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By Tom Whipple

1.  Oil and the Global Economy

Oil prices trended downwards last week as progress on the Syrian poison gas situation and possible progress on the Iranian nuclear standoff weighed on the markets. There was a brief rally at mid-week when the Federal Reserve announced that it would continue quantitative easing for a while longer. This news was overcome later by the announcement that about 700,000 b/d of Libya’s oil production was available for export again. Increasing concerns that the US government may face some sort of shutdown added to the decline.  At week’s end NY futures were at $105.74 and London at $109.22.  New York oil prices are now back to where they were in early August before tensions rose over the Syrian gas attack. London oil is still a couple of dollars higher than in August as Libyan exports are still well below normal and the situation there remains volatile.

The American Petroleum Institute reports that US oil consumption in August was down 0.7 percent as compared to August 2012. US crude imports, benefitting from the continuing rise in US oil production, fell 6.8 percent in August year over year to a 17-year low of 8.04 million b/d.  Refined products imports dropped 22.2 percent in August from last year to an 18-year low of 1.7 million b/d.

US natural gas prices which had climbed by some 50 cents per million BTUs to circa $3.75 in the last two months fell late last week as temperatures dropped and the fall lull-in-demand began.

Washington announced the first ever regulations setting strict limits on the amount of carbon pollution that can be generated by new power plants.  The backlash and lawsuits from the coal and power industries over these regulations are likely to continue for years. The coal and utility industries believe they already have a legal strategy to derail the regulations by using legal loopholes in the Clean Air Act on which the regulations are based.


2.  The Middle East & North Africa

Iran: In recent years, the confrontation over Tehran’s alleged attempt to develop nuclear weapons has been at the top of the list of threats to Middle Eastern oil exports. Western sanctions on the Iranians for their refusal to cooperate with nuclear inspectors have already cut Iranian oil exports by at least a million b/d and have thrown the country into economic turmoil. The Israelis are adamant that Iran should not obtain a nuclear deterrent and maintain they are ready to attack Tehran’s nuclear facilities to prevent this from happening.

For its part, Tehran maintains that it is not developing nuclear weapons, but refuses to prove it, and says that any foreign attack on their nuclear facilities will result in closure of the Straits of Hormuz and massive damage to the global economy. With the inauguration of new Iranian President, however, the tone of the standoff has changed. President Hasan Rouhani says that his country is “loyal” to its pledge not to seek nuclear weapons and wants to resume talks with the US and other western powers to settle the issue and most particularly to end the economic sanctions on Iran.

Both Presidents Obama and Rouhani are scheduled to attend the UN General Assembly’s annual meeting this week and there is much talk that the two could meet. Tehran maintains it has the right to enrich uranium for peaceful purposes and this is generally agreed to by the West. The dispute is over intrusive safeguards that would preclude Iran’s nuclear material from being diverted to weapons production.

After decades of anti-western torrents from the Iranian government and Tehran’s deep commitment to support the fellow-Shiite government in Damascus, many are skeptical that Tehran’s new peace offensive is only a ruse to buy more time while continuing to work on nuclear weapons.

It is clear, however, that in the elections that brought Rouhani to office, the Iranian people voted change from the policies of confrontation and delay that have resulted sanctions which are slowly destroying their economy. We should know shortly whether Iran’s supreme leader, the Ayatollah Khamenei, has gotten the message and is willing to take steps that will satisfy the West and result in a major relaxation of tensions in the region.

Iraq: It was more of the same last week as bombers blew up an Iraqi funeral service killing at least 72 and wounding another 120. This was the largest death toll inflicted on an obviously civilian target in recent years. Other attacks around the country on Saturday brought the day’s toll to 96. The UN says more than 4,000 have been killed in terrorist attacks between April and August, and another 493 thus far in September.

Some observers maintain that the Iraqis, hardened after decades of war, can live with this level of carnage much as the world lives with traffic deaths and in some countries with gun violence. These observers do not see a civil war on the scale of the Syrian uprising happening in Iraq anytime soon.

However, Iraqi plans to become the next Saudi Arabia of oil are rapidly going by the board. Western oil companies are gradually decamping for Kurdistan where security and the opportunity for profits are better, and are being replaced by Chinese and other Asian oil companies who may not fully appreciate what they are getting into.

Iraq’s northern export pipeline was bombed yet again last Monday. So far the pipeline has operated for only 13 days since the attack at the end of August. Work is underway to install a new oil metering platform at Basra. While slowing exports for the next few months this project is ultimately expected to increase the port’s export capacity. Some have noted, however, that in Iraq schedules for such projects have a tendency to slip badly.

Libya: Last week the Zintan tribal militia, which had shutoff the oil pipeline supplying refineries and export terminals in the western part of Libya, opened valves and allowed the oil to flow again. This development does not affect the eastern part of the country where strikes by guards and terminal workers are still blocking exports.  It is not clear what prompted the militia to open the valves or how long they will remain open. The Western part of the country produces only about a third of the 1.6 million b/d the country was capable of producing before the civil war. Tripoli says about 700,000 b/d should now be moving to refineries and active export terminals. It may take a week or two before we learn if this is actually the case.

The overall situation, however, is far from stable. Foreign oil companies are reluctant to undertake new projects due to the lack of security and Exxon announced last week that it was cutting back its staff and operations in the country. While the Zintan militia in the western part of the country seems susceptible to promises of more money and jobs from Tripoli, in the East the Benghazi region is demanding autonomy from the central government and authority to directly sell its oil and keep the revenue. This will turn out to be a more serious problem.

Some 40 years ago Libya produced over 3 million barrels of oil per day and many believe there are sufficient reserves in the country to attain this rate again. However, given the political situation in the wake of Gadhafi’s overthrow, the situation seems likely to get worse before it gets better.

Syria: The focus of the Syrian situation has shifted to the UN where efforts are underway to get a UN backed resolution affirming the US-Russian accord on the removal or destruction of Damascus’s poison gas stockpiles. Moscow, which still denies that the Assad government is responsible for the recent gas attacks, is doing its best to avoid the UN’s agreeing to the use of force should Damascus fail to comply with the terms of the poison gas accord. Moscow fears that any relaxation of its stance would free the US and its allies to destroy Assad’s military machine and turn the country over the rebels.

Although the UN assessment of the gas attack supported the thesis that it was carried out by Assad’s forces, Moscow feels it cannot officially acknowledge that its ally was responsible for the attack no matter how strong the evidence.

Last week Damascus submitted its declaration of its chemical weapons stocks to the UN as required under the agreement and initial reports say it was unexpectedly complete, giving some basis for hope that the agreement will hold together.

Egypt: There has been little change in the situation during the past week. Mass demonstrations by Brotherhood supporters have largely disappeared. The new government is drafting a new constitution to replace the one adopted by the Morsi government. The current constitution was designed to ensure that the Brotherhood would maintain large parliamentary majorities no matter what the electorate wanted and was short on civil and women’s rights. Rumors persist that the Army’s Chief of Staff, General el-Sisi, who led the coup against Morsi will himself run for President giving the country yet another military strongman.

Egypt has returned $2 billion that Qatar had deposited in Egyptian banks after the two countries could not agree on a schedule for converting the deposing into long-term Egyptian bonds. Qatar had been a major supporter of the Morsi government and was much distressed when in was ousted by the Egyptian Army. Most observers believe that as long as Cairo has financial backing from the Saudis and other Gulf states, their economy is not in immediate danger of collapse.

Scattered violence is taking place in Egypt as the Army moves against insurgents near the Gaza strip and in Brotherhood strongholds south of Cairo.

3. Quote of the Week 

  • “I don’t think Saudi Arabia can actually go much beyond the current level of 10.2 million barrels per day. Let’s say they can, they will be extracting very heavy crude which cannot fulfill shortages from African countries for instance.”

— Kamel al-Harami, a Kuwait-based independent oil analyst.

  • “Enter my definition of constructive engagement. In a world where global politics is no longer a zero-sum game, it is – or should be – counterintuitive to pursue one’s interests without considering the interests of others. A constructive approach to diplomacy doesn’t mean relinquishing one’s rights. It means engaging with one’s counterparts, on the basis of equal footing and mutual respect, to address shared concerns and achieve shared objectives. In other words, win-win outcomes are not just favorable but also achievable.”

Iran’s President Hassan Rouhani (Washington Post, September 20)

4. The Briefs

  • The world has large potential technically recoverable resources of tight oil, possibly several times those of North America, according to a recent study by IHS. Commercial production of these resources could equal and exceed current estimates for North America tight oil output. The study cites almost 300 billion potential barrels from 148 play areas studied.  (9/19 #2)
  • Those who thought that world oil production would peak in 2005 have been proven to be wrong. But so, too, were those who thought the run-up in oil prices of the last decade would be a temporary disruption until we found a way to return to the world as it had been for a century up until that point.  (9/16 #13)
  • The Kashagan field in Kazakhstan, 13 years in development and $50 billion later, has reached 40,000 barrels/day and its developers hope to meet 75,000 b/d by next month to avoid a fine.  Kazakhstan has forecast the field will produce 1 million b/d from 2020 and eventually reach 1.5 million b/d. (9/19 #13)
  • Iraq is struggling to boost its energy production amid a deteriorating security crisis that could seriously curtail Baghdad’s drive to exploit its vast oil and gas reserves.  Iraq has failed to reach targets it set itself, in part because of the violence that has wracked the country for the last decade, but also because of persistent logistical problems, bureaucratic bottlenecks, weak government, deep-rooted corruption — and a lack of drilling rigs. (9/20 #9)
  • Nigerian-owned oil companies are boosting their share of the country’s output by taking up fields in restive areas as international energy companies retreat. (9/18 #13)
  • In Nigeria, the large-scale theft of crude by criminal networks plus related pipeline sabotage reduced output in Africa’s largest oil producer to below 2m b/d this summer, a four-year low. (9/20 #11)
  • Venezuela will partner with China National Petroleum Corp. on a $14 billion development project in the country’s Orinoco heavy oil belt. (9/19 #15)
  • The Chinese government said it expects to have invested more than $13 billion in oil and natural gas production by the end of the year, in order to reduce the economy’s reliance on oil and natural gas imports. Xinhua said China imported 58 percent of its oil needs and 30 percent of its natural gas last year. (9/17 #12)
  • Major US producers Exxon and Chevron and UK’s BP are sitting out Brazil’s first auction of massive deep-water finds, reflecting the changing landscape of the oil business and Brazil’s government-heavy strategy for developing the fields. (9/21 #10)
  • Asian government-controlled oil companies—including China’s two largest oil producers—headed up the list of 11 potential bidders for Brazil‘s largest oil discoveries. (9/20 #15)
  • An international arbitration tribunal issued a partial ruling in favor of Chevron and found the U.S. oil company isn’t liable for collective environmental damage claims in Ecuador. (9/19 #14)
  • US approval of the Keystone XL pipeline is unlikely to occur in 2013, Canada’s natural resources minister said last Monday. (9/17 #19)
  • There is no way that EIA’s 2013 prediction for growth in oil production from the US Gulf of Mexico can be correct. There are new GOM projects coming on line but there is also a far steeper decline in some of their current leases than they had anticipated. (9/20 #28)
  • Texas oil production from just two fields, the Eagle Ford shale and the Permian Basin, is likely to total well over 2 million b/d this year, if recent output trends continue, and could approach 2.5 million sometime in 2014. (9/20 #22)
  • Energy rigs in the US fell by seven to 1,761 this week according to Baker Hughes. Gas rigs dropped by 15 to 386 while oil rigs jumped by eight to 1,369. (9/21 #17)
  • Last week’s floods in Colorado caused at least 10 oil spills, including two significant releases from damaged storage tanks. The two tanks, owned by Anadarko Petroleum Corp., released a total of 448 barrels of oil, or nearly 19,000 gallons, when floodwaters washed through the sites in northern Colorado. (9/20 #20)
  • As for US gasoline prices, last Tuesday marked the 1,000th consecutive day that average retail gasoline prices stayed above the $3 per gallon mark, the AAA reports, adding that $3 gasoline is most likely a thing of the past. (9/18 #21)
  • US natural-gas drilling sites aren’t leaking as much methane into the atmosphere as the federal government and critics of hydraulic fracturing had believed, according to the first study of emissions at multiple drilling sites led by researchers at the University of Texas. (9/17 #16)
  • California Gov. Jerry Brown signed legislation Friday that will establish the state’s first rules detailing how oil drillers use hydraulic fracturing to crack underground rock formations and free up oil and natural gas. The bill requires drillers to disclose the chemicals used and acquire permits before they use hydraulic fracturing. (9/21 #16)
  • Coal’s future in the US is being built in rural Mississippi, and so far this is what it looks like: a $1 billion cost overrun, a stew of legal battles, a revolt by ratepayers and a credit downgrade for the local utility. With all those challenges, Southern Co.’s $4.7 billion project in Kemper County may still be coal’s best hope to survive President Obama’s limits on greenhouse-gas emissions. (9/20 #24)
  • A US appeals court upheld California’s low-carbon fuel standard requiring a 10 percent reduction in carbon emissions by 2020 to fight global warming. The low-carbon fuel standard is part of California’s Global Warming Solutions Act of 2007, also known as AB 32, aimed at decreasing the state’s greenhouse gas emissions to their 1990 level by 2020. (9/21 #15)
  • Norway is shutting down the Statoil-operated Mongstad CO2 capture project. The full-scale project was meant to capture CO2 from the nearby gas-fired power plant and refinery. The project is led by Statoil, but the government pays all the costs. The project has been both challenging and costly, and the risks are now seen as too big to go through with it, the government said. (9/2 #18)
  • The cost of electricity from wind and solar sources in America has fallen by more than 50% over the past four years, according to a report recently released by global financial advisor Lazard Freres & Co. (9/16 #15)
  • China consumed 510.3 billion kWh of electricity in August, up 6.8% year on year, according to data released by the National Energy Administration Saturday. (9/17 #14)
  • GM is working on an all-electric car that can go 200 miles per charge and will cost andabout $30,000.  Currently GM sells the $35,000 Chevrolet Volt plug-in hybrid, which can go 38 miles on electricity before a gas-powered generator kicks in. It also offers the all-electric Chevy Spark subcompact that can go 82 miles on a charge. It starts at $26,685.  (8/17 #23)
  • BMW is launching production here on Wednesday of its new Project i cars, the first large-scale test of whether building cars out of carbon fiber and plastic instead of steel can overcome the obstacles to adoption of electric vehicles. (9/19 #22)
  • Two executives at top automotive battery companies said this week that the cost of lithium-ion batteries used in electric and hybrid vehicles are on a steady decline and are likely to be about half of today’s price by 2020. (9/18 #25)
  • China rolled out a new incentive program for environmentally friendly cars and buses to help battle increasing levels of pollution. Buyers of electric cars can receive up to $9,800 in subsidies, while buyers of certain gasoline-electric hybrids can get as much as $5,700. The subsidies, which take effect immediately, will drop 10% next year and another 20% in 2015. The program seeks to “speed development of the new-energy automobile industry. (9/18 #16)
  • New car registrations are falling in most of Europe.  They are down nearly 11% on the year in France, 5.5% in Germany, and 18% in Spain. (9/17 #20)
  • Australia’s new coalition government has abolished the country’s climate change commission. (9/21 #12)
  • How secure is the Chinese economy and what would happen to the energy market if the glory days come to an end? The reality is that economic growth has been slowing for some time and looks set to keep falling. For the global energy market the shift will come as a shock. (9/19 #17)
  • In Germany, it is an audacious undertaking with wide and deep support: shut down the nation’s nuclear power plants, wean the country from coal and promote a wholesale shift to renewable energy.  But the plan, backed by Chancellor Angela Merkel and opposition parties alike, is running into problems in execution that are forcing Germans to come face to face with the high costs ($735 billion) and complexities of sticking to their principles. Last year, wind, solar and other non-fossil-fuel sources provided just 22 percent of the power for Germany. (9/19 #21)
  • Russia’s economic growth has fallen below the world’s average for the first time in five years. The economic growth has been falling since the second half of 2012, with the GDP expanding only 1.4 percent in the first half of 2013 over the same period last year. (9/20 #26)
  • Islamist Boko Haram militants killed 159 people in two roadside attacks in northeast Nigeria this week, far more than was originally reported and a sign that a four-month-old army offensive has yet to stabilize the region in this oil-producing country. (9/21 #9)
  • A Hong Kong-listed company embroiled in a corruption investigation focused on China’s biggest state-owned oil conglomerate said on Thursday that Chinese investigators had questioned the company about projects, seized documents and frozen some bank accounts, while the company chairman remains under interrogation. (9/19 #16)
  • Saudi Arabia and the UAE are in the top five nations for international migrants as demand for foreign labor in the oil-producing countries grows. The US hosted the largest number at 45.8 million, followed by the Russian Federation (11 million), Germany (9.8 million), Saudi Arabia (9.1 million) and United Arab Emirates (7.8 million). (9/16 #7)
  • The United Nations population division said this summer that fertility rates in many developing countries had not slowed as the U.N. had expected. As a result, it revised its forecast of the world population in 2100 upward by 700 million people, to 10.9 billion. (9/21 #3)