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1. Oil and the Global Economy

After a dip which sent NY oil down from $110 a barrel to as low as $106 on Tuesday, prices bounced back to close at $112.29 on Thursday, the last trading day of the week. The dip was precipitated by the Saudi oil minister‘s announcement that his country had cut back production by 800,000 b/d in March as the oil markets were “oversupplied.” After recovering from the shock of hearing that the oil markets were “oversupplied” prices climbed steadily on Wednesday and Thursday to close just $1.70 below the recent high of $114 a barrel hit two weeks ago. A falling dollar and the perception that the US economic situation is improving contributed to the increasing prices. The weekly US stocks report, which showed an unexpected drop in the US crude inventory of 2.3 million barrels, also contributed to the strength. The most remarkable feature of the week‘s trading was the minimal attention paid to the news that the Saudis were in fact not replacing the lost Libyan oil exports.

Despite some unexpected earnings that sent the equity market higher earlier in the week, there is still an undercurrent of concern that the struggle in Congress over the size of the US deficit and the steady decline of the dollar. Last week S&P warned that expanding deficits may lead to a downgrading to US public debt. US Federal Reserve policy of holding US interest rates close to zero likely will continue to erode the value of the dollar and increase the price of oil.

In London, Brent crude remained about $12 a barrel higher than NY oil and closed the week at $123.99. Many analysts are noting that oil prices are becoming more tightly linked to the dollar, which will play an increasing role in oil-price moves in the weeks ahead. NY gasoline futures moved ahead steadily last week to close at $3.31 a gallon, the highest since the summer of 2008. Overall US demand for oil products remains firm although there are indications that gasoline prices that are approaching or over $4 a gallon in many places may be cutting consumer demand.

There are also indications that the demand for oil may be edging up in Asia. Japan‘s problems are well known, but there are reports of coal and electricity shortages in China and India which usually leads to increased demand for oil.

2. China

Last week‘s news out of China was a familiar story. Consumer prices are still rising rapidly and China‘s central bank took yet another move to control prices by increasing reserve requirements. Despite state subsidies on gasoline and diesel which keep their retail price below world levels, hundreds of Shanghai truck drivers staged a rare strike for three days last week to protest high fuel prices. Ironically, this strike took place at the same time that the IEA was calling on China to eliminate energy subsidies in order to foster more economically rational usage. Despite efforts to tamp down an overheated economy, China‘s GDP still grew at 9.7% last quarter with the demand for oil up roughly 9% over last year and electricity consumption up by 11%.

There are already signs that energy shortfalls are developing. A growing number of regions are reporting electricity shortages due to a dearth of coal and low water levels at hydro dams. In the past, electricity shortages have led to widespread use of emergency generators, with an accompanying increase in oil imports, to keep factories running.

Coal markets in Asia are unusually strong, with steam coal likely to average $130 a ton this year, up from $99 in 2010. Chinese coal imports are expected to rise by 8% this year while India‘s may climb 28%. Japan may be forced to import an extra million tons to offset the loss of nuclear generating capacity. Chinese coal production, about 3 billion tons a year and growing at roughly 10% a year for the past decade, is bound to run out of steam one of these years just because of sheer size. Last year there were reports that this explosive growth was coming to an end in the next few years. Whether this was from concern about emissions or a simple inability to mine and ship to power plants an additional 300+ million tons of coal each year was never made clear. Plans are underway across China to consolidate small, inefficient coal companies into larger, hopefully more productive organizations

China‘s domestic oil market appears to be tightening. Sinopec announced that it is halting fuel exports to ensure the domestic supply and the large state-owned refiners announced that they will increase production this month. Some of this increase will be refineries returning from maintenance but some will make up for production slowdowns from small private refiners that are losing money due to price controls.

Where this all goes will have a significant impact on world fuel prices for the rest of this year. China already appears to be increasing its demand for oil imports in 2011 at a level higher than forecast by IEA. If electricity shortages develop this summer, it seems likely that China‘s oil demand will exceed the IEA‘s forecast.

3. The Saudi Enigma

The Kingdom of Saudi Arabia is a troubled place these days. With other less-than-democratic governments falling or teetering across the region it seems only a matter of time before the legitimacy of the royal family‘s claims to power is questioned in the streets. To counter the “Arab Awakening” there is little the royal family can do but beef up the security forces, head-off any signs of popular opposition, and buy the acquiescence of the governed by increasing the populace‘s share of oil revenues.

Last week it came as a shock when the Saudi oil minister announced that the Kingdom had cut oil production by more than 800,000 b/d from February to March. The minister talked about the market being “oversupplied”; but with 1.3 million b/d of Libyan exports lost indefinitely, the US economy holding steady, Asian demand for oil growing rapidly, and global oil prices flirting with all-time highs, “oversupply” of the oil markets seems unlikely. The Saudi announcement set off a wave of interpretations as to just what was going on and, more importantly, would the Saudis keep their exports around 8-9 million b/d rather than increasing them to 10-12 million b/d as is generally deemed necessary to keep oil prices under control in the next year or two.

The first interpretation of the Saudi cutback was that Saudis are correct: world oil markets were indeed oversupplied in March, due if anything to the temporary loss of about a third of Japan‘s refining capacity. High oil prices are only caused by speculators betting on prospects for further unrest in the Middle East. This interpretation was seized upon by the Obama administration, which launched an investigation of oil “speculation” amidst much fanfare. The corollary to this interpretation is that as soon as the Saudis get more orders for their oil, they will respond by increasing production right up to the theoretical maximum of 12.5 million b/d if necessary.

Another hypothesis is that Saudi oil production finally has reached the practical limits to its growth. After jacking up production to meet Chinese demand to 9+ million b/d over the winter, it turned out that this level of production was more than the Saudi oil fields could sustain comfortably. This interpretation is doubted by the IEA and others who continue to assert that the Saudis can sustain a production level above 12 million b/d. A research paper published this week by the Saudi OPEC governor, however, talks about the Kingdom‘s oil production remaining steady at 8.7 million b/d to 2015 and then slowly rising to 10.8 million b/d in 2030. If Saudi production does hold below the 8.7 million b/d for the next 4-5 years, the world oil markets are going to be a lot tighter than most people would like to see.

The final possibility is that the production cutback is a manifestation of Saudi displeasure with the US and EU for failing to give full support long-time allies in Egypt, Yemen, and Bahrain that were threatened by internal dissent. This idea holds that the Saudis have decided to cut back production to a comfortable level, let prices rise, and use the massive revenue increases to fight domestic unrest. The effects of very high oil price on OECD economies are no longer of concern to the Saudis, as rapidly increasing Asian demand would suffice to keep the revenue flowing. “Arab Awakening” has made the Middle East a very different place from the one we have come to know ever since the end of World War II. It is not surprising that the Middle Eastern oil markets are becoming a different place too.

Quote of the week

“We continue to believe that the top for crude oil prices this year is not yet in.”

— Oil Analysts at Barclays Capital

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

  • Japanese exports, which had seen more than a year of solid growth before the earthquake, fell 2.2% from a year earlier in March, to $71 billion. More pronounced than some analysts had expected, the decline was a sharp turnaround from February’s increase of 9%. (4/20, #17)
  • Disruptions at component suppliers will prevent a resumption of full production at Toyota’s global factories until at least November. Domestic plants will produce at around 50% of normal through July; outside Japan, production will be at 40% through August. (4/23, #12)
  • Electricity generation in India grew 5.6% in the year ended March 31, to 811 billion kilowatt hours from 768 billion kWh a year earlier. Government targeted 830 billion kWh. Generation at coal-fired plants rose 4% to 53 billion kWh, while government targeted 8%. (4/21, #15)
  • Reliance, India’s biggest company, missed analysts’ earnings estimates for the 5th time in six quarters after natural gas production from the nation’s biggest deposit declined. Net income from January through March rose 14% to $1.2 billion from a year earlier. (4/22, #11)
  • A mob opposing a government plan to build the world’s largest nuclear plant in Maharashtra state, India, ransacked a hospital and set buses afire last Tuesday, April 19, during a protest strike. The four-year opposition in Jaitapur port has grown since Japan’s nuclear crisis, with critics noting the site is in a seismic zone. (4/20, #18)
  • In Pakistan, refineries and gas-distribution companies owe Oil & Gas Development Co. Ltd. $1.58 billion, including a late fee of $160 million. To ensure a regular fuel supply, OGDCL needs $600 million for projects with a combined estimated capacity to produce 400 million cu. ft. a day of natural gas, 500 tons a day of LPG, and 8000-9000 b/d crude oil. (4/22, #7)
  • Thailand’s decision to continue capping diesel prices at $3.80 a gallon will trim annual headline inflation by 0.7%, according to Bank of Thailand. The move to preserve what is seen as one of the government’s more populist policies comes as it prepares to dissolve parliament and call a general election that could come by early next month. (4/20, #19)
  • Half of Dhaka’s 577+ pump stations have not yet obtained permanent generators to ensure an uninterrupted water supply during summer load-shedding. Bangladesh power generation capacity is now 4,000 MW vs. demand of 5,500. (4/22, #13)
  • Sinopec seeks $3.8 billion of five-year term loans from lenders. The loans are being offered to banks with interest and fee payments. Proceeds will be used for overseas acquisitions and to refinance debt associated with Syncrude Canada. (4/18, #17)
  • China aims to build its coal stocks by 5 million metric tons in the first phase of a proposed national coal reserve. China Shenhua Energy Co. will contribute 1.7 million tons. (4/20, #16)
  • An annual 1/10-inch rise in sea levels caused by global warming over the past 30 years has contributed to a growing number of disasters along China’s coast, according to the country’s oceanic administration. Average air and sea temperatures in coastal areas have risen about 0.7 and 0.4 Fahrenheit degrees respectively over the past 10 years. (4/21, #18)
  • The Chinese government’s commitment of $15 billion to build and sell electric cars in the next five years would dwarf any financial support from the World Bank for new technology. A Bank study indicates China’s soaring oil imports could stifle the economy, while vehicle emissions could choke cities with air pollution. Seventy percent of Beijing’s carbon monoxide and hydrocarbon emissions come from transportation. China’s oil consumption is expected to rise to 11.6 million b/d by 2020, from 7.6 million in 2007. Half its oil is now imported. (4/20, #28)
  • Russia’s Sovcomflot will ship 3-4 cargoes of gas condensate from northwest Russia to Asia via the Arctic Ocean this year. This year’s 1st shipment will mark the 2nd voyage ever of a tanker carrying hydrocarbons across the so-called Northern Sea Route, which is a bit more expensive but quicker as it trims 4,000 nautical miles from the 11,000-mile journey via the Suez Canal, Sovcomflot’s Ambrosov says. (4/21, #28)
  • The year before Britain took a leading role in invading Iraq, plans to exploit its oil reserves were discussed by government ministers and the world’s largest oil companies, government documents show. The minutes of a series of meetings between ministers and senior oil executives are at odds with the public denials of self-interest from oil companies and Western governments at the time. (4/20, #13)
  • The Iraqi Oil Ministry will announce a 4th bidding round this week. The oil minister is expected to offer international companies 12 oil and gas exploration blocks. (4/21, #11)
  • Dubai will continue to use natural gas as a main fuel for power generation even as its Supreme Council of Energy is studying plans to start producing power from clean coal and solar energy by 2020 and from nuclear plants by 2030. The UAE sheikhdom aims to generate 70% of its power from natural gas and the rest from coal, nuclear energy, and renewable sources. (4/19, #12)
  • Former Egyptian Oil Minister Fahmy has been arrested with five associates on charges of supplying natural gas to Israel at below-market prices at a loss to Egypt of $714 million. Former President Mubarak will be questioned for another 15 days on the secretive deal. (4/23, #5, 6)
  • Iran’s oil and gas sectors suffer from the absence of the oil majors. Field productivity is undermined by the threat of legal action for sanctions violations, unattractive terms that Iran offers operators, and a purge of experienced oil officials. These need at least $200 billion in investment by 2015, according to the oil ministry. (4/21, #10)
  • US Congress is expected to consider a new round of Iran sanctions, some to be aimed at companies doing business with Iran’s energy sector. (4/22, #18)
  • Kathmandu is suffering acute fuel shortages. Since last week’s tanker strike and two national holidays, Nepal Oil Corp. has been unable to buy enough fuel from India. (4/19, #18)
  • France is considering banning shale oil and gas exploration. This would be a first in Europe, where shale reserves remain relatively unexplored compared to the US. (4/20, #24)
  • Qatar’s Bu Samra, one of the world’s largest LNG tankers, has docked in England. With a capacity of 9.36 million cu. ft. of LNG, it is the first Q-Max tanker to arrive at the terminal in Kent since a new jetty allowed them to dock in December 2010. (4/21, #27)
  • To transport wind energy, the German Energy Agency estimates over 2,000 miles of high-voltage power lines are needed by 2020. It will cost 75% less to upgrade Germany’s rail grid than to build new power lines, economic officials say. (4/23, #22)
  • RWE has criticized Germany’s temporary suspension of the country’s seven oldest nuclear plants. The company also warns that an accelerated exit from nuclear power generation would jeopardize jobs in the country’s industrial sector, put its climate-protection targets at risk, and increase energy prices. (4/20, #23)
  • Pemex says crude-oil production and exports were stable April 1-17, with total output just under the company’s target of 2.6 million b/d, preliminary figures show. (4/20, #14)
  • BP sues Transocean, which owned and operated the Deepwater Horizon, and also Cameron, which manufactured the blowout preventer, for negligence. A US Coast Guard report cites Swiss Transocean’s safety failures. (4/21, #25, 26; 4/23, #15, 16)
  • US oil production this year is on course to rise, independent forecasters believe, in spite of delays to drilling in the Gulf of Mexico. Although offshore output will probably decline, the Bakken shale will drive onshore production. Including related liquids as well as crude oil, IHS CERA and Wood Mackenzie expect that total US production will rise, albeit probably at a slower rate than in 2010. (4/21, #24)
  • The US worries Cuba can’t ensure its offshore drilling will be safe. Less concerned is Mexico, which has an offshore boundary dispute with Cuba. Cuba wasn’t among a dozen nations invited to Interior’s drilling safety conference, but Interior and Spain’s Repsol have recently met about the company’s plans to drill in Cuban waters. (4/21, #13)
  • More drilling rigs sought crude oil than natural gas in the US last week for the first time since 1995, according to Baker Hughes. There were 913 rigs drilling for oil, up 33 from the previous week and the most since 1987. The increase in oil rigs was the largest in any week since 1990. The natural-gas rig count fell by seven, to 878. (4/22, #17)
  • A Chesapeake gas-well blowout near Canton, Pa., spilled thousands of gallons of chemical-laced water last Wednesday, April 20, contaminating a stream and leading officials to evacuate seven nearby families. Tainted water flowed all Wednesday; by mid-afternoon workers had diverted the salty water from the stream. By Friday workers had stopped the flow of liquid and natural gas and were to start to seal the well. The cause was unclear through Thursday. (4/21, #22; 4/23, #19)
  • Companies’ disclosure to a new hydraulic fracturing-chemical database will be voluntary, and “will not include the chemical identity of products labeled as proprietary,” US House Democrats say. The lawmakers note that the fluids contain substances identified as human carcinogens, or listed as hazardous under federal clean air or water rules. (4/18, #26)
  • As researchers study whether 1,000 unexplained earthquakes in Arkansas are linked to natural-gas exploration, Chesapeake and Clarita have agreed to extend the shutdowns of two injection wells in the region. (4/21, #23)
  • A six-state lawsuit to cap greenhouse-gas emissions from power plants nationwide seems likely to fail after Supreme Court justices suggest recent federal action to slow climate change leaves no room for separate litigation. The states allege that, by discharging 650 million tons of carbon dioxide annually, five power companies are accelerating global warming, causing smog in Los Angeles and lower crop yields in Iowa. Defendants argue that these policy questions don’t belong in court. (4/20, #22)
  • Industrial-scale freshwater algae farming could lessen US oil imports but drain water resources, according to the Department of Energy. The algae could produce enough fuel to eliminate 48% of imports for transportation but require 5.5% of the land area in the lower 48 states and consume three times the water now used to irrigate crops. (4/18, #30)
  • NRG will drop plans to build two nuclear reactors in Texas. But NRG with partner Toshiba intends to continue seeking permission from the US Nuclear Regulatory Commission to build reactors adjacent to its existing South Texas Project nuclear plant. (4/20, #27)
  • Biofuels could meet 27% of world demand for transportation fuels by 2050 vs. 2% now and cut carbon dioxide emissions by 2.1 billion tons a year, according to IEA. Increased use of biofuels could help boost global food production by encouraging investment in agriculture, IEA says. Critics say increased growing of crops for fuel strains agricultural resources; and biofuels can encourage deforestation in the developing world. (4/21, #7; 4/22, #4)
  • The world must prepare for more nuclear accidents like Chernobyl and Japan’s Fukushima Dai-ichi plant, UN Sec.-Gen. Ban warns at a Kiev commemoration of the reactor explosion 25 years ago. Ban proposes strengthening the Int’l Atomic Energy Agency and increasing attention on “the new nexus between natural disasters and nuclear safety.” (4/21, #31)
  • The Sakti3 company aims to develop solid-state batteries for electric vehicles composed of a thin material layer that won’t explode; are half to a third the size of conventional ones; can survive thousands of charge-discharge cycles; and can withstand high temperatures; in order to double or triple the energy density. Cutting the size of a battery system in half could also cut its cost by as much as half. (4/22, #21)
  • Near-infrared photovoltaic cells can turn a windowpane into a solar panel without blocking visible light. The current efficiency of 2% could be easily increased to 10%. Longevity of the cells needs to approach the decades-long life span of the windows themselves. (4/23, #23)