1. Prices and the bailout
Oil prices, and nearly everything else, were dominated by the course of the $700 billion liquidity bill through Congress last week. On Monday oil fell by a record $10 to $95 a barrel after the House of Representatives rejected the first version of the bill. By the next day however, oil was back up to $102 on hopes that a similar bill would pass later in the week. By midweek, the markets began to appreciate that while the $700 billion might unfreeze credit markets it was unlikely to help the deteriorating economic situation or increase the demand for oil. A stronger dollar and new reports of lower US oil demand kept pressure on oil prices all week. After the house passed the $700 billion rescue plan on Friday, oil fell and closed at $93.88 as concerns about the continuing economic slide outweighed the perceived benefits from the bill’s passage. By this morning, oil was below $90.
The EIA published revised estimates for July showing consumption to be 736,000 b/d less than previously reported. Demand in July was 6.4 percent less than in July 2007.
The $60 a barrel drop in oil prices since July has led to much talk about further declines all the way to $50 a barrel if the economic situation gets worse. These forecasts seem to discount the role of OPEC in supporting prices. The average price that OPEC members received for their crude slid below $90 a barrel last week and the muttering about low prices inside OPEC continues. If prices continue to fall, it likely that that OPEC either formally or informally will reduce production by whatever amount is necessary to keep prices closer to $100 a barrel.
The average US gasoline price is now nearly 60 cents a gallon cheaper than in July, thereby reducing the incentive to cut back on driving. Gasoline shortages across the Southeast caused by the September hurricanes are easing so consumption in the affected areas should be returning closer to normal soon.
For the next few weeks the state of credit markets and the direction of the economy are likely to overshadow any fundamental news about oil production and consumption. The immediate concern will be the availability of credit and whether or not the $700 billion actually will help the situation.
2. Gasoline shortages
The effects of September’s hurricanes were still being felt across the southeast last week. While the refineries are nearly all back on line, 40 percent of the Gulf’s normal offshore production is still shut-in. The DOE continues to release crude from the Strategic Petroleum Reserve to make up for the shortfall. Gasoline shortages are expected to continue for another two weeks, but appear to be easing. At the height of the shortages, police were called to gas stations dozens of times to break up fights and settle disputes. Most involved cutting into line.
Questions are being raised about whether government officials did all they could to mitigate the fuel shortages and whether anything can be done to improve the situation when the next hurricane hits the Gulf coast. Officials point out that storing significant amounts of extra gasoline in local tank farms would be prohibitively expensive. They also note that the changeover to non-attended, credit-card operated gas pumps in the last 20 years has made it difficult to enforce odd-even days or minimum purchases as attendants would have to be hired to monitor the pumps during shortages. Some areas are looking at ways to move gasoline inland from coastal cities that get their fuel shipments by tanker or barge and are not as dependent on Gulf refineries and pipelines.
3.China
One of the key factors determining oil prices and global demand for oil over the next few years will be the course of China’s economy. Beijing continues to maintain that its GDP is now so big and its foreign exchange reserves so large that they can weather a deep, prolonged recession in the rest of the world and still continue to grow. China’s economy grew by 11.9 percent last year and all indications are that it will increase by 10 percent or so this year despite slumping exports. Chinese oil consumption has been growing by about 5 percent a year.
In recent weeks, however, there been signs that China’s economy is starting to slip. Growth in electricity consumption has started to slow and imports of key commodities are declining as are shipments to the US.
For now, no one seems willing to forecast a major slowdown in the growth of China’s economy and oil consumption, but this situation bears watching. While the growth of world oil consumption has been slipping in recent months, lower prices and continued growth in consumption by China and the Middle East oil exporters could be enough to offset the declines caused by a rather serious recession.
4. India
As power shortages and blackouts due to poor monsoon rains and increased demand spread across India, the issue of using expensive, subsidized diesel to fuel generators for backup power is becoming important. In one state, diesel consumption jumped by 14 percent in the weeks after the blackouts started.
The issue is complicated by the policy of keeping diesel cheap to support agriculture and transportation. The government, however, currently is considering removing the subsidies within the next two years. India has a pair of large refineries, one of which is just starting up, that were built to export their products rather than consume them domestically. These refineries receive export subsidies that make them profitable. New Delhi is considering reworking its tax and subsidy policies so that more diesel will remain in the country and reduce its dependence on imports.
5. Trouble in Detroit
Now that gasoline prices are receding, lack of credit to finance new car sales has become Detroit’s number one problem. In September, US auto sales reached a 15-year low with sales of cars and light trucks falling by 27 percent to 964,000.
There was some good news, however, when President Bush signed off on a $25 billion loan package that will help automakers retool their plants to build smaller, more efficient vehicles. Congress also passed a tax credit of $7,500 for the purchase of Chevrolet’s upcoming electric Volt.
There are many strings attached to the loan package, however, and sales of the Volt are still two or three years away. In the meantime, sales of cars are falling so fast that unless the credit problem is turned around soon, Detroit’s automakers may not survive in their current form long enough to take advantage of the new loans and credits. European automakers are now asking the EU for loans similar to the one granted by Congress.
6. Briefs
(clips from recent Peak Oil News dailies are indicated by date and item #)
- Russia’s oil production fell for the ninth straight month, down 0.4 percent in September compared to the same period last year, to 9.83 million barrels per day, the first time since 1998 that Russia will suffer an annual decline. In terms of new fields, there is very little that will come online in the next few years to boost production output. (10/5, #15)
- The cost of adding new oil production is now $70 to $90 a barrel, according to JPMorgan and other analysts. Already, some producers are feeling the pinch. Petro-Canada, for example, signaled recently that the cost of developing oil sands in Canada would not be economical below $100 a barrel. (10/3, #4)
- US natural gas production is expected to be nearly 8% higher this winter than last, due in large part to increases from unconventional gas plays. (10,4, #11)
- Japan, the world’s third-largest oil consumer, said gasoline demand in August fell 14%, the most for the month since 1953 as prices climbed to a record. (9/30, #12)
- Henry Groppe says “We’ve been telling our clients all year that oil prices would inevitably go down to $70 by the end of this year.” Over the next decade, he sees the price of oil climbing slowly just to $110. While Groppe agrees with Matt Simmons and T. Boone Pickens on the limits of the oil supply, he says they don’t pay enough attention to how sensitive demand is to price. (10,3, #21)
- Ecuador’s President Correa said he may expel foreign oil producers, including Spain’s Repsol and Brazil’s Petrobras, because of declining production. The companies, particularly Petrobras, have dragged their feet in contract negotiations in which Correa wants a greater share of the oil income. (10/5, #5)
- International energy companies had hoped to gain a toehold in Mexico‘s unexplored deepwater territory in the Gulf of Mexico by partnering with Pemex, but congressional hearings on the reform package point to a more modest overhaul of energy legislation. (10/5, #6)
- Iranian Oil Minister Nozari said that a price of under $100 for a barrel of crude oil is “unsuitable.” He also said Iran is targeting a share of the global gas market of between 8 percent and 10 percent, without specifying a date. Iran currently has less than 1 percent of the global gas market. (10/5, #1-#2)
- Nigeria will consider stopping or suspending all LNG projects if adequate gas is not supplied for domestic use, according to Emmanuel Odusina, minister of state for gas. (9/30, #6)
- Power-station coal prices at Australia’s Newcastle port, a benchmark for Asia, fell to near their lowest in six months on concern Chinese demand is slowing. From a peak of $195 in early July, the price has dropped one-third to $129. (9/29, #8)
- The Kansas Energy Council recommends lowering the speed limit again. This time, they are considering a maximum speed of 65 miles per hour instead of 55. (10/2, #14)
- Tata Motors, India’s biggest truck maker, abandoned its newly built factory for the world’s cheapest car because of violent protests by farmers, hampering plans to start selling the $2,500 vehicle this year. Tata Motors will move equipment and machinery from Singur in West Bengal to a new location to be decided later. (10/5, #8)
- Shorter commutes are one way to reduce gasoline consumption, but a new study finds that not all cities are equal in how easy it would be to achieve that goal. Atlanta and Minneapolis may be the metropolitan areas that would find it most difficult to reduce the miles that workers commute each day. Meanwhile, Las Vegas and Miami may be areas where it would be easiest to reduce commuting miles. (10/5, #3)
- In rural Alaska, high costs for fuel and food are driving people into cities. This year the poorest 20 percent of rural residents were paying 47 percent of their income in energy costs, compared to only 16 percent for energy as recently as 2000. (10/5, #5)
- The American Society of Civil Engineers estimates $1.6 trillion is needed over a five-year period just to bring U.S. infrastructure—roadways and the grid—into a state of good repair. (10/5, #16)
- Iraq’s oil ministry will list a second group of oil and gas fields that can be leased by International Oil Companies. Petroleum Intelligence Weekly reports the two rounds account for 94 billion barrels of Iraq’s 115 billion barrels of proven reserves. (10/4, #5)
- Petrobras, Brazil’s oil company, and its partners in the Tupi field (estimated reserves: 5 billion barrels) may spend as much as $50 billion to develop what is the biggest discovery in the Americas since 1976, according to Deloitte. (10/4, #6)
- Brazilian officials said the country will invest some $25 billion for the construction of new ethanol plants to meet domestic demand growth projected at 150% over the next decade. Brazil plans to expand its production capacity over the next 10 years by constructing 246 new distilling plants. (10/1, #6)
- Pakistan’s Electric Power Company says the addition of some 30 million energy-intensive electric home appliances, not just economic growth, is the major reason for the 3,570 MW power shortfall that resulted in the recent power crisis, (10/5, #4)
- India’s electric power situation is bleak. The gap between supply and demand nationwide averages up to 16 percent at peak times, according to government figures, and 25 percent according to industry estimates. (10,3, #7)
- Ukraine and Russia will switch to a new scheme for pricing Russian gas based on European market prices. (10/3, #15)
- Global financial mayhem is dimming prospects for a strong new UN pact to fight climate change, but it might aid cheap schemes such as insulating buildings to save energy. The turmoil, straining government coffers with bank bailouts, may sap interest in more costly projects such as burying carbon dioxide from coal-fired power plants, refining biodiesel or other renewable projects.(10/2, #4)
- The U.S. Department of Energy delivered 900,000 barrels of crude from the nation’s Strategic Petroleum Reserve to two refiners whose supply was disrupted as a result of the hurricanes last month. That brings the total delivered crude from the SPR to 5.7 million barrels. (10/2, #10)
- US diesel exports: The EPA did not require refiners to invest the estimated $6 to $9 billion in technical improvements needed to meet the 2006 low-sulfur standards. As a result, U.S. refiners have continued to produce large amounts of high-sulfur diesel for export. The US now exports about 12% of its refined diesel production. Between 2004 US diesel exports increased from 12 million barrels to 150 million and 1,250 percent increase (10/2, #19)
- Last week deployment of the first commercial wave energy farm in the world started 5 Km off the coast of Portugal. When all 25 units are deployed the project will have cost 70 million Euros and should produce 18.75 MW of power. (10,2, #20)
- As of September 29th, 52 of the 3,800 offshore oil and gas production platforms have been confirmed as destroyed. Initial estimates are that the 52 destroyed platforms produced a total of 13,300 b/d of oil and 90 million cubic feet of gas per day. (10/1, #14)
- Offshore quick fix? The reality is that it will be at least two years before an oil lease in a newly opened area (such as off the coast of Virginia, as could happen in 2010) is awarded and at least several more years, if not a decade, before any crude found comes into production. (10/1, #20)
- US Secretary of Energy Bodman, concerned about Russia’s use of energy as a tool of foreign policy, said he would take up the issue with officials at a meeting this week in Vienna. “I am concerned when…there seems to be a pattern of using energy and their God-given resources to affect foreign policy.” (10/1, #3) [Editor’s memo to Bodman: wake up and smell the Starbucks.]
- Scottish Power Ltd. plans to invest more than $184 million on tidal-power developments as the utility develops energy production that doesn’t add to carbon-dioxide emissions. (9/29, #17)
Quote of the Week
- “One of the key questions the country faces is whether we will use our remaining wealth and fossil fuel to prop up the past or to transition to a different future.”
— Carl Etnier, Energy Matters column (9/29, #15)
