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1. Oil and the Global Economy

There was little change in oil prices last week as the markets waited for further developments in the various Middle Eastern uprisings and the outcome of Japanese efforts to control its radiation leaks. In NY, oil prices climbed from $103 a barrel to $105 on Tuesday and remained there for the rest of the week. In London, oil prices moved up to $115-116 a barrel on Monday and hovered there until the Friday close at $115.59. While most commentators still say prices contain a $15 a barrel “fear premium” due to the Middle Eastern protests, a few analysts are starting to talk about Brent crude moving up to $120-130 in the next quarter as summer demand gets ahead of OPEC’s ability to increase supplies.

China is forecast to increase its demand for oil by a conservative 6 percent this year, but new analysis has Beijing’s apparent oil demand still increasing by 10.1 percent year over year in February. China does not release official oil demand statistics, so outside observers are forced to develop an “apparent demand” from import and refining data.

US crude stocks continued their normal seasonal growth the week before last, but gasoline stockpiles registered an unexpected 5.8 million barrel drop. US gasoline prices resumed climbing last week with NY futures closing at a recent high of $3.06 a gallon. The AAA now puts the average US retail price for regular gasoline at $3.58 and over $4 a gallon in California. These numbers are likely the cause of a drop in US consumer confidence registered by a new survey last week.

Financial institutions have always been reluctant to talk about the possibility that very high oil prices might be in the offing, but last week a veteran Barclays Capital analyst came out with a forecast of $185 oil, albeit in 2020. Given the pace of events in the Middle East, the OECD, and Asia and the likelihood that substantial increases in global oil production is not in the cards, $185 oil 10 years from now seems conservative; unless, of course, a major economic setback comes first.

2. Conflict in the Middle East

Events moved quickly across the Middle East and North Africa last week as coalition airstrikes forced Gadhafi’s troops to withdraw from Eastern Libya towards Sirt halfway between Benghazi and Tripoli. From here on the course of the Libya uprising and with it the duration of the Libyan oil outage becomes murkier. With the elimination of the country’s air defenses and the destruction of the tanks and artillery that were firing on urban areas in eastern Libya, the course of the struggle rests on the outcome of political disputes within the coalition of countries enforcing the no-fly zone. If coalition aircraft continue strikes against the government’s tanks, artillery and rocket launchers wherever they are found in the country, then the opposition could conceivably be able to take over the major cities and drive Gadhafi from power in the foreseeable future. If, however, Gadhafi is allowed to fortify and control the major cities, unmolested by coalition airpower, then the conflict could be protracted.

With much of the country’s oil export capacity now in the hands of the opposition forces, it is possible that arrangements could be made for some resumption of oil exports with the proceeds going to the opposition. Preliminary reports suggest that there has been minimal damage to oil infrastructure in the east. Considering that foreign oil workers have nearly all left the country, any resumption of shipments are likely to be at a very low level for the foreseeable future.

If a stalemate develops in Libya, other factors such as shortages of food, fuel and medicines are likely to increase in importance eventually forcing some kind of settlement. On balance, however, it seems that there will be very little oil exported from Libya for the immediate future.

The newest factor in the spreading Middle Eastern unrest is Syria where, in a now familiar scenario, government security forces gunned down unarmed protestors thereby sparking more and larger protests. Although talking about reform, the government fears that even a small relaxation of the oppression will set off forces resulting in the end of the regime. Syria is Iran’s closest associate in the Middle East. The demise of the Assad regime could result in serious repercussions in the confrontation with Israel and the future of Hezbollah and Hamas. Clashes between pro- and anti-monarchy demonstrators took place in Jordan last week and there were exchanges of fire between the Israelis and Palestinians in the Gaza strip. A change of government in Yemen appears to be drawing near and in Bahrain the Kuwaitis are offering to mediate between the Sunni government and the Shiite protestors.

With the exception of Libya, thus far the pan-regional unrest has resulted in very little reduction in oil exports. The natural gas that Egypt was supplying Israel and Jordan that was interrupted by sabotage is still not flowing but this seems to have something to do with a dispute over prices and there has been some reduction in Yemen’s exports.

It was a quiet week in the streets of the region’s major oil producers, with several governments, most notably the Saudis, claiming that they are different from those that have succumbed to or are under heavy pressure from protestors. However, it seems only a matter of time before further disruptions in oil exports take place somewhere in the region.

3. Japan

As the crisis surrounding the continuing leakage of radioactivity from Japan’s tsunami-damaged nuclear reactors entered its third week, there have been a number of developments affecting the short and longer range outlook for oil. As tsunami clean-up operations get underway and a large share of Japan’s electrical generating capacity remains off-line, the demand for oil and products to provide relief to the hundreds of thousands of tsunami victims is increasing. This is balanced by the economic dislocations caused by the tsunami damage, the forced evacuations, and the spreading radioactive material from the overheating nuclear reactors.

In a few cases, relatively small factories that were producing critical parts have been destroyed, thereby shutting down many larger factories across the globe. One estimate says that has much as 35 percent of global automobile output could be affected for several months. Disruption on this scale could put a crimp in the global demand for oil.

Leaking radioactivity could prove to be a more significant problem. Japan has already widened the exclusion zone around the leaking plant to a 20-30 Km zone and has warned residents to prepare for a mandatory evacuation should the situation get worse. Major shipping companies are already bypassing ports close to the leaking reactors including Tokyo. Disruption of port facilities for an extended period could do major damage to the Japanese economy and reduce its demand for oil. Extensive disruption of Japan’s economy would have repercussions among Japan’s many trading partners around the globe and could eventually lead to measurable decline in global economic activity and the demand for oil.

Repercussions from the leaking reactors have already caused many countries to rethink their nuclear generating programs. In Germany there have been large demonstrations demanding that the country’s nuclear reactors be closed permanently. Most countries, however, are simply reviewing the susceptibility of their existing and planned reactors to earthquake and other potential threats.

Quote of the week

“Global oil prices are moving towards $120 a barrel. We consider this an acceptable price that will not harm global growth.”

— Iraqi oil minister Abdul-Kareem Luaibi

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

  • Japan’s fossil-fuel needs are likely to be higher than forecast. Several reactor restarts and new building projects have already been pushed back, even for utilities not directly affected by the quake. Power rationing and blackouts in the northeast could last until summer, and efforts to restore power have been hampered by the country’s modular power grid. (3/25, #8)
  • Renewed concerns about atomic power may spur orders for $202-million liquefied-natural gas tankers already in short supply. “Demand for LNG is going to grow as a source of alternative energy,” a Mirae Asset Securities Co. analyst says. (3/21, #4)
  • Shell says Japan’s nuclear accident will support world natural gas demand in the longer term and plans to increase liquefied natural gas supplies to Japan. The company made eight extra shipments of LNG to Japan the week before last; an executive says there is “more than enough” supply for extra shipments to Japan and although there is currently “limited flexibility,” more uncommitted cargoes are available beyond three months. (3/22, #5)
  • Russia will double its oil exports to Japan to 18 million tons this year in the aftermath of the earthquake and tsunami. Japanese companies could join Russia’s Gazprom in exploring two massive gas fields, and Russia PM Putin has suggested that Russia could redirect some of the liquefied natural gas it planned to sell to Europe to Japan instead. (3/24, #20)
  • The disruptions from Japan’s crisis have cascaded into cargo shipping. Fearing the potential impact on crews, cargo, and vessels, shipping lines are restricting or barring ships from calling on ports in Tokyo Bay over radiation concerns. From China to California, radiation checks on ships have started to be required. (3/26, #9)
  • Japan’s Chubu Electric will delay building a 6th nuclear reactor at its Hamaoka plant 125 miles southwest of Tokyo by one year, until 2016, but still aims to put the reactor into operation by March 2024, and to build a 2nd nuclear plant with 3,000-4,000 MW of capacity by 2030. (3/24, #14)
  • Delta Air Lines won’t add flights this year and instead will cut capacity 2% from 2010 levels. Delta has the largest presence among international airlines in Japan, deriving $2 billion a year from flights going through Tokyo, and expects earnings to be cut by $(250-400) million due to reduced traffic in the wake of Japan’s multiple disasters. (3/23, #15)
  • While other uranium investors have been losing their heads during Japan’s nuclear crisis, China has kept its. A $1.23-billion deal on March 7 to buy Kalahari Minerals has put China in the box seat to secure access to one of the world’s biggest uranium deposits in Namibia. But the Japan crisis has collapsed uranium-mining shares, making the Chinese deal look overpriced as other deals in the sector are being renegotiated in favor of buyers. (3/22, #17)
  • China will tax rare earths starting April 1, increasing the country’s leading rare-earth producer’s costs by $110 million this year. (3/24, #16)
  • Following a move by China’s central bank Friday, March 18, to raise reserve requirements to a record 20% of deposits, the bank last week took further measures to tighten liquidity. (3/24, #17)
  • China could be poised for a 3rd increase since December in retail prices for refined products. Road users say the February hike in retail prices for gasoline and gasoil has already hurt businesses and caused private car owners to reduce vehicle use. (3/23, #9)
  • China Oilfield will continue to expand drilling operations to the Middle East and Africa despite political turmoil in those regions. (3/23, #10)
  • Saudi Aramco has agreed with PetroChina to supply crude oil to a new refinery in Yunnan province. PetroChina parent CNPC says the new refinery will receive crude through a pipeline being built from the coast of Myanmar to China. (3/21, #8)
  • Saudi Arabia was the top crude supplier to China for the sixth month in a row in February and is set to retain the position for the foreseeable future. China imported 1.04 million b/d of crude oil from Saudi Arabia in February, up 9.8% year on year but 5.7% less than in January. Angola was the second top supplier at 693,395 b/d. (3/24, #12)
  • Saudi Arabia’s 2nd-ever municipal elections, delayed since October 2009, will be held on April 23. The government won’t extend suffrage to women. (3/23, #7)
  • Some oil and natural gas continued to flow from Yemen to customers abroad last Thursday, March 24, despite an escalation in unrest and what opposition groups warned was an increasing threat of civil war. Canada’s Calvalley said a pipeline shipping 50,000-70,000 b/d from Yemen’s western oil fields to the port city of Ras Isa on the Red Sea was shut down in a recent tribal attack. Austrian oil company OMV had shut all its production of 6,600 boe/d since March 18. (3/25, #6)
  • Iraq Oil Minister Luaibi announces a bid in November for another 12 oil and gas projects, and he outlines a 4-year plan that sees oil production and export capacity doubling through 2014. Also, he says, OPEC believes the oil price is approaching $120 a barrel but unlikely to go higher, a level that is “acceptable” and will not hinder global growth. (3/23, #3, 6)
  • India’s coal output will grow 7-8% next financial year, which starts this Friday, April 1. Production target for the current financial year was 572.37 million metric tons. (3/22, #18)
  • Korea National will buy a stake in a Texas shale-oil block from Anadarko for $1.55 billion. Also, South Korea will cooperate with Mongolia in clean coal technology and resource development; to upgrade coal for heating and power generation, and to invest $300 million in coal-gas power generation. Seoul has also made recent investments in Indonesia and deals for Kazakh oil reserves. (3/22, #19, 22)
  • Indonesia’s crude output in February fell 7% year on year to 785,234 b/d, compared with 841,280 b/d a year ago. But February production edged up 0.5% compared with 781,544 b/d in January. (3/25, #10)
  • Venezuela hopes to send 1 million b/d of oil to China within the next three years. That would require a drastic increase in production at a time when the former faces a lack of investment and declining output. (3/23, #8)
  • Brazil’s Petrobras will import 1.5 million barrels of gasoline in April to ensure adequate fuel supplies, as many sugarcane crushers are producing sugar rather than ethanol. (3/26, #7)
  • Argentina may step up controls on diesel and gasoline exports, industry insiders say. The nation’s energy secretary has requested details on exports in the 2nd half of 2010 from refiners ExxonMobil, Petrobras, Shell, and YPF. (3/22, #10)
  • Profit from shipping gasoline to the US from Europe in the 2nd quarter will rise 24%. European refiners will need to find alternative markets for naptha while Japanese petrochemical plants remain shut. (3/22, #4)
  • Libya’s European interests including refiner Tamoil Group, with sister operations in Africa, has been dragged into the conflict. Although UN sanctions didn’t list Tamoil, BP has severed trading links with Tamoil in Germany while Uganda is freezing company assets. (3/26, #5)
  • An increased tax on UK oil production risks holding back investment in the North Sea and stalling BP and ConocoPhillips’s plans to sell off mature assets. The tax changes will lower the value of fields on the block in the UK continental shelf, where deals have already been hampered by the cost of dismantling decades-old platforms. The tax rate was raised on oil production profit to 62% from 50% to pay for a tax cut on gasoline for consumers. (3/25, #16)
  • BP’s proposed $16-billion partnership with Rosneft was thrown out after a legal challenge by Russian billionaire partners. BP will apply for a ruling on whether the share swap can proceed without the Arctic exploration deal. Rosneft has vowed to push ahead despite the block. (3/25, #14, 15; 3/26, #13)
  • BP will sell for $575.5 million its remaining interest in a Colorado gas-processing plant to Anadarko, BP’s second asset sale in a week. Plant production capacity is 195 million cu. ft. ft. a day of gas and 15,000 b/d of natural-gas liquids and gas condensate. (3/25, #12)
  • A piece of drill pipe trapped inside the Deepwater Horizon’s blowout preventer kept the device from averting last year’s massive oil spill in the Gulf of Mexico, U.S. investigators say. The force of the blowout bent the pipe, which jammed the shears of the blowout preventer, leaving plenty of space for 4.9 million barrels of oil to leak out. (3/24, #18, 19)
  • In an ongoing bout between Texas and the Environmental Protection Agency over gas- drilling safety, the state says extensive testing shows that inflammable water wells west of Fort Worth were not contaminated by nearby drilling, as the EPA maintained. (3/23, #14)
  • Higher fuel prices will likely take a toll on the US gaming industry, analysts predict, at casinos from Atlantic City, N.J., to Las Vegas, Nev., and beyond. (3/25, #13)
  • ExxonMobil expects to spud a deepwater well in the Gulf of Mexico within weeks, after getting permission last Tuesday, March 22, to resume operations halted by the US drilling moratorium. (3/25, #11)
  • The US Bureau of Ocean Energy Management, Regulation, and Enforcement has approved a 6th deepwater drilling permit that complies with new safety standards implemented in the wake of the Horizon disaster. The approved permit is a revised permit to drill a new well for Statoil on Alaminos Canyon, about 216 miles south of Texas City, Texas. (3/26, #11)
  • The number of rigs drilling for natural gas in the US rose for the first time in four weeks, while the oil rig count hit its highest level in over 20 years for a 3rd week. There were 880 rigs drilling for natural gas in the US during the week ended Friday, March 25, up by five from the previous week. The oil-rig count rose by 12 to 851. (3/26, #12)
  • A perspective paper in Journal of Chemical Technology & Biotechnology makes a case that conversion of biomass to cellulosic ethanol is the most efficient and productive use of biomass to create a high-octane, environmentally friendly transportation fuel. (3/23, #17)
  • Scientists are using a photosynthetic bacterium and a hydrocarbon-producing bacterium together to make hydrocarbons from carbon dioxide. A University of Minnesota graduate student figured out how a protein could transform fatty acids produced by the bacteria into ketones, which chemical engineering professors then turned into diesel fuel. (3/24, #23)
  • In Germany wind turbines, hydroelectric plants, solar cells, and biogas digesters provided 17% of electricity last year, exceeding a 12.5% target for renewable sources. (3/26, #14)