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Peak oil review - October 10

1. Oil and the Global Economy
After falling to one-year lows below $75 a barrel on Tuesday, oil prices rebounded by $6 a barrel on Wednesday on optimism that the EU ministers would find a way out of the ongoing financial crisis. NY oil futures closed at $82.98 a barrel and London’s Brent closed at $105.70 after briefly falling below $100 a barrel on Tuesday.

Despite the widespread pessimism about what renewed recession in the US and EU economies would do to the demand for oil, the underlying fundamentals of the oil market for now remain “exceptionally” tight. The rebound from last Tuesday’s lows was the biggest two-day gain for oil prices in seven months, and came even as Fed Chairman Bernanke was warning that the US economy was “close to faltering.”

On Saturday the Saudi Oil Minister announced that Aramco had reduced its oil production to 9.4 million b/d in September from the 9.6-9.8 million b/d maintained in June, July and August. Although this cut in production may eventually be made up from renewed Libyan exports, for the near future it is yet another reason why oil prices should hold above $100 a barrel despite concerns of a renewed recession.

Among those arguing for continued high oil prices is Goldman Sachs which notes that seasonally adjusted global supply demand remains in deficit and that crude inventories outside of the US are down to the lowest in nine years. This view was reinforced by an unexpected decline of 4.7 million barrels in US crude inventories the week before last. Goldman Sachs believes that while the Saudis produced 9.8 million b/d this summer, effective OPEC spare capacity was down to less than 1 million b/d. Although there is much talk concerning the resumption of Libyan production, only insignificant amounts are as yet being exported. Goldman’s analysts also note that much of the increase in global “oil” production is made up of natural gas liquids, not the more versatile crude.

The Financial Times notes that the demand for physical oil remains unusually strong despite the concerns engulfing the futures markets. Backwardation, a situation where the price of oil for near-term delivery is higher than for more distant deliveries, has surged to the strongest in recent years. The Saudis recently raised to record levels the premium it charges for deliveries to Asia adding to the evidence for a tight market.

Demand for oil in the fourth quarter normally increases as the winter heating season arrives. The IEA is only expecting an increase in demand over the next 3 months of 400,000 b/d, down from the 700,000 b/d increase seen in 2009 and 2010.

2. The EU’s financial crisis
For the past 18 months Europe’s sovereign debt crisis has dominated the headlines. It is becoming obvious that the Greek economy and political system cannot muster the strength to pay off the debt, mostly to European banks, that has accumulated in recent years and that default is inevitable. While the big European banks and their bondholders may be able to handle a default by Greece, waiting in the wings are the economies of Italy and Spain that many believe will shortly follow Greece into default.

Many hold that there is simply not enough money in Europe to bail out the EU banks from defaults by Spain and Italy so the problem is likely to be transferred to European governments. Last week a major Belgian-French Bank, Dexia, ran into troubles and was taken over by Paris and Brussels, thereby setting the precedent that government will bail out failing European banks.

If Greece defaults, private investors will likely flee from Italy, Spain, Ireland and Portugal leaving more German and French banks in a lot of trouble. The problem only gets worse when we learn that Wall Street has loaned Eurozone banks roughly $2.7 trillion. Over $1 trillion of this has gone to the German and French Banks that face collapse if Spain and Italy default. Wall Street’s loans to the EU are likely covered by credit default swaps meaning that some group of financial institutions is ultimately on the hook to pay for all those losses which are likely in the trillions.

The European problem becomes still worse when we consider that the EU is showing signs of falling into recession. Greece, Ireland, Portugal, and Spain are already there due to all the austerity measures that have been required of them. As they are no longer exporting as much to the countries in recession, the French and German economies are being dragged down.

The implications of this potential trouble ranges from serious to devastating even if only a fraction of the looming dangers should come to pass in the next few years. The oil markets are reacting violently to every scrap of news emanating from the nearly continuous ministerial meetings that are taking place across Europe. To many observers, the various schemes that have been announced in the last week for central banks and the IMF to buy bonds, make loans, and print money are simply too little, too late in avoid the inevitable -- the key remaining question is how bad the situation gets.

While renewed recession in the EU and US would cut global oil demand, a collapse of large parts of the financial system would create untold havoc. There are already complaints that the economic troubles in Europe have reduced the amount of money available to drill for more oil. Given that global oil depletion requires constant investment in new production facilities, a long-term reduction in available financing will eventually lead to faster oil depletion.

3. The Middle East
The final attack on Sirt is underway, where the remnants of Gadhafi’s supporters are holding out to the last rather than facing trial or the wrath of the insurgents. More ominous for swift resumption of Libyan oil exports are reports of increasing disagreements among the various insurgent groups as to the form a new Libyan government would take. With nearly everyone in in Libya now heavily armed from the vast munitions stores captured from the Gadhafi regime, the outlook for resumption of the 1.3 million b/d of high quality crude exports seems uncertain at best.

The Syrian situation which has the potential of morphing into all sorts of Middle Eastern turmoil continues to fester as crowds of protestors are still being dispersed with lethal force. Last week the Beijing and Moscow vetoed a mild UN resolution condemning the Syrian government, likely fearing that any UN action was a step toward NATO airstrikes on Assad’s forces. Damascus seems to be having trouble exporting its oil in face of various embargos -- a problem that could eventually force the government from power. The Saudis, Kuwait, and Bahrain have turned against the Assad government while Iraq, likely at the urging of Tehran, is supporting the regime with financial assistance. Such are the Byzantine politics of the Middle East today.

The big news of the week came from Saudi Arabia where anti-government riots broke out in a Shiite village in the oil-rich eastern province. The government blamed Iran and promised to crack down on dissent with an “iron fist.” Shiites constitute only about 15 percent of the Saudi population but comprise more than 75 percent in some of the more sensitive oil producing areas. As the Saudi government is a long-time master of the carrot and stick in keeping dissent under control not much is expected from the incident for the immediate future except increasing tension with Tehran.

The most important news of the week came in a series of announcements on Saturday. The CEO of Saudi Aramco said that the country was unlikely to expand its capacity to produce oil to 15 million b/d given that expected increases from Iraq and Brazil would be enough to fulfill demand. Aramco, however, remains committed to spending $125 billion over the next five years to maintaining production and increasing refining capacity despite the global slowdown.

The announcement by Saudi oil minister Ali Naimi on Saturday that there was no excess capacity in world oil markets and that Riyadh had unilaterally cut back production in September by 400,000 b/d came as a surprise. Recent wire service surveys were crediting the Saudis with 9.8 million b/d last month. This cutback simply adds more uncertainty over the course of oil prices over the coming months.

The recent fall in oil prices, which had the OPEC receiving less than $100 a barrel, set off a wave of concern among over-extended oil exporting governments. Oil production in Iran and Venezuela which continues to slip is leading these governments to demand production cutbacks by the Gulf States. We may be entering a period where formal OPEC quotas play less of a role and where the Saudis and their Gulf allies regulate production in camera.

To top off the week, a pipeline bombing in Iraq temporally cut oil production by about 700,000 b/d. Although the damage is expected to be repaired quickly without affecting exports, the incident again raises questions as to just how much oil the country can keep producing after US forces leave.

4. The sands of Alberta
The future of increased production from Alberta’s tar sands is raising passions and rhetoric in the US and Europe. The very-expensive-to-produce, and at least for now dirty-to-produce, tar sands oil seems to be approaching a turning point. The EU Commission is preparing to declare oil extracted from the sands as 25 percent dirtier than conventional oil production thereby discouraging its use in Europe which is more concerned about global warming than most. The Canadian government responded to this threat by saying it was unfair to stigmatize Alberta’s heavy oil when equally dirty-to-produce oil from other countries was not mentioned.

The second major issue facing the expansion of Alberta’s oil production is the approval of the Keystone pipeline expansion to the Gulf of Mexico. The Obama administration seems to have transferred authority to sign off on the project to the US State Department which says it has no problems with the project, raising all sorts of concerns among environmentalists.

While the oil industry and its allies have released a barrage of propaganda advocating for quick approval of this “essential” project, the environmental movement in equally strident in its opposition. Environmentalists see approval of the Keystone pipeline expansion as symbolic of whether or not the world is ready to confront global warming. In the words of NASA’s Jim Hansen, if we torch the tar sands, it is “essentially game over for the climate.”

Quote of the week
“In the old days, Saudi Arabia had plenty of spare capacity and could always flood the market with extra oil if supplies got pinched. But that's no longer the case. Global demand is growing too quickly, and the Saudis are running out of spare capacity. Nor will new, unconventional sources alleviate the problem entirely… However you want to define peak oil, it looks like we’re in for an uncomfortable ride.”
-- Brad Plumer, Washington Post

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

  • The head of the world's biggest food company Nestle said that rising food prices have created conditions "similar" to 2008 when hunger riots took place in many countries. (10/8, #8)
  • Low water levels at some of Chile's reservoirs, which fuel hydroelectric generation, are worrisome, Energy Minister Rodrigo Alvarez said. (10/8, #11)
  • China will reduce retail prices for gasoline and diesel by 300 yuan (about 47 US. dollars) per ton starting Oct. 9, the country's top economic planner said. The decrease marks the first fuel price reduction since June 1, 2010. (10/8, #12)
  • The US EPA proposed easing new pollution restrictions that angered several states and infuriated GOP presidential contender Texas Gov. Rick Perry. The proposed fix to the cross-state pollution rule would allow 10 states, especially Texas, to emit more smog-causing pollution than had initially been permitted. (10/8, #14)
  • In a major victory for the coal industry operating in the Appalachian region, a US district judge ruled that environmental officials overstepped their authority by subjecting mountaintop-removal mining operations to more stringent permit reviews. (10/8, #20)
  • The pressure is on in the US heating oil market as physical and futures prices climb amid tightness in supply that is being punctuated by the possible loss of some 690,000 b/d of US Atlantic Coast refining capacity. " (10/8, #21)
  • US crude oil and natural gas drilling rig activity this week jumped 22 units to reach a total of 2,012, the first time the count was above 2,000 since the week ended Sept. 19, 2008, when the count was 2,018. (10/8, #22)
  • Oil production in Syria by Gulfsands Petroleum is down nearly 20,000 barrels per day at the request of the government. Gulfsands Petroleum said it was ordered by the Syrian Oil Ministry in September to reduce production because of the reduced availability of crude storage capacity in the country. (10/7, #9)
  • Venezuelan President Chavez proposed creating a new oil exporters group parallel to OPEC that would include only the "giants" of global petroleum producers. (10/7, #15)
  • Uruguay is set to become a major exporter of natural gas after assessments indicated it has potentially commercially viable gas deposits on its territory. (10/7, #16)
  • Rising Chinese labor costs are changing the economics of global manufacturing and could contribute to the creation of 3m jobs in the US by 2020. (10/7, #17)
  • China's greenhouse gas emissions are expected to rise higher than expected, even though the country is on course to meet or even surpass pledges made at the Cancun, Mexico, climate summit last year, a new study indicates. (10/7, #20)
  • The EU won a preliminary victory for its plan to charge the world's biggest airlines for their greenhouse gas emissions even as international opposition to the plan grew fiercer and support among European countries weakened. (10/7, #26)
  • A new type of solar energy power plant that keeps working at night was inaugurated in Spain this week by its Spanish and Abu Dhabi backers. (10/7, #31)
  • Violent protests, demonstrations and strikes against power cuts continued into a third day in Punjab as the energy crisis is aggravating the country. (10/4, #11), (10/6, #10)
  • For the past week, Venezuela has experienced shortages of fuel supplies. (10/6, #12)
  • The International Islamic Trade Finance Corporation, the lending arm of Islamic Development Bank Group, has provided a $250 million loan to state-owned Bangladesh Petroleum -- in addition to a previously-committed $1.2 billion facility -- to help the cash-strapped company pay its oil import bills. (10/6, #17)
  • The average selling price for a range of crude oil grades produced by OPEC dipped below $100 a barrel for the first time since February. (10/5, #10)
  • China has proposed stricter standards for determining its air pollution index. (10/5, #13)
  • Ozone loss over the Arctic this year was so severe that for the first time it could be called an ozone hole" like the Antarctic on. (10/3, #6)
  • China's southern and central regions, which depend heavily on hydropower, will face a power supply squeeze this winter due to low water storage and strong demand growth. (10/3, #11)
  • Beijing has called on Burma to protect the rights of Chinese companies after construction was halted on the $3.6 billion Myitsone dam, in a rare example of public disagreement between the two neighbors and close allies. (10/3, #12)
  • Escalating investment in geothermal power could result in a 134% increase in global geothermal capacity between 2010 and 2020, from 10.7 gigawatts (GW) to 25.1 GW, under a high-growth forecast scenario, according to a report by Pike Research. (10/3, #24)
  • Spending on fossil fuel subsidies jumped significantly in 2010 compared with the previous year due to higher commodity prices. Spending on fossil fuel subsidies reached $409 billion in 2010, up $110 billion on the prior year. (10/4, #4)
  • Saudi Arabia, the world's largest oil exporter, may be forced to tap its reserves to fund spending programs as oil revenue drops below the kingdom's breakeven budget price. King Abdullah announced a $130 billion plan to create jobs and build homes after uprisings toppled leaders in Tunisia, Egypt and Libya. (10/4, #9)
  • Iraq's crude oil outputhit 2.9 million b/d, the highest level achieved since the US led war against Iraq in 2003. (10/4, #10)
  • The Obama administration said it was moving forward with oil-drilling leases off the coast of Alaska issued by the Bush administration in 2008, a victory for oil companies in the battle over Arctic Ocean drilling. (10/4, #17)
  • Asian energy companies facing a boom in fuel demand in their home markets are looking to buy old US refineries to dismantle and ship overseas. (10/4, #18)
  • Enbridge said it will spend C$120 million on two pipeline projects to expand the eastward flow of crude oil from producers in western Canada. (10/4, #21)
  • A rare earth project nestled into a mountain ridge on Alaska's Prince of Wales Island may unlock a mother lode of resources, bringing needed jobs and opportunity to the state and offering a secure supply of the strategic metals for the high-tech sector. (10/4, #22)
  • Russian oil production increased by 1.23% in the first three quarters of this year to 381 million metric tons, and exports shrank by 2.13% to 18 million tons, the Energy Ministry said. (10/4, #25)
  • The official launch of the Nord Stream pipeline designed to carry Russian natural gas to the European market is set for November 8. (10/4, #26)

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