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Peak oil review - September 26

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ASPO-USA 2011 Conference – Peak Oil, Energy & the Economy
November 2-5, Capitol Hill Hyatt, Washington DC

Get the latest research, analysis, and insights on Peak Oil, the ripple effects that a new energy reality will have on the economy and modern life, and response strategies for businesses, government, and communities.
More information: aspousa.org/conferences/2011


1. Oil and the Global Economy

The pressures that have been building for months came to a head last week when a combination of the EU debt crises, political gridlock in Washington, and the perception that the US Federal Reserve has run out of options to stimulate the economy culminated in a precipitous drop of equity and commodity markets. NY oil, which had been trading in the vicinity of $88 a barrel early in the week, fell as low as $78 before closing on Friday at $79.85. London oil which had been trading in the vicinity of $111 fell to a Friday settlement of $103.97.

The unsettled condition of the EU and US financial situations continues to drive the markets with an increasing number of observers raising the likelihood of further global economic contraction and a decline in the demand for oil.

For now, however, the fundamentals of the world oil markets still remain tight. US crude inventories fell by 7.3 million barrels the week before last and the IEA says that the increase in global stockpiles is well below the norm for this time of year. Fighting continues in Libya and while a few token shipments of Libyan crude will likely take place in the next few weeks, most independent observers do not expect substantial shipments to resume until next year. While gasoline consumption in the US slipped to a 10-year low in August, consumption of distillates and jet fuel remain steady considering the precarious state of the economy. Among the few bits of good news last week was that US retail gasoline prices fell by 10 cents and are now averaging $3.50 a gallon - only 80 cents a gallon higher than this time last year.

Until last week’s sell-off, Brent crude was holding above $110 a barrel. There is near universal agreement, outside of Wall Street, that the price of West Texas Intermediate as traded in NY is no longer a useful indicator of oil’s value on the global oil markets. Futures prices of oil for delivery on the London market in December 2012 and 2013 have been falling lately, suggesting the traders believe that a combination of lower demand and the return of Libyan production will loosen the oil markets in the coming year.

The next two months could prove pivotal to the global economic system and the demand for oil over the next few years. There seems to be a consensus that at some point Greece will default on its public debt, leading to unknown but likely serious damage to the EU’s and possibly the global financial system as additional defaults take place. The gridlock in Washington seems to be coming to a head with threats of a partial government shutdown this week and major reductions in federal spending in the offing. The euro/dollar ratio, which has considerable influence on dollar-denominated oil prices, is likely to become even more volatile as the markets react to new developments.

2. INTERNATIONAL ENERGY OUTLOOK 2011

After a detailed review of the EIA’s International Energy Outlook 2011 (IEO2011), one can only conclude the Administration erred on the side of rampant optimism in nearly every area of energy production they considered. In forecasting that total world energy consumption will increase by 53 percent in the next 25 years, the EIA seems to have paid scant attention to the increasing costs in money and energy of extracting fossil fuels from increasingly difficult locations. Even the EIA’s high estimates that oil prices won’t approach $200 a barrel (after adjustments for inflation) for another 20 or 25 years seems wildly optimistic. Nowhere in the document is there discussion of increasing depletion rates for conventional oil, the difficulties of extracting it from the Arctic, or the limited utility of some forms of liquid fuels.

The editors of EIA’s document seem to have almost no awareness of just how seriously the various financial crises engulfing the OECD are likely to impact the demand for production of energy. It seems highly likely that neither the demand nor the resources to develop very expensive energy will be with us much longer.

Nowhere in IEO2011 is there concern for the environmental impacts of increasing fossil fuel production at the projected rates for another 25 years. Detailed examination of the projections for conventional oil, non-conventional oil, natural gas, coal, and renewables all contain unrealistic assumptions - in some cases wildly unrealistic ones - that are not supported by recent history.

Given the assumption underlying this document, it has little utility for future planning in light of the political and fiscal upheavals that the world is currently undergoing. Simply assuming a 3 or 4 percent annual global economic growth in demand and making some adjustments for the changing nature of energy resources may be relatively easy to do, but does not produce any real guidance for the situations the world is about to face.

3. A Chinese Slowdown?

Signals out of China last week were mixed. Another factor in last week’s market sell-offs was the perception that the Chinese economy is starting to slow under the weight of falling exports and domestic fiscal tightening. A new survey of Chinese purchasing managers shows manufacturing contracting for the third consecutive month. Inflation is still running at 6 percent per annum and Beijing continues to reiterate that it will not embark on another stimulus program similar to the one it undertook in 2008 until inflation is under control.

Although China’s economy is still assessed as growing at approximately 9.5 percent a year, some observers are saying that this rate of growth is unlikely to be sustained much longer as diverse sectors of the economy ranging from real estate to automobiles report slowdowns. Some observers are forecasting that growth could slip considerably over the next year.

A new analysis of China apparent demand for oil by Platts shows that it averaged 8.9 million b/d in August which was the lowest since last October. Some of the slowdown in August’s consumption, however, is attributed to an unusual amount of maintenance and unplanned shutdowns which slowed refinery utilization. Oil consumption for August, however, was still up by 7 percent and net oil product imports were up by 53 percent over August 2010.

While it is still too early to forecast that the increase in China’s oil consumption will drop markedly from the pace of the last year, some analysts see the lower consumption in August as indicating that a slowdown in rates of consumption is underway.

Quote of the week

“With demand for oil and all forms of energy continuing to rise exponentially, and with huge uncertainty whether fossil fuels can keep pace, business as usual isn’t an option.”

– Jan Lars Mueller, ASPO-USA Executive Director, in WSJ Letter to the Editor

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

  • A Pennsylvania appeals court ruling has raised questions about who can claim ownership of natural gas embedded in the Marcellus shale formation, potentially putting in doubt the legitimacy of thousands of drilling leases. (9/24, #12)
  • Reliance Industries is studying shale-gas assets in Canada after agreeing to spend $3.4 billion to acquire and develop reserves in Pennsylvania and Texas last year. The Mumbai-based energy explorer and refiner controlled by Indian billionaire Mukesh Ambani may also use part of its $16 billion cash reserves to invest in clean energy ventures. (9/24, #13)
  • Chinese firms are rushing to snap up Canadian oil sands and invest in ongoing projects - to the tune of $15 billion in the past 18 months. They are motivated by a desire to jump into one of the world’s lowest-risk oil investments and to quench the exploding energy demands of Asian markets. (9/20, #30)
  • Ottawa will not release new rules for greenhouse gas emissions from the oil sands this year, contrary to what Environment Minister Kent said in May. (9/20, #31)
  • Ukrainian President Yanukovych visited Moscow for talks over natural gas contracts as the two states risk their third gas war in six years and another disruption to Europe’s supplies. (9/24, #14)
  • In a move to calm tension between Greek and Turkish Cypriots over drilling for offshore natural gas, Cypriot President Christofias said that he wants all island citizens to benefit from any natural gas found off the island’s coasts. (9/23, #8)
  • Argentina is betting on corn to increase the ethanol in its gasoline blends to 20-25 percent. The government has authorized $450 million in financing for five projects to supply corn and sorghum-based ethanol to oil refiners. (9/23, #9)
  • Indonesia will likely miss its crude and condensate production target this year — already revised downwards by 3% to 945,000 b/d — by pumping only 915-920,000 b/d according to a senior official at BPMigas. (9/23, #11)
  • Chevron Energy Solutions and the Marine Corps celebrated completion of the Department of the Navy’s first landfill gas cogeneration plant. The plant produces 1.9 megawatts of renewable electric power and steam by burning landfill gas collected from a nearby landfill. (9/23, #15)
  • Venezuela’s oil minister moved quickly to quash media reports that the Caracas was negotiating a $6 billion settlement in its arbitration case with Exxon. (9/22, #12)
  • Mexico’s state-owned oil company Petroleos Mexicanos said it has begun the first phase of a project using electric pumps to increase output at its declining fields in the southern Gulf of Mexico, estimating the project will add 25,000 barrels a day of crude-oil production during the next 14 years. (9/22, #14)
  • Chevron won Australian government approval for its multi-billion dollar Wheatstone liquefied natural gas project, but with strict environmental conditions. The plant, which will consist of two processing units with a combined capacity of 8.9 million metric tons of LNG a year is scheduled to start production in 2016. (9/22, #16)
  • Authorizing oil and natural gas leasing on the Arctic National Wildlife Refuge would provide thousands of new jobs and major economic benefits relatively quickly, Alaska state officials told the US House Natural Resources Committee. Republican committee members supported the idea while most Democrats opposed it. (9/22, #17, #18)
  • Russia has decided to extend the life of a controversial generation of nuclear reactors like the one that catastrophically exploded at Chernobyl in 1986. (9/22, #20)
  • The Kurdistan Regional Government published all production-sharing contracts it has signed with foreign oil companies for 42 license areas in the semi-autonomous northern Iraqi province as part of a transparency drive. (9/21, #10)
  • Chevron said it was disappointed with the US court decision to unfreeze an $18 billion case regarding environmental damage in Ecuador. The 2nd US Circuit Court of Appeals in New York reversed a February lower-court decision, moving the 18-year legal fight in the Ecuadorans’ corner. (9/20, #18) (9/21, #14)
  • China’s currency, the yuan, strengthened 108 basis points to 6.3772 per dollar on Wednesday, a fresh high since the reform of the yuan’s exchange rate formation mechanism. (9/21. #16)
  • Japan’s imports of LNG and thermal coal rose to a record in August because of low utilization rates at its nuclear power plants. The nation’s LNG imports climbed 18.2 percent from a year earlier to 7.55 million metric tons, while thermal-coal imports increased 7.1 percent to 10 million tons. (9/21. #19)
  • OPEC countries plan to bring on stream a total of 21 million b/d of new oil capacity over the next five years. The organization’s Secretary-General el-Badri also said that US benchmark West Texas Intermediate crude is unsuitable as a reference for international oil trading and North Sea Brent crude isn’t perfect either. (9/20, #4, #7)
  • OPEC members will earn an unprecedented $1 trillion this year, according to the US Energy Department, as the group’s benchmark oil prices exceeded $100 a barrel for the longest period ever. They are promising to plow record amounts into public and social programs after pro-democracy movements overthrew rulers in Tunisia, Egypt and Libya and spread to Yemen and Syria. (9/20, #12)
  • US and European sanctions on the Syrian energy programs have led to “uncertainty” for the production output there, Gulfsands Petroleum announced. (9/19, #9) (9/20, #16)
  • Oil will start flowing from the Falkland Islands’ offshore fields in 2016. The British-backed quest for oil in the islands’ waters has angered Argentina, which is pursuing its claim of sovereignty over the territories at the UN and regional forums in Latin America. (9/20, #19)
  • Liquefied natural gas prices are surging to a three-year high as demand from Japan, China and India outpaces supply increases, boosting sales for producers from BG Group Plc (BG/) to Exxon Mobil Corp (XOM). (9/19, #6) (9/22, #22, #23)
  • Bangladesh has raised the prices of petroleum products by 6.32-19.04% to cut the growing losses of the state-owned oil company. (9/19, #12)
  • China’s Goldwind Science and Technology Co. said that it will build a $200 million wind farm in Illinois. “As the largest and most competitive market in the world, the United States is a key component of Goldwind’s international growth,” Goldwind Chairman and CEO Wu Gang said. (9/19, #14)

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