1. Oil and the Global Economy
In a short trading week, oil prices gained on Tuesday, Wednesday, and Thursday in anticipation of President Obama’s job stimulus speech and then fell sharply on Friday on fears for the future of the EU. The week’s trading was dominated by the possibility of a Greek default and repercussions that would occur should that happen. The euro sank 3.8 percent last week to close at $1.36, the lowest level against the Japanese yen in 10 years. European bank and sovereign credit risk surged to an all-time high on concerns about policy disagreements in the European Central Bank.
The EU financial crisis overshadowed President Obama’s proposal of a $447 billion mix of tax cuts and new spending to create more jobs in the US. NY oil closed out the week at $87.24 a barrel after trading above $90 on Wednesday and Thursday, while London’s Brent settled on Friday at $112.77 up 0.4 percent for the week.
The hurricane threat to Gulf oil production seems to be over for the moment and output is returning to normal. Gasoline futures in NY fell by nearly 10 cents a gallon on Friday, closing at $2.77 as attention shifted to weakening demand across the US. Over the last four weeks demand for gasoline in the US is down 2.9 percent from last year. Barclays Capital estimates that US gasoline demand over the summer driving season in the US was 4.1 percent lower than in 2010 as retail gasoline prices ran some 34 percent higher.
Concern about the sagging global economy continues to grow. The OECD estimates that the potential output of its 34 members has dropped 2.5 percent in the last few years and that most are taking a permanent hit to their growth rate trend.
The premium of $26 a barrel that London’s Brent crude is demanding over NY’s West Texas Intermediate continues to be a puzzlement. For many months it was common wisdom that a large glut of oil at the Cushing, OK contract delivery point has been keeping US prices low. In recent weeks the surpluses at Cushing have been worked off and for the last two months inventories there have been 2.8 million barrels lower than in 2010.
The reason for the large spread, which some traders say is roughly $10 a barrel too high, is now being placed on falling North Sea oil production and the Libyan outage. Although there are plans to resume some Libyan exports this week, fighting in the country is still going on so that it is likely to be many months before large quantities are again exported regularly. If the Keystone pipeline from Cushing to the Gulf becomes a reality in the next few years that could help to relieve the situation.
In the meantime, the constant repetition of the NY oil prices in the US media as the value of oil is leaving a false impression that oil is considerably cheaper than the prices US refiners are paying for imports. The cost of oil imports, of course, is a major reason why US gasoline prices have remained so high this summer. Brent crude, which is indicative of the “real” price of oil has now been above $100 a barrel for the last 8 months and shows no sign of falling below that level in the immediate future. In 2008 Brent oil prices were above $100 a barrel for only five months and then was trading in the vicinity of $60 a barrel by the end of the year. This year’s price increase is looking like more of a permanent plateau in the vicinity of $110-120 a barrel and is likely to cause more economic damage than the quick surge and fall of prices three years ago.
The news out of China last week suggests continuing growth and increasing demand for oil. Beijing announced that its July crude import figures were 6.3 percent too low as somebody forgot in add in the oil imported via the newly opened pipeline from Russia. The Saudis increased the prices they charge Asian buyers by 90 cents a barrel over the regional Oman/Dubai benchmark. They did this while cutting premiums for cargoes to the US suggesting that Riyadh foresees continued strong demand from Asia and weaker demand from the US. Beijing also revised its 2010 GDP growth by 0.1 percent to 10.4 percent. Manufacturing and construction in 2010 was revised up to a 12.4 percent growth.
After increasing interest rates five times and minimum bank reserves nine times, the Chinese seem to be making headway against inflation while still maintaining solid economic growth. Beijing reported last week that its consumer price index for August rose by 6.2 percent year over year as compared to 6.5 percent in July. Much of the inflation problem is food prices which moderated to a 13.4 percent increase in August, year over year, from a 14.8 percent increase in July. Although some progress is being made, inflation remains China’s number one problem. Middle class demand for food and consumer goods are rising along with once-cheap wages for factory workers.
China rang up some healthy economic numbers in August, however, with exports up 24.5 percent from 20.4 percent in July and imports were up 30.2 percent – all year over year. China imported 21.04 million tons of crude in August, up 1.8 percent from July. Oil imports in August slipped to the lowest rate this year; maintenance schedules were the main reason behind the dip. Crude imports are expected to be stronger in September.
New statistics show Chinese industrial production in August rising by 13.5 percent over last year and fixed asset investment increasing by 25 percent in the first 8 months of the year over last year.
Overall, numbers issued over the last few months continue to suggest that China is weathering the global downturn well and is on track for 9+ percent economic growth this year.
Quote of the week
“A significant number of petroleum geologists believe that in this decade, and perhaps already, we have reached global peak oil production, something that happened in 1970 in America, where half of all the oil that we can get out of the ground has been taken out… that’s a cause of great concern independent of global warming….”
— President Bill Clinton in a Keynote Speech
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- Libya’s Arabian Gulf Oil Company is hoping to be able to export Mellitah crude as early as next week. (9/9, #5) (9/10, #6)
- Iraqi Deputy Oil Minister al-Shamma said at an Iraqi mining conference in London that Iraq needed roughly $30 billion in investments to build five oil refineries. (9/10, #8)
- A consortium of energy companies reported a large oil discovery off the coast of French Guiana, opening up a potentially massive frontier of petroleum development along the northern coast of South America. (9/10, #13)
- Exxon and Chevron are increasing their lobbying efforts to push the US government to grant drilling permits for exploration. (9/10, #20)
- The Canadian Association of Petroleum Producers released a set of principles to govern the controversial practice of hydraulic fracturing used to release reserves of natural gas. (9/10, #24)
- Total announced a major gas discovery in the Caspian Sea in the Absheron block offshore Azerbaijan. (9/10, #25)
- The US Department of Energy said it was investing more than $230 million in clean energy projects ranging from geothermal energy to wind energy systems. (9/10, #29)
- Meetings between the new head of the IEA, Maria van der Hoeven, and members of OPEC in Vienna are part of a broader outreach program. (9/8, #3) (9/9, #3)
- Lebanon warned the United Nations that Israel’s proposed maritime border threatens peace and security, as the two East Mediterranean nations spar over offshore oil and gas reserves.(9/9, #7)
- Pakistan loses 500,000 Mcf/day of gas due to theft and a poor distribution network, forcing gas companies to increase load shedding to textile mills and compressed natural gas stations. (9/9, #8)
- African Petroleum Corp said its Apalis-1 deepwater wildcat off Liberia confirmed the critical components of a working hydrocarbon system but found no commercial quality reservoir. (9/9, #12)
- Queenslanders face up to 143 minutes of blackouts in 2012-13 because of soaring demand for power and pressure on its electricity generation capacity, new modeling finds. (9/9, #19)
- Saying that it’s as important to increase federal revenue as to cut government spending, US House Natural Resources Committee Chairman Doc Hastings (R-Wash.) said he intends to ask the congressional deficit reduction “super committee” to consider oil and gas leasing on the Arctic National Wildlife Refuge’s coastal plain. (9/9, #21)
- A successful appraisal well in a previously untested northern segment of Mad Dog field in the US Gulf of Mexico has hiked the complex’s resource to as much as 4 billion bbl of oil equivalent in place, rivaling that of the Thunder Horse field. (9/9, #23)
- UK oil production fell below 1 million barrels per day (bpd) for only the second time in more than 30 years this summer as maintenance exacerbated a decline in output from depleted North Sea oilfields. (9/9, #24)
- Brussels is seeking to assert more control over energy deals between EU members and third parties. (9/9, #25)
- The minimum summertime volume of Arctic sea ice fell to a record low last year. (9/8, #6)
- In a sign of growing interest in Iraq’s upcoming bidding round – its fourth auction for oil and gas development deals since mid-2009 – another six foreign oil companies have been pre-qualified to participate, days after an American firm was disqualified for signing deals with the semi-autonomous Kurdistan region. (9/8, #10)
- Saudi Arabia’s water challenges are growing as energy-intensive desalination erodes oil revenues while peak water looms more ominously than peak oil. Water use in the desert kingdom is already almost double the per capita global average and increasing at an ever faster rate with the rapid expansion of Saudi Arabia’s population and industrial development. (9/8, #11)
- A delegation led by William Reilly, a top official at the National Oil Spill Commission, left for Cuba to discuss Havana’s oil plans. Cuba is looking into cutting the amount of oil it imports from Venezuela through development of offshore reserves. US Rep. Ileana Ros-Lehtinen, R-Fla., chairwoman of the House Foreign Affairs Committee, said sending a US delegation to Cuba sends the wrong message. (9/8, #13)
- Rising sea levels could force Kiribati authorities to move the country’s entire population onto artificial islands. Some villages in the country have already been forced to relocate due to rising sea levels. Kiribati President Tong said if the situation continued to decline, the government would consider moving the entire population – of 100,000 people – to artificial islands. (9/8, #15)
- The chief executive of one of the top US natural gas producers delivered a blistering rebuke of critics of shale gas drilling on Wednesday, calling them fear-mongering extremists who want Americans to live in a world where “it’s cold, it’s dark and we’re all hungry.” (9/8, #21)
- In a detailed assessment of the Deepwater Horizon oil spill, researchers have determined that the blown-out Macondo well spewed oil at a rate of about 57,000 barrels a day, totaling nearly 5 million barrels of oil released from the well between April 20 and July 15, 2010. In addition, the well released some 100 million cubic feet per day of natural gas. (9/8, #22)
- Russia can double its oil reserves if the government exploits the potential in the Arctic, a senior Lukoil Holdings executive said. (9/8, #25)
- Russia Deputy Prime Minister Sechin gathered government officials to formulate a response to looming fuel shortages at the nation’s airports. Sechin announced at the meeting that a 10-day fuel reserve was to be created for the capital’s airports. (9/8, #26)
- Halliburton Chief Executive Lesar said there are “fantastic and phenomenal opportunities” for oilfield service companies to expand shale drilling beyond North America, but that growth may come slowly. (9/7, #5)
- Chevron reported a crude oil discovery on its Moccasin prospect on Keathley Canyon Block 736, adding to its portfolio in the Lower Tertiary trend of the deepwater Gulf of Mexico. (9/7, #11)
- Sunoco said it will exit the refining business, underscoring how tough it is for US refiners to profit as they spend more to make gasoline while selling less of the fuel. (9/7, #12)
- Russian natural gas began to flow Tuesday through the Nord Stream pipeline under the Baltic Sea, inaugurating a controversial and expensive Russian-German project with geopolitical overtones. (9/7, #13)
- Any serious oil spill in the ice of the Arctic, the “new frontier” for oil exploration, is likely to be an uncontrollable environmental disaster despoiling vast areas of the world’s most untouched ecosystem, according to Peter Wadhams, Professor of ocean physics at the University of Cambridge. (9/7, #14)
- OPEC members Saudi Arabia and Kuwait boosted their oil production in August to prevent prices from rising sharply and negatively impacting on the world economy, Kuwait’s oil minister said. (9/6, #5)
- Iran made its first counterproposal in two years to ease the confrontation with the West over its nuclear program, offering to allow international inspectors “full supervision” of the country’s nuclear activities for the next five years, but on the condition that the mounting sanctions against Iran are lifted. (9/6, #6)
- Iran’s first nuclear power plant has finally begun to provide electricity to the national grid, official news media reported, a long-delayed milestone in the nuclear ambitions of a country the West fears is covertly trying to develop atomic weapons. (9/6, #7)
- Panama’s National Energy Secretariat announced that 900 million barrels of oil have been detected at two basins in eastern Panama, representing a potential contribution to the Panamanian Treasury of $15 billion dollars over the next two decades at current oil prices. (9/6, #9)
- For General Motors, the new Chevrolet Volt plug-in hybrid represents the automotive future, the culmination of decades of high-tech research financed partly with federal dollars. But as G.M. prepares to start selling them in China by the end of this year, the Chinese government is putting heavy pressure on the company to share some of the car’s core technology. (9/6, #10)
- A succession of government officials at a weekend conference called for China’s automakers to shift their focus from making ever more cars and toward producing more fuel-efficient and more advanced models, including gasoline-electric hybrids and all-electric cars. (9/6, #9)
- Russia may start producing gas at the giant Shtokman offshore gas field in the Arctic from the fourth quarter of 2016, Prime Minister Vladimir Putin said. (9/6, #12)
- The U.K. government will reveal a device designed to cap an underwater oil well in the event of a major incident so as to minimize environmental damage, the Oil Spill Prevention and Response Advisory Group said. The device was designed in response to BP PLC’s (BP) oil spill in the Gulf of Mexico in April 2010. (9/6, #13)