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Peak Oil Review - May 25

1. Production and Prices
Oil prices had a bullish week, increasing steadily from $57 a barrel, at one point getting above $62, and then closing at $61.67. Once again the fundamentals of supply and demand had less to do with the price increase than financial considerations. On Monday oil surged in sympathy with a 2.9 percent jump in the Dow Jones. However, by mid-week the picture changed with the release of a Federal Reserve statement saying there are still troubles ahead. This dampened the enthusiasm for equities, but a plunge in the dollar soon increased demand for oil contracts as an inflation hedge. Problems auctioning off massive amounts of US treasury securities and concerns that higher interest rates may be ahead continue to support prices.

US crude inventories dropped by 2 million barrels last week, but considering that inventories are well above normal this decrease is not significant. Demand for oil products in the US is still running about 8 percent lower than last year with the demand for distillates, mainly diesel fuel, down 12 percent.

In Nigeria, heavy fighting between government forces and the Niger Delta militants continues. So far there has not been a significant new reduction in oil production, but the militants are threatening to block the waterways in order to contain exports and hamper support to offshore platforms.

The $20 increase in oil prices since February should be enough to keep OPEC from cutting production at this week’s meeting. The run-up in crude prices and higher costs of summer blends have pushed up average US gasoline prices to over $2.40 a gallon. While many note how cheap this is compared to last summer’s $4 a gallon, every increase damages a struggling economy.

The increase in oil prices at a time when many think they should be falling is starting to refocus attention on the role of speculation in the determination of prices.

2. Washington
The nation’s capital had the activity of a three-ring circus last week, with a challenge fired at the Chrysler bankruptcy; a GM bankruptcy in the wings; a cap and trade emissions bill clearing its first legislative hurdle; and the administration announcing a major increase in vehicle fuel standards.

While the administration says it is confident that Chrysler and GM can move through the bankruptcy courts and start returning to health in a few weeks, others are not so sure. On Tuesday a group of 300 disenfranchised Chrysler dealers filed to block the government’s plan for a quick restructuring. As the holders of $27 billion worth of GM bonds rejected a plan that leave them with only a small equity stake in a revived company, the government seems ready to send GM into the bankruptcy courts by the end of this week. The Administration loaned GM another $4 billion to keep it afloat until week’s end, bringing the total loan to $19.4 billion since December. During bankruptcy, GM is slated to receive billions more in government loans until the downsizing and restructuring is completed.

Congress is increasingly skeptical that the GM bankruptcy plan will work and many are concerned that the bondholders are being treated unfairly as compared to the unions. Amidst concerns ranging from the fate of dealerships to that of parts manufacturers is the overriding concern that car sales could collapse leading to cascading bankruptcies and millions being thrown out of work.

On Capitol Hill the House Energy and Commerce Committee passed out the American Clean Energy and Security Act of 2009. This massive bill attempts to reduce carbon emissions from American vehicles, buildings, factories, and power plants by 83 percent within 40 years. Needless to say there are trillions of dollars at stake. Should the bill pass, the supply and consumption of energy in the United States will never again be the same. Hundreds of amendments were proposed and numerous messy compromises were reached as the bill passed through the committee.

While the bill passed the House committee despite vigorous opposition, it may not fare so well in the whole House and Senate where many are concerned about the economic impact in recessionary times.

Should the legislation stall, the Obama administration unveiled a new set of much tougher emissions and mileage standards last week. This time the automakers, realizing the precariousness of their situation, stood by the President to support the new standards. The rules essentially mandate a 40 percent improvement in mileage and emissions standards over the next six years.

These new regulations further complicate the already complex automobile-energy- economic situation. The new standards could increase the costs of cars at a time when manufacturers are struggling to stay viable, with failing business models, and many consumers are struggling to buy much of anything. All available indicators suggest that the global economy will continue to have serious problems for the foreseeable future, that oil supplies will continue to contract, and that oil prices will rise. The net outcome of the actions that took place in Washington this week, when combined with all the global economic forces that are in motion, is simply too complex to foresee.

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

  • Nigeria’s oil production has fallen to less than half its capacity as fighting escalates in the Niger River delta. The West African nation, formerly the continent’s biggest producer, now pumps about 1.6 million barrels a day, compared with capacity of 3.2 million. (5/23, #1)
  • Mexico said that in the first four months of 2009 the value of its crude exports dropped 60.4 percent compared to the same period of 2008. Mexico’s production is down 24 percent from its 2003 peak even as domestic demand for oil-derived products continues rising. Pemex exported an average of 1.25 million barrels/day, down 15.3 percent from 2008. The government depends on oil earnings to fund one-third of its budget (5/23, #8; 5/22, #7)
  • Pemex, the state-owned oil company, should reevaluate its investment plan for the onshore Chicontepec project after oil prices plunged from last year’s record, said newly appointed board member Fluvio Ruiz. “I believe Pemex is being too optimistic about Chicontepec,” Ruiz said in an interview. “The current price conditions may be a bit too onerous.” Pemex plans to invest more than $11.1 billion in Chicontepec from 2009 to 2012 to offset a production decline at Cantarell. (5/22, #8)
  • China is securing energy resources to power its economy, the world’s third-largest, by offering loans to oil-producing countries including Russia, Venezuela and Kazakhstan. Last week, the $10 billion loan-for-oil deal with Brazil will help it finance development of the Tupi field, the largest crude discovery in the Americas in more than 30 years. (5/20, #6)
  • China National Petroleum Corp. began work in March to develop the Ahdeb oil field in Iraq, marking the first significant foreign investment in the country's creaky oil industry. (5/23, #7)
  • Iraq's Oil Ministry accused the Kurds of squandering the country's oil wealth by giving Western oil companies an excessive share of crude production in contracts the government considers illegal. (5/18, #5)
  • OPEC said the group's 11 quota-bound members had raised production in April by around 200,000 barrels a day, the first rise in nine months. Most of that increase came from Angola, Iran and Venezuela, according to OPEC data. (5/23, #2)
  • Rigs drilling for natural gas in the US fell by 17 to 711 this week, down 56 percent from the high of 1,600 rigs last September according to Baker Hughes. (5/23, #18)
  • Fourteen years after the execution of Nigerian author/activist Ken Saro-Wiwa by Nigeria’s former military regime, Royal Dutch Shell will appear before a federal court in New York to answer charges of crimes against humanity in connection with his death. The trial is the latest in a series of cases aimed at some of the world’s biggest oil companies, asserting misdeeds in developing countries where they were once seen as unassailable. Chevron, for example, could face up to $27 billion in liability in Ecuador for pollution. (5/22, #6)
  • Russia and the EU failed to agree on measures to prevent another cutoff of gas supplies to Europe. (5/22, #12)
  • Russian President Medvedev said he doubts Ukraine’s ability to pay for natural gas from Russia, five months after OAO Gazprom halted shipments in a spat that disrupted supplies to the EU. (5/22, #14)
  • Trading firms are offering to sell large volumes of “floating” crude into the US in what could be the first steps to unload their large offshore storage positions as the crude futures curve flattens. (5/21, #4)
  • Mexico’s GNP fell at an annualized rate of 21.5% in the first quarter. Japan reported that its economy contracted in the first quarter at a 15.2% clip. Last week, Germany said its first quarter decline in GDP, an annualized 14.4%, was the worst since 1970. (5/21, #5)
  • Output from Canada’s oilsands could rise to as much as 6.3-million barrels a day by 2035, a nearly fivefold increase above current levels, according to a US report released Monday by energy consultancy IHS Cambridge Energy Research Associates. (5/20, #18) [Editor’s note: we consider this an enormous long-shot.]
  • Study update: World liquid fuels production probably passed peak in July 2008 at 87.9 million b/d. It is expected that world oil production will decline slowly to about December 2010 as OPEC production increases while non-OPEC production decreases. After 2010 the resulting annual production decline rate increases to 3.4 percent as OPEC production is unable to offset cumulative non-OPEC declines. (5/20, #20) [Editor’s note: we’re a bit more optimistic than this post-December-2010 forecast.]
  • In a research note, Raymond James said it looks like the oil industry’s immediate future will be a severe down cycle that will look “eerily similar to the early 1980s,” which was when the world was awash with oil, causing prices to plunge and drilling activity to stall. (5/20, #23)
  • Energy economist Jeff Rubin, in his new book Why Your World is About to Get a Whole Lot Smaller, has taken his long-standing forecast that inevitably declining production and rising demand will send oil prices inexorably higher - over $200 (U.S.) a barrel by 2012 or earlier, just for a start - and imagines how the world will have to change to adjust to such a reality. Rubin had to leave his post at CIBC World Markets to publish the book. (5/20, #21)
  • The Department of Defense is the single biggest consumer of energy in the US, a country that burns more oil than any other but controls only 2 percent of the supply. These facts alone are enough to justify concern about energy policy and the future says a panel of retired generals and admirals. The report by the Military Advisory Board calls for a speedy, national transition to alternative sources and greater energy efficiencies. (5/19, #19)
  • The US is now the country with the world's largest installed base of wind power—about 25,000 MW. More than 8,300 megawatts of wind power were installed during 2008. Total US installed nameplate generation capacity is roughly 1.1 million megawatts. (5/19, #24)
  • IEA forecasts that global electricity use will fall 3.5 percent this year, the first decline since 1945, signaling the seriousness of the economic recession. About 75 percent of expected decline will be from industrial rather than household demand. (5/23, #4)
  • When public office holders approach the end of their terms, they sometimes feel less constrained by political correctness. That's precisely what seems to be happening with European Energy Commissioner Piebalgs. In a note that could be your regular post on The Oil Drum, the Commissioner talks about peak oil in the past tense and warns that present oil prices at relatively low figures are simply transient. (5/18, #12)

Quote of the Week

"It is well-recognized that the main drive of the deepest recession since the Great Depression was the failure of the US and global debt and credit systems. But the surge in commodity prices, notably oil, was a very significant contributing factor.”
-- Daniel Yergin, CEO Cambridge Energy Research Associates

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