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By Tom Whipple

1.  Oil and the Global Economy

It was largely a quiet week for the energy markets. NY oil hovered around $96 a barrel, London’s Brent around $104, natural gas futures just below $4 per million, and gasoline futures around $2.87 a gallon with little movement in any of the markets. Downward pressure on prices came from a weak yen which slid to a 4-year low against the dollar, increased OPEC production, and continuing growth in US petroleum stocks to the highest level since 1931. Oil prices slid on Friday under pressure from the strong dollar, but recovered at the close to nearly unchanged for the week.

The news that crude stocks at the Cushing, Okla. storage facility fell by 625,000 barrels narrowed the spread between WTI and Brent to touch a recent low of $7.48 on Thursday. Goldman Sachs is forecasting that the spread will close to $5 a barrel in the 3rd quarter. Goldman Sachs notes that several pipeline and refinery projects are due to be completed within the next year that will further reduce glut at Cushing.

OPEC reports production rose to a five-month high in April largely due to an increase in Saudi production. The cartel forecasts that oil demand will increase later this year as increases in demand from the emerging markets offset the weakness in the US, Europe, and possibly China.

The announcement that the average concentration of CO2 in the atmosphere has hit 400 parts per million set off another round of warnings from environmentalists that continuing increases in the combustion of fossil fuels must be stopped.

With increases in oil production from the North Dakota and Texas tight oil fields likely to slow in about three years, attention is focusing on tight oil deposits in California which are reputed to be the biggest in the US. Some knowledgeable observers are skeptical that California’s Monterey tight oil deposits, which are estimated to hold 15 billion barrels of oil, will ever be exploited in the manner of the sparsely populated south Texas and North Dakota fields due to environmental concerns and the different geology in the region. Last week’s auction of drilling leases in California was postponed.

2. Middle East & North Africa

The situation in the region continues to deteriorate, but seems to be reaching some sort of turning point as the US and Russia agreed to seek new peace talks on Syria. While Moscow is still insisting that President Assad must be part of the solution, the US and Russia realize that the situation is rapidly spinning out of control and could result in a wider conflict. Whether the disparate rebel groups can be brought into talks with the Assad government remains to be seen. From a peak oil perspective, the deteriorating situation seems almost certain to lead to some sort of disruption of oil exports from the region within the next few years.

Syria: The uprising in Syria is looking far more dangerous than a few weeks ago. Government forces have been on the offensive with the help of Shiite militias, Hezbollah fighters from Lebanon, and Iranian logistical support. This offensive is aimed at preventing the rebels from overrunning airfields and isolating the government from its supporters in Syria’s northwest and supplies from Iran and Russia.

Moscow announced last week that it was supplying more air defense weapons to Damascus under existing contracts, but refused to say if it was supplying its advanced S-300 air defense missiles. While such weapons are a “game changer” in theory, making effective use of them against Israeli or Western airpower is probably beyond what is left of Assad’s increasingly dysfunctional armed forces which has lost much of its air defense expertise.

So far the response to Israel’s air strikes on advanced missiles being sent to Lebanon has been mostly rhetoric from Hezbollah about how Syria will soon supply it with new “game changing” weapons.  No one in the region is in a position to directly confront Israel so retaliation will like come in the form of rhetoric and small terrorist attacks.

Over the weekend, two car bombs exploded in a Turkish border town, killing 42 and wounding some 140, that is filled with Syrian refugees and serves as a center for supporting Sunni rebels fighting the Assad regime. It is still uncertain who was responsible for the bombings, but Ankara is already suggesting the Syrians are the only ones with a motive for such an operation.

It was reported last week that what is left of Syria’s oil production has fallen into the hands of local tribal militias who are moving some of the oil to Turkey for sale. This news undercuts the EU’s proposal that the remaining oil production could be used to finance the rebel forces.

It has hard to say where the situation is going. As the bombs and artillery shells continue to fall, the refugee populations will continue to grow threatening Jordan and Lebanon and causing serious problems in Turkey and Iraq.

Iraq: As tensions increase between the minority Sunnis and the majority Shiites, a major question is how long it will be until Iraqi oil exports are affected. The UN reports that some 700 people were killed in Iraq during April, the highest monthly toll in five years. The repercussions of the attack on a Sunni protest camp by Shiite security forces in April that killed 45 and led to the death of some 200 around the country has yet to play out, but some Sunni leaders are calling the attack a turning point in relations with the Shiites.

Talk of civil war seems to be everywhere. Without the presence of US forces to stabilize the situation, at some there is likely to be a de facto partition of the country along sectarian lines with an increasing number of Sunnis being forced to move into the Sunni-majority Anbar province north of Baghdad.

A new factor in the Iraqi security situation is the settlement between Ankara and the Kurdish Workers Party that has been waging a civil war in Turkish Kurdistan for the last 30 years. As part of this settlement, some 2,000 well-armed and experienced Kurdish fighters are to move out of Turkey and into northern Iraq, thereby strengthening the Kurdish Regional Government in its confrontation with the central government. Baghdad is already protesting this movement.

As is the case in Syria, the situation is Iraq seems to be deteriorating.

Iran: At last count some 684 candidates have registered to run for Iran’s presidency. The next step for candidates is to receive approval from country’s Guardian Council which is controlled by Ayatollah Khamenei. In the last election only four of the 475 registered candidates were approved by the council as ideologically worthy of being placed on the ballot. Iran is going through some very tough times. The sanctions are taking a toll on the economy and the Syrian situation is clearly turning against Iran’s interests.

It is doubtful if the upcoming elections will change much of anything. The opposition parties have been effectively suppressed by the government’s security forces and it seems likely only reliable, pro-current-policy candidates will be approved to run for the Presidency.

Libya:  The two week siege of Libya’s Foreign and Justice Ministries by armed militia ended over the week end. The besieging militias were demanding that parliament pass a law banning anyone who held high government office under Gaddafi be banned from further government service. As part of the settlement, the ministries were handed over to a committee formed by parliamentarians and militia leaders.

At one point the militias holding the ministries demanded that the Prime Minister resign. The situation is highly unstable. During the week, the US and other western embassies began to evacuate non-essential personnel. The US put troops in Europe on alert should there be a need for military intervention. While there does not appear to be any immediate threat to the Western presence in the country, the government is clearly in no position to guarantee the safety of foreigners.

There is a move on to form a new Cyrenaica Congress that would be a regional government in the eastern part of the country where much of the oil is located. In the 1950s Libya was run as a federal country with three regional governments. There seems to be no immediate threat to oil production, but the lack of stable government and reliable security forces is not likely to attract much in the way of foreign investment in the near future.

 

3. China

The future course of China’s economy is very much in the air at the minute. Growth in the 1st quarter unexpectedly slowed to 7.7 percent from 7.9 percent during the second half of 2012. Last week Beijing reported that the consumer price index increased by 2.4 percent last month and that exports rose by nearly 15 percent. There is much skepticism about the export number which does not square with other indicators of economic activity and import data from China’s major trading partners. The suspicion is that Chinese exporters are “over-invoicing” as a means to import capital in violation of government regulations. A recession in Europe and little growth in the US suggest that exports should not be growing much.

China’s oil imports in April reached 5.64 million b/d which was 3.7 percent higher than in April 2012. This came after two months of year-over-year declines in February and March. China now has a driving season much as in the US which runs from May when the weather gets warm to the national holiday in October.

China’s major energy issue right now, however, is what to do about the toxic smog which comes from burning in excess of 4 billion tons of coal and 10 million barrels of oil, with minimal pollution controls, each year. Last winter air quality in Beijing rose to nearly 1000 ppm as compared to 50 ppm or below which is considered good. Even in April the pollution index was flirting with 200 ppm which is flat out unhealthy.

China’s economic miracle over the past 35 years has been based on rapidly increasing consumption of large quantities of coal and oil. To maintain economic growth without an annual increase of 10 percent more coal and 5 percent more oil consumption each will be difficult. Last week it was revealed that China’s top power producer recently started construction on 16 large energy projects without approval from Beijing.

China’s leaders, including the new President, know they have a major problem. If they continue to increase their pollution their citizens will become ill and die at ever increasing rates and anyone with an option will choose to live somewhere where they don’t have to breathe China’s air. In short the China’s economic miracle seems to be on course to strangle itself.

Even though Beijing has numerous plans to deal with air pollution while continuing to grow economically, the simple fact is that Chinese Communist Party’s no-elections legitimacy is based largely on the argument that it can deliver 7-10 percent economic growth each year. At all levels China’s leaders know that they will be judged on how well they deliver economic growth to the exclusion of all other concerns.  A good guess would be that air, water, and soil pollution in China is going to get a lot worse before actions that will seriously slow economic growth are taken.

There are some signs for hope however. Last week local officials agreed to consider cancelling a planned petrochemical plant following protests by local residents. A similar protest took place in Shanghai last week over the construction of a new battery plant.

4.  Quote of the Week

  • “The Saudi oil ministry forecasts world demand will rise this year by about 1 million barrels a day and exceed 90 million barrels for the first time in history,”

— An advisor to Saudi Oil Minister al-Naimi

5.  The Briefs

  • NRG Energy announced it has opened its 66 megawatt solar facility in southern California. The new facility which will sell its electricity to Pacific Gas and Electric under a 20 year agreement is the largest photovoltaic facility in the state. (5/6, #10)
  • India’s Supreme Court has approved the commissioning of the Kundankulam Nuclear Power plant built by the state-owned Nuclear Power Corp with the help of the Russians. In the wake of the Fukushima disaster, petitions were filed with the courts to prevent the plant’s opening. (5/7, #3)
  • The IEA says that natural gas consumption in Europe is not likely to increase much in the near future. When adjusted for temperatures, natural gas consumption in some countries is at 10-year lows due to modest population growth and increasing efficiency. (5/7, #12)
  • GM has received approval for the construction of a 150,000 vehicle per year Cadillac factory in China. The company currently sells imported Cadillacs in a luxury market dominated by Mercedes, Audi, and BMW. (5/8, #16)
  • A non-profit group notes that water shortages could soon limit hydraulic fracking of gas and oil wells in south Texas. In some counties, well fracking accounts for 20 percent of the water consumption. Persistent drought in the area is making the situation worse. (5/8,#20)
  • Palestinians report there are growing indications that oil has been found in the Israeli-occupied West Bank which Israel may be quietly exploiting by horizontal drilling. Even modest amounts of oil would be a great boon for Palestine which has few natural resources. (5/8, #5)
  • Exxon and Statoil announced they are developing a new field in the Gulf of Mexico which could hold six billion barrels of oil. The oil bearing rock is located more than five miles below the ocean’s surface and would be one of the first ultra-deep fields. Initial production at the modest rate of 34,000 b/d is expected in 2016. (5/8,#14)
  • Alberta announced that production from its oil sands increased by 10 percent to 1.9 million b/d last year and will double to 3.8 million by 2022. Investment in the sands has been slowing lately due to the availability of cheaper tight oil from North Dakota and Montana. (5/9,#15)
  • Scotland has given approval for the construction of an offshore, 7-megawatt, 640 foot tall, prototype wind turbine. The installation will be built by South Korea’s Samsung Heavy Industries. Samsung officials said the tower will be used to test new designs of wind turbines with the aim of increasing their efficiency. (5/10, #15)
  • Lebanon says that preliminary surveys show that it has offshore reserves of 30 trillion cubic feet of natural gas. Some 46 firms have qualified to bid on the first round of licenses to explore the offshore fields. If all goes well, the exploration should be finished by 2017 with production coming thereafter. (5/11, #12)
  • Plans have been scrapped to build a $200 million coal export terminal on the Columbia River in northern Oregon that would have exported 30 million tons of coal a year to Asia. Three of the six coal exports terminals that were under consideration for construction in the Pacific Northwest have now been scrapped. The projects face opposition from environmentalists who argue that it makes no sense to switch US power plants to natural gas while exporting the coal to be burned in Asia. (5/10, #19)
  • The US drilling rig count increased by 5 units last week to 1,769 units down from 1,974 in the same week last year. Rigs drilling for oil increased by 9 units while those drilling for gas decreased by 4 units. The objective of the drilling is somewhat messy as many rigs produce both “oil” and gas. As oil is more profitable, it impresses investors if you say you are drilling for oil. The industry maintains new techniques of directional drilling allow it to get along with fewer rigs. (5/11, #20)
  • The Republican-led House Natural Resources Committee accused the Obama administration of waging a “war on coal” that was hurting job creation in the industry. (5/6, #9)
  • The EIA says US consumers will pay an average of 16 cents a gallon less for gasoline this summer than last year. (5/8, #19)
  • The Department of Energy plans to award up to $20 million for research on methane hydrate deposits. The projects will focus on the danger posed by melting methane hydrates in response to global warming as well as the economic viability of extracting energy from these deposits. (5/8, #26)
  • The discovery of large quantities of natural gas off its coast not only offers Israel the prospect of cheap energy for its people for another generation, but also the prospects of exporting the fuel to Europe or its Middle Eastern neighbors. Some Israeli leaders have suggested a “gas for peace” which would have Israel selling to its needy neighbors in return for a reduction in tensions. (5/9, #3)
  • Iraq is looking to rebuild its dilapidated rail system which has suffered from decades of neglect. (5/10, #9)
  • China is considering taxing resource consumption including that of coal as a means of reducing consumption. In November Beijing announced a tax on gas and oil based on the value rather than the volume of production. The tax did not apply to coal however. In March, the government announced that it would attempt to cap coal production at 4 billion tons per year by 2015. (5/9, #12)