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Peak Oil Review - May 26th, 2008

1. Production and Prices
2. In the Congress
3. Subsidies
4. The IEA's Forecast
5. Energy Briefs

1. Production and Prices

Crude started the week by dropping below $126 a barrel. By Thursday prices had surged by nearly $10 to a new high of $135.09 due to a weaker dollar, an unexpected drop in US stockpiles, and short covering by those prematurely betting that prices were about to go down.

On Tuesday there was a rush to buy futures contracts as far forward as December 2016, pushing their prices as high as $139.50 a barrel, up more than $9.50 in one day. Veteran traders said they had never seen such a jump which they are attributing to growing sentiment that world oil production is approaching a peak. For the first time in the history of oil futures trading, oil prices are now in continuous “contango” which is when oil futures contracts get progressively more expensive each year into the future.

2. In the Congress

Four dollar gasoline has set off yet another wave of activity on Capitol Hill. Proposals range from the Democratic “NOPEC” bill which would allow the US take legal action against OPEC for conspiring to fix prices to a Republican package of 15 bills which its sponsors say will drive gasoline prices back to $2 a gallon.

On a more serious note, however, sentiment is growing in Congress to at least partially end the longstanding ban on drilling in environmentally sensitive areas including ANWAR in Alaska, the continental shelves, and on federally-owned lands. The oil companies and some members of Congress have long maintained that there are prodigious quantities of oil to be found, but usually fail to mention that it will take many years to bring these areas into production so that major new discoveries, if any, are unlikely to have more than a marginal impact on declining world oil production. (See Commentary, p. 5)

As it becomes apparent that a continuation of current oil prices is likely to cause major damage to the US economy, many individuals and organizations who have long opposed increased domestic drilling seem willing to compromise. The oil industry insists that improvements in drilling techniques in recent years have reduced environmental risks considerably.

A major concern is whether relaxing restrictions in the interest of expanding supply would only serve as another meaningless political distraction from efforts to increase conservation, efficiency measures, and the use of renewable fuels.

3. Subsidies

In much of the world, retail prices for petroleum products have been kept artificially low by government policy. In addition to most oil-exporting states outside of Europe, the major Asian countries including China, India, and Indonesia have long had such policies. While major exporters such as Middle Eastern oil producers and Venezuela can maintain such policies, oil importers are running into increasing economic problems due to high world prices.

In many cases the government has simply put a cap on retail prices, forcing oil companies to swallow increasing losses on the sale of retail products. In cases such as China where the oil industry consists of two big state-owned oil companies and many smaller private companies, shortages have developed when the private companies simply stopped refining and selling at a loss. Last week there were reports that India’s oil companies are weeks away from bankruptcy because the politicians are afraid to raise oil prices.

Taiwan, Malaysia and Indonesia have announced plans to cut subsidies. India is likely to follow suit soon and there have been persistent rumors, that China is considering an increase in prices. Beijing, which has a serious inflation problem, denied such a move was in the offing if for no other reason but to forestall hoarding. The Chinese, however, can relax other taxes to relieve the burden of price caps on the oil industry rather than raising taxes.

The impact of imposing higher prices extends further than motor fuels as most households in Asia and the underdeveloped world have become dependent on kerosene and LPG for cooking. A significant increase in the price of these fuels will cause serious hardships and social unrest in many countries.

4. The IEA's Forecast

For many years, the International Energy Agency has forecast that supplies of crude and other liquid fuels would increase with rising demand so that by 2030 world production would be about 116 million b/d. The IEA is not alone, for the US’s Energy Information Administration also forecasts that supply will rise to meet demand for at least the next 20 years.

Last winter the IEA, possibly under pressure from some member states, decided to undertake a comprehensive study of the 400 most important oil fields to determine the ability of the oil industry to keep up with rapidly increasing demand. Although the findings will not be released until November, last week the Wall Street Journal ran a front-page story saying that the Agency is preparing to issue a “sharp downward revision of its oil supply forecast.”

Several major oil producers such as China, Venezuela, Iran and Saudi Arabia are not cooperating with the study so the Agency will have to rely on outside estimates to fill in the gaps. The IEA has not completely bought into the notion that geologic constraints on world oil production are imminent; it emphasizes the lack of adequate investment necessary to maintain and grow production in the face of rapidly increasing exploration and development costs.

The US EIA is also reassessing its optimistic forecasts and is expected to release a new, more pessimistic, appraisal of world oil supplies this summer. The surge in oil prices over the last few years has finally triggered a change in attitude by many old-line energy supply forecasters. Release of more pessimistic studies later this year is likely to lead to better understanding of problems the world will be facing and perhaps more rational policies in coming years.

5. Energy Briefs

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

  • OPEC's daily shipments of crude oil declined by 4.3 percent in the four weeks ended May 4, according to Lloyd's Marine Intelligence Unit. (5/24, #2)
  • Mexico’s April crude production fell 13 percent compared to April 2007. Exports fell 14 percent to 1.43 million b/d. Output at its largest field has declined 51 percent since it peaked four years ago. (5/24, #5)
  • Russia's oil and gas condensate production declined 0.7 percent during April 2008 compared to the same month a year earlier, the Federal State Statistics Service reported Friday. (5/24, #18)
  • US Energy Secretary Bodman rejected a call by some members of Congress to release oil from the government's emergency stockpile, saying it is needed to respond to future supply emergencies, not to influence prices. Bodman also told a Congressional hearing he does not believe that rampant market speculation is causing record high oil prices and that it is a matter of supply and demand that can be traced to essentially flat global production over the last three years. (5/23, #10)
  • US gasoline demand is down 0.6 percent this year compared with the same period in 2007 according to the Department of Energy. (5/24, #12)
  • Three major US airlines have raised round-trip fares in the United States by up to $60 as they struggle with record oil prices. AMR CEO said the airline industry as presently constituted could not withstand oil prices at $125 a barrel. (5/24, #16)
  • Pakistan’s provinces have warned that there may be massive unemployment in several industries if the central government reduces electricity supply to industrial zones under its new energy conservation plan to be implemented in June. (5/24, #3)
  • In Angola, French oil major Total’s CEO said the company plans to increase their production from today’s 290,000 b/d to 700,000 b/d with two or three years. OPEC reports April’s total Angolan production at 1.873 million b/d. (5/24, #4)
  • In Belize, the electricity company has warned that it will be forced into rotating blackouts within weeks if it is not granted the 25 per cent rate increase it wants. The rate increases are needed to offset the cost of oil-fired generation as well as the cost to import higher-priced electricity from Mexico. (5/24, #8)
  • In China, coal shortages have forced 39 power plants to halt generation with 6.37 gigawatts of capacity affected, as fuel inventories further decline. (5/24, #9)
  • Legislation that would cut US greenhouse gas emissions by about 70 percent by 2050 is slated for a vote on June 2 in the US Senate. (5/24, #14)
  • Ukraine's President urged fellow leaders to diversify eastern Europe's energy supply routes away from Russia and not succumb to "energy blackmail." (5/24, #19)
  • Spanish fishermen will demonstrate in Madrid next week and could strike in June if the government doesn't come up with aid to cushion rising fuel prices. (5/24, #21)
  • French fishermen protesting high fuel costs blocked access to a Total oil refinery in northern France. Riot police were deployed to secure the entrances. (5/23, #17)
  • Nepalese officials warned the country was set to run out of petroleum products within a week.(5/22, #15)
  • Costs for solar thermal electric generation technology will fall below coal as soon as 2020, the U.S. government estimates. JPMorgan Chase & Co. and Wells Fargo & Co. invested last year in the biggest solar plant built in a generation; Chevron and Google are funding research; and Goldman Sachs is seeking land to lease as demand outpaces wind turbines and geothermal. (5/24, #23)
  • Oil production from countries outside OPEC is stagnating despite a more than a six-fold rise in oil prices since 2002. Non-OPEC supply growth in 2008 is expected to average 680,000 b/d, according to the IEA's latest Oil Market Report. Biofuels will contribute 425,000 b/d of this total, making non-OPEC oil production growth just 255,000 b/d. (5/23, #4)
  • Oil industry executives, raked over the coals in Senate and House hearings last week while insisting that Congress should focus its efforts on allowing more drilling for domestic oil — in the Arctic National Wildlife Refuge, offshore in the Atlantic and Pacific, and in the eastern Gulf of Mexico, also told Congress that prices should be between $35 and $90 a barrel. (5/23, #11)
  • Ford warned that it would miss its goal of returning to profitability in 2009 underscoring the growing economic pressure on the battered auto industry. (5/23, #13)
  • In Nigeria the MEND threatened more acts of sabotage against the nation's oil industry, accusing the government of "insincerity." (5/22, #7)
  • Petrol stations in at least five Chinese provinces are limiting sales of diesel, as oil firms divert supply from the price-capped retail sector to avoid losses in the face of soaring crude prices. (5/22, #11)
  • In India, a shortage of nuclear fuel is having a telling effect on the functioning of major nuclear stations in the country, with a majority of them operating at very low power. (5/21, #13)
  • President Bush told leaders of the oil-rich states of the Middle East that they must face up to a future without their hydrocarbons. In a stark warning, he said their supplies were running out and urged them to reform and diversify their economies. (5/20, #2)
  • Over the past five years, US demand for diesel has been rising at triple the rate of gasoline. Each 42-gallon barrel of crude oil yields about 19 gallons of gasoline and about 10 gallons of diesel fuel and heating oil. Increasing imports of gasoline from Europe and increased ethanol production here has resulted in reduced production of diesel. (5/20, #5)
  • Nigeria signed a $2 billion deal with Exxon to help plug a funding gap which has delayed some of their joint venture projects. Despite its massive oil revenues, the government has trouble coming up with its share of joint venture funding. (5/20, #12)
  • The US asked that China join the International Energy Agency, which was set up after the oil shocks of the 1970s to help developed countries manage oil supplies. (5/20, #23)
  • Kazakhstan’s Minister of Energy said the Agip KCO consortium has proposed postponing the beginning of commercial production from the Kashagan field for another couple of years. According to the minister, they talked about re-scheduling the “big Kashagan oil” from 2011 to 2012 or 2013. (5/19, #6)

Quote of the Week

“The first peak that we've achieved. ... [is] in light, low-sulphur crude. The next peak will be when the producer countries' exports start falling because their [internal consumption] growth rates are much higher than those in the West….Finally we will get the peak where we simply cannot produce any more of any grade, any quality, anywhere. And that will give the final kick-up [in prices]...probably around 2011.”
      —Chris Skrebowski, editor of Petroleum Review

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