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1. Oil and the Global Economy

Oil prices were little changed last week as the European sovereign debt crises and the various upheavals and machinations taking place in the Middle East roiled the markets. NY oil closed at $96.77 and London at $106.40 — both down about 1 percent for the week. As there seems to be no resolution to the underlying problems in sight, and the distinct possibility that either or both could get worse, the Middle East and the EU are likely to dominate oil prices for many months to come.

There was some news regarding the fundamentals of the markets last week. Platts calculated China’s apparent oil demand for October and reported that it was up 1.4 percent over last October to 9.08 million b/d. This was the highest since last May and is about what could be expected from an economy that is still reported to be growing at 8+ percent. US crude stocks fell by 6.2 million barrels the week before last and distillate stocks fell by 800,000 barrels. We are starting to get scattered reports of diesel shortages around the world. With stockpiles down, US distillate exports way up in recent years, and conventional oil production stagnant, it seems possible that endemic distillate shortages are not too far away.

US gasoline prices have fallen by nearly 40 cents a gallon to an average of $3.31 since their recent peak in early September. Even with the recent declines prices are 44 cents a gallon higher than last year and consumption over the past four weeks is still down by 4 percent from last year. The Oil Price Information Service says Americans are on track to spend $488 billion on gasoline this year, up $40 billion from the record high of 2008 when the economy was in better shape.

An unusual amount of pessimism was expressed last week with China’s Vice Premier for trade and finance calling the global economic situation “extremely serious.” This was topped by IEA’s Chief Economist, Fatih Birol, who said that current high oil prices could “strangle” global efforts at economic recovery.

2. Sanctioning Iran

In the wake of the IAEA report earlier this month alleging that Iran was still moving towards the development of nuclear weapons, the US and its allies announced further sanctions on Tehran last week. Rejecting calls to formally sanction Iran’s central bank, an effort is being made to pressure governments and businesses in Europe, Asia, and Latin America to wind down their business ties with the Iranians and to reduce their purchases of Iranian oil in an orderly manner. The US declared the Iranian banking system a “money laundering” system in support of terrorism organizations and warned that any financial institution in the world doing business with it could face penalties if they want to do business with the US. So far the UK, Canada, Italy and France are supporting the new sanctions, with Paris asking Japan and the rest of the EU to stop doing business with the Iranians and purchasing their oil.

The US and its allies are drawing a fine line in attempting to reduce Tehran’s $80 billion per year oil revenue while at the same time not driving global oil prices considerably higher which is what would happen if a significant portion of Iran’s roughly 2.4 million b/d of exports came to a halt. The US and France do not import Iranian oil and the EU’s energy commissioner says that those countries that do can find supplies elsewhere. The EU takes about 18 percent of Iran’s exports. Italy, which imports 200,000 b/d from Iran — about 13 percent of its fuel needs, is supporting the sanctions. Some EU members, however, are already saying they do not want to stop importing Iranian oil and Tehran is saying it can find ways to get around the embargo.

The stream of bluster from Tehran, which seems to have no intention of bowing to demands concerning its nuclear intentions, continues. The Iranians contend that the world cannot do without their oil and the embargo will be meaningless. The rest of the trade embargo may have more of an impact in more ways than one. Dubai is Iran’s second biggest trading partner and 8,000 traders in Dubai deal in re-exporting goods to Iran. Should the bank system stop financing this trade there would be repercussions all over the Middle East.

The big question remains whether the problems in the Middle East will eventually engulf exports through the Straits of Hormuz. The situation in Syria continues to deteriorate with the Arab League imposing harsh sanctions on Damascus as it continues to gun down its domestic protestors. Lebanon and Iraq, which need Syria in one way or another, are not so sure that they want to go along with the new League sanctions. How all this comes out is impossible to predict, but the possibility of increasing regional instability looks likely. Even the Saudis had a small round of protests amongst their Shia minority last week.

3. Turmoil in Europe

Nearly everything went wrong in the Eurozone last week with bond auctions going bad, interest rates hitting unsustainable levels, and sovereign debt being downgraded. Even France is in peril of losing its triple A status. Hopes that the European Central Bank will bail everybody out by turning on the printing presses seem to be waning as the Bank’s Board of Directors and the Germans remain adamantly opposed. European banking problems are being felt around the world as loans in Asia, Africa and Latin America are becoming harder and more expensive to get. Even the oil rich Middle East is starting to feel the financial pinch as rolling over debt is becoming more difficult. In the US, the cost of credit default swaps on US banks with exposure to Europe is soaring.

The latest plan is to draft a new “stability pact” that could be in place by the end of December and would spell out strict deficit rules and control rights for national budgets. Such a pact would bypass the cumbersome treaties which formed the EU and Eurozone, and allow for more centralized supervision of national budgets. Whether this plan will gain more traction than previous efforts remains to be seen, but European banks are preparing for the breakup of the Eurozone despite the continuing assurances from politicians that it will never happen.

As could be expected from all this uproar, predictions of a severe economic downturn in Europe are on the rise with many believing it will quickly spread around the world. For the time being all this uncertainty is keeping a lid on oil prices. We are clearly entering a year of much uncertainty with powerful forces poised to drive oil prices lower — or much higher.

4. Saudi growth

What may turn out to be the peaking of Saudi oil production certainly deserves a mention in this publication. Last week Riyadh announced that pressure to increase its productive capacity from the current 12 million b/d to 15 million by the end of the decade has been falling. Therefore ARAMCO has halted the $100 billion expansion program that has been going on for the last 10 years. The Saudis are saying that increases of oil production in Iraq, in the waters off Brazil, and of tight oil from shale deposits around the world will be sufficient.

ARAMCO executives say their current priority is to increase natural gas production, but that they have several projects that are already pre-engineered and that can be brought online to offset declines in production from existing fields.

The announcement comes at a time of increasing social unrest across the Middle East with four being killed and nine wounded during clashes between Shiites and Saudi security forces in the oil producing Eastern Province last week. Earlier this year Riyadh announced a major increase in social spending in order to forestall the unrest seen in so many other Middle Eastern countries with less than democratic governments. Some are suggesting the cut in capital spending on the oil industry is the result of a need to increase social and security spending still further. Others note that the steadily increasing oil prices are providing the country with steadily increasing revenues while saving whatever oil is left for future generations.

Whatever the case, it now seems unlikely that the Saudis will lead global oil production to spectacular new highs as many had predicted just a few years ago.

Quote of the week

“In its simplest form, Peak Oil means that just as oil production in the US peaked in 1970 and began to decline, so shall global production do the same. Once you get past that basic premise – one in which there is near-universal agreement once people understand that is what you mean when you say “Peak Oil” – there are many different opinions of exactly how events will unfold. The would-be Peak Oil debunkers are only addressing their arguments at one of the ways some people think this will play out, and then declaring that they have debunked Peak Oil.”

— Robert Rapier

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

  • When oil starts pumping within the next several years, the expected revenue of up to $2 billion a year could propel Uganda into the strata of middle-income countries, where few sub-Saharan African countries rank. Yet there are growing worries that the oil may prove to be more of a curse than a gift, similar to the fates of other countries in sub-Saharan Africa that have joined the petroleum bonanza. (11/26, #12)
  • An oil leak at a Chevron Corp. deep-water well off the Rio de Janeiro coast this month has provoked local outrage and investigations of the US company. It also has become a messy reminder that Brazil’s bid to reach prosperity through oil may be costlier and more challenging than many expected. (11/24, #18) (11/26, #14)
  • Renewable energy is surpassing fossil fuels for the first time in new power-plant investments, shaking off setbacks from the financial crisis and an impasse at the United Nations global warming talks. (11/25, #6)
  • Saudi Arabia, OPEC’s largest crude producer, will seek to ensure climate talks starting next week in Durban, South Africa, won’t unfairly limit the exporter group’s income. (11/25, #11)
  • Saudi Arabia will need 53 percent more fuel to fire its power and desalination plants by 2017 as demand jumps. The kingdom will use 2.3 million b/d of oil equivalent by 2017 for domestic use, compared with 1.5 million barrels last year. (11/25, #12)
  • Canadian politicians and energy executives are ratcheting up support for several big infrastructure projects aimed at redirecting the country’s growing oil output to Asian markets-a move seen as crucial in preventing a looming bottleneck of crude. (11/25, #17)
  • Iraq’s Deputy Prime Minister for Energy, Al-Shahristani, said that since Exxon signed a deal with the semi-autonomous Kurdish region without the consent of Baghdad or Washington, the government of Iraq might punish Exxon through sanctions. (11/21, #13, #14) (11/22, #16, #17) (11/24, #8)
  • Kuwait pumped 3.05 million b/d of oil last week. Industry sources said it is the highest output this year and evidence that Gulf countries continue to strive to push world oil prices below $100 a barrel. (11/21, #8)
  • Israel is pushing ahead with plans to export its natural gas production from major offshore fields to Greece via Cyprus, defying threats by onetime ally Turkey to use military force to block such a move. (11/24, #13)
  • Cash-strapped Yemen has again been forced to increase oil product imports after its Aden refinery shut down last weekend after crude supplies dried up. (11/24, #15)
  • China has agreed to a new $4 billion loan to help Venezuela boost its oil output and will also help upgrade power plants and increase production of iron and aluminum. (11/24, #19)
  • China’s oil consumption by 2015 will be “significantly” higher than IEA forecasts, surging 35 percent from this year, as economic expansion spurs fuel demand, Barclays Capital forecast. (11/24, #20)
  • Turkmenistan’s agreement to boost its supply of natural gas to China by nearly two-thirds significantly expands the world’s largest energy consumer’s access to the fuel, the sourcing of which is a key concern in China, where winter shortages are common. (11/24, #21)
  • Indian oil refiners are likely to turn more to crude supplies from the Middle East in 2012 to meet rising domestic demand for sour grades as more refining capacity comes online next year. (11/23, #20) (11/24, #23)
  • US livestock farmers are demanding a change in the nation’s ethanol policy, claiming current rules could lead to spikes in meat prices and even shortages at supermarkets if corn growers have a bad year. (11/24, #25)
  • The waters off a tiny Norwegian Arctic island may hold vast amounts of oil and gas, the Nordic country’s authorities said, as they prepare to open the zone for exploration by oil firms. (11/24, #30)
  • Iraq is planning to raise its crude oil exports to 2.75 million b/d next year, compared with a target of 2.2 million this year. (11/23, #8)
  • The repairs to bombed pipelines supplying Nigeria’s refineries and distributing petroleum products will cost $2 billion. Nigeria’s hundreds of kilometers of oil pipelines are targets of sabotage attacks by thieves who steal crude for their numerous illegal refineries in the region or steal oil products to sell on the black market abroad. (11/23, #12)
  • China’s factory sector shrank the most in 32 months in November on signs of domestic economic weakness, reviving worries that China may be slipping toward a hard landing and fuelling fears of a global recession. (11/23, #17)
  • The World Bank projected a growth of 9.1 percent for China in 2011, followed by a slower growth of 8.4 percent in 2012. East Asia as whole is expected to grow by 7.8 percent in 2012, down from 8.2 percent this year as the growth continues to moderate on weakening external demand. (11/22, #25)
  • China’s trade balance faces the risk of sliding into a deficit for the first time in two decades in 2012 as export demand in Europe and the United States slumps. (11/22, #26)
  • US retail gasoline demand fell 4.5 percent year-on-year for the week ending November 18, with a total 60.943 million barrels pumped in the period. (11/23, #21)
  • Oil sands production in Canada will likely triple by 2035, making it the overwhelming source of Canadian crude oil and opening doors to additional energy exports, says a new report from the National Energy Board. (11/23, #22)
  • Oil giant Royal Dutch Shell signed a deal with the Turkish state-run petroleum company, TPAO. The deal will allow the two companies to search for oil and natural gas offshore in the Mediterranean as well as onshore in Turkey’s southeast region. (11/23, #26)
  • A crude oil pipeline in the United Arab Emirates that will bypass the Strait of Hormuz is nearly complete with first oil to flow next month.. (11/22, #14)
  • Jordan might look for other natural gas suppliers after Egyptian authorities said they were resuming delivery through the frequently bombed Sinai pipeline. (11/22, #18)
  • In stark contrast to the their reserves of fossil fuels, the oil-rich member countries of the Gulf Co-operation Council – Qatar, the UAE, Kuwait, Bahrain, Saudi Arabia and Oman – are becoming increasingly concerned by a growing shortage of water and food. (11/22, #19)
  • Early next year Saudi Arabia is expected to announce a plan to generate up to 10 percent of its electricity from the sun by 2020. (11/22, #32)
  • Global economic output is set to double as the global population grows to 8.7 billion people by 2040, when global energy demand will be 30% higher than it was in 2010, ExxonMobil CEO Rex Tillerson said. (11/21, #7)
  • Shale gas development in Poland has gathered momentum after news that an Irish-Canadian joint venture has found gas in a Baltic Basin well. (11/21, #26)
  • Poland expects to import up to 10 percent more hard coal this year than in 2010 while its exports will fall by as much as 50 percent due to falling production. (11/21, #27)