1. Oil and the Global Economy
It was a volatile week with oil prices falling some $3.50 a barrel on Tuesday, recovering on Wednesday, and falling again on Friday. At week’s end NY oil ended down a couple of dollars for the week at $89.88 and London ended largely unchanged at $112.02. These moves widened the spread between NY and London oil to $22.14, the widest in almost a year largely due to increasing US production. Declining production from the North Sea suggests that the Brent benchmark may become less relevant as a gauge of global oil’s value in the future. Except for the refining situation in California, oil supplies in the US are adequate, with domestic production the highest in 16 years at 6.5 million b/d, weak demand of 18.3 million b/d, and crude stockpiles up 8.4 percent from last year.
The global economic situation remains largely unchanged with the US limping along with little real growth; the EU’s economies continuing to slow and facing several major sovereign debt issues; and China suffering from falling exports and a lower-than-usual growth rate. Large speculators are pulling out of oil contracts on the theory that the various new economic stimulus programs will not be enough and that the global economy will be demanding less oil in the months ahead.
US natural gas futures climbed to a new 2012 high of $3.55 per million BTUs last week on forecasts of colder weather across the northern US. By week’s end, however, these forecasts were moderated pushing prices back to close at $3.39. It is still too early for winter demand forecasts.
For now the global demand for oil seems to be in a rough balance. Increased production by the Saudis and its Gulf allies has offset the roughly one million b/d drop in Iranian exports occasioned by the sanctions. Increased US production and lower demand is slowly cutting US imports. While the fears of Middle Eastern disruptions continue, they are fading in importance as an Israeli strike on Iran does not appear as imminent as it did a few months ago. The longer term outlook, however, is not good as the Sunni-Shiite animosity stemming from the Syrian uprising continues to worsen and the ripples from Arab Spring make their way in to hereditary kingdoms of the Gulf States.
2. Middle East
Iran’s currency, the rial, collapsed last week as Iranians rushed to sell rials for dollars. The sudden decline set off a wave of unrest in Tehran not seen is several years as police tried to shut down black market money changers and force merchants to stay open in the face of uncertain currency values. The general assessment is that a combination of Western sanctions and government economic mismanagement was behind the collapse. The development heartened those that believe the sanctions program will eventually bring a change in Tehran’s nuclear policy. At one point even Iran’s President Ahmadinejad admitted that the West’s “hidden war” against Iran was having an effect.
By Friday prayers however, Iran’s clerics were expounding a message of defiance, assuring the faithful that the country would stand resolute and that things would get better soon. In the meantime, the average Iranian is beginning to suffer serious hardships as some foods are becoming too expensive for many families. In the midst of all this Tehran unveiled a new plan that would have the West lift all economic sanctions after which Iran might do some reassuring things with their stocks of uranium. Washington dismissed the plan as a non-starter.
Fighting in Syria continues unabated. Last week hostilities spread to the Turkish border where Syrian shelling of insurgent forces along the border struck a Turkish village killing five Turkish civilians. Ankara retaliated by shelling Syrian military bases and moving tanks to the border. Intermittent exchanges of mortar and artillery fire seem to be continuing, adding a new dimension to the uprising. In the meantime, Moscow remains steadfast in its support of the Assad government, warning other countries that whatever comes after Assad is likely to be far worse for regional stability.
The Eurozone’s troubles continued last week with manufacturing falling to the lowest levels in three years. A new business survey points to renewed recession with troubles now spreading from the peripheral European states to the core countries of the zone.
The sovereign debt troubles continue to deepen. Spain’s corporate tax collections have fallen to one-third of pre-crisis levels as small businesses fail and large companies flee the country. Pre-bailout maneuvering is now going on. Madrid, for now, remains reluctant to ask for a loan fearing the harsh conditions that central bankers will demand. Greece’s Prime Minister says that his country will collapse in two months unless more aid is received.
There are two sides to the growing EU economic problems from the perspective of oil consumption. The EU is already a very efficient consumer of oil and its economies have survived for years with motor fuel prices in the range of $6-10 a gallon. Europe’s oil consumption per capita is roughly half that of North America. The EU’s oil consumption has fallen by couple of million b/d in the last five years, so it is a good question as to whether additional economic slowdown will cut the EU’s oil demand much further. The second side is what a major recession in EU economic activity will do to the global economy and the demand for oil. We are already seeing a fall in China’s exports which these days is a fair indicator of the economic health of the world. Beijing is now looking at growth in the 6-7 percent range rather than the circa 10 percent it has registered in recent years. As exports slow, China’s demand for oil is also slowing although with one of the fastest economic growth rates in the world, its oil consumption will continue to grow.
4. US Gasoline Prices
Retail gasoline prices in California hit an all-time high on Sunday of $4.65 a gallon of regular, exceeding the 2008 high. Several factors contributed in the sudden increase in prices but the proximate cause was troubles at a southern California refinery that was out of production for most of the week, coupled with problems at other refineries that reduced output. California, of course, is isolated from the rest of the country and requires special gasoline blends in order to meet air quality requirements. Many major retailers such as COSTCO were forced to close their gasoline pumps as they could not acquire sufficient supplies. The problem is expected to be over this week as other large refineries have delayed maintenance and outages are expected to be repaired.
The California problems contributed to a 3 cent a gallon increase in the average retail price of regular in the US to $3.81 a gallon. This is nearly 40 cents a gallon higher than at this time last year. While the West Coast, Alaska, and Hawaii are over $4 a gallon so are New York and Connecticut in the east.
Analysts are starting to say that US gasoline consumers, like Europeans, are becoming used to high prices, have made whatever adjustments are necessary and are not expecting much in the way of repercussions in next month’s elections.
Quote of the week
“The assumptions we have been fed over the past few decades are up for reexamination. And it’s really important that we understand why this is happening, because if we don’t, I think scapegoats will be paraded in front of us. As economies fail to grow, we’ll be encouraged to think that this group over here or that country over there is keeping us from achieving our destiny.”
– Richard Heinberg, in a lecture to the University of South Australia
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- Pemex plans to drill six new exploratory wells at two sites in the deep waters of the Gulf of Mexico where it recently made its first big oil discoveries in thousands of meters of water. (10/6, #10)
- Uruguay’s government signed offshore exploration deals with four oil and gas companies that have committed to invest $1.65 billion over the next three years. The companies include the U.K.’s BP and BG Group, France’s Total, and Ireland’s Tullow Oil. They will join Uruguay’s state-owned energy company, Ancap, to explore in eight offshore blocks. (10/6, #12)
- China’s railways carried 1.44 billion people in the first three quarters of the year, up 4 percent from a year earlier. (10/6, #13)
- A group of energy giants comprised of BP, ExxonMobil, ConocoPhillips Co. and TransCanada have submitted a plan to transport Alaskan natural gas for export to Asia. The project, estimated to cost $45-65 billion, comprises of an 800-mile pipeline that would move North Slope gas to a port in south central Alaska where it would be liquefied for export. (10/5, #16) (10/6, #20)
- Oil companies operating in Iraqi Kurdistan are threatening to cut exports because of delayed payments from Baghdad, exposing the frailty of a “reconciliation” between the Kurds and the central government. (10/5, #10)
- The Kurdistan Regional Government is planning to build a 1 million b/d oil pipeline linking oil fields in the semi-autonomous region with the Turkish border where it will connect with a planned line on the Turkish side. (10/4, #12)
- The rapidly growing crude-oil flow out of North Dakota is breaking out of its transportation bottleneck thanks to an expanding railway network. The growing availability of the North Dakota crude is changing the US oil market and could help drive down the need for oil imports at refineries along the coasts. (10/5, #14)
- The land rush that drove thousands of roughnecks, drillers and leasing agents to North Dakota’s oilfields is cooling off, bringing down costs in the country’s most expensive energy basin. Service costs are falling as companies concentrate drilling in fewer locations, while equipment rentals are down after demand fell due to a nationwide glut of natural gas. (10/4, #20)
- Russia is considering allowing western companies to acquire oil licenses in its Arctic waters, a bold concession that would make the world’s second largest crude producer much more attractive to foreign investors. (10/5, #19)
- Canadian officials are under pressure to exact better terms from Beijing-controlled Cnooc Ltd. in exchange for approval of its proposed $15.1 billion takeover of Canadian energy firm Nexen, according to people with knowledge of the government review. (10/4, #24)
- A Chinese-owned firm in the US is suing President Obama after he blocked a wind farm deal on national security grounds. Ralls Corp, a private firm, acquired four wind farm projects near a US naval facility in Oregon earlier this year. The lawsuit alleges the US government overstepped its authority in blocking the deal. (10/3, #5)
- France’s Total projects a plateauing of global crude oil production at 95 million b/d by 2025-30, according to Michael Borrell, Total senior vice-president. (10/3, #7)
- Moscow and Beijing are still “not close” to reaching an agreement on conditions for bringing Russian gas to China, China’s former national energy administrator Zhang Guobao said. (10/3, #15)
- Russian energy company Gazprom announced it signed a long-term contract to deliver liquefied natural gas to India’s state-controlled GAIL Ltd. Gazprom will deliver 2.5 million tons of LNG per year to GAIL for the next 20 years. (10/3, #16)
- Venezuela and Russia have signed a new round of energy-cooperation deals, including an agreement to create a new joint venture between Venezuelan state oil firm PDVSA and Russia’s Rosneft. (10/1, #11)
- Masdar, the Abu Dhabi government-backed renewable energy firm, is looking into investing in neighboring Saudi Arabia for the first time.
- State-owned Kuwait Oil Tanker has deployed armed security squads on board its oil and product tanker fleet passing through pirate-infested regions. (10/2, #9)
- A Brazilian court has overturned a lower court ruling and allowed Transocean to continue operations in Brazil, except at the Frade oil field, the site of an oil spill last November. (10/2, #12)
- Turning air into liquid may offer a solution for storing energy. The Institution of Mechanical Engineers says liquid air can compete with batteries and hydrogen to store excess energy generated from renewables. Electricity generated by wind farms at night can be used to chill air to a cryogenic state at a distant location. When demand increases, the air can be warmed to drive a turbine. Engineers say the process to produce “right-time” electricity can achieve an efficiency of up to 70%. (10/2, #22)
- A Chinese shipyard has delivered the first of 12 supertankers to Iran, giving Tehran extra capacity to transport its oil to Asia, but it is unclear if the ship has the permits necessary to call at global ports. (10/1, #6)
- Nigeria plans to increase its share of offshore oil profits because of “prevailing realities” in the industry. The Petroleum Industry Bill, which was sent to Parliament in July, proposes boosting the government’s share to 73 percent from 61 percent. “The proposed increase of the governments take to 73 percent is not only competitive but considerate when we look other deals around the world” — citing Norway, Indonesia and Angola as examples. (10/1, #10)