Peak oil notes – May 16

May 16, 2013

While oil prices are little changed this week, there has been considerable news concerning the energy markets. Bad economic reports from Europe, the US, and China have helped keep pressure on the markets and raised fears of lower demand for oil in the months ahead. The worse-than-expected economic news, however, pushed the S and P to a new high Wednesday on the hope that Federal Reserve will continue quantitative easing. The increase in equities helped oil prices to recover from losses earlier in the week. At the close, NY oil was $94.30 a barrel while London had climbed to $103.68 thereby widening the WTI-London spread to $9.38 from Monday’s close of $7.65.

The weekly stocks report showed an increase in US refining last week which resulted in a 600,000 barrel decrease in crude stocks and 2.7 million barrel increase in total commercial petroleum stocks. The most interesting news was a 500,000 b/d drop in oil product consumption last week to 18.5 million b/d which seems to be in line with the slowing economy.

The EU’s antitrust regulators have opened an investigation into oil price fixing. So far Shell, BP, Statoil, and Platts seem to be under investigation. The British government is claiming there is substance to the charges and is threatening that very harsh penalties will be imposed on any firm conspiring to drive up oil prices unnecessarily in recent years.

Problems in the Middle East continue apace. The rebels in Syria have opened a renewed offensive to isolate Damascus. As pictures and reports of atrocities committed by both sides increase, the likelihood of meaningful talks seems to be residing amongst growing religious and tribal hatreds. Bombings continued to take place regularly in Iraq this week. The report that Turkey is close to an energy agreement with the Iraqi Kurds, Exxon and other IOCs to develop the oil in Iraqi Kurdistan has Baghdad very upset. The Kurds maintain that they have a legal right to one-third of Iraq’s oil reserves and can sell it anywhere they want. Some are already predicting that this move could lead to civil war.

A civil war seems to be starting in Nigeria with the government going on an offensive against Islamist militants in the Northern provinces. Whether this fighting eventually affects southern Nigerian oil production remains to be seen.

The major news of the week, however, was the IEA’s release of its medium-term review of the oil market. In this issue the Agency comes down firmly on the notion that US tight oil production will rise steadily for the next five years and will come to dominate the world oil markets at the expense of OPEC. This surge in production is supposed to create a transformative “supply shock” that will dominate the oil markets. North American oil production which includes US tight oil and Canada’s tar sands is seen as increasing by 3.9 million b/d by 2018.

A reduction in demand for OPEC oil will lead to a large increase in OPEC’s spare capacity as demand for its oil remains flat for the next five years.

Needless to say, many observers believe that the IEA has gone over the top in predicting such a large increase in tight oil and tar sands oil production. Current estimates by knowledgeable geologists in the peak oil community who have studied the subject are that US tight oil production should start to slow circa 2016-2017 and will enter a decline thereafter.

Production from tight oil wells is not only very expensive, but productivity declines are rapidly forcing steady redrilling to maintain production. There are many concerns about the very heavy costs of increasing production from the tar sands. Should there be a drop in oil prices from an economic slowdown and an oversupply of oil, tight oil and tar sands production is likely to slow markedly.

Tom Whipple

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the long-running Energy Bulletin (formerly "Peak Oil News" and "Peak Oil Review"). Tom has degrees from Rice University and the London School of Economics.  

Tags: IEA report, Middle East conflict, oil price fixing, oil prices, tight oil production