Download Full PDF: Peak Oil Review 08/27/12

1. Oil and the Global Economy

After climbing a dollar or so a barrel by mid-week, oil prices slipped on Friday to close largely unchanged, with NY crude at $96 a barrel and London at $113. The number of factors now impacting oil prices seems to be increasing. Tending to pushing prices higher we have the Iranian sanctions and the threat of an Israeli strike on Iranian nuclear facilities prior to the US election; falling petroleum stockpiles in the US and other OECD countries; hopes that the Eurozone crisis, particularly the Greek situation will be settled soon; and hopes that slowing economies in the US, EU, and China will lead to more central bank bond-buying and other stimulus packages that will push oil prices higher.  There are also several short-term factors such as the hurricane currently headed for the Gulf oil fields and a 17 percent drop in production from the North Sea oil fields next month due to maintenance.

Keeping a lid on prices is the stream of economic data showing slowing economies in the US, EU, China and several other nations which eventually should lead to a decline in the demand for oil. The interaction of these factors from day to day is resulting in very choppy oil markets and little net movement in the past week.

The meetings last week aimed at heading off a breakup of the Eurozone seem to have been indecisive. The Germans and French, while continuing to profess support for Greece continuing in the zone, are refusing to give Athens more time or money to settle its affairs. Athens’ debts continue to pile up so that it is difficult to see this situation going on much longer.

Gasoline prices in the US continue to rise even as US oil consumption continues to slip. US petroleum deliveries for July were at their lowest level since 1995. Last week US gasoline prices reached their highest level ever for the third week in August with regular now averaging $3.75 a gallon. Regular gasoline in California is now at $4.13, and Connecticut, Hawaii, Oregon, and Washington are over $4 a gallon. MasterCard reports that year-to-date gasoline demand is 4.4 percent below last year. Interestingly, a new Reuters’ poll shows that voters are not unduly concerned about high gas prices, placing them 10th in a list of economic concerns.

Oil entered the Presidential race last week as Republican candidate Romney proposed ending federal control over drilling on federal lands and in coastal waters. This would primarily affect New Mexico, Nevada, Utah, Colorado, and Alaska where there is still much land under federal control. Romney claims that such a move would increase domestic oil production so much that the US would be “energy independent” in eight years and that 3 million new jobs would be created.


2. The Middle East

The civil war in Syria continues unabated with government forces driving back rebels from parts of Damascus amid bombing and shelling of residential areas. The number of refugees fleeing to foreign countries is now over 200,000 and climbing. The rebels are saying that government forces are now rounding up all young men in areas they overrun and are summarily executing them. Hundreds were said to have been executed over the weekend. The fighting is now spreading to parts of Lebanon where heavy fighting is reported between Assad government and rebel supporters.

Rising concerns over the security of Syria’s large and dispersed chemical weapons stockpiles led President Obama’s threat to intervene militarily in the fighting to secure the weapons should there be any sign of their use by government forces or even movement out of storage sites. The threat brought a sharp retort from Moscow and Beijing who accused the US of using the issue as a pretext to invade and destroy the Assad government. Russia assured the world that it has received assurances from the Syrians that the weapons are secure and will not be used. The Free Syrian Army, however, is saying that gas has already been used by government forces in the fighting, but these reports cannot be confirmed. Most observers are saying that to situation is so confused that direct foreign intervention in Syria would only make matters worse.

Security of chemical weapons is only one aspect of the Syrian uprising that makes it extremely dangerous and, over the longer run, a threat to Middle Eastern oil exports. The increasing animosity between Sunnis and Shiites and the atrocities that are taking place bodes ill for the stability of the Middle East. The fighting has already spread to parts of Lebanon and occasionally to Iraq which has long been a center of Sunni-Shiite animosity.  Bombs, mostly against Shiite targets, continue to explode in Iraq, and are likely one of the factors driving foreign oil companies into Kurdistan where the security situation is much better.

The Iranian nuclear situation is clearly deteriorating with new reports from UN inspectors that Iran has expanded its underground capacity to enrich uranium. Israeli media is reporting that Prime Minister Netanyahu is “determined to attack Iran before the US elections,” unless he receives iron-clad guarantees from President Obama that the US will attack Iran in the spring if the Iranians do not come to a satisfactory agreement by then.

An Israeli attack on Iran is still the most serious threat to Gulf oil exports, affordable oil prices, and the welfare of the global economy on the horizon. The Iranian response to such an attack is almost certain to drive oil prices much higher and very likely would reduce Middle Eastern oil flows for an indeterminate length of time.


3. Ethanol

As the drought in the central US drives corn prices ever higher, both political parties are starting to question the policy of mandating corn-based ethanol in gasoline which has been in effect since 2005. Long a favorite of corn-state congressmen, the mandate was seen as a perfect answer to the rise in corn yields from 20 bu/ac prior to 1940 to160 bu/ac in recent years. About a third of the US corn crop goes to produce ethanol. While the drought has not yet seriously impacted food supplies, it has affected livestock producers who can no longer afford to feed their animals. Seven governors have already asked the EPA to waive the mandate, which it can only do if there is evidence of “severe” damage to the economy.

The real problem, however, is that while the government can mandate that ethanol be put in gasoline to replace imported oil, it has also mandated under the 1990 Clean Air Act that gasoline be cleaner. This is now largely achieved by adding ethanol to gasoline. As ethanol is currently cheaper than gasoline to produce, some 96 percent of the “gasoline” sold in the US now contains ethanol. Corn prices would have to rise to circa $10 a gallon or oil fall to less than $70 before there would be an economic incentive for gasoline companies to stop using ethanol.

All this says that any decision by the Obama administration to waive the mandate is likely to be meaningless. Unless corn or oil prices change rapidly, the only way to prevent food from being changed into fuel is for Congress to reverse itself and pass legislation preventing the use of corn as a fuel.


Quote of the week

  • “Many analysts predict that the world’s production of oil will peak in the next ten to twenty years, but oil expert Matt Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, presents a compelling case that Middle Eastern oil production may have already reached its peak… But whether the peak is already past or will be reached within a few years, world oil supply will decline at some point, and no one predicts a corresponding decline in demand.”

Mitt Romney in his 2010 book: No Apology; The Case for American Greatness

  • “With no ‘Peak-Oil’ in Sight.”

– Romney Campaign 8/23/12 Energy Policy Whitepaper, quoting Leonardo Maugeri


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

  • An explosion tore through Venezuela’s biggest oil refinery on Saturday, killing 41 people. Caracas says most of the damage was to storage tanks and outside the refinery so that it is expected to return to operation in two days. (8/25, #8)
  • Venezuelan President Hugo Chavez, seeking re-election Oct. 7, says he plans to spend $130 billion over six years to double the country’s daily crude oil output. Venezuela produces about 3 million barrels per day when its state-controlled hydrocarbons industry operates normally. However, production has slumped in recent years. (8/24, #15)
  • US drivers paid an average of $3.72 per gallon on Monday. That’s the highest price ever on this date, according to auto club AAA, a shade above the $3.717 average on Aug. 20, 2008. A year ago, the average was $3.578. More daily records are likely over the next few weeks. The national average could increase to $3.75 per gallon by Labor Day, said Tom Kloza, chief oil analyst at Oil Price Information Service. (8/22, #13)
  • A Texas judge ruled in favor of pipeline operator TransCanada Corp.’s use of eminent domain to build an oil pipeline that could ultimately stretch from the Canadian tar sands to the Gulf Coast. (8/24, #19)
  • An impending 9 percent energy price hike from British household energy provider SSE this week brought protests from politicians and consumer groups. SSE, Britain’s second-largest energy company, announced it will increase consumer prices for both electricity and natural gas by 9 percent beginning Oct. 15, citing increased wholesale gas costs and other factors. (8/24, #24)
  • Qantas has scrapped a US$8.5 billion order for Boeing’s state-of-the-art Dreamliner aircraft because of “lower growth requirements” and confirmed its first full-year net loss since it was privatized almost two decades ago. (8/23, #8)
  • The US Coast Guard closed traffic on a section of the Mississippi River after a barge grounded because of shallow water. The river was closed on an 11-mile stretch near Greenville, Mississippi, between mile markers 524 and 535. (8/23, #11)
  • Fossil fuel subsidies continue to far outweigh support for renewable energy, according to new research conducted for the Worldwatch Institute’s Vital Signs service. Although independent reporting on these subsidies has increased, global efforts to move forward with subsidy reform have been hindered by a variety of causes, leaving international pledges unfulfilled. (8/22, #4)
  • There were no casualties reported in the bombing of a natural gas pipeline that ties into a terminal on the Gulf of Aden, a Yemeni energy company said. Energy company Yemen LNG confirmed in a statement that unnamed saboteurs caused an explosion on a 38-inch natural gas pipeline tied to a terminal on the Gulf of Aden, the country’s only liquefied natural gas export facility. (8/22, #12)
  • Sea ice in the Arctic Ocean is likely to shrink to a record small size sometime next week, and then keep on melting, a scientist at the US National Snow and Ice Data Center said. “A new daily record … would be likely by the end of August,” said Ted Scambos, lead scientist at the data center, which monitors ice in the Arctic and elsewhere. (8/21, #5)
  • Washington has advised US energy companies working in Iraq that signing deals without Baghdad’s approval is a risky move. The central government in Iraq warned last week it was considering cutting ties with foreign energy companies signing unilateral deals with the Kurdistan Regional Government, which controls oil-rich northern Iraq. (8/21, #12)
  • France’s Total has purchased a minority share in an exploration block in Iraq’s semi-autonomous northern Kurdistan region, its third such deal in less than three weeks, disregarding threats from Baghdad. (8/20, #7)
  • Environmental concerns about hydraulic fracturing are legitimate, but banning the technique thwarts efforts to wean the world off dirtier fuels, the head of the International Energy Agency told a Rice University audience. The agency’s executive director, Maria van der Hoeven, called on natural gas producers to improve transparency around hydraulic fracturing and its impact on aquifers and greenhouse gas emissions. (8/20, #5)
  • Golden Pass Products, a joint venture between Exxon Mobil and Qatar Petroleum, is asking federal authorities for permission to export large quantities of liquefied natural gas made in the US from an existing terminal near the Texas-Louisiana border. If permission is granted, Exxon, the biggest natural-gas producer in the country, and its partner would spend $10 billion converting a recently finished terminal near Port Arthur, Texas, to import natural gas into a facility capable of exporting 15.6 million tons of LNG per year, or approximately two billion cubic feet per day. (8/20, #15)
  • Shell is spending billions of dollars to drill the first oil wells in U.S. Arctic waters in 20 years, backed by an Obama administration eager to show it wasn’t opposed to offshore exploration. However, sea ice in the Chukchi and Beaufort seas off the northern Alaska coast was slow to break up this year, leaving the drilling areas inaccessible much later than anticipated. (8/20, #17)
  • The US rig count fell by 16 units during the week ended Aug. 24. The total number of rotary rigs in the US reached 1,898 this week, Baker Hughes reported. This compares with 1,975 rigs during the comparable week last year. Land drilling operations were down 13 units from a week ago, reaching 1,830 units. (8/25, #11)