Peak Oil Review — July 14th, 2008

1. Production and Prices
2. China
3. Blackouts and Shortages
4. Washington
5. Energy Briefs

1. Production and Prices

Oil prices fell by $10 a barrel during the first part of last week on reports of a more conciliatory attitude in Tehran, a rising dollar, and profit-taking. On Thursday and Friday, oil jumped by more than $10 a barrel to touch an all-time high of $147.25 on reports, later denied by the Pentagon, that Israeli aircraft were rehearsing for strikes against Iran over Iraqi airspace and on well-publicized Iranian missile tests. A statement by the MEND that they are going to renew attacks on Nigeria’s oil infrastructure contributed to the price spike. Despite the $10s’ worth of volatility, oil closed out the week at $145.08, down 21 cents from the previous week’s close.

The Wednesday stocks report showed a 5.9 million barrel decline in US crude inventories, a small increase in gasoline and distillate stocks, and a 2.1 percent decline in US gasoline consumption.

The International Energy Agency’s monthly report has OPEC production up by 350,000 b/d last month and Saudi production up to 9.45 million b/d. Although high prices will flatten OECD demand for oil during 2008-9, high demand from Asia will continue to lift world wide demand. Declines in the US crude stockpile restricted the May increase in all of the OECD countries to 24 million barrels – half the normal increase. Preliminary June data suggests that the OECD crude stockpile increase was only about 100,000 b/d during the second quarter – well below the 900,000 b/d increase which is normal for the second quarter.

2. China

The specter of serious power shortages across China this summer looms larger as more provinces are reporting problems. According to BP’s Statistical Review China is a very inefficient user of energy. Couple this with drought-induced shortages of hydro-power, the recent earthquake, various kinds of price caps on power and coal, and efforts to improve China’s abysmal coal mine safety record, and one has the perfect recipe for power shortages in a economy that is growing at 10 percent a year.

Beijing obviously will pull out all stops to ensure that shortages do not mar the August Olympics, even at the cost of slowing economic growth. In June Chinese aluminum exports jumped 43 percent. Chinese aluminum smelters are estimated to consume as much power as 100 million people. Already power for the aluminum industry has been cut by 10 percent.

The real issue is what will happen after the Olympics. During the major power shortage four years ago, China stepped up oil imports to keep many enterprises functioning with backup power generators. Given the much tighter coal and oil market that exists in 2008, any increase in imports likely would result in still higher world prices.

China’s economy, however, may be in more trouble than Beijing is letting on with rosy forecasts of at least a 10 percent increase in GDP during 2008. While China’s exports are still growing prodigiously – 17.6 percent year on year in June – this was down from 28.1 percent in May. Outside observers are beginning to question whether or not China’s years of unprecedented growth are coming to a close. The Chinese economic miracle has been built on cheap energy, which permitted inefficient plants coupled with cheap labor, a cheap Yuan, and cheap transportation to capture much of the world’s manufacturing.

Beijing maintains that its domestic market is so large that it can weather any economic downturn in its OECD customers. All these assumptions, including the course of Chinese oil imports, may well be tested before the year is out.

3. Blackouts and Shortages

The CIA reports that there are 266 “nations, dependent areas, and other entities” on the world today. During the last few weeks at least 90 of these are reported to be having continuing serious or very serious energy shortages. The number of countries with energy problems may be much higher as the CIA also reports that 94 of the world’s nations are islands many of which are so small they are rarely heard from but are almost certain to be suffering from $140 oil.

Most of the places having serious energy problems are in South Asia, Africa, Latin America, and scattered islands. Taken together, they make up over half of the world’s population. Nearly all are having electric power shortages that have resulted in daily blackouts ranging from a few hours to most of the day. Droughts, fuel costs and rapid growth in electrically powered consumer goods are behind most of the shortages. Insurgencies, mismanagement, and even accidents are taking a toll. Liquid fuel shortages are growing rapidly as poorer nations struggle to keep up with surging prices.

In sum, these shortages are causing serious hardships among peoples who have grown accustomed to electric lights, refrigeration, air conditioning and motorized vehicles. Some form of energy-related strike, demonstration, or riot is now being reported almost daily somewhere around the world. It will not be long before serious repercussions evolve from these shortages.

There are so many places with serious troubles that it is difficult to pick out the more vulnerable. Pakistan, where power shortages have nearly eliminated the export-textile industry and which is only days away from running out of liquid fuels, is likely near the top of the list. Bangladesh and even India may not be too far behind, possibly failing to produce enough food for their peoples. Beyond South Asia there are numerous places of consequence that may be facing political upheavals due to the declining availability of electricity and liquid fuels.

4. Washington

Capitol Hill is again in turmoil as both political parties and the White House jockey to assuage voter concern about $4-5 gasoline and diesel. So far most proposals are directed towards giving the appearance of decisive action for the benefit of the fall election campaign rather than doing anything that can possibly lower fuel prices in the near term.

The Republicans, led by President Bush, are adamant that lifting drilling restrictions would lower gasoline prices almost immediately despite the fact that nearly every competent observer says that it would take one or two decades before significant quantities of newly found oil could be delivered to US refineries.

Polls show that the American voters are so stressed by gasoline prices that they are now in favor of lifting drilling restrictions on the theory that you have to start sometime. Some form of a bill lifting restrictions now seems likely to pass the Democrat-controlled Congress shortly. Bills to control “excessive” speculation are also in the works and are likely to be passed before the summer recess. In an open letter to all airline customers, CEOs from 12 of the nation’s airlines said lawmakers must curb excessive speculation to scale back record fuel costs.

The only proposal that would have a near term effect was one by Virginia Senator John Warner, who has asked the Department of Energy to look into reviving the still highly unpopular 55 mph speed limit. Warner is retiring at the end of the year and therefore is immune from the consequences of being the first to raise the issue.

5. Energy Briefs

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

• According to new information obtained by Business Week, for at least the next five years, and possibly longer, the Saudis are likely to produce less crude than promised. Saudi Aramco will be limited to sustained production of just 12 million barrels a day in 2010, and will be able to maintain that volume only for short periods before scaling back to a sustainable 10.4 million b/d. (7/11, #4)

• Nigeria’s MEND sounded “a stern warning” to British Prime Minister Gordon Brown over his recent statement offering to provide military support to the Nigerian government (7/11, #7)

• Iran’s President Ahmadinejad dismissed the possibility of a war with the U.S. and Israel over his country’s nuclear work, saying Iran is trying to avoid conflict. (7/9, #5) Yet the government also stated it will hit Tel Aviv, US shipping in the Gulf and American interests around the world if it is attacked over its disputed nuclear activities. (7/8, #5)

• Total has decided to back away from planned investments in Iran because of political uncertainty. It is the last western oil company that held out hope but has now given up on Iran. (7/11, #5)

• Biofuels have forced global food prices up by 75% – far more than previously estimated – according to a confidential World Bank report obtained by the Guardian. The figure emphatically contradicts the US government’s claims that plant-derived fuels contribute less than 3% to food-price rises. (7/12, #19)

• European officials propose scaling back drastically on their goal of increasing Europe’s use of biofuels, a major about-face on a key environmental and energy issue. At the same time, a new report by the British government casts doubt on fuels made from crops as a way to fight climate change. (7/8, #18)

• US natural gas prices, which have surged 64 percent this year, may stay near “international levels” as buyers there compete with Asia and Europe for liquefied natural gas supplies, Goldman Sachs Group Inc. said. (7/11, #17)

• Global fertilizer demand may rise 14 percent by 2012 as farmers increase plantings to benefit from high prices and growing food consumption, the International Fertilizer Industry Association said. (7/10, #4)

• E-T Energy Ltd. revealed a process that uses electricity to heat the bitumen-soaked Alberta tar sands. The company claims that it takes about $4 worth of power to produce one barrel of oil, that the use of water-in-place eliminates the need to import water, and that emissions are reduced. (7/12, #18)

• According to the IEA’s latest Oil Market Report, global oil product demand is expected to grow by 1.1 percent or 860,000 b/d to 87.7 million b/d in 2009, on a par with 890,000 b/d growth in 2008. High oil prices are contributing to a contraction in OECD oil product demand, offset by robust growth in developing economies. (7/11, #2)

• Twenty-five airlines went bust or stopped operations in the first six months of this year and more could fold as fuel prices soar, a spokesman for aviation industry association IATA warned. (7/9, #4)

• Governors from across New England are warning that some families may have to choose between food or warmth this winter and are calling for a sharp boost in federal home heating aid to offset much higher heating oil prices. (7/11, #20)

• According to Matt Simmons, most of the world’s oil analysts are far too optimistic about how long existing fields will last, the prospects for new discoveries, technology’s ability to unlock new sources and to extend the life of existing ones, and so on. He prefers to rely on data rather than daydreams. (The Economist, 7/11, #22)

• UK-based oil explorer Tullow Oil said reserves at its Jubilee field in Ghana could be as much as 1.8 billion barrels and that it was on track for first oil in 2010. (7/9, #8)

• Texas energy tycoon T. Boone Pickens is calling for a massive switch to natural gas as a transportation fuel and a boost in wind power in a plan aimed at reducing U.S. foreign oil dependence by a more than a third. (7/9, #17)

• Shell has canceled plans to build a new multibillion-dollar refinery near Sarnia, Ontario, due to poor market conditions and surging construction costs. (7/9, #17)

• The cost of shipping a 40ft container from Shanghai to Rotterdam has risen threefold since the price of oil exploded. (7/7, #8)

Quote of the Week

• “The days of cheap air travel are over — or they should be, if large U.S. airlines expect to survive. With oil at $140 a barrel, the old business model is broken.”
       —Minneapolis Star-Tribune editorial