1. Oil and the Global Economy
This week the oil markets have been dominated by the course of negotiations in Washington over the fiscal cliff. Prices surged on Wednesday following news that President Obama was returning from vacation in an attempt to revive the stalled negotiations. By Friday’s close NY oil prices were up about 2.4 percent for the week to settle at $90.80 with London oil settling at $110.62. The fiscal cliff negotiations continued over the weekend and it will probably be late Monday before we know the outcome which is likely to be a quick fix that will continue unemployment payments and prevent an across-the-board tax increase.
The weekly stocks report which was released on Friday showed a 600,000 barrel drop in crude inventories, but a 3.8 million barrel jump in gasoline inventories and a 2.4 million barrel jump in distillate stocks. Total US petroleum product consumption fell 5.5 percent last week to 18.9 million b/d, the biggest drop since August. Stockpiles at Cushing, Okla., the center of the mid-west oil glut, grew nearly 5 percent last week to 49.2 million barrels.
The fiscal cliff, which we are due to fall over on Tuesday unless there is some meaningful Congressional intervention, is only one of several possible “cliffs” which could do grave economic damage to the US economy. Among these are the debt ceiling which could put some of the US debt in default and the continuing budget resolution which is due to expire in March, once again leaving the country without a budget. Some observers believe the results of the November elections will simply harden the political gridlock in the next Congress and that there will be little progress in the immediate future.
Forecasters are saying that world benchmark Brent crude will likely trade above $100 a barrel in 2013 for the third straight year, unless there is a major economic downturn.
Natural gas futures, which have been trading in a narrow range since mid-December, climbed a little late last week on prospects for colder than normal temperatures in the Northeast and Mid-Atlantic states.
Of the numerous threats to stable or growing oil exports from the Middle East, the situation in Iraq seems to be moving to the top of the list. Baghdad’s Shiite rulers are engaged in a two-front dispute with its semiautonomous province of Kurdistan and with its indigenous Sunnis who say they are being persecuted by the Shiite majority now that US forces have pulled out. Either or both of these situations could easily get out of hand in the near future, damaging the plans for major increases in Iraqi oil production in the next few years.
Last week Exxon announced plans to begin drilling in the Kurdistan/Iraq disputed zone despite warnings from Baghdad that this move could result in civil war. During the week, the Kurds completely halted oil exports via Baghdad’s northern export pipeline. This has been and on and off arrangement under which Kurdistan’s revenues go to Baghdad which is supposed to forward them to the Kurds. Baghdad says the Kurds have not been shipping the required volumes of oil and has halted payment. Underlying this dispute are the 50 or so deals that the Kurds have made with foreign oil companies. Baghdad fears the Kurds will soon build their own pipeline to Turkey, allowing them to collect oil revenues directly from foreign buyers and eventually realize a long-held dream of breaking away from Iraq, while taking an estimated 40 billion barrels of oil that the rest of Iraq considers to be its oil with them.
A more serious problem, however, could turn out to be the growing discord between Iraq’s Shiites and Sunnis. Although the Sunnis are estimated to be about 35 percent of Iraq’s population they used to have total control of the country under the Hussein government and haven’t forgotten it. Most of the bombings and other violence taking place in Iraq these days is perpetrated by Sunni insurgents against Shiite security forces. Protests against the arrest of Iraq’s Sunni finance minister’s bodyguards have been taking place all week in Sunni- dominated cities. The protestors which sometimes have numbered in the thousands have begun to chant the words of Arab Spring: “The people want the downfall of the regime.”
The Sunnis say they will continue demonstrating until they are accorded their rights and unwarranted arrests of Shiites stop. The origins of this dispute, of course, go back about 1400 years so we can’t expect a resolution soon. The best estimate is that 80 to 90 percent of the world’s Muslims are Sunni leaving much room for outside support for the Iraqi Sunni cause.
As has been the case for many weeks now, the government’s position continues to deteriorate. Assad is said to be afraid to venture outdoors, his armed forces have little offensive capability, and the government continues to slaughter civilians by aerial bombardment and artillery fire in retaliation for rebel advances. Moscow has abandoned Assad, and the UN’s negotiator, Brahimi, says the country will descend into hell unless a solution is found soon. As those still loyal to Assad are literally fighting for their lives, this increasingly tragic situation could go on for weeks or months.
Speculation as to what a post-Assad Middle East might look like is rife; however, it is clear that Sunni-Shiite relations in the region have taken a major turn for the worse and Tehran is suffering a serious blow to its foreign policy aspirations. Should the hatreds that have arisen during the Syrian uprising feed over in to the Iraqi unrest, the region could easily go off on a new round of troubles.
4. Elsewhere in the Middle East
It was a relatively quiet week in the nuclear standoff. Tehran conducted yet another naval exercise in the Straits of Hormuz – largely to boost civilian moral which is suffering from the economic sanctions and to distract attention from Syria where 30 years of Iranian foreign policy is going down the tubes. The Sunni dominated Gulf Cooperation Council issued a statement calling on Iran to stop interference in Gulf Arab affairs. Tehran naturally rejected the statement calling it an irresponsible move that only heightened regional tensions.
The Egyptian Prime Minister signed the controversial new constitution amid protests by the opposition. The constitution was reported as gaining 64 percent of the vote which was only 33 percent of the registered voters. If these number are for real it would seem that only about 20 percent of the Egyptians actively support the measure suggesting that there may be more difficulties ahead.
Egypt’s next problem is its economy. With tourism down to a trickle, and foreign exchange nearly gone, the country is going to need a steady stream of loans to import the food and fuel it needs for its population. Last week two Egyptian cabinet ministers resigned in protest over unpopular austerity measures. While Egypt is not an oil exporter, its economic collapse would have serious repercussions across the region.
In a new development, security forces in the United Arab Emirates arrested a terrorist cell of Saudi militants who were planning attacks in the UAE and Saudi Arabia. Although it receives little attention, the UAE has arrested some 60 Islamists this year on suspicion of terrorist links.
Quotes of the week
“Representatives from The Association for the Study of Peak Oil and Gas USA met for two hours on December 17 with EIA Administrator Adam Sieminski and EIA staff to discuss concerns laid out in an October letter…” – Platts
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)
- India is considering a plan to phase in diesel and kerosene price hikes to help the government cut its fiscal deficit. This move could hurt the ruling Congress party’s chances in elections due in several states next year and a general election in 2014. (12/27, #13; 12/29, #12)
- US oil inventories shrank far less than analysts had expected, but the glut at the Cushing, Okla., hub continued to grow, setting a new record, according to data released Friday by the US Department of Energy. (12/29, #13)
- US crude imports fell 9.2 percent in October from a year earlier to 8.091 million b/d, the lowest amount of imported crude since January 2000. The data are the latest illustration of how the drilling boom in North Dakota and other states is remaking the U.S. energy picture. The year-over-year drop of 816,000 barrels a day was the eighth straight decline from year-earlier levels. (12/29, #14)
- The Army Corps of Engineers is tackling one of two significant problems presented in the drought-stricken Mississippi River. The Corps, aware that barge traffic could be disrupted as early as next week because of sharply lower water levels, can’t do anything about ice forming in northern portions of the river, impeding adequate water flow. But it is using contractors to remove rock formations in the river near Thebes, Illinois, to help maintain a 9-foot-deep channel for navigation. (12/29, #16)
- After a yearlong investigation by a team of climate scientists, the World Meteorological Organization, announced this fall that it was throwing out a reading of 136.4 degrees claimed by the city of Al Aziziyah on Sept. 13, 1922 – leaving Death Valley in California as the record holder. (12/29, #17)
- Europe risks losing new petrochemical investments to the US and other countries because of its reluctance to embrace shale gas, the head of the industry’s biggest company has warned. "Some European countries already made the decision not to go into shale gas, so naturally when they do that there will not be development," said Mohamed al-Mady, chief executive of Saudi Arabia’s Sabic. (12/27, #17)
- China began service on the world’s longest high-speed rail line, covering a distance in eight hours that is about equal to that from New York to Key West, Florida. Bullet trains traveling 300 kilometers an hour, or 186 miles an hour, began regular service between Beijing and Guangzhou, the main metropolis in southeastern China. Older trains still in service on a parallel rail line take 21 hours; Amtrak trains from New York to Miami, a shorter distance, still take nearly 30 hours. (12/26, #10)
- China has made key progress in finding and protecting mining resources in recent years, according to a recent report on land administration and mining resources. Some 5.01 billion tons of petroleum reserves, 2.6 trillion cubic meters of natural gas and 279.8 billion tons of coal were discovered between 2008 and 2011 in a large-scale geological survey. (12/25, #11)
- Energy companies that want Americans to embrace the use of inexpensive natural gas are beginning to lead by example. The three biggest providers of oil-field services in North America—Schlumberger, Halliburton, and Baker Hughes — are spending millions of dollars to retrofit pumps and drilling-rig engines to run on natural gas instead of diesel fuel. (12/26, #13)
- West Antarctica has warmed much more than scientists had thought over the last half century, new research suggests, an ominous finding given that the huge ice sheet there may be vulnerable to long-term collapse, with potentially drastic effects on sea levels. (12/24, #4)
- Venezuela will not call fresh elections if Hugo Chavez’s cancer prevents him from taking office by January 10, the head of Congress said, despite a constitutional mandate that the swearing-in take place on that date. (12/24, #10)
- The US drilling rig count decreased by another 11 units during the week ended Dec. 28, with the total number of rotary rigs reaching 1,763, Baker Hughes Inc. reported. This compares with 2,007 rigs working in the comparable week last year. (12/29, #18)