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1. Oil and the Global Economy

Oil prices rose steadily through Wednesday, fell sharply on Thursday, and stabilized on Friday. The underlying tension between concerns over the advent of a demand-killing recession vs. increasing demand for oil in Asia coupled with stagnant global oil production is behind the volatility. NY oil climbed to nearly $89 a barrel on Wednesday, fell to $79 on Friday, and climbed to close out the week at $82.26. Traders say there is good support at the $80 level.

In London, Brent crude took a less volatile path, falling less than $7 a barrel from the Wednesday high of $110 and then closing out the week at $108.75. In Europe, where there have been shortages of Libyan, North Sea, and Nigerian oil in recent weeks, crude settled at a record $26.21 a barrel above the US contract. US oil prices continue to be suppressed by outside factors such as the glut at the key Cushing, Oklahoma oil terminal and an outlook among traders that places an excessive weight on US economic developments rather than the fundamentals of the oil markets.

The global economic news was not good last week, with slowdowns reported by numerous indicators in the US and EU, sparking renewed talk of recession. Japan’s economy is recovering more quickly than expected from the tsunami, but is facing many challenges stemming from the radiation leakage and the possible loss of its nuclear power production. Tokyo’s demand for LNG to generate the lost nuclear power is increasing rapidly and may lead to global shortages and higher prices.

Last week’s US stockpiles report had some unusual aspects. On Tuesday the American Petroleum Institute which garners a lot of publicity by releasing its version of Department of Energy’s official and thorough stockpiles survey 18 hours earlier, announced a 5.4 million barrel drop in US gasoline stocks. This unexpected number helped drive crude prices in London up to $110.31 a barrel in the hours before the official numbers showed gasoline stocks falling by 3.5 million barrels as refiners switched over to increased production of distillates in anticipation of the winter heating season.

The EIA also reported an increase in US commercial crude inventories of 4.2 million barrels without noting that this increase came from transfer of 5.9 million barrels out of the strategic reserve and into commercial stockpiles. Without this transfer, akin to moving money from one pocket to another, the US crude stocks would have declined by 1.7 million barrels due to lower imports. The IEA still believes that global oil consumption is running somewhat ahead of production, with the balance coming out of various kinds of stockpiles – commercial, floating, and strategic.

Ward’s Auto reported last week that the global car and truck fleet topped a billion vehicles for the first time last year. The Chinese vehicle fleet is now over 78 million including a 27.5 percent jump during 2010.

2. The Middle East

Repercussions from the Arab awakening continue to grow across the region triggering new confrontations that could ultimately threaten oil exports. Freed from the constraints of the Mubarak-Israeli alliance, various Palestinian groups are seizing the opportunity to have a go at the Israelis. Attacks on Israel and the obligatory Israeli retaliation have the potential for all sorts of complications. A faction of Hamas has already declared an end to the ceasefire and tensions between Cairo and Tel Aviv are increasing.

A new wave of bombings across Iraq last week left 60 dead and over 100 wounded as the issue of some residual US force remaining in Iraq comes to a head. The stability of Iraq in the wake of a US complete or partial withdrawal will be crucial to the hoped-for increases in oil production. The Middle Eastern situation is complicated by the uprising in Syria. While nearly every nation is condemning Damascus for its brutal suppression of demonstrations, the Iraqi government is voicing support for the Assad government at the behest of Tehran. The many cross currents at play in the region make the situation as dangerous as it has been for many years, while the loss of substantial quantities of oil production so far has been limited to Libya; this could change at any time.

With insurgent forces now in Tripoli, there has already been talk that oil exports could resume shortly. A report released by consultants Wood-Mackenzie, however, is not so optimistic. The report notes that there has been an unknown amount of damage to oil production facilities and that most of Libya’s oil was produced with the aid of thousands of foreign oil workers who have left the country. At best Wood-Mackenzie does not foresee substantial amounts of Libyan oil being exported before the end of 2012 and it could be 2014 before the pre-crisis production of 1.6 million b/d is achieved.

3. Global power shortages

Largely unreported in the western press is the extent of the power shortages that are plaguing an ever-increasing number of countries across the world. Some of the shortages are due to droughts which have cut hydro-electric production, but more and more of the world’s electric companies report they cannot afford to operate thermal power stations with oil prices above $100 a barrel.

As increasing quantities of inexpensive electric-powered consumer devices are being sold across the world, decades-old power systems can no longer support the demand. In many countries theft of electric power is endemic, leaving companies unable to pay for high-priced fossil fuels to burn in their power stations. Government price controls are only adding to the revenue problems.

It is hard to find a Central African country these days without some sort of power shortage – usually electricity but sometimes gasoline or propane. In South Asia the situation is worse with Pakistan, Nepal, and Bangladesh destined to be in serious economic trouble within the next few years.

Small island states which are completely dependent on imported fuel are nearly all have a problem. On these islands, the little power in use is generated by small, inefficient, thermal or diesel power stations making the essentials of civilization such as lighting, refrigeration, and water pumps very, and sometimes prohibitively, expensive to operate.

In most cases, the now widespread rolling blackouts are inconveniences, but as outages extend to 12 or more hours a day, vital services are threatened. Operating factories under these conditions is becoming difficult to impossible and unless an organization can afford to generate its own very expensive electricity, enterprises around the world are being shuttered throwing hundreds of thousands out of work.

The prognosis is not good even for the world’s economic powerhouses such as India. A recent report by Deloitte Touche notes that India’s plans for economic growth are likely to be derailed by a lack of sufficient electricity. Increased demand for imported fuel from China and Japan and numerous other countries will make it difficult for India to import the quantities of fuel to necessary to maintain economic growth.

In sum, the evidence is accumulating that the limits to growth are already being felt in many corners of the world.

Quote of the week

“A strong majority of Americans say it is likely that oil prices will triple in the coming five years and that such a tripling would be harmful both to the economy and to public health. Conservatives and those dismissive of climate change are among the most concerned by the threat of a major spike in oil prices, suggesting that a broad cross section of Americans may be ready to engage in dialogue about ways to manage the risks associated with peak petroleum.”

— Matthew Nisbet, Associate Professor at American University

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

  • China is expected to face a power shortage up to 70 million kilowatts in 2013, worsening from 50 million kilowatts in 2012 according to an official with the China Electricity Council. (8/15, #13)
  • The US Department of Energy awarded Abengoa Bioenergy a $133.9 million loan guarantee for a commercial-scale cellulosic ethanol plant in Kansas capable of producing 23 million gallons of ethanol/year using agricultural waste. (8/20, #25)
  • Evergreen Solar, once a darling of the US solar industry, filed for bankruptcy protection this week, saying it couldn’t compete with Chinese competitors without a reorganization. (8/17, #11)
  • Maersk Drilling, the oil rig unit of Denmark‘s largest company, may put its expansion on hold because the cost of building platforms is rising and takeovers are too expensive. (8/20, #5)
  • Pakistan plans to borrow $300 million from local banks to build a pipeline that will carry natural gas from Iran, easing its worst energy crisis that is curbing economic growth. (8/20, #6)
  • The Pakistan government intends to raise gas prices by 13 to 15 percent with the objective of bringing gas prices at par with alternative fuels like petrol, diesel and furnace oil. (8/15, #7)
  • The chronic electricity shortage in Pakistan, which is costing the country’s steel industry millions of dollars in lost revenue every year, has convinced steel mills to seek a steady supply of energy sources and venture into building their own power stations. (8/17, #5)
  • Saudi Arabia delivered the final oil shipment as part of a grant of three million barrels to Yemen which will process the oil to tackle the ongoing fuel crisis. (8/20, #11)
  • Mongolia, which is forced to import virtually all of its refined oil products and frequently faces chronic fuel shortages, will build an oil refinery early next year in an effort to meet domestic demand and reduce dependence on Russia for energy supplies. (8/20, #16)
  • Making good on a promise, the Interior Department announced that it had scheduled its first sale of offshore oil leases in the Gulf of Mexico since the Deepwater Horizon disaster last year. The Department is changing the rules to ensure that leased parcels are actually drilled and not hoarded. (8/20, #18)
  • The race is on to build pipelines to relieve a glut of crude oil in the US heartland, but not all of the four plans will be built. The pipeline capacity that eventually comes on line and the pace at which it is built will determine how fast US and European oil prices will come together again. (8/20, #19)
  • Marcellus Shale gas production in Pennsylvania continued its rapid rise in the first half of 2011. The state’s 1,632 producing Marcellus wells pumped out 432.5 billion cubic feet of gas during the first six months of the year – a 60 percent increase from the amount of gas produced in the second half of 2010. (8/20, #20)
  • The US Federal Energy Regulatory Commission is launching an environmental review for Freeport LNG’s plan to liquefy and export domestic gas from its import terminal on Quintana Island, Texas. Freeport is one of a number of LNG import facilities that are considering exporting domestically produced natural gas. (8/20, #21)
  • US drilling activity increased this week with the addition of 15 rigs, bringing the total working rigs to 1,974. This is up from 1,651 in the comparable period a year ago. The count has not been this high since October 2008, when the count was 1,979. (8/20, #22)
  • A fuel shortage hit Juba after Sudan reportedly blocked transportation of refined oil into South Sudan. “Khartoum has blocked our borders,” said the caretaker Information Minister, Benjamin. Around the capital Juba, the shortage has pushed fares and food prices to a new high. (8/19, #10)
  • At a time when India is embarking on ambitious power generation programs, the shortage of coal is expected to impact plans for new capacity. A parliamentary panel said that coal for power plants running on indigenous coal would be only 417.5 MT against the requirement of 480 MT. (8/18, #12) (8/19, #11)
  • Japanese inspectors found the first case of radioactive rice on Friday, adding the grain to the list of foods harmed by the accident at the Fukushima Daiichi nuclear plant. (8/19, #12)
  • Japan’s crude oil imports fell 11.2 percent in July to 16.03 million kiloliters from a year earlier. The country’s coal imports fell 14.6 percent to 14.3 million tons, while liquefied natural gas imports increased 14.3 percent to 6.5 million tons, the report said. (8/18, #13)
  • ExxonMobil sued the US Interior Department, asking a judge to set aside the agency’s decision to cancel offshore leases that may yield “billions of barrels of oil.” Exxon says the department overstepped its authority in a ruling on Gulf of Mexico leases for the Julia Unit. .(8/19, #13, #14)
  • A second pipeline ruptured this week in the flooded Missouri River basin, a month after federal officials warned operators to be on the lookout for “scouring,” or erosion along the beds of flooded rivers. Enterprise Products Partners said Thursday that scouring fully exposed its pipeline where it broke in the floodplain near Onawa, Iowa. (8/19, #15)
  • Exports of crude oil by OPEC member countries rose 2 percent in June after Saudi Arabia boosted shipments by 7.9 percent, according to data supplied to the Joint Organization Data Initiative. The Organization of Petroleum Exporting Countries shipped 22.54 million barrels a day in June, up from 22.11 million in May. (8/18, #3, #4)
  • Increasing demand and a slowing rate of creating additional capacity has the global liquefied natural gas market on a “tightening path” that will lead to a rise in spot prices, Barclays Capital analysts said. (8/18, #5)
  • Venezuela will host bilateral talks with Iran next month as the two OPEC countries look to strengthen their alliance. (8/18, #11)
  • As higher gasoline prices cut into cash-strapped American consumers’ budgets, some have decided to save money by not driving and shopping online. That has prompted retailers – from Wal-Mart to Amazon.com – to invest heavily in expanded operations to better capture Web-based sales. (8/18, #17)
  • The US Energy Information Administration has trimmed its forecasts of OPEC’s net oil export earnings to $1.011 trillion this year and $1.105 trillion in 2012, down $17 billion and $3 billion respectively. (8/17, #4)
  • Democratic Republic of Congo’s main hydro-power plant is running at half capacity due to low water levels, triggering long blackouts in Kinshasa. Problems with the Inga I and II dams come as Congo struggles with broken equipment at the decades-old plant, which could lead to continued outages even after water levels come back up. (8/17, #6)
  • Venezuela plans to transfer billions of dollars in cash reserves to banks in Russia, China and Brazil and tons of gold from European banks to its central bank vaults, according to documents reviewed by The Wall Street Journal. (8/17, #7)
  • Iran has received two-thirds of the oil debts from Indian buyers that had accumulated this year due to a sanctions-related payments problem, Central Bank governor Mahmoud Bahmani told the students’ news agency ISNA. (8/16, #5)
  • The Sea Lion complex in the North Falkland basin could yield ultimate recovery of 325-434 million barrels of oil, according to Rockhopper Exploration. (8/16, #10)
  • A federal judge has struck down an Obama administration policy for drilling on public lands, raising the possibility that more permits will be issued for oil and gas companies. But it isn’t clear how the Interior Department, which processes the permits, will respond. (8/16, #14)
  • The euro zone economy grew less than forecast in the second quarter, held back by a sluggish performance in Germany and stagnation in France. The Eurostat agency estimated gross domestic product (GDP) for the 17-country euro zone increased 0.2 percent in the three months to the end of June from the previous quarter, compared with economists’ forecasts of growth of 0.3 percent. That was sharply off the rate of 0.8 percent in the first three months of the year. (8/16, #15, #16)
  • The Egyptian Ministry of Electricity and Energy is coordinating with officials of the Ministry of Oil to fill the shortage of oil, diesel and natural gas at Egypt’s power plants. The shortage has thus far caused a loss of 1000 MW of production. (8/15, #4)