1. A spreading crisis
Oil prices moved above $75 a barrel early last week as the markets anticipated a cut in OPEC production. By Wednesday, however, fears of a deepening recession, falling equities markets, a rising dollar, and increasing US stockpiles overcame concerns over the production cut to send the markets lower, closing out the week at $64.15. Early today oil fell to below $62 a barrel.
There were new reports of falling oil production last week. Lloyds reported that OPEC exports fell by 900,000 b/d during September. The IEA reports that total liquids production in September decreased by 1.09 million b/d to 85.5 million b/d. Part of this drop was due to the hurricane disruptions in the Gulf of Mexico. So far in 2008, world production has been averaging 86.9 million b/d as compared to 85.4 in 2007.
The EIA released figures for crude oil production in July showing an increase of 840,000 b/d to 75.1 million b/d over June’s production. Considering world economic developments in the last three months, the July record for crude production could well turn out to be the all-time peak.
Roughly a third of US Gulf of Mexico oil production is still shut-in by hurricane damage; however this shortfall is being made up by lower demand and increased imports of crude and gasoline.
The widely reported drop in US demand for oil products may have bottomed out due to falling gasoline prices. The average US price for gasoline is now $2.67 which is down over a dollar a gallon in the last month and nearly 20 cents below the cost of gasoline one year ago. The EIA reports that US oil consumption over the last four weeks is down 8.5 percent compared to last year but that gasoline consumption is only down 4.3 percent. The previous week’s figures were an 8.9 percent drop in overall oil consumption and 5.2 percent lower gasoline consumption.
Despite the predictions that the Oct. 23 meeting would be contentious, OPEC decided in 90 minutes to cut its oil production by 1.5 million b/d and allocated the cuts among its members. The final cut was a compromise between the conservative Gulf producers who were arguing for a cut less than 750,000 b/d and the price hawks who wanted a cut of 2 or more million b/d.
Among the more interesting features of the run-up to the meeting were appeals to non-OPEC producers Russia, Norway, and Mexico to share the burden by cutting production along with OPEC. These appeals fell on deaf ears, but Russia, for obvious reasons, seems interested in helping prop up world prices. OPEC’s Secretary General met with Russia’s President for the first time and Moscow and is talking about setting up an oil reserve so Moscow could become the swing producer and control prices.
The markets were not impressed by OPEC’s production cut and prices fell more that $4 a barrel to $64 after it was announced. OPEC members are already talking of additional emergency meetings and further production cuts if prices continue to fall. Whether the increasingly desperate members will adhere to these group decisions has yet to be seen. The average price received for OPEC oil is usually around $10 less than the benchmark New York price . If prices
fall much more, the revenues received by most OPEC members, and other major oil exporters as well, will be below that needed to support government budgets and social programs.
For the immediate future, oil prices, production and OPEC’s fate will hinge on the state of financial markets and the availability of loans. Although governments have dedicated trillions of dollars to support liquidity in the financial markets in recent weeks, it is not yet clear whether this support is as yet having the desired effect.
3. Investment in new production
Hardly a day goes by without a report that investment in new oil production projects is being delayed, postponed or cancelled. A combination of falling oil prices, declining demand, the unavailability of loans, and fears of a global economic meltdown are more than enough to stop many projects.
Most at risk are those projects with high capital costs per barrel of production such as upgraders for the Alberta oil-sands and deep-water oil fields. Last week two major oil-sand producers announced or hinted at postponements of multi-billion dollar projects. Even Brazil, which had been talking about starting projects from new deep-water discoveries in the next one to four years, is now talking delays of a decade or more.
In the US, plans for an $800 million coal-to-liquids plant have been delayed by capital shortages as has a carbon capture project. In addition to the major projects, hundreds of small producers have been forced to the sidelines for lack of financing.
Even the ultra-conservative Saudis seem to be running into financial troubles as oil prices plummet. Last week King Abdullah was reassuring his people by saying, “Citizens should be sure that the country is moving calmly and all the coming days will be happiness and prosperity.”
The slowdown in new oil production projects will obviously have a profound effect on rates of oil production in coming years. The world is still producing about 85 million b/d which will drop by 3-4 million b/d each year unless an equivalent amount of new production offsets the decline.
It will be several years before cancelled or delayed projects fully impact the world’s capacity to produce oil. Unless demand for oil is devastated by severe and lengthy economic setbacks, these delays are almost certain to have a major impact on the availability and price of oil with the next five years.
4. Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- A report by the US Department of Transportation showed the largest monthly decline in miles driven in 66 years during August. Americans have drastically altered driving habits, if they are driving at all, amid a severe economic downturn. They have cut discretionary trips, and are carpooling and using public transportation more—sure proof of what economists call “demand destruction.” (10/26, #1; 10/25, #1)
- Global oil demand may decline for the first time in 15 years in 2008 and stagnate next year, the Centre for Global Energy Studies said in a report on Oct. 20. (10/25, #2)
- Russia, Iran and Qatar, holders of more than half of the world’s natural gas, agreed to form a “gas troika” for joint exploration and production, Gazprom said. (10/21, #10)
- Iran’s president is under mounting political pressure as plummeting oil prices damage the national economy and persistent reports suggest that he may be in poor health. Whenever the oil price falls by a dollar, Iran probably loses about $1 billion. The International Monetary Fund estimates that Tehran needs an oil price of $75 per barrel to avoid a large budget deficit. (10/25, #7)
- Venezuelan President Chavez could survive a large oil price drop in the short term due to abundant government funds, but could face a larger-than-expected 2009 fiscal deficit amid the global financial crisis. Oil prices are close to the 2009 government budget price target of $60 per barrel, meaning a further slump could boost the budget shortfall. (10/25, #11)
- OPEC member Angola’s deepwater oil projects need around $70-a-barrel oil prices to justify continuing investments in new projects. (10/24, #4)
- Oil recovery from the giant Tupi field in Brazil’s Santos Basin will be profitable even if crude prices drop substantially from their current levels according to Manuel Ferreira de Oliveira, CEO of Galp. (10/22, #13)
- Saudi Arabia’s conservative fiscal policies have put the country in good stead to weather lower oil, with analysts saying the current year’s budget is based on a price of around $45-50 a barrel, while expansion next year will require around $55-62. (10/24, #5)
- Cuba‘s announcement last week that its still untapped offshore oil fields may hold more than 20 billion barrels of oil has raised eyebrows among outside oil experts who say the big number is hard to believe but not out of the realm of possibility. Jorge Pinon, an expert on Cuban oil at the University of Miami, said there was room for doubt because Cuba was basing its claims on comparisons with other geological formations in the world, not on data from actual wells. (10/25, #9)
- Exploration of new offshore oil fields in Brazil may be hindered for two years because the government is having trouble writing rules to govern the finds. (10/25, #10)
- The US finished 2007 with dry natural gas reserves at a record peak after additions more than doubled production. (10/25, #12)
- While General Motors is talking about offering the Volt for sale two years from now (late November 2010), China’s BYD announced its own plug-in hybrid will go on sale two years in advance of that, meaning next month. (10/22, #15)
- By 2003, GM’s full-size SUV production peaked at 680,000 vehicles. Today, its dealerships are crowded with lines of unsold Tahoes and Suburbans, which increasingly look like dinosaurs in a gas-conscious marketplace. (10/26, #11)
- Heating oil inventories are about 25 percent lower on the East Coast than they have been in recent years, increasing the likelihood of regional shortages and sharply higher prices in a cold snap. (10/25, #15)
- The price of corn is down about 50 percent from its record high in June, even as the amount of the grain used to produce the renewable fuel in the United States remained the same. The price difference is attributed to speculation…U.S. capacity to make ethanol has risen about 60 percent since last year to about 730,000 b/day. (10/25, #21)
- Last Wednesday, Jeff Rubin, chief economist for CIBC’s World Markets, said the world oil supply has not grown for the past three years and predicted oil prices will rebound to triple digit levels by next year and could go to even higher triple digits than we’ve seen before. (10.24, #20)
- World oil demand is expected to fall to as low as 83.5 million barrels a day in the second quarter of 2009, a Morgan Stanley consultant said. Sadad al Husseini, a former VP with Saudi Aramco, said global demand—85.7 million barrels a day in the third quarter of this year—will fall to 85.1 million in the fourth quarter and 84.7 million in the first quarter of 2009. (10/23, #9)
- Despite falling costs for steel and other materials, the oil and gas industry again finds itself confronting a shortage of people with the skills and experience to lead new developments. If efforts to plug the skills gap don’t succeed, senior industry executives say oil companies’ ability to tap new and challenging hydrocarbon resources fast enough to meet demand may have already have reached its limit. (10/23, #17)
- The world’s biggest publicly funded project to make transport fuels from algae was launched Thursday by a UK government agency which develops low-carbon technologies. (10/23, #20)
- The United States is providing Angola with ships, radar and intelligence to prevent it becoming a target for seaborne attacks as it becomes Africa’s biggest oil producer. (10/22, #12)
- Saudi Arabia will bring on stream its 1.2 million barrel a day Khurais oil field in mid-2009, the country’s oil minister, Ali Naimi, said Friday. Naimi said the 500,000-barrel a day Khursaniyah oil field, which was originally due to start pumping crude at the end of 2007, was now on stream. (10/26, #3)
- PetroChina, Asia’s biggest oil producer, may buy energy companies made vulnerable by the global credit crisis to expand output and meet rising fuel demand in China. China National Petroleum Corp. signed an accord with Uzbekistan’s state oil company to jointly develop an oilfield in the central Asian country. (10/21, #16; 10/20, #7))
- China‘s crude-oil processing in September fell to the lowest in four months after refiners cut fuel output because of high stockpiles. (10/20, #9, #11)
- In Nigeria, with the imminent zero production of petroleum products in the nation’s refineries, the Federal Government has decided to embark on massive importation of fuel to prevent scarcity and queues at filling stations. (10/20, #8)
- South Korea, the world’s second-biggest buyer of liquefied natural gas, cut September imports of the fuel by 5.1 percent as demand dropped in summer and high stockpiles limited storage. (10/20, #15)
Quote of the Week
- “I’m strongly of the opinion that we’re on the cusp of a global liquid fuels crisis. The forthcoming energy crisis, should it develop, could result in economic, political and social stresses, and turmoil on a scale not experienced for half a century.”
— Jim Gray, former CEO of Canadian Hunter Exploration.