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Peak Oil Review -- June 2, 2008

1. Production and Prices
2. The Reaction
3. Declining Exports
4. Energy Briefs

1. Production and Prices

It was a week of volatile retrenchment with oil falling from an all-time high of over $135 a barrel the previous week to below $125 and then closing at $127. Other than a general feeling that oil prices had moved up too far, too fast, there was little news to move the markets. Reports that gasoline consumption in the US was dropping significantly seemed to be the major reason for the drop. Even a bullish report on Thursday that US crude stocks had dropped by an unusually large 8.8 million barrels and gasoline stocks by 3.2 million barrels caused only a momentary spike in prices.

The large drop in crude stocks was so unusual that the EIA felt obliged to note that “the drop was due to temporary delays in crude oil tanker off-loadings on the Gulf Coast.” This statement seemed to reassure the markets with analysts noting that we can expect a surge in imports this week. If an increase in imports takes place this month, all may be well for the remainder of the year. It should be noted, however, that crude, gasoline, and distillate inventories in the US are edging closer to the lower limit of their average range and that US imports of crude and products have been falling. Have world exports peaked?

Retail gasoline prices, which have been lagging behind increases in the price of crude and diesel, continued to climb last week. The AAA reports that the nationwide average price of regular has reached $3.975.

2. The Reaction

It has been an unexpectedly long time in coming, but it seems as if surging oil prices finally have started to elicit reactions around the world. In the rich countries, most just griped, swallowed the increase and continued business as usual. In many Asian countries governments just increased the subsidies, or forced their local oil companies to accept the losses, as their populations went on enjoying low oil prices. Only the very poor states stopped buying as much oil and started turning out the lights.

In Europe, where a decades-old policy of heavily taxing oil products has resulted in gasoline and diesel retailing for $8 to $11 dollars a gallon, protests, blockades, and strikes by fishermen, farmers and truck drivers broke out across the continent last week. The protesters say fuel prices are so high they can no longer make a living and demand that the many-dollars-per-gallon fuel taxes be cut. So far France’s President has proposed cutting the EC-wide 20 percent value added tax and Britain’s Prime Minister has urged the oil companies to produce more oil. Neither of these proposals was met with much enthusiasm.

In Asia, where most consumers have been shielded by subsidies and state-mandated retail price caps, the cost has become overwhelming. Imported oil has gotten so high that national budgets are being eviscerated or local oil companies are going broke. Last week several countries, after much debate and soul searching, moved to increase retail prices. Governments fear that price increases for petroleum products would invoke such hardships on their peoples that widespread social disorder would ensue.

Indonesia, Taiwan, and Sri Lanka have already raised prices and India is expected to follow soon. The Chinese, faced with high rates of inflation, are expected to withhold any decision until after the election. Fuel shortages are appearing in China, India, Pakistan, and many other countries as national oil companies are no longer able to absorb the cost of crude.

In the US indications of reduced gasoline consumption are starting to appear with reports from the Federal Highway Administration that vehicle miles in March were down 4.3 percent over 2007 and from MasterCard that gasoline sales just before Memorial Day were down by 7.6 percent. The EIA however is still reporting only a minor drop in gasoline consumption. In the next month or so we should have a better indication of how much of an impact $4 gasoline is having on American driving habits. 

3. Declining Exports

Newly released information shows that declining world exports of crude oil are likely to become a major problem for importing nations well before world oil production goes into a decline. As the world’s largest importer, the US is particularly vulnerable to this phenomenon as exports from at least three major suppliers --Mexico, Venezuela, and Nigeria-- are dropping.

Last week, the Wall Street Journal ran a story containing a new EIA estimate that the petroleum products exported by the top 15 oil exporters fell by 2.5 percent or 1 million b/d from 2006 to 2007. Some of this reduction is due to depletion of older oil fields, some to political problems and increasing domestic consumption, perhaps a little due to the OPEC cuts of November 2006, and some to lack of sufficient investment to maintain production.

The EIA also reported last week that US crude imports during the first 143 days of 2008 were down by 2.9 percent over 2007 and that petroleum product imports were down by 19.6 percent. The US’s top suppliers in March were Canada (1.7 million b/d), Saudi Arabia (1.5 million b/d), Mexico (1.2 million b/d), Nigeria (1.1 million b/d), Venezuela (0.8 million b/d), and Iraq (0.8 million b/d). As exports to the US from Mexico, Venezuela and probably from Nigeria drop, increased imports from Iraq and Saudi Arabia are picking up part of the slack.

4. Energy Briefs

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

  • Russia doesn't have enough natural gas to meet all its export contracts and to fill all the pipelines to Europe it's building now, according to a Ukrainian Foreign Ministry official. Gazprom responded by saying it has more than enough gas to meet all contracts with Europe up to 2035. (5/30, #17)
  • While the International Energy Agency welcomes Russian tax incentives for oil producers, IEA’s Deputy Executive Director said Wednesday he doubts those incentives will be enough to increase Russia's oil production. (5/28, #2)
  • Last week MEND in Nigeria bombed another Shell flow station. The militants claim that the government is now forbidding the oil companies from publically announcing the amount of oil that has been shut in by their attacks. At mid-week, however, Nigeria’s Oil Minister told a reporter that the recent attack shut-in another 130,000 b/d. This seems to be in addition to the 175,000 b/d that was shut in by an attack two weeks ago. (5/27, #4)
  • China has told state-controlled oil refiners China National Petroleum Corp. and China Petrochemical Corp. to boost supplies of diesel and other fuels to meet demand from farmers during the summer planting and harvesting season. (5/27, #9)
  • In China, petrol stations in at least three major coastal cities were rationing diesel on Thursday causing long queues of trucks and reviving the specter of bigger fuel shortages that could stir discontent. (5/30, #8)
  • China's economy can maintain a steady growth above 8 percent for a relatively long period because of a stable society, a vast market and ample capital, said an economist and former vice chairman of the Standing Committee of the National People's Congress. (5/28, #7)
  • In China, gasoline sells for $2.49 per gallon. Beijing last raised domestic gasoline prices in November 2007, by 9%, and that was the first and only hike since January 2007, when crude was $57 per barrel. (5/29, #20)
  • Chinese retailers will no longer provide free plastic shopping bags. China is trying to reduce the use of plastic bags in a bid to reduce energy consumption and pollution. (6/1, #5)
  • According to Pemex, production from Cantarell – one of the world’s largest oil fields which accounts for roughly half Mexico’s total daily output – has shrunk 24 percent in the past 12 months alone. (5/27, #6)
  • In Brazil a shortage of drilling rigs and looming relinquishment deadlines have led Petrobras to delay tests on potentially huge subsalt finds like Carioca and move the rigs to other blocks. Oil exploration equipment is in short supply and becoming more expensive. Renting a deepwater rig costs, on average, between $400,000 and $600,000 a day. (5/27, #7)
  • Argentina, Chile’s sole supplier of natural gas for power plants, completely shut off exports to their neighbor last Wednesday. (5/31, #5)
  • Argentine gas distributors have begun to restrict supplies of natural gas to some service stations that sell compressed natural gas for cars amid the nation's first winter cold spell. Argentina has faced chronic winter gas shortages since 2004. (5/30, #7)
  • Paraguay is receiving between 50% and 70% less diesel than normal. (5/31, #6)
  • Venezuela has increased petroleum product imports by nearly 150 percent between the first quarter of 2007 and the same period this year. The imports, which include diesel oil, gasoline and chemical additives for gasoline products, are the country's highest in more than a decade. (5/30, #6)
  • Americans expect gasoline will only get more expensive, with 78 percent anticipating $5 a gallon next year, according to a recent CNN/Opinion Research poll. (5/31, #11)
  • School buses: in Minnesota a school district with 700 students plans to eliminate classes every Monday so it can afford fuel for its buses. Mississippi approved a plan to cut the number of varsity games by 10 percent beginning this fall for all sports except football. When North Carolina lawmakers drafted the state's current two-year spending plan, they estimated a gallon of diesel would cost $1.69 this school year, well below the current average cost of $4.79/gal. (5/31, #12)
  • Fuel costs for airlines, which now typically account for up to 40 percent of total operating expenses, have already jumped more than 50 percent since the start of the year. (5/30, #1)
  • U.S. airlines trim flights: Airports in Pittsburgh and Cincinnati are among 120 where airlines reduced seating capacity at least 10 percent in the past year, with more cuts likely to offset the 83 percent, 12-month surge in the cost of jet fuel. (5/29, #12)
  • L.N.G. shipments to the U.S. are slowing to a trickle, and Cheniere and other companies have dropped plans to build more terminals. (5/29, #13)
  • Iran is facing a summer of power cuts after a severe drought slashed output from its hydroelectric power plants, the energy minister warned, according to press reports on Thursday. (5/30, #3)
  • A shortage of diesel has hit the UAE again, one year after their first diesel crisis. Truck drivers and salesmen at petrol stations across the country say there is a severe shortage of the fuel. (5/30, #4)
  • In southern Egypt, an electricity generating company has reduced supplying electricity from 18 hours to 5 hours a day, due to persistent shortages of diesel fuel. (5/30, #5)
  • India’s largest oil company said Wednesday that it would stop buying foreign oil, sell only the oil it produces domestically, and ration supplies in order to cut revenue losses. India’s state-run oil operations have to pay world prices for imported oil, then sell the oil at a capped price, but subsidies to them from the government treasury don’t make up the difference, so they are going broke. (5/29, #9)
  • Indonesia, the only OPEC member in Southeast Asia, will pull out of the group as aging fields and declining production force the region's biggest economy to boost imports. Indonesia imports about a third of its oil and production has slumped 49 percent from a peak in 1977. (5/28, #3)
  • Britain faces the danger of repeated blackouts as crumbling power stations suffer a series of failures. More than 500,000 homes lost electricity for several hours after two major sites shut down suddenly last week. Ten of British Energy's 16 nuclear generation units were out of service either for maintenance or through faults. (5/29, #15)
  • Verenium Corporation has begun the commissioning phase at its demonstration-scale cellulosic ethanol facility in Jennings, Louisiana. The plant is rated to produce 91 barrels per day using specialty enzymes and the company’s proprietary technology to convert non-food biomass to ethanol. (5/29, #22)
  • A major report was released in Paris that urged countries to reconsider biofuels policies in the wake of soaring food prices. Just hours later, US Agriculture Secretary Edward Schafer claimed biofuel production was responsible for only 2 to 3 percent of the increase in global food prices. (5/30, #13)
  • For years, scientists have had a straightforward idea for taming global warming: take the carbon dioxide that spews from coal-burning power plants and pump it back into the ground. But it has become clear in recent months that the nation’s effort to develop carbon capture and sequestration is lagging badly. (5/30, #16)

Quote of the Week

“A few years ago people looked at L.N.G. as a solution to North America’s gas needs. But today we see that there is less L.N.G. around than people expected, and there is more competition for that L.N.G. from markets that are willing to pay more than the United States.”
      —Nikos Tsafos, analyst with PFC Energy

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