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1. Production and prices

Last week’s oil price story was more about the falling dollar than fundamentals. However, prices moved little, hovering around $71 a barrel and closing at $71.77 — the highest in three weeks. While prospects for a slow economic recovery kept pressure on oil prices, the falling dollar caused upward pressure. Over the last six months, the dollar has fallen 11.5 percent on a trade-weighted basis. The Obama administration continues to insist that it will live up to its responsibilities and maintain the strength of the dollar, but many believe the situation could spin out of control. Gold prices continue to increase and foreign investors are slowly moving out of US Treasury securities. On Thursday several Asian central banks were forced to intervene to support the dollar and their export markets.

During the week there was a report in a British newspaper that the Gulf Arabs along with China, Russia, Japan and France were holding secret meetings to discuss switching oil trading from dollars into a basket of currencies including the Japanese Yen, the Chinese Yuan, gold, and the Euro. The meetings were immediately denied by most of the alleged participants and observers pointed out that talk of replacing the dollar has been going on for years. Many hold that the global oil market is too big to be traded in anything except the dollar.

Some commentators, however, are beginning to worry that the situation is markedly different this time. The US, through its policy of quantitative easing (money printing), is debasing the financial assets of many foreign countries to its own benefit. At some point the benefits of breaking the oil-dollar link may come to be seen as making sense. The damage of such a move to the US dollar and economy would be massive.

The IEA again increased its estimate for likely oil demand in 2010 to 86.1 million b/d, an increase of 350,000 b/d over its September estimate. The Agency also increased its forecast demand for 2009 by 200,000 b/d to 84.6 million. This is still 1.7 million below estimated 2008 consumption. Some are dismissive of recent IEA consumption forecasts, saying they simply follow optimistic IMF projections of better economic times in Asia and do not involve a hard look at the oil markets.

2. An independent assessment

In recent years there have been a number of studies on the likelihood that the world’s oil supply will start declining soon. Among the organizations issuing these reports were the US’s National Petroleum Council, the US Government Accountability Office and the IEA which produces an annual assessment — the World Energy Outlook. For the most part, these studies have not issued a loud and clear warning of just how close or how steep a drop in world oil production could be. Moreover earlier studies were unable to take into account recent work done by the IEA on rates of depletion and the effects of the 2008-9 recession.

Last week the UK Energy Research Centre, an independent academic group funded by the British government, issued a new study, arguably the most sophisticated and comprehensive one yet. As one British commentator, David Strahan, put it, “This report is significant because it is the first dispassionate academic attempt to reconcile the highly polarized debate over whether and when oil supplies will start to decline, yet its conclusions chime with a growing number of recent forecasts that warn of an early peak in production.”

The report confirms what is well known in the peak oil community. Depletion from existing oil fields is running at 4 percent or more each year and is likely to increase as a larger share of the production moves from giant land-based fields to smaller off-shore fields. Every year the oil industry has to produce at least 3 million new b/d just to keep even. Increased demand that would accompany an economic recovery would only exacerbate the situation. Replacing this amount of lost production each year from very expensive deep-sea production, natural gas liquids, and heavy oil is unlikely.

The report concludes that “on the basis of current evidence we suggest that a peak of conventional oil production before 2030 appears likely and there is a significant risk of a peak before 2020. Given the lead times required to both develop substitute fuels and improve energy efficiency, this risk needs to be given serious consideration.”

The report is already troublesome for the British government which recently reaffirmed its position that oil depletion will not occur prior to 2030 and there is no need to begin making preparations. The British government still bases its view on the work of the International Energy Agency which forecasts that while conventional oil will peak in 2020, rising output from non-conventional sources such as the Canadian tar sands will push the overall production peak out to “around 2030.”

3. The Bangkok climate talks

The pre-Copenhagen talks on global climate changes that have been going on for the last two weeks in Bangkok ended on Friday with little agreement. The heart of the issue remains the gap between developing and industrialized nations.

As global emissions are distributed unequally, particularly on a per-capita basis, and the costs of switching to non-emitting sources of energy will ultimately run into trillions of dollars and will have a major impact on future global economic development, the developed OECD nations want to see the big developing nations such as China and India commit to reducing their emissions while the developing nations are reluctant to significantly slow their economic growth without financial assistance.

Even the US is reluctant to agree to cut emissions in December unless a domestic law is passed by the US Congress.

An interesting sidelight to the meeting is the Saudis running around behind the scenes insisting that the oil exporters be compensated for any lost of revenue due to reduced oil consumption.

Given the magnitude of the issues involved, it seems unlikely that agreements can be reached prior to the Copenhagen meeting. As the recent British report on peak oil points out, falling oil production and rising oil prices will have a major impact on the world’s economic development, a factor which has yet to be considered in climate change discussions.

The final pre-Copenhagen meeting will be held in Barcelona for five days in early November.

Quote of the Week

  • “We came here for this two-week meeting with hope and confidence, yet have to leave with disappointment and deep concern,”
    — Su Wei, China’s lead negotiator at the Bangkok climate meeting

Briefs

  • Iran appears ready to institute gasoline rationing with individual purchases cut to 44 liters a month from the current 100. Due to a shortage of refinery capacity, Tehran must import 40 percent of its gasoline. Iranian imports are already down 20 percent from September. The government has asked for an additional $6.5 billion to pay for imports. (10/10, #5; 10/7, #6,7)
  • Exxon Mobil has agreed to pay about $4 billion for a minority stake in an oil field off the coast of Ghana, a region that has emerged as a major new petroleum province. Exxon’s acquisition of 23.49 percent of the Jubilee oil field underscored the interest that energy companies have shown in the 700 miles of Western African coastline that stretches from Sierra Leone to Ghana. Last month, the Italian oil giant Eni agreed to buy two fields off Ghana from the Vitol Group, a major oil-trading firm. (10/07,#13)
  • Deutsche Bank’s new report, The Peak Oil Market, says global oil supplies are indeed set to peak within a few years, and it will “spell the end of the oil age.” Oil will increase to $175 a barrel by 2016—and will simultaneously put the final nail in oil’s coffin and send prices plummeting back to $70 by 2030. That’s because there’s an even more important “peak” moment on the horizon: A global peak in oil demand. That has already begun in the world’s biggest oil-consuming nation. (10/06, #15)
  • Uganda says oil companies operating in the country have agreed to build an oil refinery so that any crude produced can be refined and sold locally. (10/10, #7)
  • The Iraqi Oil Ministry, BP and Chinese National Petroleum Corp. have signed an agreement to develop the super-giant Rumaila oil field, Iraq’s biggest producer. Members of Iraq’s parliament are objecting to the deal which still has to be approved by the cabinet. (10/09, #5)
  • In Nigeria, the government says that 15,000 militants took advantage of the amnesty and surrendered nearly 3,000 weapons. The MEND, however, say they will resume fresh attacks on oil facilities after the cease fire expires on October 15th. (10/9,#7; 10/8, #6)
  • Mexico’s new oil watchdog wants Pemex to cancel contracts at its key Chicontepec oil field but the state-owned company said it could not abandon the project. Pemex has spent more than $3.4 billion on Chicontepec; it was hoped the heavy-oil field’s large reserves would lift Mexico’s oil output from near 20-year lows, but output has been disappointing because of the complexity of the deposits. (10/09, #8)
  • A Russian oil consortium will only have to pay $600 million, not the $1 billion Venezuela previously said, as a down payment for its participation in exploiting Venezuela’s Orinoco oil fields. A group of five Russian firms — OAO Rosneft, Lukoil, OAO Gazprom, TNK-BP and OAO Surgutneftegaz — are planning a joint venture with state energy firm Petroleos de Venezuela to develop the Junin 6 block in eastern Venezuela. Officials say the block has huge proven reserves and could produce 450,000 barrels of crude a day. (10/08, #9)
  • T. Boone Pickens said Chinese purchases will help push up crude-oil prices to as much as $90 a barrel next year as output declines and the global economy rebounds. Next year’s average oil price will be $80 a barrel, 39 percent more than the average so far this year. China has spent $200 billion on forward purchases, “tying up” the world’s oil supply. The U.S. “can’t compete” with China-owned oil companies because it lacks state-owned oil companies to pursue its economic interests. He said crude will eventually reach $170 a barrel without giving a date. (10/07, #8)
  • Shell announced plans to build the world’s first floating liquefied-natural-gas facility off the coast of northwestern Australia. The facility will be the world’s largest vessel, much bigger than an aircraft carrier, and will be closely watched by the other super-majors, who have long been considering the potential for a floating facility. The technology allows offshore gas reserves to be processed in situ, rather than being piped to the coast and liquefied in onshore plants. It has the potential to unlock dozens of “stranded” gas fields that are too remote to be developed by conventional means. (10/09, #13)
  • An Interior Department review team proposed putting on hold or blocking about three-quarters of the 77 leases awarded last year to drill for oil or gas in wilderness areas of Utah. The team recommended that eight parcels of land be withdrawn from leasing and said that action should be deferred on 52 parcels, a step that could potentially put the land off-limits for drilling. It recommended that leases be permitted on 17 parcels. (10/09, #15)
  • Russia’s Gazprom aims to take a 10 percent share of the U.S. natural gas market within five years, according to Deputy Chief Executive Alexander Medvedev The company plans to expand into the United States as it did in Britain in recent years, Medvedev told reporters.(10/09, #18)
  • ConocoPhillips said it will sell about $10 billion of assets in the next two years and cut capital spending in 2010 to reduce debt and increase returns on capital. The divestitures may include oil and natural-gas properties and refineries. (10/08, #14)
  • Canada’s energy regulator said it will not hear final arguments in its review of the C$16 billion ($15 billion) Mackenzie Gas Project until at least April, further delaying the potential approval of the massive Arctic gas pipeline. (10/08, #18)
  • The United Nations called for a new global reserve currency to end dollar supremacy which has allowed the United States the “privilege” of building a huge trade deficit. “Important progress in managing imbalances can be made by reducing the reserve currency country’s ‘privilege’ to run external deficits in order to provide international liquidity,” UN undersecretary-general for economic and social affairs, Sha Zukang, said. (10/07, #3)
  • An investment of $10 trillion in renewable energy and other carbon-abatement technology will be necessary over the next two decades to limit the rise in the Earth’s temperature, the International Energy Agency warns in a new report. That is 37% more investment than the IEA estimated was necessary just a year ago. Some analysts put the current level of investment in clean energy at around $100 billion a year. The additional investment called for could be particularly expensive for consumers in developed nations such as Germany and the U.S. which would likely face higher costs to fill up their vehicles and keep their lights on. (10/07,#4)
  • US natural gas inventories are expected to reach a record peak of 3.85 tcf when storage injections end on Oct. 31, the US Energy Information Administration said in its latest short-term energy outlook. Nearly 3.59 tcf was in storage on Sept. 25, 481 bcf above the 2004-08 5-year average and 491 bcf above the level during the same week in 2008. (1007, #15)
  • Scientists in India and China have determined that glaciers in the Himalayas and the Tibetan plateau that feed the river systems of almost half the world’s people are melting faster because of the effects of clouds of soot from diesel fumes and wood fires. The research, to be announced this month in Kashmir, shows for the first time that clouds of soot – made up of tiny particles of “black carbon” emitted from old diesel engines and from cooking with wood, crop waste or cow dung – are “unequivocally having an impact on glacial melting” in the Himalayas. (10/06, #11)
  • Burning coal underground could be one of the next breakthroughs to increase the world’s energy supply, executives and academics told a conference in London. The world could exploit huge additional coal reserves that are too deep or remote to mine, using a technology that burns the fuel hundreds of meters underground. But the approach is so far untested on a commercial scale, making the initial expense a concern for governments and investors. “The potential is huge,” said Gordon Couch, from the International Energy Agency’s Clean Coal Center. Despite 50 years of trials, no commercial use has been demonstrated. (10/06, #18)
  • Carbon-dioxide emissions are turning the waters of the Arctic Ocean into acid at an unprecedented rate. Research carried out in the archipelago of Svalbard has shown in many regions around the north pole seawater is likely to reach corrosive levels within 10 years. The water will then start to dissolve the shells of mussels and other shellfish and cause major disruption to the food chain. By the end of the century, the entire Arctic Ocean will be corrosively acidic.(10/05,#4)