Peak Oil Review – July 7th, 2008

1. Production and Prices
2. The World Petroleum Conference
3. The IEA’s Medium-Term Market Report
4. Energy Briefs

1. Production and Prices

The week started with the oil markets focused on the bombast surrounding the Iranian nuclear situation and a fall in the dollar sending oil to a then all-time intra-day high of $143.67 a barrel. On Tuesday, the IEA’s medium-term outlook said world oil demand would rise less than previously forecast, but also said supply would be tighter than anticipated. Wednesday’s US stocks report which showed an unexpected 2 million barrel drop in US crude inventories and a smaller than expected increase in the distillate stockpile sent prices to a new intra-day high near $146 a barrel on Thursday. Prices then eased on Friday following an Iranian offer to talk about the latest proposal to settle the nuclear dispute and closed out the week just above $144.

The differential between prices in London and New York has narrowed to a six-month low as demand for gasoline in the US slows and North Sea production falls due to field maintenance. OPEC production was reported as being 300,000 b/d higher in June due to increases in Saudi production. US Gasoline prices continued to rise last week to a nationwide average of nearly $4.11 a gallon.

2. The World Petroleum Conference

Held every three years, the World Petroleum Congress which met in Madrid last week attracted 3,000 delegates from all over the world including OPEC’s President Khelil, its Secretary-General El-Badri, the Executive Director of the International Energy Agency Tanaka, the European Commissioner for Energy Piebalgs, several ministers of state, and many senior oil company executives.

The focus of the meeting was naturally on oil prices which set new records nearly every day and reached $146 a barrel on Thursday. Despite numerous expressions of concern about what oil prices will do to the world’s economy, no consensus was reached. Consuming nations spoke of inadequate supplies while producers blamed the falling dollar and speculators. OPEC’s Secretary General called on the US to stop “harassing” the organization while OPEC’s President told the US to stabilize the dollar.

3. The IEA’s Medium-Term Report

The “surprise” in last week’s IEA report was not that high prices and faltering economies are causing demand to fall, but that the Agency cut its supply forecast for the next 5 years. Global oil demand is now expected to grow by 1.5 million b/d each year for the next five years or 1.6 percent a year as compared to 2.2 percent in the last five-year forecast. On average, new oil projects will slip by 12 months keeping markets tight for the foreseeable future.

Non-OPEC production, including biofuels, will increase 0.5 percent a year to 51.1 million b/d in 2013 from 49.9 million b/d this year. Effective OPEC spare capacity is projected to rise from 2.5 million barrels a day in 2008 to over 4 million a day in 2010 before fading to “negligible levels” of around 1 million barrels a day by 2013.

This fourth release of the Medium-Term report, which is intended to bridge the gap between the monthly reports which contain two-year projections and the annual report which covers 25 years, has a new chapter dedicated to explaining the reasons for the price run-up. While pointing out that there are a “multitude of interactions” contributing to prices, the Agency concludes that “the primary driver of current high oil prices is strong demand growth in a number of highly populous countries, relative to the limited supply growth seen over the past few years.”

Other factors contributing to high prices include spiraling costs in the oil sector that are delaying projects and hampering investment, tight supplies of distillate fuels and refining problems, and a weaker US dollar.

4. Energy Briefs

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

• Russian oil production declined in June 1% over June 2007. Russia’s crude oil exports fell much faster, an estimated 5.3%, year-on-year, from January-May 2008. (7/2, #21; 7/1, #15)

• OPEC increased oil production 1 percent in June, as Saudi Arabian output rose to a two-year high according to a Bloomberg News survey. OPEC pumped an average 32.52 million barrels a day in June, up 320,000 barrels from May. (7/4, #3)

• Nigeria’s vice president Goodluck Jonathan asked for US assistance to curb spiraling crude oil theft in the creeks of the Niger Delta. The US has established an African military command which will oversee the deployment of US forces in the area and supervise distribution of money, material and military training. (7/5, #7)

• Natural gas prices rose 2.9 percent this week to settle at $13.577 per million BTUs yesterday, the highest close since Dec. 21, 2005. (7/4, #13)

• Preparing for a possible strike that could affect US gasoline supply, the union that represents refinery workers voted to increase its strike fund. (7/4, #16)

• Suncor Energy is unlikely to meet its 2008 production target for its Alberta oil sands operations and may be forced to revise the goal for a second time this year. In April, it trimmed the top end of its range because of operational problems caused by frigid weather and power outages. (7/4, #17)

• A weaker dollar cannot be blamed for soaring oil prices as policymakers around the world tussle with the twin specters of rising inflation and slowing growth, Treasury Secretary Paulson said on Thursday. (7/3, #4)

• The EPA is reviewing congressional requests to relax rules mandating the use of ethanol in gasoline, which some lawmakers say is straining corn supplies. The Department of Agriculture says corn supplies will be 10 percent smaller than last year’s record crop and that report was released before rains washed out numerous fields in the Midwest. Floods in the corn belt have helped send the price of ethanol up 21 percent since the beginning of June. (7/1, #5; 7/4, #7)

• Republican Senator John Warner (Va) is proposing that Congress might want to consider reimposing a national speed limit to save gasoline and possibly ease fuel prices. (7/4, #8)

• The Air Transport Association expects airline fuel expenses to total $61.2 billion this year, compared to $41.2 billion in 2007. It is going to be much worse for aircraft manufacturers as the airline industry will cut capacity by 9% in 2008. (7/4, #10, #11)

• The tiny western Pacific nation of the Marshall Islands has declared a state of economic emergency as soaring fuel prices threaten to shut down electricity supplies. (7/5, #10)

• Many Iraqis are reminded that their government, though controlling a record budget of $42 billion, has failed to end periodic gasoline shortages and power cuts. Gasoline supplies have never met demand since the collapse of the former regime in 2003, which had tight control over the market. (7/3, #9)

• China National Petroleum, China Petrochemical, and two other Chinese companies will bid for oil and gas exploration rights in southeastern Iraq as energy demand rises in China. (7/3, #10)

• In Tijuana, Mexico hundreds of truck and bus drivers spent Wednesday waiting in line up to eight hours to buy diesel at gas stations. (7/3, #12)

• Russia may consider adding the Black Sea and the far eastern Sea of Okhotsk to the list of regions that will enjoy oil tax breaks to help the country reverse a decline in production. (7/3, #15)

• British demand for gasoline fell by around 8 percent year-on-year in January and February. Recent surveys show that Britain is leading the way with the change in driving habits, probably because pump prices here are higher than the global average. (7/3, #16)

• Natural gas, trading at a 39 percent discount to crude, may climb to reach the equivalent of record oil prices as demand for cleaner-burning fuels increases, according to energy ministers from Qatar and Algeria. (7/2, #2)

• Starting in June 2009, Saudi Arabia claims that their redeveloped Khurais field will produce 1.2 million barrels a day. The Saudis say they are investing more than $10 billion with 26 contractors, 106 subcontractors and 28,000 employees. This project is the largest share of a five-year, $60 billion effort to expand oil production capacity.

• A military attack on Iran would have a “catastrophic” effect on the Middle East, a Russian foreign ministry official said Wednesday after reports Israel might launch such an attack. (7/2, #5)

• An Iraqi oil official confirmed that northern exports in June were one-third lower than the approximate 450,000 barrels a day Iraq shipped during the previous month. Falling oil production was the reason for the decrease in June. (7/2, #6)

• The Kazakh government, after winning important new economic concessions, agreed to a further delay in the start of production at the offshore Kashagan oil field. The current agreement is the fourth postponement of production from Kashagan, which originally was to come on stream in 2005. (7/2, #7)

• US imports of Venezuelan oil and oil products fell by 11.7 percent to a five-year low in the first four months of the year while Venezuela boosted oil shipments to China instead. (7/2, #8)

• The Cuban government expects to sign an oil exploration deal with Brazilian state-run energy giant Petrobras later this year, the president of Cuba’s state-owned oil company told the Estado news agency. (7/2, #11)

• In China, industries with high energy consumption and emissions are developing too fast, along with the quick economic growth, the State Council warned on Tuesday. (7/2, #13)

• Utah this summer will become what experts say is the first state to institute a mandatory four-day work week for most state employees, joining local governments across the nation that are altering schedules to save money, energy and resources. (7/2, #16)

• A survey released last week by the Pew Research Center shows 47 percent of those surveyed rate energy exploration, drilling and building power plants as the top priority. Five months ago, 35 percent considered them a priority. (7/2, #17)

• The speed at which gas prices are climbing is forcing a seismic change in long-held American habits, from car-buying to commuting. Last week, Ford Motor reported that S.U.V. sales were down 55 percent from a year ago, while demand for its full-size F-series pickup, a gas guzzler that was the country’s best-selling vehicle for 26 consecutive years, is off 40 percent. The only Ford model to show a sales increase was the midsized Fusion. A Ford spokeswoman says the market shift is “totally unprecedented and faster than anything we’ve ever seen.” (7/6, #18)

• For the first six months of 2008, U.S. sales for all light-duty vehicles are down 10.1%, while June sales are down 18.2%. Car sales dropped 1.6% by volume, while truck sales have dropped 18 percent. (7/2, #19)

• The current surge in oil prices is expected to cost India’s government about $60 billion in additional fuel subsidies this fiscal year, roughly four times more than the cost during the previous fiscal year. (7/1, #12)

• Electric and natural gas shut-offs in Massachusetts are predicted to increase by at least 20 percent this summer as 125,000 low-income households face energy bill debts totaling about $100 million. (6/30, #16)

• Growing biofuel crops on the 385-472 million hectares of once-productive abandoned agricultural land globally could meet up to 8% of the world’s current energy demand, according to a recent report from researchers at Stanford University and the Carnegie Institution for Science. Planting these crops would not take away land now used to grow food and would not contribute to deforestation. (6/30, #20)

• While the US oil industry wants access to more federal lands to help reduce reliance on foreign suppliers, American-based companies are shipping record amounts of gasoline and diesel fuel to other countries. The biggest share of U.S. oil products exported went to Mexico, Canada, Chile, Singapore and Brazil. (7/5, #11)

• German truckers are planning work stoppages and demonstrations for government relief from soaring fuel prices and toll increases. A market-research company said 51,000 medium-sized German companies are close to failure because of rising costs. During the last year the cost of diesel for a large truck has risen by $12,000. (7/6, #13)

• South Korea announced it is implementing a multi-stage contingency plan aimed at reducing energy consumption before increasing oil prices push Asia’s fourth-largest economy into a full-fledged crisis. (7/6, #14)

• Pakistan’s textile industry, its biggest source of exports and manufacturing employer, could collapse because of surging fuel prices and chronic power cuts. Textiles account for about 70 percent of Pakistan’s exports and the sector contributes about 8.5 percent to GDP. (7/6,#2)

• BP’s Thunderhorse platform in the Gulf of Mexico, which started production on 14 June, has only one of 4 wells operational. It may take several months to repair the remaining wells. The platform was originally scheduled to start production in January 2005. (7/6, #8)

• A strike by Indian truckers pinched Indian consumers and farmers as fruit and vegetable prices jumped 10 to 30 percent in wholesale consumer markets. Millions of Indian truckers went on an indefinite strike last week to protest against high taxes and rising fuel bills. (7/4, #6)

Quotes of the Week

• “With oil prices hitting 140 dollars, we are clearly in the third oil shock.”
      — Nobuo Tanaka, executive director of the International Energy Agency

• “America needs a comprehensive plan to deal with post-peak oil — and that is going to involve some serious long-term thinking.”
      —Nicholas Von Hoffman, The Nation