raising fears of fresh outbreaks of social unrest across Asia where the grain is a staple food for more than 2.5bn people. Global rice stocks are at their lowest since 1976. (3/28, #17)
  • Shell in Gabon said Wednesday it was working to resolve a strike that has halted crude oil production for the last seven days. Action by oil workers for Shell and France’s Total has halted crude production of 90,000 barrels a day. (3/27, #7)
  • A Nigerian oil workers' union accused ExxonMobil on Friday of reneging on agreements in a labor dispute and said it may launch an industry-wide strike. (3/29, #10)
  • Senators from North Dakota and Montana say the future of coal as an energy source depends on capturing and storing carbon dioxide emissions. (3/27, #15)
  • Oil companies have begun looking for crude deposits off Greenland’s west coast, thanks to its melting ice pack. Speculation says there may be more oil there than the entire past production of the North Sea, and that production could start within 15 years. (3/27, #16)
  • Eni SpA, Italy's largest oil company, said authorities in Kazakhstan are investigating potential fraud in a 2005 contract awarded by a unit developing the Kashagan oil field as well as in tax payments on two projects. Kazakh officials say Eni may owe $235 million in taxes, fines and interest for not repaying or improperly withholding value added tax related to the Kashagan development, Eni said. (3/29, #8)
  • Venezuela’s oil minister said Friday that ExxonMobil stopped buying oil from the Chalmette, La., refinery owned jointly by the U.S. oil giant and Venezuela’s PdVSA. The oil minister also reiterated that shipments of hard-to-process heavy oil that used to go to Chalmette are now purchased by China. (3/29, #12)
  • A glut of trucks in the US and the sliding dollar have encouraged a boom in exports of class 8 rigs, the biggest vehicles on the road, vividly underscoring the contrast between the faltering US economy and fast-growing emerging markets. Russia and Mexico are the biggest buyers. Hundreds of used American trucks are also on the road in Nigeria, Vietnam and South Korea. (3/29, #17)
  • Venezuelan President Hugo Chavez said last Monday that a proposal for a new tax on oil companies for what the government deems ‘sudden gains’ from world oil price fluctuations ‘is ready.’ (3/25, #10)
  • Japan, the world's third-largest oil consumer, increased crude imports 10% last month as oil requirements rose to meet growing demand for heating oil. (3/26, #14)
  • Ecuador's state oil company reported oil export revenues of $1.27 billion in the first two months of 2008, more than double the $487 million reported in the same period of 2007. According to Dow Jones Newswires Petroecuador exported 16.1 million barrels of crude oil between January and February, up 42% from 11.37 million barrels registered a year earlier. (3/25,#11)

Quote of the Week

If any good can come out of this [pain at the pump] mess, it would be an understanding — by corporations, consumers and government — that the era of cheap oil is truly over. With that, the country could finally focus on developing clean alternative energy sources and reducing oil consumption, a strategy that has served other countries well.
       —New York Times Editorial

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