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Peak Oil Review - May 5th, 2008

1. Production and Prices
2. U.S. Politics
3. Nigeria
4. Iraq
5. Energy Briefs

1. Production and Prices

Oil prices hit an all-time high of $119.93 last Monday and then subsided on the prospects that oil-worker strikes in Scotland and Nigeria were about to end. By Tuesday oil prices were dropping rapidly on speculation that US interest rate cutting would be over soon. A larger than expected increase in the crude stockpiles reported on Wednesday sent oil down to a low of nearly $110 on Thursday. On Friday, however, fresh US economic data led many to believe that US economic problems were decreasing so oil rose by nearly $4 a barrel to close the week at $116.37.

The rapid drop in crude prices led to a 0.1 cent drop in the average retail cost of US gasoline to $3.622, the first decline in more than two weeks. This, of course, led to speculation that the surge in gasoline prices was running out of steam and that $4 a gallon for the national average retail price is no longer in the cards.

Discussion of oil prices now centers on the strength or weakness of the dollar and moves by speculators rather than supply and demand for oil. Although some still maintain that oil prices still contain $40 or $50 worth of speculation, most recognize that the $8 to $10 drop followed by a quick rebound probably is a more accurate measure of the speculative component of oil prices.

2. U.S. Politics

With 44 percent of Americans now saying that gasoline prices are a serious problem, food prices continuing to climb, and Detroit’s sales plummeting, politicians of all stripes are speaking out in a effort to exploit the situation.

President Bush attacked the Democrats in Congress for blocking his proposals to drill in ANWR and off the coasts, and to increase refining. Presidential candidate McCain joined 22 Republican senators in urging the EPA to lower corn-based ethanol rules that are now perceived as running up food prices. The US Federal Trade Commission said it will yet again investigate possible market manipulation of gasoline prices and Senate Republicans have filed another bill to authorize drilling in Alaska’s ANWR and on the Outer Continental Shelf.

The most controversial proposal of the week was the one put forward by John McCain, endorsed by Hillary Clinton, and opposed by Barack Obama to suspend the 18.4 cent federal gasoline tax during the coming summer. This proposal raised a storm of adverse commentary ranging from “ gas taxes should be raised not lowered” through “the oil companies will keep the money,” to “what will pay for road maintenance.”

Another proposal popular in the Congress is to suspend additions to the strategic petroleum reserve, a move opposed by the administration. One senator even claims a veto-proof majority for this measure.

Throughout this furor, proposals that might do some good are few and far between. The trucking industry, realizing they have a big problem, is pushing for a national 65 mph speed limit for all vehicles. The Rockefeller family is pushing Exxon to acknowledge global warming and get moving on alternative fuels. Climate change legislation that would significantly reduce greenhouse gases is headed to a debate in the Senate. The EIA weighed in on this by pointing out that a widespread switch to nuclear power and carbon sequestration is still years away so that electric utilities would be forced into increased use of expensive natural gas leading to increased prices.

Amidst the jockeying for political advantage, no one, with the possible exception of the truckers, is willing to recognize that a massive conservation program is the only short-term way to keep gasoline prices from climbing to un-affordability. Even corn-based ethanol has become such a sacred cow that the Administration and Congress seem unwilling to tackle the problem until after the fall elections.

3. Nigeria

Despite the end of last week’s oil workers strike against Exxon which shut-in 860,000 b/d, Nigeria’s problems are a long ways from being over. Exxon announced that 300,000 b/d is now restored, but that it may take a while to resume full production.

Attacks on Nigerian oil infrastructure by the Movement for the Emancipation of the Niger Delta (MEND) continued last week as the government announced it would try in secret one of the movement’s leaders who is facing the death penalty.

The amount of Shell’s production shut-in by recent attacks is still unknown. Shell has declared force majeure on 167,000 b/d and has announced that an additional quantity has been shut-in. The MEND continues to claim that the total shut-in is now closer to 500,000 b/d and that the government will not let Shell reveal the actual situation.

Nigeria’s electricity problems continue. In recent months the power plants remaining in operation have been producing about 3,000 megawatts, but last week the Energy Minister announced that this was down to 2,130 megawatts. On Friday a system failure blacked out the entire country for three hours.

The confrontation between the government and militants has taken a turn for the worse in recent weeks. The government seems bent on trying MEND’s leader and the MEND has launched “Operation Cyclone” with the objective of halting all Nigerian oil production. The MEND have a reasonable track record in carrying out their threats, so unless the government changes policy soon, the chances for reduced oil output from Nigeria in the near future seem pretty good.

4. Iraq

Higher exports and oil prices have been bringing record oil revenue to Iraq, possibly as much as $70 billion this year. As most political factions in Iraq have found a way to share in the revenue, either legally or illegally, there is little incentive to change the status quo. The Iraqis claim that in April exports through the northern pipeline climbed to 430,000 b/d.

Last week, the Deputy Prime Minister said, according to reliable reports, the country’s reserves may total 350 billion barrels putting it ahead of Saudi Arabia. Negotiations for western contractors to participate in developing Iraq’s oil fields are still bumping along despite the country’s inability to pass a comprehensive oil law.

Among those most unhappy with the current situation are members of US Congress who are faced with a request for another $108 billion in war funding and are wondering when Iraq can shoulder some of the load. US auditors, however, report that Iraq still does not have the institutional capacity to contract for and spend the revenue on oil and other forms of infrastructure or to crack down on massive corruption in the country.

The security situation in Iraq is still not safe enough for foreign contractors and in recent weeks, US casualties have increased. Many Iraqi’s see no obligation to start paying for their own reconstruction, maintaining that it was the US that started the current round of disruptions. In the meantime Iraq’s oil refining, electricity, and water infrastructure continues to deteriorate.

5. Energy Briefs

  • China's consumption of gasoline, diesel and kerosene increased 16.5% over the previous year, hitting new record highs. China’s production of oil only increased 2.2% while imports increased 14.9%. China imported just under 50% of the oil they consumed. Reuters suggests that the current surge in gasoline and diesel imports is related to the Olympics and that imports will subside in the autumn. (4/29, #10; 5/1, #8)
  • Russia, the world’s second-largest oil supplier, produced the least crude oil in 18 months in April as aging fields and rising costs threaten the country with the first annual decline in oil output in a decade. April production was 0.8% less than April 2007 and 0.4% less than March 2008. Last month Russia’s two largest independent oil companies said that the country’s oil production may have peaked. (5/2, #2)
  • Mexico will reduce its crude oil exports to the US by an average of 184,000 b/d throughout 2008, a situation that could continue for 2 years longer, reported a Mexican media outlet. (4/30, #9)
  • Some kinds of fertilizer have nearly tripled in price in the last year. That is one of many factors that threaten to push tens of millions of poor people into malnutrition. Without nitrogen fertilizer, there would not be enough food for 40 percent of the world’s population, at least based on today’s diets. (4/30, #20)
  • ExxonMobil is beginning to show signs of weakness as it struggles to increase oil production and to squeeze profit out of its refining business. Overall oil and gas production fell 5.6 per cent from the year-earlier quarter. (5/2, #4)
  • Market observers say Venezuela’s oil output is below official figures and that Venezuela’s total output is around 2.5 million bpd compared with government figures above 3.0 million bpd. The government deems that as political mischief. (5/3, #9)
  • Early last week thousands of demonstrators marched in Mexico City to protest a government bill to partly privatize state-run Pemex, as lawmakers blocked the measure from reaching a vote. (4/28, #8)
  • Chevron announced that they are drilling more follow-up wells near their Jack and St. Malo discoveries. They also announced the delay of 70,000 b/day production from their Blind Faith project. (5/3, #18; Note--the Jack, a highly publicized discovery announced in September 2006, won’t enter production for five or more years.)
  • At a huge tailings pond serving Syncrude’s Alberta tar sands, 500 water fowl were killed last week when the noisemaker cannon wasn’t turned on as the pond melted. Industry now faces a new struggle to convince the world they are not just paying lip service to cleaning up operations. (5/3, #20)
  • OPEC won't consider increasing crude output before it meets in September because the market is well supplied, Qatari Oil Minister Abdullah al-Attiyah said. (5/2, #3)
  • Royal Dutch Shell provoked a storm of anger among its partners in the world’s largest offshore wind proposal last week when it revealed plans to sell its stake. Their pullout has plunged the 341-turbine, 1000-MW project into crisis. (5/1, #13)
  • Indonesian coal is expected to reach $150/ton soon, up from $50/ton last year. (5/1, #18)
  • OPEC President Chakib Khelil does not rule out oil prices reaching $200 a barrel, even though supply is adequate, because the market is driven by the dollar's slide, Algerian government newspaper El Moudjahid reported on Monday. (4/28, #3)
  • There is a "huge risk'' that oil prices will continue to rise until demand collapses because additional supplies are limited and alternative fuels decades away from replacing crude, Deutsche Bank AG said. (4/28, #4)
  • Crude oil may rise to $200 a barrel by the end of the year as refiners increase purchases of low- sulfur oil to make diesel fuel, economist Philip Verleger said. (4/28, #5)
  • In April Chinese motorists waited in half-mile lines to buy rationed diesel at subsidized prices near $3 a gallon from state-run gas stations, rather than go to Exxon- and Shell-owned outlets, which set their own prices. (5/2, #16)
  • Analysts say airline ticket prices have to rise 15 to 20 percent just to cover fuel costs and that the increases will price some leisure travelers out of the market. The ripple effect could affect every part of the economy that depends on air service. Resorts, hotels, cruise lines and convention destinations could suffer. (5/2, #18)
  • Pakistan increased state-subsidized gasoline and diesel prices for the fourth time in two months after record crude oil prices increased import costs for refiners. Pakistan imports about 85 percent of the oil it uses domestically. (5/1, #3)
  • Brazil's plan to become one of the world's biggest oil exporters hinges on exploiting crude six miles below the ocean surface. Tapping this oil will require equipment that can withstand 18,000 pounds per square inch of pressure, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick. Until the tools needed to exploit the reservoirs are invented, the crude will remain locked under the sea. (4/29, #9)
  • India's three state-owned refining companies say they are nearing the brink of collapse. The high price of oil has badly affected their liquidity, and they are losing an estimated $125 million/day on domestic sales of gasoline, diesel, kerosene, and liquefied petroleum gas.(4/16, #12)
  • The boom in the use of diesel for electric generators in parts of Asia, Africa, the Middle East and Latin is helping to propel crude oil above $100 a barrel even as energy demand wanes in the United States and Europe. Demand for distillates to fuel diesel generators has increased 250,000 bpd in China, South Africa and Latin America since the beginning of the year, according to Goldman Sachs. (4/30, #3)
  • Japan's government restored an unpopular tax on gasoline despite scuffles in Parliament as opposition lawmakers tried to stop a vote on the issue. The restored tax is 24 US cents a liter or nearly a dollar a gallon. (5/1, #12)
  • South Africa's power utility Eskom said it will suspend scheduled load shedding as energy savings have eased a severe power shortage. Recent explosions and fires at older power sub-stations that were unable to cope with frequent blackouts is more likely the reason for the suspension. (5/2, #7)

Quote of the Week

“There are mainly three different problems [with oil production]: geology, investment and policy of the main oil producers. Those three aspects taken together make the future of oil very difficult."
     —Fatih Birol, chief economist, International Energy Agency

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