1. Production and Prices
2. Forecasts
3. Shortages
4. Energy Briefs

1. Production and Prices

While last week started quietly, Thursday and Friday turned into a frenzy, with prices surging from a low of $132 a barrel on Wednesday to touch a new high of $142.99 on Friday. The week closed with oil at $140.21, another new high closing price. The $10 a barrel increase was mostly due to financial developments—such as a weak dollar, a major drop in the equities markets, and a flight to the safety of commodities—rather than to oil industry news.

Industry news for the week was mixed. Shell started up its offshore platform that had been overrun by Nigerian militants, while Chevron in Nigeria declared force majeure due to a pipeline bombing last week. China seems to be producing more gasoline and diesel in response to the recent price increases. Iraq is on the way to a banner month producing 2.5 million b/d in comparison with the 1.5 million averaged in 2007 and Mexico’s Cantarell oil field continued its relentless decline.

Still looming ominously in the background is the Iranian nuclear enrichment dispute. Europe is preparing new sanctions and Tehran is sounding more threats about what will happen to Gulf oil shipments should anyone attack its nuclear enrichment facilities.

By week’s end, the Saudi pledge last weekend to increase production by an extra 200,000 b/d was largely forgotten in the pace of events. Commodity prices during the first half of 2008 are on track for the largest gain in the last 35 years.

2. Forecasts

As oil prices approach $150 a barrel, more forecasters are issuing reports on just what might be in store during the next few years. Two years ago suggestions that oil might reach $100 were considered far fetched. However, now that prices have increased by $40 a barrel in the last six months, more organizations have sensed a dire trend and are willing to talk about very high numbers.

Much of the discussion centers around the notion that there is an oil price up there somewhere that will trigger so much demand destruction that the world will suffer an economic collapse and at least for a while further price increases will not happen. Last week Deutsche Bank set out the figure of $200 a barrel as the point that “would break the global economy.” With the world economy broken, presumably demand would drop so much that prices would at least stabilize if not sporadically decline.

Others are not so sure. They point out that at least half the world’s population is insulated by state subsidies from world prices, so the economic damage would be more localized. If oil reaches $200 a barrel, that would translate into gasoline around $6-7 a gallon at the pump in the U.S. which is certainly manageable in comparison to European prices which are now in the $8-10 range.

A recent CIBC study sees $200 oil within the next 2 years, leading to a 15 percent reduction in annual miles driven, major reductions in sales of large SUVs and trucks, and the decline in the number of cars on the road as more and more drivers are priced out of the market. There are currently 10 million households in the US earning less than $25,000 a year with one or more motor vehicles; these will be the first to go. The study foresees a drop in US vehicle sales from 17 million per year a few years ago to 11 million by 2012.

While the effects of $200 oil seem analyzable, others are beginning to talk of the possibility or the likelihood of $300, $500 and even $600 oil 4 or 5 years from now. As yet no one seems to be thinking through the implications for society should oil reach these prices in a short time. Obviously use of private automobiles would be very limited except in those cases where many are sharing the cost of gas. Air travel would be prohibitively expensive for most and the movement of goods would have to become far more efficient.

3. Shortages

Largely unreported in the American media is the growing frequency of electricity, diesel, and gasoline shortages around the world. Only in the OECD and oil producing countries is the situation normal. The reasons for these shortages vary somewhat from country to country but the common denominator is the growth of a middle class that has purchased appliances such as air conditioners, TVs, computers, and refrigerators at a pace far faster than the infrastructure can be built to keep up with demand. Droughts across the world are killing the production of hydro-electricity and in many places countries can no longer afford to import $140 oil to sell at subsidized prices.

South Asia–Pakistan, Bangladesh, India, and Vietnam–seems to be in the worst shape, but parts of Africa, Latin America, and many island states are not far behind. In many regions, these shortages are not just inconvenient but are life-threatening. Reports of water pumps being shut down for lack of fuel or electricity and limited fuel for the spring planting are becoming more frequent. As global temperatures rise, life in the world’s megacities, with limited air conditioning and refrigeration, is becoming unbearable. The better-off are increasingly turning to small generators for personal comfort or to keep business functioning in the 21st Century. The din, pollution, and increased fuel consumption is growing worse all the time. There is no end in sight.

Major economic projects are being cancelled due to the shortages. Last week a $2.7 billion aluminum smelter in South Africa was put on hold until there is enough power to operate the facility. The project would have created 1,000 jobs.

The shortages are not without complaint. Demonstrations and in some cases riots are happening with increasing frequency by people protesting their plight.

4. Energy Briefs

  • Saudi Arabia has arrested 700 militants in the past six months on suspicion of planning attacks on the country’s oil industry and other targets and 500 are still being held. The large number of arrests suggests that al-Qaida still poses a more serious threat than is generally perceived. (6/26, #3)

  • After the Jeddah Conference, at which the Saudis announced an increase in production, Libya said it may cut oil production because the market is oversupplied. (6/26, #4)

  • Officials from India, Pakistan and Iran will meet next month for more discussions on the $7.6 billion project to pipe Iranian gas to the South Asian countries. (6/23 #6)

  • Uranium prices, currently $57, are likely to rebound to $90 a pound as the result of new reactors coming on line and the restarting of several reactors that have been shutdown. (6/23, #12)

  • Saudi Aramco says it will start production at its Khursaniyah field in August thus adding 500,000 b/d to its productive capacity in August. They also plan to increase production at the Shaybah field by another 250,000 b/d by the end of the year. (6/24, #4)

  • US drivers crossing into Mexico to fill up at subsidized prices caused a 31 percent increase in demand during May and shortages along the border. PEMEX dispatched an additional 300.000 barrels of diesel to ease the situation and will monitor the situation. (6/24, #10)

  • It may take as long as six months to repair the Varnus Island natural gas plant that was damaged by an explosion, thereby cutting Western Australia’s natural gas supply by 30 percent.(6/24, #12)

  • OPEC says the US inventory data, which is released every week, is not reliable and should only be released every two or three weeks. OPEC is unhappy that the data has been showing falling inventories in recent weeks that has led to increased pressure on OPEC to increase production. (6/25, #2)

  • In the wake of power cuts throughout Southern Africa, Zambian copper mines are now relying heavily on diesel-powered generators to keep operating. Diesel consumption has risen from 1 million to 1.6 million liters per day and gasoline from 750,000 to 1 million liters per day. (6/25, #9)

  • Barclays, Morgan Stanley, and the Citi Group may help start a commodities exchange in Hong Kong. The proposed exchange that would open in the first quarter of 2009 would offer dollar-denominated fuel oil contracts for delivery in China. (6/25, #11)

  • Coal for delivery in Europe traded at $200/MT for the first time last week. (6/25, #18)

  • The pipeline that carries 100,000 b/d from the Cano-Limon oilfield in Eastern Columbia to the Caribbean seaport of Covenas was shut down by two bombings last week. (6/26, #7)

  • The head of the EIA reiterated that offshore drilling won’t affect oil prices very much as the time involved in bringing any new oil to market will dampen the impact. (6/26, #9)

  • Daniel Yergin, chairman of Cambridge Energy Research Associates, told the Joint Economic Committee that oil prices are being driven by “new fundamentals” involving the merging of oil and financial markets. He added that the price of oil has hit a “break point” where the U.S. will begin to seek alternatives and that 2007 may well have been the peak year in terms of U.S. gasoline demand. (6/26, #11)

  • Aviation experts are saying the US may have to re-regulate the industry in order to avert a collapse. (6/26, #15)

  • British Prime Minister Brown said the government will encourage utilities to build 7,000 wind turbines for generating electricity, part of a program to cut pollution and reduce Britain’s dependence on fossil fuels. (6/26, #16)

  • In the last 30 years, the oil companies operating in Nigeria have flared about $72 billion worth of natural gas according to a new study by the Nigeria Gas Association. (6/27, #7)

  • Iraq’s oil production will exceed 2.5 million barrels a day this month according to Oil Minister al-Shahristani. This is up from an average of 1.9 million barrels a day for 2007. Iraq has earmarked $8 billion to start a fourth state-run oil company. (6/27, #8, 6/28, #6)

  • Nigeria’s senior oil workers’ union has called off its strike against Chevron after reaching agreement in a labor dispute with the firm. (6/28, #7)

  • US natural-gas companies are drilling horizontal wells that cost three times as much as traditional vertical shafts to unlock gas from rock formations that were unprofitable to exploit before this year’s 78 percent gain by gas futures. The number of active U.S.gas rigs rose to a record high this week. (6/28, #15)

  • Gazprom will likely double gas prices for Ukraine starting in 2009 as it pays more for gas imports from Central Asia. CEO Miller told a news conference that prices would likely rise to above $400 per ton from $179.5 this year. (6/28, #20)

  • Gazprom is considering buying oil and power assets abroad as it seeks to become a global energy company. The CEO said that state energy firms have significant advantages and are poised to dominate the global fight for new energy resources. (6/27, #s 18,19)

  • The US fishing industry is reeling from high food prices. All along the US coasts fisherman are remaining in ports as they cannot readily pass on the high fuel costs to their customers. (6/28, #17)

  • Mexican Energy Minister Kessel reiterated that there will be fuel shortages in less than a decade unless the Congress passes the energy reform bill and begins to invest in the industry. Mexican oil production has fallen by 600,000 barrels a day since peaking in 2004 at 3.4 million barrels a day. (6/28, #8)

Quotes of the Week

[Due to high oil prices:] “Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history.”
     —Jeffrey Rubin, CIBC Markets

“You can’t solve today’s energy problems with tomorrow’s new technologies.”
     —Quote on Saturday from private seminar, not for attribution