1. Production and prices
The struggle between optimists and pessimists goes on and on with neither side as yet gaining a decisive advantage. Oil prices started the week close to $75 a barrel on rising stock markets and hopes for a global recovery; fell to below $70 at mid-week on rising inventories and the outlook for bad employment numbers; and then bounced above $73 on Friday as the stock market gained. Until more definitive information as to the course of the recession arises, this pattern is likely to continue.
Natural gas prices fell to $2.69 per thousand cf last week, the lowest since August 2002, as the government announced that underground storage is filling up. Lack of industrial demand, mild weather, and good production is behind the glut.
US gasoline consumption which was holding its own a couple weeks ago is down as the summer driving season comes to a close. MasterCard reports consumption is 2.2 percent lower than last year and the EIA says that so far in 2009, gasoline consumption is down about 1 percent over last year, while jet fuel is down 13 percent and distillates down 10 percent.
Tanker tracker Petrologistics reports that OPEC shipments were up about 300,000 b/d in July as compared with June. Chatter surrounding the forthcoming OPEC meeting suggests that there will be no change in quotas at the September 9th meeting. Given the drop in world prices for goods and services, OPEC is happy with the relative price of oil for the time being and those members with excess production capacity appear to be taking advantage of the situation.
2. Droughts in Asia
New reports on the drought that is affecting the Asian sub-continent and parts of China highlight how serious the situation could become. Inadequate rain is not only damaging crop yields but is also reducing hydro-generated electricity production which in turn leads to myriad other problems.
For now the top problem is in India where drought conditions are affecting 278 districts that are home to 700 million people. The government is already taking measures to prevent hoarding and to import food.
In China, severe drought is already ravaging China’s northern areas and is beginning to extend to the south. According to the State Flood and Drought Relief Headquarters, 12.7 million hectares are currently affected – up 35 percent from past years. Some 5 million people are short of drinking water and will have to be supplied by truck from outside the region.
Changing weather patterns are affecting the amount of snow falling on the Himalayas, its glaciers and ultimately the quantity of water flowing into the rivers of China and the sub-continent. While it will take many years of drought to dry up the major Asian rivers, the situation in Nepal at the foot of Mt Everest is already serious with this year’s crops forecast to be only half of normal. Oxfam reports that millions in Nepal are already facing food shortages.
Pakistan and Bangladesh are also facing severe electricity shortages due to reduced water flows and the need to furnish more power to irrigation pumps. Pakistan’s cabinet approved a plan to rent 2,250 megawatts of generating capacity to help alleviate the critical situation. This of course will likely be oil powered and will just add to the country’s problems. Bangladesh will tender for $6 billion worth of power plants next month.
If the droughts across Asia continue and increase in severity, it will not be long before substantial resources will have to be diverted to their mitigation, thereby hampering other economic development. All countries talk of improved water management as the answer to droughts. This involves better containment and storage of rain water and efficient utilization in agriculture and other uses. All this will take decades to achieve and will likely require large amounts of energy to collect, store and distribute water.
Iraq’s oil production hit a post-2003 war high of 2.03 million b/d in July but will be hard pressed to increase production further due to the poor state of its infrastructure. With one of the largest known oil reserves in the world, contracts to further develop Iraqi oil are much sought after. The first attempt to auction off drilling concessions to foreign oil companies in June was a failure due to the government’s insistence that the international oil companies only be allowed a pittance ($2 a barrel) profit for their efforts.
A second auction is scheduled for November. This auction will involve un-developed and partially-developed fields. Baghdad says it has lowered its demands to the point where foreign companies are expected to bid.
In the last few weeks, however, a surge in violence has injected a new note of uncertainty into the prospects for the badly needed foreign investment. US troops now have withdrawn from Baghdad and other urban areas, leaving government forces responsible for security. Since the withdrawal, hundreds have been killed in bombings and a new wave of sectarian violence is anticipated.
Attacks on the oil infrastructure could shut down the economy and make it far too dangerous for foreign oil workers to begin drilling. The ruling Shiite coalition is fracturing, leaving open the possibility of Iranian-backed factions coming into power after the elections next January. Some fear that Iraqi oil policy could shift to Tehran. None of this is likely to encourage the international oil companies to invest billions in developing Iraq’s oil in return for minimal profits.
Quote of the Week
— Puru Saxena, founder Puru Saxena Wealth Management, publisher of Money Matters