Peak oil review – January 30

1. Oil and the Global Economy
Crude prices changed little last week as the various forces moving the markets seemed to balance each other out. New York oil closed on Friday at $96.65 and London at $111.52. In contrast with the oil markets, gasoline futures and natural gas underwent substantial moves. Gasoline futures in New York closed 15 cents a gallon higher as reports of multiple refinery closures and production problems at others in the US and Europe raised concerns over the availability of gasoline in coming months.

Natural gas futures, which had been trading above $4 per million BTUs in November, fell to below $2.30 per million last Monday as warm weather and over-production in the US continued. After Chesapeake Energy and other producers announced that they were making substantial cuts in their drilling programs in the coming year, futures rebounded sharply, closing out the week at $2.67 per million.

The now familiar crises of the Iranian confrontation, the EU’s sovereign debt, employment, interest rates, economic growth and the Syrian uprising continued to make news, pulling the markets one way and then the other. In addition to the world’s multiple mega-crises, numerous smaller situations that will impact the availability of oil continued to fester. Bombs continued to go off amid increasingly unstable political and social situations in Iraq and Nigeria suggesting to some observers that civil wars in one or both of these countries might not be far away. South Sudan shut-in some 350,000 b/d of oil production claiming that Sudan was stealing its oil as it was being exported to customers. Although Libyan oil is reported to be back to 80 percent of pre-uprising production, the political situation is still highly unstable with clashes between various militia groups starting to occur.

In the US, “Election 2012” moved ahead with President Obama devoting a substantial portion of this year’s State of the Union address to energy policy and his various political opponents denouncing his positions. With higher, and possibly much higher, gasoline prices in store for the next few months, energy policy could easily come to dominate the political discourse this year.

2. The Iranian Confrontation
Developments came rapidly last week with the European Union formally establishing a phased embargo on Iranian oil imports starting on July 1st — new contracts with Tehran are banned already. Various other economic sanctions imposed by the UN, US and EU already are starting to have an effect, with the value of Iran’s currency dropping precipitously. For the first time, senior Iranian officials have moved beyond bravado to admit to their people that the sanctions are hurting the economy.

Tehran’s response to the EU’s announcement has taken two tracks. One was to call for renewed negotiations over its nuclear program and an IAEA team is now in Tehran to explore whether the Iranians are genuinely seeking a solution to the crisis or, as many believe, are simply seeking to buy more time to develop nuclear weapons.

The second and more risky track for Tehran was the announcement that it could halt oil sales to Europe as early as this week, thereby preempting the EU’s embargo and depriving Italy, Greece, and Spain of five months’ time to line up other sources of oil. Over the weekend mixed signals came from senior Iranian officials. While debate on a bill to halt oil sales to the EU was postponed, a senior Iranian official said oil exports to the EU would be “stopped soon.” Another official warned that the IEA inspection team had better act “professionally” or suffer the consequences.

Should the negotiation track fail once again, the situation gets murkier. The Iranians are saying that stopping the 600,000 b/d that it currently sells to Europe will drive world oil prices to $150 a barrel and thereby do more harm to the EU’s economies than to Iran as Tehran will benefit from the price increase. However, Libyan oil production is recovering nicely and Saudi production is at a recent high, so that the loss of Iran’s exports may not hurt the EU as much as Tehran portrays. Whether Tehran would be able sell the 600,000 b/d to Asia, possibly at cut rate prices, or be forced to load them onto floating storage for a while remains open. Should Beijing be tempted to fill its strategic reserve cheaply with Iranian oil while the rest of the world suffers from high oil prices is an open question. It is clear that China does not want to become dependent on Iran as its major source of Middle Eastern oil and has much to lose from this confrontation.

There are numerous sub-plots to the embargo story. Some of the oil Iran ships to Europe is coming in repayment for investments that Italy, which is still owed $1.5 billion, has made in Iran. Tehran is threatening to cancel these contracts. It also seems that 95 percent of the world’s oil shipments are insured by EU companies and insurance pools subject to the sanctions. Without proper insurance many tanker owners and destination ports would be reluctant to accept Iranian oil shipments.

Although a handful of Iranian politicians continue to talk about closing the Straits of Hormuz in retaliation for the EU’s embargo, the realization that Iran would be a clear loser in any military confrontation with the West is reducing such talk. The situation remains volatile but for now the ball is in Tehran’s court. The solution to the problem most frequently mentioned is to allow the Iranians to develop their nuclear technology under strict supervision to the point where they could in theory quickly build and deploy nuclear weapons without actually doing so. Whether this solution would be acceptable to those countries who would feel most threatened by a nuclear armed Iran remains to be seen.

3. The Euro Crisis
The interminable sovereign debt crisis continues to muddle along with endless talks and new “agreements” surfacing almost daily. On Sunday yet another agreement on conditions for the next Greek bailout of $170 billion was said to have been reached. As usual, this agreement forgives a large part of Greece’s current debt, said to be as much as 70 percent, and sets strict standards for how the Greeks are to manage their fiscal affairs in the future. This time, however, there are said to be automatic penalties should Athens fail to meet its obligations. As the Greeks have a rather bad track record in meeting EU fiscal standards, there is talk that an EU commissioner, with veto power over Greek budgetary decisions will be stationed in Athens for as long as needed. On Sunday, Germany’s economics minister openly endorsed the proposal for Athens to surrender control over its national budget. A German official said the statement was aimed at other EU members struggling to gain political control over their budgets as well.

Whether the Greeks are willing to accept such a surrender of their national sovereignty to remain in the EU is an open question, as is whether the rest of the EU is willing to sign off on the new agreement and hand over yet another bailout to the Greeks. Many observers are skeptical that the new proposal will be ratified. They believe that the only solution is for Greece to be cut loose from the Eurozone while efforts are made to protect the remaining members.

4. Refining petroleum
There were a number of developments in the last few weeks that contributed to the 8 cent a gallon jump in gasoline futures on Friday. At one point during the day gasoline was trading at a five-month high of $2.96 a gallon after it was announced that Conoco was having troubles at its 238,000 b/d Bayway refinery in New Jersey. This news came after Hess Energy announced that it was considering shutting down another New Jersey refinery for maintenance. In recent months announcements have been made that five large refineries serving the US East Coast were shutting down this spring unless buyers could be found. This comes on top of the closing of two other East Coast refineries in recent years.

As in the US, European refiners are coping with overcapacity, weak demand, and tight credit. Two weeks ago Petroplus announced that it was going into bankruptcy and would shut its five refineries located in the UK, Belgium, France, Germany, and Switzerland. Three of those have already been shut down and the outlook for another is precarious. The prospects for EU refining in the wake of the Iranian oil embargo is also raising concerns. The fear is that Iran will dump its oil production on Asian refiners at cut-rate prices, where it will be refined and shipped back to Europe in a position to undercut local refiners.

The Eastern US has long benefited from refining overcapacity in Europe as refiners there could profitably ship to the US gasoline that they were unable to dispose of locally. Any reduction in EU refining capacity is likely to be felt in the form of higher prices along the US’s eastern seaboard.

The outlook already is for higher prices along the East Coast. While retail prices have not kept up with the recent gasoline price increases in the futures markets – up by over 40 cents a gallon in the last six weeks as compared to a 15 cent increase at the pump – it is only a matter of time. Gasoline prices in relatively high-tax New York and Connecticut are now only 2 cents a gallon below those in California, the traditional price leader in the lower 48. Gasoline prices in the Washington DC area, where the political impact is likely to be the greatest, are not far behind.

Given that it is only January and that we still have four or five months of traditional spring price increases to go before the 2012 peak is reached, this year is giving every indication of shaping up to be a record breaker for gasoline prices. Given that it is a presidential election year, and considering what we saw in Washington during the 2008 gasoline price spike, we can expect the political theater, histrionics, and finger pointing to begin any day now.

Quote of the week
“The approaches needed for tackling the economic impacts of resource scarcity and climate change are the same: moving away from a dependence on fossil-fuel energy sources. Whereas the implications of climate change have driven only slow policy responses, economic consequences tend to drive shorter-term action.”
— James Murray and David King

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

• The International Monetary Fund sharply cut its forecasts for global economic growth, warning about multiple challenges as financial stability is in danger, growth prospects have dimmed, and downside risks have escalated. (1/25, #4)
• The IMF also said the oil-related sanctions imposed on Iran could add at least 20 percent to market prices for crude oil. (1/27, #5)
• Chesapeake Energy, one of the oil and gas producers at the origin of the U.S. natural-gas supply glut, said it will reduce drilling activity this year amid tumbling prices for natural gas. (1/24, #19)
• U.S. energy officials have cut their natural-gas-resource estimates, saying there is far less gas in a region known as the Marcellus Shale than previously thought. (1/24, #3)
• The EIA expects offshore production in the Gulf of Mexico, not onshore shale plays, to be the main driver of growth in US crude output to 6.7-6.8 million b/d by 2020. (1/28, #22)
• ConocoPhillips and China National Offshore Oil Corp. have agreed to pay 1 billion Chinese yuan, or around $159 million, to settle compensation claims resulting from oil spills in Bohai Bay off northeastern China. (1/25, #17)
• Since the US military withdrew from Iraq in the middle of last month, 434 Iraqis have been killed in attacks across the country, one of the highest tolls for that amount of time in the past few years. (1/28, #10)
• Iraq is facing worsening water shortages caused by the failure of successive postwar governments to ensure supplies and extensive dam-building in neighboring states that could trigger sectarian conflict. (1/28, #11)
• South Sudan will press ahead with its shutdown of oil production after negotiations with Sudan ended without agreement. (1/28, #17)
• South Sudan and Kenya signed a memorandum of understanding to build an oil pipeline to the Kenyan port of Lamu. The need for a new pipeline has taken on added urgency since the South Sudan production shutdown began on Jan. 22. (1/25, #13)
• Enterprise Product Partners said it is “looking at” June 1 as the date to begin pumping crude on the reversed Seaway crude pipeline. The reversed line is to ship 150,000 b/d of crude from Cushing, Oklahoma, to Enterprise’s ECHO terminal in Houston and with modifications the line could ship up to 400,000 b/d in early 2013. (1/28, #23)
• The first of hundreds of employees have been laid off from a Philadelphia-area oil refinery that hasn’t found a buyer after four months on the market. ConocoPhillips laid off two shifts of workers at its Trainer, Delaware County facility on Thursday. The remainder of the 385-employee workforce is expected to be laid off soon. (1/28, #24)
• Environmentalists who scuttled development of a coal-export terminal in Washington state last year are back at it in Oregon, trying to keep two ports from becoming transit points for coal shipped to the Far East. But while many local residents share the activists’ concerns about pollution, the projects’ promise of jobs also resonates widely. (1/28, #26)
• Russia has set a new record on volumes of fuel drawn from underground reservoirs in the face of increasing winter demand by domestic and European customers. Draws on underground natural gas reserves inside Russia totaled 565 billion cubic meters on Wednesday – topping a previous 553 billion cubic meters single day record set in January 2011. (1/28, #31)
• OPEC will increase shipments through the middle of February as winter demand in the northern hemisphere reaches its peak, according to tanker-tracker Oil Movements. OPEC will ship 23.51 million barrels a day in the four weeks to Feb. 11, 1.3% more than the 23.2 million transported in the period to Jan. 14. (1/27, #4)
• Pakistan and India made considerable progress in talks over a multibillion-dollar gas pipeline planned from nearby Turkmenistan. Pakistani and Indian officials met in New Delhi to discuss prospects for the $7.6 billion Turkmenistan-Afghanistan-Pakistan-India natural gas pipeline. (1/25, #11) (1/27, #21)
• Kuwait chose Total as the third partner to build a $9 billion oil refinery in China, as the Gulf state seeks a foothold in Asia’s biggest consumer of refined products. (1/26, #13)
• Two major oil companies in Libya say they expect to restore their pre-war production levels by the end of the month, just in time to help pick up the slack for energy-hungry Europe if Persian Gulf crude supplies are cut off. But the security situation in the North African state five months after the overthrow and death of longtime dictator Moammar Gadhafi remains as precarious as it is in the gulf. That could adversely affect oil production. (1/26, #16)
• n Nigeria, the union of electricity workers have given the government up to February 8 to address their grievances or the sector would be shut down without notice. (1/26, #17)
• Nigeria’s central bank told a parliamentary committee that subsidy payments for imported fuel totaled $11 billion, as gasoline consumption in the OPEC member country had jumped by more than 100 percent over the past five years. (1/25, #15)
• Argentina’s president has condemned the UK prime minister’s claim last week that her government takes a colonialist attitude to the Falklands Islands. (1/26, #18)
• The drought sweeping swathes of South America’s prime farmland is really starting to bite in Argentina now as farmers count the cost of irrevocably lost crops. (1/24, #16)
• China’s apparent oil demand in December rose 0.7 percent year on year to 41.02 million metric tons, or an average 9.69 million b/d, reaching new records despite slowing growth. (1/26, #19)
• China is rapidly becoming a country on wheels and its crowded driving schools are racing to churn out licensed drivers as fast as cars roll off the assembly lines. But judging by the daily smash-ups and blatant disregard for even basic traffic rules on China’s roadways, quantity seems to have trumped quality at many schools. (1/26, #20)
• The Japanese government’s worst-case scenario at the height of the nuclear crisis last year warned that tens of millions of people, including residents of Tokyo, might be forced to leave their homes, according to a report. Fearing widespread panic, officials kept the report secret. (1/26, #21)
• North Dakota’s economy outpaced every other state in 2011, with the fastest growth in personal income, jobs and home prices. Yet the oil boom fueling the nation’s lowest unemployment rate also has a dark side. It’s pushing rural North Dakota’s housing, electric, water, police and emergency services to the breaking point. (1/26, #26)
• Enbridge’s controversial plan to build a pipeline to the Pacific Coast from oil-rich Alberta requires the consent of aboriginal bands, some of whom staunchly oppose the project. (1/26, #30)
• India is producing power from solar cells more cheaply than by burning diesel for the first time, spurring billionaire Sunil Mittal to jettison the fuel in favor of photovoltaic panels. (1/26, #35)
• India is likely to miss its electrical power capacity addition target for the five-year plan that ends this year, a government official said. (1/25, #18)
• Gazprom plans to drill 10 wells in Bangladesh in collaboration with a state-owned company. (1/24, #18)
• An unexpected renaissance in US energy production derailed Cheniere Energy’s debt-fueled ambitions to become a big importer of liquefied natural gas. Now, if it can stay ahead of its creditors, the money-losing company is aiming instead to be the nation’s first large LNG exporter. (1/23, #19)