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Peak oil review - March 26

1. Oil and the Global Economy
The markets were nervous last week so that even dated news such as the Saudis pumping more oil or Iranian exports declining triggered sharp price movements. By week's end NY and London prices were down a dollar or so with NY closing at $106.87 and London at $125.13 after having touched a high of $127.06. Only NY gasoline futures continued climbing to new highs for this time of year and are now only some 20 cents a gallon short of all-time highs set in 2008.

With the Eurozone debt crisis out of the headlines for now, attention is focusing on the Iranian confrontation which was quieter than usual last week. Oil prices, however, fell on Thursday after the Saudis restated for the umpteenth time that they can raise their production to 12.5 million b/d, if needed, thereby offsetting any loss of Iranian exports. On Friday, oil prices rebounded on reports that Tehran's exports in February were down by at least 300,000 b/d from last fall.

Fears are rising that persistent high oil prices -- Brent crude has now been over $100 a barrel for more than a year -- will eventually lead to a new recession. Oil stockpiles, especially in the EU, are low and, even though Libyan oil is mostly back to normal, a series of smaller outages around the world now add up to 1.2 million b/d less output than would be expected. If prices remain high for the rest of the year, the cost of oil imports for the lead economies will grow to $1.5 trillion this year. The IEA estimates that the EU will spend $502 billion on oil imports this year as compared to $472 billion in 2011, which on an annual basis is well beyond 2008 when the world economy went into recession.

The US's natural gas glut is coming in for increased attention as record breaking temperatures have cut the demand for heating gas dramatically. With prices at record lows -- down 46 percent in the last 12 months -- major producers continue to curtail drilling just for gas. Rigs drilling for gas have fallen from 811 to 663 so far this year. The newest problem to arise is where to store the over-production. US natural gas storage facilities usually finish the winter at 30-40 percent of capacity after the heating season is over. This year it looks as if the facilities will close out the winter of 2011-2012 at close to 60 percent, raising the possibility that prices will either fall still lower later this year, or production will have to be curtailed.

In the short run, lower prices will drive electric power producers to consume more natural gas in place of coal. The longer term solutions such as increased exports of LNG or building of more natural gas vehicles will have to await the construction of liquefaction plants and distribution facilities.

2. The Iranian Confrontation
The bombast surrounding the confrontation was lower last week as attention turned to the ever tightening sanctions being applied to the Iranians. As Tehran is loath to admit that the sanctions are having an effect, as such an admission would hurt its bargaining position, most attention has been on just which countries are curtailing their imports of Iranian crude and by how much.

Tehran's exports are reported as having increased in January, but then fallen by around 300,000 b/d in February. Iranian oil production seems to be continuing apace as there are reports that the amount of oil going into Iran's floating storage is increasing. This, of course, reduces the number of Iranian flagged tankers available to export oil to other countries.

As the Iranians are having trouble paying for imports, a wide range of products that normally flow into Tehran are backed up due to exporters' inability to get paid for shipments. While the Iranians have long experience finding their way around sanctions, as the months go on this set of sanctions seems likely to have a serious impact on the Iranian economy and lifestyle. While the curtailment of oil exports is likely to be at least partially offset by higher prices, the inability to import vital goods such as medicines and foodstuffs will have an impact on a society which has become highly dependent on foreign imports.

Last week, the EU foreign ministers adopted detailed rules on how the ban on Iranian oil imports will be handled after July 1st. For now, most analysts believe that the oil embargo will eventually cut between 800,000 and 1 million b/d from Tehran's normal exports of 2.5 million b/d. Under a new US law, foreign nations have until June 28th to demonstrate that they have significantly cut back on Iranian crude imports or face having the banks handling Iranian crude transactions cut off from the US financial system. Washington announced last week that the EU and Japan are meeting the requirements of the law and expressed the hope that China, India, and South Korea would follow suit.

While publicly rejecting sanctions that are not approved by the UN, China has cut back significantly on its Iranian oil imports, perhaps out of fears of what could happen to their Middle Eastern imports should hostilities arise and a realization that Iranian intransigence is behind most of the trouble.

3. Gasoline and the US economy
The controversy between falling US motor fuel consumption and the "ongoing economic recovery" flared last week with the release of an EIA admission that they have been underestimating the size of US oil product exports and consequently overestimating the drop in US consumption this year. The problem has been that the weekly "consumption" number supplied by EIA measures the amount of gasoline and other petroleum products moved out of the refineries after which they may go either to export or to domestic consumers.

In 2010 US exports of gasoline and diesel began to increase sharply, leading to over-estimates by the EIA of the amount of motor fuel that was being consumed domestically. The numbers were eventually corrected from monthly export figures collected by the census bureau and the EIA adopted a new and more accurate methodology for its estimates of oil product exports in August 2011. The problem was that comparing 2012 consumption against inflated domestic consumption figures for the second half of late 2010 and the first half of 2011 resulted in calculations showing large drops of US gasoline consumption when measured year over year.

This did not sit well with many Wall Street analysts who continue to talk about an ongoing economic rebound at the same time the EIA was saying that motor fuel consumption in the US was down by circa 7 percent this year. The EIA points out that using the new methodology, US gasoline consumption in January 2012 should have been recorded as down by 4.3 percent rather than 7 percent or so in its weekly reports.

The other, and theoretically more accurate, way of looking at US gasoline consumption is MasterCard's Spending Pulse which compiles gasoline sales data from 140,000 US gasoline stations on a weekly basis. Interestingly, MasterCard reports that US gasoline consumption over the past four weeks was down 7.8 percent as compared to the same four weeks in 2011 suggesting that consumption is indeed falling despite the problems with the EIA data.

US consumer spending on gasoline consumption as compared to last year is not up all that much, as the drop in consumption is partially offset by the 30 cent a gallon price increase over the last 12 months. Last year at this time Americans were spending about $1.35 billion a day on gasoline. It is now about $1.36 billion a day. Informed observers predict that gasoline prices will peak this year somewhere between $4.05 and $4.24 a gallon -- unless the Middle Eastern situation, or possibly the East Coast refining situation, gets worse. Then we could see national averages approaching $5 a gallon. This would increase our collective daily gasoline bill to about $1.5 billion in the best case and $1.9 billion if things go really bad -- and we have not even gotten to the question of hostilities in the Gulf. If the prevalent conjecture that gasoline could go to $8 a gallon should the Straits of Hormuz ever be blocked, we would be left with a theoretical daily gas bill of $2.8 billion and a lot of economic damage. Our 8 million b/d of gasoline consumption would have plummeted long before prices reached the $8 level.

In recent days there have been numerous stories in the mainstream media expressing skepticism that more domestic oil drilling would help lower gas prices which emerge from many factors worldwide. Increases of a few hundred thousand b/d in US shale oil production are of minimal significance in a world where demand has been increasing at circa 1 million b/d each year and new production is just offsetting depletion. A few writers have tried to make the case that US gas prices, when corrected for inflation, are still way below those of 30-40 years ago, but generally ignore the idea that prices will likely go higher before the year is out.

Alarm bells are starting to sound about the dangers persistently high gasoline prices pose to a possible economic recovery. Last week the IEA and IMF weighed in with warnings focused on the fragile EU economies. In the US, the Wall Street Journal noted that "rising oil prices haven't stalled the US economic recovery...but that doesn't mean they won't."

Quote of the week
"There's not a good argument here for business as usual... We think of optimism as a virtue. It's a trait of people who don't give up, a better way of thinking. But optimistic means something else when you're talking about science. When a scientist decides that an estimate is optimistic, she's applying that label in relation to two other possibilities: pessimistic, and realistic. Optimism isn't the ideal here."
- from Maggie Koerth-Baker's new book, "Before the Lights Go Out"

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

  • Around 20 permanent jobs are expected to be tied to the planned Keystone XL oil pipeline, a study from Cornell University found. (3/21, #25)
  • Emirates, the biggest airline by international traffic, said more carriers will go bust this year as fuel costs and sluggish economies undermine profitability. (3/24, #6)
  • Italian oil and gas group Eni is still owed over $1 billion in oil by Iran and will be allowed to cash in the remainder because of its special status. (3/24, #12)
  • A LNG tanker hired by Morgan Stanley, the bank that ships the most commodities, is hauling a cargo about 14,500 miles from the U.S. to Japan, where the fuel fetches almost seven times more. (3/24, #21)
  • A temporary shake-up of Gulf of Mexico shipping patterns, drawing on a fleet of 43 giant oceangoing tug-propelled barges, could meet the shortage of gasoline and ultra low sulfur diesel expected in the US Northeast if a third Philadelphia-area refinery closes this summer. (3/24, #26)
  • Valero Energy Corp. said it will suspend operations at its Aruba refinery by the end of March because inadequate margins have resulted in financial losses. The move comes as the refining industry grapples with major shifts in fuel demand and in energy production that have wiped out the profitability of such former refining hubs as the U.S. East Coast and the Caribbean. (3/20, #13)
  • Canadian pipeline company TransCanada may be considering a $5.6 billion pipeline system to carry oil from Canada's western provinces to refineries in Ontario and possibly to eastern ports. (3/24, #31)
  • The White House announced plans to share the cost with the private sector to develop and license small modular nuclear reactors. The Obama administration said it was offering $450 million in a cost-sharing plan meant to support engineering, design, certification, and licensing for small modular reactors. (3/24, #35)
  • Petrol pumps have run dry and power cuts are blacking out the Gaza Strip because of a dispute over fuel supplies between Egypt and the enclave's Hamas Islamist rulers. (3/23, #6)
  • Argentina's Foreign Ministry has formally notified stock exchanges in London and New York that it will pursue administrative, civil and criminal charges against companies exploring for oil in waters surrounding the disputed Falkland Islands. (3/23, #9)
  • China is tightening the issuance of drivers' licenses by increasing the difficulty of the test and building a backtracking supervision system -- a bid to curb the increase in road accident-related fatalities. (3/23, #10)
  • A wind turbine capable of generating 6 megawatts of power, the world's most powerful, was installed off the Belgian coast. (3/23, #24)
  • China's manufacturing activity contracted in March, a preliminary HSBC survey showed, raising fears the global slowdown is harming its economy. (3/22, #9)
  • Oil giant Royal Dutch Shell signed a production-sharing contract with state-controlled China National Petroleum Corp. to explore, develop and produce shale gas in China. (3/22, #10)
  • India lost up to $210 billion in revenue by selling coal deposits too cheaply, according to a government auditor's draft report, renewing pressure on Prime Minister Singh, who is already reeling from corruption scandals. (3/22, #11)
  • BP, ExxonMobil and ConocoPhillips are in discussions about a $40bn project to export liquefied natural gas from Alaska to Asia, potentially opening up large but stranded reserves that currently have no route to market. (3/22, #18)
  • An energy company in the United Arab Emirates said it is developing a terminal to receive liquefied natural gas supplies on the country's eastern coast, bypassing the strategically sensitive Strait of Hormuz. (3/21, #13)
  • India has given the green light to the controversial Kudankulam nuclear power project in the southern state of Tamil Nadu. (3/21, #19)
  • Iran is pursuing a national policy of extracting crude oil from shared fields with Kuwait as part of an effort to expand overall production. (3/20, #7)
  • As Iraq prepares to showcase itself to the world next week with a highly anticipated gathering of Arab leaders, a string of suicide attacks and car bombings offered a bloody reminder that insurgent violence still wreaks havoc with the country's tenuous stability. (3/20, #8, #9)
  • Chinese patrols have uncovered more than 30 illegal platforms used for oil and gas exploration. A China Marine Surveillance patrol team recently finished its third mission targeted at the illegal exploration of oil and gas in the South China Sea.
  • China, the world's largest oil consumer after the US, increased gasoline and diesel prices for the second time in less than six weeks after crude gained last month the most in a year. (3/20, #16)
  • A combination of cheap financing, popular new models and rising consumer confidence is stoking pent-up demand and drawing customers back to the nation's auto showrooms. New-vehicle sales have surged at the start of 2012, outpacing forecasts and putting the nation's automobile industry on track for its best year since 2007. (3/23, #19)
  • American drivers are looking south of the border for an alternative to ease the pain at the pump. But there's growing concern that bargain-seekers could be putting their lives at risk, with the US State Department issuing travel alerts because of the dangers of encountering drug violence in Mexico. (3/20, #20)
  • As a stubborn recession made drivers wary of new purchases for several years, the average age of vehicles on the road in the United States stretched to a record 11.1 years in 2011. (3/20, #21)
  • The US Environmental Protection Agency has begun to approve registrations from companies to sell gasoline blended with 15% ethanol, a fuel known as E15. (3/20, #22)
  • The Alaska North Slope well that suffered a blow out last month has been plugged. Crews pumped cement into the well Sunday to seal it off. Repsol, the Spanish Company that owns the well, decided it was easier to abandon the well than get it working again. (3/20, #24)
  • Greece's international creditors see "significant risks" that the country might fail to bring down its debt burden within targets, meaning it would require more rescue loans. (3/20, #26)
  • The world's top oil and gas producer may be watching its energy riches blow away in the wind. Russia, in 2008, was wasting enough energy to power Britain for a whole year. It was then that President Dmitry Medvedev set a target to reduce energy intensity, a rate of waste measure, by 40 percent by 2020. (3/20, #27)
  • Private resources companies will soon be allowed access to Russia's vast Arctic oil and gasfields, and the country's tax system will be changed to promote growth in the sector, according to the chief executive of Lukoil, (3/19, #20)

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