Peak oil review – July 4

1. Oil and the Global Economy
Oil prices rebounded last week from the sell-off triggered the previous week by the sale of 60 million barrels from IEA stocks. By mid-week, prices in NY were back to where they were before the sell-off and London prices, which sustained a circa $10 drop during the sell-off, were back to nearly the levels of the week before last. Trading in the early part of last week was dominated by expectations that the Greek parliament would pass the austerity measures thereby delaying further EU economic problems for a while.

At mid-week, the news that US crude and gasoline stocks took an unexpectedly large drop the week before last gave oil prices a boost. The end of the week was dominated by worse-than-expected manufacturing data from China and the EU, leaving NY oil at $94.94 and London oil to close out the week at $111.77. A better than expected report on manufacturing in the US tempered the report from China.

The weekly gain, however, was the biggest in almost three months suggesting that there may be some truth in IEA fears that widespread power shortages and hot weather will lead to tighter oil markets in the 2nd half of the year. For the next few months, the course of oil prices could be determined by the balance between slowing economic growth in China and the increased demand for oil occasioned by droughts, unusually hot weather, and power shortages in many countries. China’s manufacturing growth in May was the slowest in 28 months and the Beijing Times reports that the Bank of China is likely to raise interest rate one or two times this quarter.

The IEA’s Oil Market Report for June says that OPEC will have to produce 1.5 million b/d more during the 3rd quarter to keep up with demand than the 29.2 million b/d the Agency believes the cartel produced in May.

US gasoline futures which were trading below $2.70 a gallon on Monday rose sharply on the news that US gasoline stocks had declined by 1.4 million barrels the previous week and closed out on Friday at $2.97 a gallon. This move retraced nearly half of the decline from early May when gasoline futures were trading at $3.30 a gallon.

2. Middle East – North Africa
Although there is as yet no clear end to the Libyan insurrection and the shut-in 1.3 million b/d of light sweet crude exports, insurgent forces seem to be making progress in moving towards Tripoli. Stepped up NATO air strikes which now include the use of attack helicopters have eliminated much of the large stock of heavy weapons held by the Gadhafi government. France has admitted parachuting weapons and ammunition to rebel forces in the mountains south of Tripoli. Economic activity in the capital has nearly halted.

Despite the shift in momentum, Gadhafi and his supporters who are now facing criminal charges have no place to go and are betting their futures that the NATO governments will tire of the attacks and seek a settlement. Given the rules of engagement for NATO and the difficulty the rebels will have overcoming Gadhafi’s security forces that may be literally fighting for their lives, the struggle may be a long one.

If the situation stabilizes the rebel government may be able to resume some oil shipments before the year is out. Last week rebel chief Jabril told reporters that they were reviewing the oil contracts with foreign companies for signs of what is thought to be widespread corruption.

As the US winds down its forces in Iraq, there are signs that sectarian troubles and the accompanying violence are increasing, suggesting that major increases in Iraqi oil exports may not be as easily achieved as many had hoped. More Americans were killed in June than in the last two years, and troubles are increasing in Sunni areas of the country as forces from the Shiite-led government tighten their grip. In recent weeks, attacks on oil facilities have seen an upswing.

Last week Hama, Syria saw the largest demonstrations since the uprising against the al-Assad government began three months ago. Hama is the city where Assad’s father killed some 30,000 people while putting down an uprising in 1982. This development has increased concerns in the West that the Syrian situation could get out of hand. Ankara has already warned al-Assad against repeating another Hama. So far there is nothing that would seem to be an immediate threat to oil exports from the region, but Syria is a pivotal state. Continuing instability there could have major consequences for the region.

Gasoline shortages developed across the UAE last week as Emirates National Oil Company, a Dubai-based refiner, shut down gas stations in Sharjah after running short of supplies. Much of the problem is due to government policies that require gasoline to be retailed at well below market prices across the region. Demand for oil products by Middle Eastern oil exporters has been increasing by 5 percent a year, outrunning local refining capacity and forcing governments to import large amounts of oil products at world prices. While national oil companies may be able to extract oil at a marginal cost of a few dollars a barrel, imported gasoline and diesel is going to run closer to $100. Building more refining capacity will be very expensive – last week Kuwait approved a new refinery that will cost $14 billion.

3. Energy Shortages
The last few weeks have seen what appears to be a substantial increase in electricity and liquid fuels shortages across many parts of the world. The common theme behind these shortages is higher prices for liquid fuels and hot, dry weather which is reducing hydro generated power and increasing the demand for air conditioning. Brent oil prices that have now been above $100 a barrel for the last six months are placing a strain on many poorer nations that can no longer afford to import enough oil to run power stations. Theft of electrical power is endemic in much of the underdeveloped world leaving many power companies without the revenue to pay for increasingly expensive fuel.

In many countries, a paradox is developing in which widespread, lengthy blackouts are in some cases saving fuel for power stations, but at the same time increasing the demand for diesel fuel to keep essential utilities, factories and computerized offices running.

Last week several new or worsening situations were reported. In Mongolia, which until recently had only a diesel crisis due to the ban on exports by its only neighbors, Russia and China, is now facing a gasoline crisis. Power cuts in Tanzania, where 70 percent of the power comes from hydro, are up to 12 hours a day for an indefinite period. Japan has now issued an official order that large power users in the service areas of the Tokyo and Tohoku power companies must cut their usage by 15 percent. Japanese car manufactures are stopping production on Thursday and Friday. Nissan says it will shift production to the weekend when more power is available.

Jordan’s electric company which was dependent on cheap natural gas from Egypt ran into troubles when the pipeline was blown up for the third time and the company was forced to turn to expensive imported oil. Botswana and Argentina in the southern hemisphere are facing shortages of electricity and natural gas respectively as temperatures fall. Nigeria is dealing with growing kerosene shortages and longer blackouts. In Nigeria the electric company is increasing prices to cope with revenue shortfalls from lower production.

Energy shortages in Pakistan continue without end. There are near-daily protests against the blackouts, and a CNG shortage has cut bus service in many regions. Gasoline is in short supply. Last week, Tehran, in an effort to supplant US influence in Pakistan, offered to sell the country electricity. The offer came at the same time Iran’s electric company reported that it was about to close 15 thermal power plants because of a fuel shortage.

While some of these shortages will be short-lived, others are systemic stemming from the rising energy consumption by a growing world running into the limits to growth.

4. The NY Times on shale gas
For several years now, many in the peak oil community have been voicing concerns that shale gas will not turn out to be the energy bonanza that proponents claim. Last week the NY Times published a story raising many of the same concerns. The Times based its story on a collection of private e-mails written by industry executives, geologists and market analysts which express skepticism about the bullish statements being issued by industry spokesmen.

The problems of the shale gas industry are well known to anyone following the situation closely. Only in very limited areas of what appear to be large shale gas fields can profitable wells be drilled. Currently producing shale gas wells are running out so quickly that many will never recoup the high horizontal drilling and fracking costs. Contamination from fracking and diminishing water resources – it can require more than a million gallons of water per well – pose environmental issues.

Last week’s Times story is news in that what is arguably the country’s leading newspaper quotes many knowledgeable insiders as saying the whole shale phenomenon may turn out to be a giant Ponzi scheme that will ultimately provide far less affordable energy than is commonly believed. While industry believers are also quoted, the thrust of the story leaves the reader with the impression that the shale gas “boom” does not have much of a future.

Quote of the week
“This kind of data is making it harder and harder to deny that the shale gas revolution is being oversold.”
— Art Berman, ASPO-USA board member

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

• Most voters continue to feel America needs to do more to develop domestic gas and oil resources. They also still give the edge to finding new sources of oil over reducing gas and oil consumption. The latest Rasmussen Reports national telephone survey of Likely Voters shows that just 19% believe the United States does enough to develop its own gas and oil resources. (7/2, #16)
• In a surprise move, New York State is likely to lift its ban on hydraulic fracturing, the controversial process used to extract natural gas. The state’s Department of Environmental Conservation released a draft Thursday of proposed regulations governing what’s known as “fracking.” (7/2, #21)
• France’s upper house, the Senate, passed late Thursday a law banning exploration for shale oil and gas. The draft law bans all unconventional exploration of hydrocarbons using hydraulic fracturing techniques, and is now set to become law following presidential signoff. (7/2, #26)
• Russia plans to deploy two army brigades in the north to defend its interests in the Arctic regions, where governments citing climate change have made competing claims over natural resources. (7/2, #27)
• Airlines won final approval from a US-based technical-standards group to power their planes with a blend made from traditional kerosene and biofuels derived from inedible plants and organic waste. (7/2, #32)
• Two laws that would dramatically alter the contentious landscape of Iraq’s oil sector – and potentially de-politicize its operations – will be taken up by two committees next week. (7/1, #7)
• State-owned China National Petroleum Corporation said it has started operations at the eastern section of the second west-to-east gas pipeline, enabling Central Asian gas to reach the country’s southern province of Guangdong for the first time. The second west-to-east pipeline, which has been deemed the world’s longest gas pipeline, spans a total length of 8,704 km (5,396 miles). (7/1, #14)
• Alaska will hold an oil and gas lease sale in October spanning 14.7 million acres in the Beaufort Sea and North Slope, Alaska Governor Parnell announced. The leases, which lie between the National Petroleum Reserve-Alaska and the Arctic National Wildlife Refuge, could contain 3-6 billion barrels of undiscovered, technically-recoverable oil, 500 million barrels of natural gas liquids, and 24-44 trillion cubic feet of natural gas, according to a state fact sheet. (7/1, #18, #19)
• Germany’s lower house of Parliament approved plans to phase out all the country’s nuclear reactors by 2022, completing a major policy reversal begun by Chancellor Merkel in March. The plan has raised tough questions over what power sources Germany will use to make up for the lost nuclear capacity, and whether it will be able to meet ambitious emissions reduction targets. (7/1, #21)
• The Chevron-led Caspian Pipeline Consortium said it has started a $5.4 billion expansion to double capacity to 1.4 million barrels a day by 2015. The capacity of the 900-mile [1500 kilometer] pipeline, which carries crude oil from Western Kazakhstan to a dedicated terminal in the Black Sea, will increase throughput from its current capacity of 730,000 b/d. (7/1, #22)
• Canada Lithium Corp. which is digging a mine in Quebec, said demand for lithium may outstrip global supply by 2015 because China will need more electric-car batteries that contain the metal. “If you are a strong believer in the green economy and electric vehicles, then demand is going to exceed supply by 2015-2016,” CEO Peter Secker said in a telephone interview. (7/1, #25)
• The International Energy Agency could decide by mid-July whether the release of strategic oil reserves needs to be extended for a month or two, an official said. The move would be in defiance of OPEC’s criticism of the IEA’s decision last week to release 60 million barrels over an initial 30-day period. (6/28, #5) (6/30, #3)
• Iran’s Ministry of Power is concerned about gas shortages at its power plants and is calling on President Mahmoud Ahmadinejad to intervene. According to the ministry, 15 power plants are currently without gas and are running on liquid fuel, but liquid fuel reserves are also running low. (6/29, #8) (6/30, #8)
• Dubai, the second-largest of seven sheikhdoms in the United Arab Emirates, has stopped supplying gasoline to its neighbors as subsidies on fuel prices squeeze the city’s ability to service and repay debt. (6/30, #9)
• East African energy ministers may decide by October on a proposal to build a natural gas pipeline from Tanzania to Kenya to help meet the region’s rising energy needs. (6/30, #11)
• Tanzania is seeking a $700 million loan from the Export-Import Bank of China to fund a power plant aimed at plugging a chronic power shortage in east Africa’s second largest economy. (6/30, #12)
• An Australian company says a coal field discovered in the Simpson Desert could be the biggest in the world. Central Petroleum Limited says it recently discovered the field in the southeast of the Northern Territory, about 300 kilometers from Alice Springs. (6/30, #14)
• Japan’s auto production dropped 30.9 percent in May from a year earlier, marking the eighth straight month of decline as the March 11 twin disasters disrupted supply chains. (6/30, #15)
• US oilfield service firm Halliburton sees a big growth opportunity in Poland where oil majors are hoping to open up a shale gas basin. (6/30, #18)
• Despite loud complaints from some members of OPEC over the International Energy Agency’s decision to tap strategic oil stockpiles, the Saudi Arabia-led wing of OPEC signaled Tuesday that it intends to implement previous plans to boost output. (6/28, #8) (6/29, #6)
• Argentina is rationing natural gas as winter in the Southern Hemisphere boosts demand amid a seven-year shortage of the fuel. Supplies to industries, which were cut, “will return to normal once the current cold wave is over,” Planning Minister Julio De Vido was quoted as saying. (6/29, #17)
• China’s Ministry of Land and Resources held its first shale gas block auction Monday, a ministry official said, marking a move to exploit on a large scale the new source of the cleaner-burning fuel. (6/29, #19)
• South Korea’s total consumption of petroleum products, including gasoline, diesel and kerosene, reached 60.27 million barrels in May, up 5.3 percent from the previous month. (6/29, #21)
• Walmart, the world’s largest retailer, has knocked a dime a gallon off its gasoline prices at Murphy USA and Walmart gas stations for the next three months. The Bentonville, Ark. chain said customers could get the 10-cent discount when they use reloadable Walmart gift cards to buy gas June 29 through Sept. 30. (6/29, 28)
• Iranian Energy Minister Majid Namjou says Iran is ready to supply Pakistan with more electricity to help overcome the South Asian country’s energy crisis. “Given the great need of Pakistan for electricity, Iran could export its surplus electricity to the country,” IRIB quoted Namjou as saying during a meeting with Pakistan’s Minister for Petroleum and Natural Resources Asim Hussain in the Iranian capital, Tehran. (6/27, #8) (6/28, #15, #17)
• Mexico’s Pemex, said gasoline imports were near a record high in May, and diesel-fuel imports reached their peak as the country continues to offset revenue from crude exports by buying fuel abroad. (6/28, #20)
• Tons of radioactive water was discovered to have leaked into the ground from the Fukushima nuclear plant, Japan’s nuclear watchdog said on Tuesday. (6/28, #24)
• A powerful Indian ministerial panel cut taxes on crude oil and oil products and marginally hiked the retail price of gasoil and LPG to tackle heavy losses incurred by state-owned refining and marketing companies selling refined products at below market rates, according to oil minister S. Jaipal Reddy. (6/27, #15)
• Nearly 70 percent of Japanese oppose the restart of nuclear reactors halted for maintenance work, a poll showed on Monday, even though keeping them shut could mean power blackouts this summer and higher electricity bills. (6/27, #16)
• The Obama administration wants cars and light trucks in the United States to average 56.2 miles per gallon of gasoline by 2025, a standard that will cut the nation’s oil consumption and carbon output significantly while also raising each vehicle’s cost by about $2,375. (6/27, #21)