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Download Full PDF: Peak Oil Review 08/20/12

1. Oil and the Global Economy

Oil prices climbed $2-3 a barrel last week with NY oil closing at a three-month high of $96.01 and London’s Brent closing at $113.71. Increased saber-rattling in the Middle East, lower output from Iran and the North Sea, and the eternal hope that the US and EU governments will renew financial stimulus programs were behind the move. Brent crude traded above $116 a barrel on Thursday, but fell on profit taking and the news that the US was contemplating releases from its strategic petroleum stockpiles.

US gasoline prices were up another 3 cents a gallon last week – 30 cents in the last month – on higher crude prices and a fire at Chevron’s 100-year-old Richmond, CA refinery. This outage already has California gas up to $4.11 for regular with expectations that it will move higher. The damage to the Richmond refinery should take four to six months to repair; however, environmentalists are demanding a complete modernization of the refinery that has a grandfathered exemption from the 1970 Clean Air Act.  Should the litigation be lengthy, or environmentalists prevail, California could be subjected to unusually high gasoline prices for an extended period.

It now appears that global oil production fell by about 1 million b/d in June from the roughly 90 million b/d plateau it had been on since January. July production figures show little change from June. Despite weaker economic conditions in the US, EU, and China, demand for oil continues to increase resulting in a drawdown of visible global stockpiles.

US natural gas prices were largely unchanged last week as the summer cooling season draws to a close and natural gas inventories remain about 12.5 percent above normal for this time of year. The weekly rig count shows drilling-for-gas rigs fell by another 11 rigs to 498 – down from 914 rigs a year ago.

Oil prices fell on Friday on the news that the Obama administration is considering releasing oil from the strategic reserve to counter rising gasoline prices. Releases were made last year to counter the production lost during the Libyan uprising. A release was studied in the spring when prices were hitting four-year highs, but were dropped after prices fell. The government will be watching what happens after Labor Day when prices usually fall. This time around there will be more opposition to a release of reserve merely to lower prices. The IEA’s director has already come out against the proposal. Many are worried that the deteriorating Middle Eastern situation may lead to lower exports and a real emergency situation.

2. The Middle East

With little progress visible in the Iranian nuclear program talks, the US presidential election drawing near, and the Syrian uprising becoming bloodier, the level of threatening rhetoric jumped significantly last week. Public statements and stories in the Israeli media raised the issue of whether Israel will strike Iranian nuclear facilities before the US elections in hopes of dragging the US into a war with Iran which would not only result in the destruction of Iran’s nuclear facilities, but would also mark a major turning point in US involvement in the Middle East not to mention the history of oil production from the area.

Opinion is divided as to whether the new rhetoric really foreshadows a unilateral Israeli strike on Iran or is intended to pressure the Obama administration into issuing a clear deadline prior to the election for Tehran to come to an agreement on its nuclear program or be attacked by the US. To back up the rhetoric, the Israeli government is handing out gas masks, testing air raid sirens, and warning its people to prepare for a month long war involving missile attacks by Iran and Hezbollah.

The situation is complicated by the Syrian uprising which now is spilling over into Lebanon and deteriorating into an ungovernable mess. The US is accusing Iran of sending advisors to train Assad’s supporters and the issue of Syria’s large and well-dispersed stockpiles of chemical weapons is coming to the fore. Should the Syrian government lose control of these stocks, the US and other foreign powers likely would be impelled to try to secure them before they fall into the hands of terrorist groups. This of course could involve large numbers of US or other foreign forces entering Syria in the midst of an ongoing civil war with unpredictable consequences.

For now there is no way of knowing where these increasingly complex and dangerous situations are leading us. Any attack on Iran, or even direct foreign intervention in Syria, would almost certainly send oil prices higher.  A direct attack on Iran is likely, at least temporarily, to reduce the roughly 16 million b/d of oil exports from the Gulf. Whether it is over in a month, as the Israelis seem to be telling their people, or drags on for years, the result is likely to be much higher oil prices, and lower global economic growth.

 

3. Peak China?

For the last 30 years Chinese economic growth has seemed unstoppable with Beijing racking up double digit increases in GDP growth year after year. Indeed much of the increase in global demand for oil in recent years has been from China. To accomplish this rapid growth, Beijing has used a mix of free enterprise and state capitalism blanketed with large doses of central planning — five-year plans and other trappings of a Soviet-style command economy. An unusual feature has been population control which has kept its population of 1.3 billion from ballooning beyond the state’s ability to sustain them. Universal education has insured a steady flow of workers into growing industries and the country’s transition into the world center of manufacturing has yielded an export powerhouse surpassing anything the world has ever seen in peacetime.

As was the case in Soviet Russia, this growth has come at the expense of the environment as little money was devoted to controlling emissions into the air and polluting of its waters. Two-thirds of China’s 669 cities have water shortages; 40 percent of its rivers are polluted as are 80 percent of its lakes. It is estimated that China suffers some 750,000 premature deaths each year from the endemic pollution.

Outside observers, however, are beginning to wonder if this economic miracle of double-digit economic growth can be sustained much longer. In response to the 2008 recession, Beijing pumped some $1.5 trillion into its economy, largely in the form of infrastructure and housing projects of dubious value. Now with global exports slumping and the bills for the stimulus spending coming due and Beijing’s economy seems to be slowing.

Over the next decade loom additional problems that will contribute to the slowing of economic growth. After 33 years of a “one child” policy and better medicine, China is faced with a burgeoning demographic problem that will double the over 65 population in less than 20 years. The problems caused by extreme weather and falling water tables will exact a heavy burden from the economy.

China’s political system which consists of generations of old men appointing their successors may not be optimal in the age of the Internet. Pushback from the people is already being felt so that directives from the center may not be so easy to fulfill in the future.

Last week China’s Premier Wen Jiabao warned that the country’s economy is facing problems that may last for some time. Despite the slowdown in demand for Chinese products from the US and In the Eurozone, the Premier maintains that China will fulfill this year’s social and economic targets. In the second quarter, China’s GDP grew by 7.6 percent, which is way below average. The IMF foresees trouble for China and is already talking about sub-6 percent growth in the years ahead.

In its most recent estimates for China, the IEA reduced oil consumption for China by 450,000 b/d for May and June. For 2012, China’s oil consumption is expected to average 9.5 million b/d — up by only 240,000 b/d since 2011. For 2013 China’s demand is expected to average about 9.7 million b/d. While China is still growing, the days of double digit growth that have dominated the last three decades may be coming to an end.

 

Quote of the week

  • “The first half of the age of oil saw this rampant expansion of industry, transportation, trade, agriculture. The population went up six times in parallel over 100 to 150 years… triggered by the cheap, easy energy that made everything possible. Now we face the second half, which is about to dawn, which just undermines this whole world system under which we’re now living… Naturally, no one wants to admit that.”

– Colin Campbell

 

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

  • US crude oil demand fell to its lowest in nearly four years in July as the middling U.S. economy and fuel efficiency gains weighed on consumption. (8/18, #11)
  • US exports of coal and fuels such as gasoline and diesel continue to soar. Both categories are on track to set new annual records. Demand for coal is rising in developing countries such as China and India as those countries work to bring electricity to millions who won’t have it. (8/18, #12)
  • G20 countries will try to co-ordinate a response to surging food prices, after the worst US drought in half a century devastated crops in the world’s largest agricultural exporter. (8/13, #4)
  • Chevron said it has appealed a court injunction barring the company from operating in Brazil. Earlier this month, a Brazilian court banned Chevron and drilling-rig operator Transocean Ltd. for their roles in an offshore oil spill last year. (8/17, #13)
  • The short window for Shell to drill exploratory wells off Alaska’s Arctic coast is rapidly narrowing as the company still hasn’t completed the retrofit of its vital oil spill response vessel or received final permits for its use. (8/17, #17)
  • Next month could see Arctic sea ice shrink to its smallest extent yet, beating the previous record, set in 2007. Any such record will be driven by unusual weather, but is also a result of underlying warming. Arctic sea ice retreats in summer, reaching a minimum in September, but in recent years this summer melt has become more extreme. If the decline continues, Arctic summers could be ice-free by the 2030s. (8/16, #5)
  • Gasoline prices are up sharply in the past month on surging crude oil costs and refinery woes, and now are likely to make 2012 the costliest year ever at the pump. Prices are likely to continue climbing through August, with little relief until after Labor Day. (8/16, #11)
  • As the drought threatens to raise food prices, energy production is also feeling the pressure. Across the nation, power plants are becoming overheated and shutting down or running at lower capacity; drilling operations struggle to get the water they need, and crops that would become biofuel are withering. Analysts say the US should survive this year without major blackouts, more frequent droughts will continue to strain power generation in the future. (8/16, #13)
  • The Rwandan government announced that geothermal energy drilling will begin in December. “We already signed a contract with a drilling company. There are three boreholes in Karisimbi. (8/16, #17)
  • South Sudan has said that it held fruitful discussions with Kenya on the South Sudan-Kenya crude pipeline. The governments are in the process of formulating an inter-governmental legal framework that will provide for implementation of the project that will allow South Sudan to export its oil via the Kenyan port of Lamu. (8/13, #12) (8/15, #6)
  • BP is seeking as much as $7.9 billion for a group of Gulf of Mexico oilfields as it unloads assets following its 2010 spill in the region. (8/15, #8)
  • Brazil’s Petrobras has made “one of the most significant oil discoveries” in the country’s offshore sub-salt area, a partner in the discovery said, raising expectations the state-led oil company has made another giant find. (8/14, #9)
  • Venezuela has increased oil sales to China to 640,000 b/d. “Before, we never sold a single barrel of petroleum to China and now we sell them 640,000 b/d … at a better price than … in the U.S. market,” Rafael Ramirez said in an interview. (8/14, #10)
  • Secretary of the Interior Salazar outlined a proposed plan to open additional acreage in the National Petroleum Reserve in Alaska for oil and gas development. The proposed plan would make approximately 11.8 million acres available for leasing. (8/14, #12)
  • Kurdistan has delivered 116,000 b/d of crude since it restarted pumping oil on August 7 after a dispute with the central government. Baghdad is determined to cut ties with ExxonMobil and any other foreign oil company if they violate Iraqi law and proceed with work Kurdistan. Iraqi authorities have warned Total that it must freeze its energy deal with Kurdistan region or sell its stake in the Halfaya oilfield. (8/13, #6, #7, #8)
  • The chief of Belgium’s nuclear power regulatory agency says he’s “skeptical” the Doel-3 reactor near Antwerp can ever be re-started. Anomalies found in the tank holding the reactor’s nuclear core could be cracks, in which case the plant would face imminent decommissioning. (8/13, #19)