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Peak oil review - Apr 8

1.Oil and the global economy

Oil prices underwent their biggest weekly drop in six months last week as US employment numbers came in far worse than analysts had expected, US crude inventories increased to a 22-year high, and the EU’s unemployment rate rose to a record. At week’s end Brent crude was down to $104.12, the lowest in eight months, after having traded close to $112 on Tuesday. NY crude closed at $92.70; the 4.7 percent loss for the week was the biggest weekly loss since last September. The Brent-WTI spread continues to narrow and is now below $12 a barrel. So far this year, Brent crude has fallen 6.3 percent while WTI has increased 1 percent.

Some observers believe the selloff, which has been based on macro economic news, rather than oil fundamentals, has been overdone. Goldman Sachs notes that Brent averaged $112.64 in the first quarter and is sticking to its forecast of $110 for the second quarter.

US gasoline futures fell precipitously early last week but stabilized on Thursday and Friday. Gasoline futures are now down nearly 45 cents a gallon since mid-February while retail prices are down about 27 cents to a current national average of $3.60 a gallon for regular. Much of the gasoline price increase in recent months was due to refinery problems, which are on their way to being solved, and a surge in export demand for US gasoline products. Some analysts are expecting lower gasoline prices this summer as demand is tepid and vehicle efficiency continues to grow slowly.

Natural gas prices which had been falling slowly for about a week reversed on Friday and shot up 18 cents per million BTUs to close at $4.12 after the EIA reported that underground storage had fallen by a larger-than-expected 94 billion cubic feet. US stockpiles are now 2.1 percent below average for this time of year as colder temperatures continue later than normal. Natural gas stocks have been above average since September 2011.

With natural gas production holding steady, and demand growing, analysts are raising their price forecasts. Goldman’s expects prices to average $4.50 per million in the second half. However, power company demand for natural gas is dropping at these price levels and a major warming period is likely only days away.

A survey taken last week showed OPEC’s March production slipping to the lowest since October 2011, partially because of oil theft in Nigeria. The survey puts OPEC production down to 30.22 million b/d from 30.46 in February. Theft of oil in Nigeria is becoming an increasingly serious problem which has forced the closure of several key pipelines. Some believe Nigeria’s production is now below 2 million b/d. The situation is further complicated with the announcement by the MEND, Nigeria’s most effective rebel group, that it was resuming attacks on Nigeria’s oil infrastructure to avenge the lengthy prison sentence given to its former leader.

China’s manufacturing expanded in March, but not as fast as economists had predicted, leaving a mixed picture for the months ahead. The Purchasing Managers’ Index suggests that the situation remains fragile for the immediate future. The country is still on track to surpass the United States as the world’s largest oil importer by 2014 according to OPEC figures. The Saudis say they are not worried about falling US imports as it will be easily replaced by Asian demand in coming years.

The air quality situation in China continues to fester. The government announced that the first three months were the smoggiest in 52 years and that two major air pollutants had increased in Beijing by 30 percent in the last 12 months. Some pollutants were up 47 percent in January over 2012, setting numerous records for hazardous air quality. Although Beijing has announced many programs to clean up its air quality, the underlying impetus to grow its economy by 8 or more percent this year remains, so it is likely that air quality will be even worse by the time next winter rolls around.

2. Middle East & North Africa

Iran: Yet another round of talks with Iran concluded over the weekend without any progress. Tehran failed to respond to a new initiative by the six powers, and the “new” proposal touted by the Iranians before the meeting turned out to be insignificant. Negotiators for the six who had been insisting that time was running out continue to say that the diplomatic process will continue and that the region is not on a direct path to a major regional war over the issue. Tehran continues to maintain that its efforts are directed to building a network of power reactors and medical research while it is the Israeli nuclear arsenal that is the threat to peace in the region. It demands that its right to enrich uranium be internationally recognized.

With Iran’s Presidential elections only 10 weeks away it appears that a factional power struggle has broken out in Tehran. On one side is President Ahmadinejad and his handpicked successor Esfandiar Mashaei and on the other a coalition of “traditionalists” including many Revolutionary Guard commanders and hardline clerics. The moderate opposition that was so prominent after the 2009 election has been suppressed to irrelevance this time around. Should the traditionalists win in the June elections, the world could be dealing with an even more recalcitrant Iran.

Given the variables involved, it is doubtful that agreement on an issue that has become so fundamental to the future of Iran and indeed to Middle Eastern oil exports, will be reached any time soon.

Iraq: As is now routine, bombs continue to go off in Iraq—targeting security forces and this week Sunni politicians seeking votes. A group of gunmen attacked a facility at a gas field in Anbar province where the Korean Gas Group is developing the field, killing three workers. The attack was unusual in that except for occasional pipeline bombing, oil and gas facilities have generally been left alone as being important to everyone in the country. Evidence of Syrian insurgent groups operating across in Iraq continues to grow and over the longer run may develop into a major problem for Iraq’s stability.

Evidence is strong that Turkey intends to establish major oil and gas ties with the Iraqi Kurds despite the enmity it will provoke with Baghdad. Ankara is arguing that by developing and buying oil from Iraqi Kurdistan, it will relieve Baghdad from the obligation of supplying 17 percent of its budget to the Kurds as established in a 2006 agreement. The Turks are also saying that Iraq is not really a united country so that dealing with one part of it is not damaging the nation’s unity. Full implementations of these plans are probably years away and the geopolitical situation is moving rapidly in the region.

Syria: The back and forth battle between the government and rebel forces continued last week. For several weeks the rebels have been making slow progress by capturing small military bases across the south. Over the weekend the government fought back with widespread airstrikes and an offensive that captured a key village near Aleppo insuring access to an airfield that can support the government.

Reports continue that the rebels are receiving an increased flow of weapons through Jordan as well as training from the United States and other countries there. It now appears that as much as 250,000 gallons of diesel fuel a day is being sold by Lebanese contractors to an increasingly desperate Assad government and tankered across the border with the government’s tacit approval. Lebanese Sunnis sympathetic to the insurgents have begun attacking these trucks.

The involvement of most of the countries bordering Syria shows the dangers of regional conflagration as the fighting drags on. With their backs to the wall, support from Tehran and Moscow, and fears of what could happen at the hands of the Sunni rebels, the backers of Assad and his government have little incentive to do anything but fight to the end.

Egypt: Cairo is seeking to increase its $4.8 billion loan request from the IMF amid growing evidence the country is approaching political and fiscal anarchy. Planning Minister al-Araby told several newspapers over the weekend that he hopes to be able to sign an agreement within two weeks that could be approved by the IMF board of directors in June. As has been the case for two years, the IMF is insisting on substantial cuts in the government’s food and fuels subsidies before making a loan—a demand the Morsi government considers politically impossible.

Over the weekend five were killed in clashes between Christians and Muslims and many more injured in riots at their funerals. Dozens more were injured in central Cairo during anti-government demonstrations and the railroad engineers went on strike, crippling commerce between Cairo and Alexandria.

Underlying the current turmoil is a fiscal reality that threatens the most serious consequences. Foreign tourism and investment have dried up. The wealthy are moving their assets out of the country as fast as possible. Energy subsidies are 80 percent of the government’s subsidy bills. Although the government recently doubled the retail cost of a canister of cooking gas to $1.20, it costs the government $12. It is doubtful that meaningful subsidy reforms can be implemented in time to prevent serious political and economic dislocations before the year is out.

Wheat shortages have already entered the food manufacturing chain. When these shortages get to the retail level in a few months, as many as 20 million people will not be able to afford bread. Egypt is clearly faced with many troubles which are likely to spread to other countries.

Quote of the Week

“Perhaps it’s the case that Saudi Arabia isn’t willing to maintain its previous production levels, or perhaps it’s the case that Saudi Arabia isn’t able to maintain its previous production levels. But whatever the explanation, this much I’m sure about: those who assured us that Saudi production was going to continue to increase from its levels in 2005 are the ones who so far have proved to be dead wrong.” - James Hamilton

Briefs

  • Russia is preparing for a fracked, tight oil boom on the scale of the one in the United States as the country’s conventional oil fields mature and new sources of oil must be found to keep production in the vicinity of 10 million b/d for years to come. Much of the discussion, however, centers on new tax breaks that Russia’s oil industry says are necessary to pay for the high costs involved in paying for the extraction of tight oil. (4/01,#10)
  • Schlumberger is making progress in collecting some of the hundreds of millions of dollars which Venezuela owes to the company for oilfield-services. For years the government has used oil revenues as a source of cash to finance its social programs. National oil company PDVSA recently said its debt to service providers grew by 35 percent in 2012 from $12 billion in 2011. Schlumberger was threatening to “cut back” on its activities in the country. (4/01, #8)
  • Exxon is planning to build the world’s largest floating natural gas liquefaction plant off the coast of Australia. Such a plant would allow the exploitation of smaller, remote natural gas fields that would not justify the construction of pipelines to shore facilities. (4/2, #9)
  • A new study says that air pollution contributed to the premature deaths of 1.2 million Chinese in 2010. Since then the pollution situation has only gotten worse. (4/02, #10)
  • Japan will overhaul its troubled electric power industry by splitting generation and distribution into separate businesses. It is hoped this will foster innovation and modernization of the power grid. Tokyo Power announced it will be impossible to restart seven shutdown nuclear reactors starting this month as had been planned. (4/02, #12, #13)
  • A new report from the EIA says that coal-fired power generation was on the rise as 2012 came to an end due to the increasing price of natural gas that has risen significantly since April. (4/02, 15 #15)
  • The Washington Post reports that some energy-intensive companies in Europe are investing heavily in new US facilities because natural gas in the United States is now about a quarter its cost in Europe. Steel and chemicals are among the industries most affected. More ambitious emissions policies in the EU are also contributing to the move. (4/02, #16)
  • An extended drought continues across the western half of the US with water supply concerns rising in Texas and New Mexico. There are serious problems in California, Montana, and Oregon and most states west of the Mississippi are affected. (4/01, #18)
  • The unemployment rate in the Eurozone hit 12 percent in February, a record high, with 19.07 million unemployed. Conditions are worst in Greece with the December figure of 26.4 percent.(4/02, #22)
  • China will become the world’s top oil importer as its refining capacity grows and increasing US domestic production cuts the need for imports. China’s imports are expected to pass 6 million b/d later this year, and US imports are expected to drop below 6 million b/d in 2014. (4/02, #8)
  • China’s Meteorological Administration announced that the country averaged 3.3 smoggy days in March vs. 1.1 in normal years. This was the smoggiest it has been in 52 years. The phenomenon is attributed to high pressure and lack of wind that engulfed some areas for up to 15 days. The administration says the cause of the smog is “mysterious,” but notes that some experts cite excessive emissions. (4/02, #10)
  • Russia increased its crude and condensate production by 1.2 percent in March from a year earlier to 10.47 million b/d which is close to a post-Soviet era high. The post-Soviet high was 10.49 million last November and the Soviet era high was 11.48 in 1987. (4/02, #18)
  • The reconciliation between Israel and Turkey could lead to an energy pact that would allow natural gas from off the Israeli coast to be piped to Turkey for distribution to Europe. The Turks appear interested in pulling Cyprus and the Turkish Cypriot community into the deal. (4/03, #7)
  • The International Energy Agency is taking steps to open its membership to emerging economies such as China, India, Russia, Brazil, South Africa, Mexico and Indonesia. The talks are at a preliminary stage and it may be years before new deals are completed. The new members would not be required to hold “emergency stocks” as the industrialized countries do. (4/05, #4)
  • Vietnam will continue buying overseas assets in hopes of increasing production to meet domestic demand. The dispute with China is casting doubts over how much oil Hanoi will ever be able to extract from what it considers its territorial waters. (4/05, #11)
  • BP is planning to sell its 16 operating wind farms in the United States so it can concentrate on oil and gas operations. (4/05, #13)

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