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Peak Oil Review -- May 12th, 2008

1. Production and Prices
2. ASPO-Ireland's Depletion Model
3. The Goldman Sachs Forecast
4. Brazil's Deepwater Discovery
5. Energy Briefs

1. Production and Prices

Not even a bearish US stockpiles report showing unexpectedly large increases in crude and gasoline inventories could stop crude prices from advancing nearly $10 a barrel last week. The surge to over $126 a barrel on Friday was accompanied by increases in natural gas, coal, gasoline, and diesel prices. A number of factors contributed to the rapid increase including sabotage in Nigeria, renewed Turkish bombing of the Kurds, better prospects for the US economy, a sinking dollar, the possibility that the US would embargo Venezuela for aiding Columbian rebels, fighting in Lebanon, and a Goldman Sachs report suggesting that crude was on its way to $150-200 a barrel.

Dow Jones reported that OPEC’s production in April was down by 160,000 b/d, largely due to the Exxon strike and sabotage in Nigeria, and Moscow reported that its product exports were way down last month due to higher export duties.

US refineries were still operating at a relatively low 85 percent of capacity so the increase in US stocks was largely due to a jump in imports, which were a healthy 10.6 million b/d for crude and 1.5 million b/d for gasoline. Distillate imports, however, averaged an unusually low 187,000 barrels per day. That led to a drop of 100,000 barrels in US distillate inventories at a time when they should be growing.

Worldwide, the distillate situation continues to tighten with shortages starting to appear in many countries. Commentators are starting to note the possibility that the demand for diesel is an important factor in rising prices.

US gasoline prices rose to a national average of $3.67 and diesel to $4.27 on Friday. During the day, however, wholesale gasoline jumped by over 6 cents a gallon and distillates by nearly 13 cents, suggesting that still higher prices are in store for next week. The EIA now expects gasoline to peak at a monthly average of $3.73 in June although most analysts are now saying that $4 is more realistic.

The issue of whether or not $4 gasoline is causing significant demand destruction in the US remains cloudy. On Wednesday, the EIA reported that gasoline consumption during April was up 0.3 percent over 2007, while other sources including MasterCard pump sales data are saying that gasoline consumption may have dropped by as much as 6 percent. The EIA however is now forecasting that total US petroleum consumption in 2008 will drop by 85,000 b/d due to the economic slowdown and high prices.

Most long-time observers hold that oil prices have risen too far too fast, and that a major correction is in the offing. They maintain that it is the falling dollar and speculation that have driven up prices, hence the efforts in Congress to curb speculation. Rarely mentioned is the possibility that the world’s demand for oil has caught up with available supplies so that better-off consumers are now in a bidding war for dwindling exports.

2. ASPO-Ireland's Depletion Model

The May issue of ASPO-Ireland’s monthly newsletter contains a significant revision to the organization’s oil depletion model. The last major change to the model, made in 2005, indicated that worldwide production of all liquids was most likely to peak in 2010. At that time, the date was pushed ahead to 2010 because of the likelihood that significant new quantities of oil would go into production and that this would keep the world’s oil supply growing.

The new model takes into consideration that producing large quantities of oil from deepwater sources is not going to be as easy as originally thought and certainly not similar to producing oil from land or shallow water. Technical difficulties in producing deepwater oil has already delayed major projects and the cost and availability of deep water drilling rigs is likely to a limiting factor determining how fast the oil can be exploited. The effect of this change is to move ASPO-Ireland’s year of maximum oil production back from 2010 to 2007.

ASPO points out that there is also some good news in that deepwater production will ultimately be 85 billion barrels rather than the 68 billion previously estimated which will make the downside of world oil production occur more slowly and the peak a more gentle curve.

3. The Goldman Sachs Forecast

In a report dated May 5th, a team of Goldman Sachs analysts wrote “The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.'' As this was the group that forecast in 2005 that there could be a “super spike” that might send oil all the way to $105 a barrel before 2009, the report immediately attracted much attention.

As crude has climbed by nearly $50 a barrel since last fall, the possibility of another $30 - $80 increase within two years no longer seems far fetched. As a gallon of crude increases by 24 cents for every $10 increase in a barrel, an $80 increase would force up US gasoline prices to the vicinity of $6-$7 a gallon. The real unknown here is what $6+ gasoline would do to consumption in the US. To the surprise of many, close to $4 gasoline so far seems to have had minimal impact and the Europeans, albeit with more efficient cars and shorter trips, continue to consume gasoline and diesel at considerably higher prices.

It is clear that the current housing and banking crisis still has many months to play out. What happens to the interaction among the dollar, GDP, inflation, and the US’s trading partners over the next two years is simply too much to foresee. As a commodity second only to food in utility, the demand for oil is likely to remain strong since substantial surpluses are unlikely to emerge again.

4. Brazil's Deepwater Discovery

When Petrobras announced that they had discovered a significant quantity of deepwater oil variously said to be anywhere from 8 to 33 billion barrels, the conventional wisdom in the oil industry was that it would take five or six years before production could start and additional years before large scale production could occur. Knowledgeable observers spoke of the troubles other oil companies had experienced in attempting to extract oil from great depths – extremely high temperatures, destroyed drill bits, cracked metal – and opined that the Brazilians would be faced with the same problems.

Much to the industry’s surprise, last week Petrobras said that at least the Tupi field would be easier to exploit than predicted as it was only 4.4 miles below the surface rather than the 6 miles the company was talking about last fall. Petrobras’ CEO told an interviewer that, “I don't think we face any technical challenges that are insurmountable…We think that today the main problem is cost reduction, not availability of technology.'' He said Petrobras already has the technology to cope with temperatures reaching 60 degrees Celsius expected to be found in the deposit. Others including the US’s EIA had suggested that temperatures could reach 260 degrees C.

Petrobras expects to bring in the first test well during the first quarter of 2009, a year ahead of schedule, and plans to increase production to 4.2 million b/d by 2015. While outside observers remain skeptical, Petrobras announced plans to hire 14,000 geologists and oil rig workers, is attempting to lease as many as 17 newly-built drilling rigs, and is talking of joining OPEC.

5. Energy Briefs

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

  • In Nigeria, the recent slump in oil output may have been disastrous, but problems could worsen. The MEND says it will step up its campaign of attacks on crude-oil facilities. The group also said that it is willing to cease hostilities if the federal government agrees to mediation by former President Jimmy Carter. (5/7, #7; 5/10, #7 )
  • China recorded a rare on-year fall in its crude oil imports in April, likely due to high oil prices and record volumes arriving in Chinese ports during March. China’s imports during January- April 2008 vs. 2007 are still up 9.8% overall. (5/9; #2)
  • The recent troubles of China’s oil industry, which is barred from raising its pump charges to offset soaring international crude oil prices, are now affecting the domestic power industry. Fuel costs are rocketing but their prices cannot match them. (5/7, #12)
  • Mexico's state oil company suffered a setback this year with its deepwater exploration program by drilling a dry hole in 810 meters of water -- the second dry hole of six deepwater wells the company has drilled in the Gulf since 2004. Each such well costs Pemex upwards of $150 million. ((5/8, #6)
  • Iraq's oil production could reach three million barrels/day by the end of 2008, according to Iraq's Minister of Industry. Oil revenue for March was up 12 percent to $5.6 billion.(5/9, #5)
  • Russia's oil production, which fell to an 18-month low of 9.72 million barrels a day in April, may decline this year for the first time in a decade as producers struggle with high costs, aging fields and new deposits in increasingly remote areas. (5/5, #8)
  • Russia will increase its crude export tax by 17 percent June 1, after oil prices rose in March and April. The tax will be set at $398.10 a metric ton, the seventh consecutive increase. The current duty is $340.10 a ton, or $46.40 a barrel.
  • Several US airlines, faced with increasing fuel costs, disclosed this week that they are trimming daily flights, eliminating entire routes, and in some cases withdrawing from airports - and this is just the beginning. (5/8, #15)
  • Throttling back to 60 mph from 70 mph would likely reduce gasoline usage between 2 and 3 percent, which is about what happened when the 55-mph limit was imposed in the 1970s, according to U.S. Energy Dept. researchers. Such a demand reduction could translate into a much larger percentage reduction in price, maybe 10 percent. (5/8, #14)
  • Connecticut State Rep. Backer announced passage of a bill that will take steps to ensure the state’s energy planning is in place and alternative strategies have been designed to address the increasing costs of oil and potential supply disruptions. (5/9, #15)
  • Democratic Senators are attacking what many Americans see as the heart of the oil price problem: speculative trading. They have filed a bill that would prohibit U.S. firms directly trading electronically in oil markets outside the U.S. (5/9, #16; 5/10, #12)
  • Democrats in the U.S. Senate unveiled a new energy package that would revoke $17 billion in tax breaks extended to big oil companies like ExxonMobil Corp and slap a 25 percent windfall profits tax on firms that don't invest in new energy sources. (5/8, #9)
  • The US should consider spiraling food prices that hurt the world's poor when it sets policies that are funneling much of its corn crop into biofuel production, the World Bank said on Wednesday. (5/8, #11)
  • The oil and gas industry will need to invest $50-100 trillion to rebuild its aging infrastructure within the next 7 years and stave off a serious drop in oil and gas production, according to Matt Simmons, chairman of Simmons & Co. Int’l. (5/6, #3).
  • Indonesia, the only OPEC member in Southeast Asia, may leave the group as early as next year because shrinking production has made the country a net importer of oil. (5/6, #10)
  • Improved predictive tools suggest that global warming will weaken slightly during the coming 10 years. On top of the long-term warming trend there is a long-periodic oscillation that will probably lead to a to a lower temperature increase than previously expected during the next years. (5/6, #18)
  • Chile's worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world's biggest mines. (5/5, #7)
  • A CNN poll found that 94 percent of Americans expect they will have to pay $4 a gallon sometime this year - and 78 percent said they figure it will hit $5. Eighty-three percent said oil companies are making too much profit. (5/6, #11)
  • Bad weather is threatening a big shortfall in this year’s US corn harvest, risking a further upward push for food and energy prices. (5/6, #13)
  • A bipartisan group of more than 200 economists, including four Nobel Prize winners, signed a statement calling the gasoline-tax-holiday plan a “bad idea.'' (5/6, #14)
  • In Tanzania, the cost of kerosene for cooking fuel has doubled in the last year. This is expected to drive more consumers towards burning charcoal and wood. (5/10, #8)
  • Venezuela's proven crude oil reserves have swelled to 130 billion barrels marking a rise of 30 billion from its prior estimate, according to Energy minister Ramirez. Caracas is trying to interest Columbia and Brazil in helping develop the Orinoco fields. (5/9, #7,8,9)
  • Venezuela and China will form a joint venture to produce oil in Venezuela's Orinoco Belt to supply a new 400,000-barrel-a-day refinery they will build in China. (5/11, #11)
  • Sugar cane-based ethanol became a more important energy source (16%) than hydroelectric power plants (15%) in Brazil's overall energy complex last year, topped only by petroleum and oil products (37%). (5/9, #10)
  • Nearly a third of India’s coal-fired power plants are now reported to be facing “critical stocks”, where coal stocks would last less than seven days. The import option is increasingly getting tougher as China, which is also facing low domestic reserves and acute power shortages, has stepped up coal purchases internationally. (5/9, #12)
  • India is facing diesel shortages as the state-owned oil companies can no longer afford to import as much diesel. The companies imported almost 2.3 million tonnes of diesel in 2007-08 against 0.96 million tonnes in 2006-07. Diesel comprises around 42% of the total petro-fuel market. (5/9,#13)
  • Increasing costs of fuel in the US during the last few months is expected to offset the benefits of the economic stimulus tax rebates. (5/10, #15)

Quote of the Week

“Demand for diesel has remained strong in the face of higher prices at the pump in large part because its use is less discretionary.”
      —John C. Felmy, Chief economist, American Petroleum Institute

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