Download Full PDF: Peak Oil Review 09/10/12

1. Oil and the Global Economy

Oil prices were little changed at the end of the four-day trading week. NY and London futures finished with small weekly losses after a surge of more than 9 percent in August. Brent closed at $114.25 a barrel and NY at $96.42. Much of the impetus for market moves last week came in anticipation of large government financial bailouts on both sides of the Atlantic. On Thursday, the European Central Bank announced a new bond-buying program aimed at keeping the Eurozone afloat until major changes in the EU’s financial structure can be negotiated. In the US, disappointing job numbers raised hopes that next week’s Federal Reserve meeting will announce another round of quantitative easing that will force down the dollar and send oil prices higher.

The weekly stocks report was affected by Hurricane Isaac which halted oil imports along the Gulf coast and production from many offshore wells. Imports fell by 10 million barrels from the previous week and commercial crude inventories declined by 7.4 million barrels.

MasterCard reported that US gasoline consumption in the two weeks leading up to Labor Day was higher than last year when a hurricane disrupted travel plans. This was the first year over year increase in gasoline consumption in the last 12 months. Gasoline futures continued to rise slowly last week closing at $3.05 a gallon. The US has experienced an unusual number of refinery outages recently due to fires, other mishaps, and Hurricane Isaac.  The EIA reported that US gasoline inventories fell by 2.3 million barrels last week.

A diesel shortage is looming in the EU which cannot refine enough to meet its needs and must import from abroad. Refinery accidents in the US and Venezuela and refinery closures have tightened the global distillate market. Higher Russian export duties have added to the problem. High heating oil prices have caused many Germans to leave their heating oil tanks half full in hopes that there will be a warm winter. All this could lead to serious price spikes in the next few months.

US natural gas prices fell by some 20 cents per million last week as cooler weather set in and the EIA reported that US inventories jumped to a record high of 3.4 trillion cubic feet at the end of August. The increase was not quite as much as expected due to the closure of offshore wells during the hurricane and reduction in drilling new shale gas wells during the past year. Some analysts are forecasting a major increase in natural gas prices during the next two years.

The notion of “peak exports” is starting to make its way into the mainstream media. The fact that major oil producers are consuming an increasing share of their own oil production to the detriment of exports has long been discussed in peak oil circles, but rarely in the financial press. Last week Citigroup released a report pointing out that, if current trends continue, Saudi Arabia could become a net oil importer by 2030. Some already are wondering just where the Saudis will find the oil to import.

Much of the financial press has been euphoric over the prospects for increased supplies of tight oil from the Bakken and Eagle Ford shales, which could lead to US energy independence and a new age of reindustrialization. A handful of deeper thinkers, however, are starting to appreciate that the cost of drilling and fracking in shales and the rapid decline in production from these wells may not be a panacea as they have to be redrilled frequently to maintain production. Some observers are starting to point out that the capital and manpower for all this redrilling does not exist even if the geology cooperates.  People who understand the realities believe that tight oil production may climb to 1.5-2 million b/d, but is unlikely to go much further.

2. The Middle East

The possibility of an Israeli military strike on Iran and spreading violence across the region remain the major threats to oil exports. Tehran seems to have given up on serious negotiation about its nuclear programs and is counting on being able to outlast or circumvent the sanctions. In the meantime, the Israelis continue to openly debate the pros and cons of attacking Iran’s nuclear facilities while Iranian generals and their friends in Hezbollah continue to talk of retaliation against American bases in response to an Israeli strike. Attacking American bases, of course, would be seen as another Pearl Harbor and seems like a sure-fired recipe for another decade of US military involvement in the region and serious problems in maintaining oil exports.

The Syrian uprising is setting off reverberations across the Middle East as 1300 year old Sunni/Shiite animosities come to the fore. With neither side seeming to have the strength for a knock-out blow in the immediate future, the situation seems destined to continue for a while. As indiscriminate bombings of civilians and other atrocities mount, refugees continue to stream out of Syria into Turkey, Jordan and Iraq. These three countries already have ethnic problems: Sunni-Shiite-Christian in Lebanon; Turks-Kurds in Turkey, and Sunni-Shiite in Iraq – that seem to be evolving into increased violence as the Syrian uprising continues.

Iraqi oil exports hit their highest level in 30 years last month at 2.56 million b/d. However, on Sunday, bombs exploded in 11 Iraqi cities, killing at least 44 and wounding hundreds, in an apparent effort by Sunni militants to undermine the Shiite government. If this gets much worse, it is difficult to imagine that Baghdad will fulfill its ambitious plans to increase oil production in the next few years.

Should this situation across the region continue to deteriorate, it is not difficult to imagine partitioning along tribal and religious lines much as happened when the British left India 65 years ago. Repartitioning of the Middle East and the movement of populations would likely be a lengthy and violent affair with oil production and exports suffering greatly.

3. The Eurozone Crisis

After weeks of buildup, the announcement on Thursday that the European Central Bank (ECB) would begin an unlimited bond-buying plan failed to stir the oil markets and ran into a storm of criticism from Germany, Italy, and Spain. Even the German Central Bank which is a key member of the ECB put out a statement saying the plan was tantamount to financing governments by printing bank notes. Italy and Spain were upset by the fine print of the offer which would demand harsh changes in economic policy in return for the loans and are unlikely to ask for them.

It is becoming apparent that the only long-term solution for Europe’s fiscal problems is some form of closer fiscal integration akin to that of the US where major economic issues are settled centrally and individual countries provide services somewhat akin to those provided by the American states. However this degree of integration among the 17 sovereign and widely differing members of the zone will be a very difficult if not impossible task.

For now, the economic situation is not good in much of the zone. Greek unemployment is above 24 percent, Spain cannot afford to refinance its debt, and a manufacturing downturn is spreading across the continent and much of Asia for that matter. In Germany, 75 percent of those polled say write off the Greeks and the German constitutional court will rule on the legality of the zone permanent bailout fund while a decision on an overdue Greek payment of €31 billion must be made next month. US companies are reported to be preparing for a Greek departure from the zone.

The complexity of all this makes it very difficult to see how the EU can avoid sinking into a deeper recession or worse in the next year. It is difficult to see just how much a recession would reduce the demand for oil. While industrial production would fall, Europe is already a very efficient user of oil which has been steadily reducing its consumption in recent years.


Quote of the week

  • “If Saudi Arabian oil consumption grows in line with peak power demand, the country could be a net oil importer by 2030.”

Heidy Rehman, Citigroup analyst

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

  • Shell’s US unit said drilling in Alaska’s Arctic will likely begin over the coming weekend, after a drillship sets down anchor over the first oil-and-gas prospect targeted by the Anglo-Dutch oil company in the Chukchi Sea. (9/8, #12)
  • Argentina’s nationalized YPF energy company is pursuing talks with Russia’s Gazprom to forge a partnership and secure needed cash investment in the company. Argentina nationalized YPF in May, alleging its principal shareholder Repsol of Spain wasn’t reinvesting enough earnings in the company. (9/8, #8)
  • Texas will soon open a stretch of highway with the highest speed limit in the country. The Texas Transportation Commission has approved a speed limit of 85 miles per hour for a 41-mile toll road several miles east of the increasingly crowded Interstate 35 corridor between Austin and San Antonio. (9/8, #9)
  • Delta Airlines said that the 185,000 b/d Trainer refinery in Pennsylvania will be operational by the end of September.  Delta, the only major U.S. carrier that owns a refinery, is trying to buy cheaper Bakken crude to boost savings on making jet fuel. Bakken crude can be purchased at a price similar to or lower than West Texas Intermediate. (9/7, #16)
  • Preliminary lab results show two oil samples taken on the Louisiana coast are from BP’s 2010 Gulf spill, state officials said. (9/8, #16)
  • The US rig count slid by 30 units during the week ended Sept. 7, with the total number of rotary rigs in the US reaching 1,864 this week, as reported by Baker Hughes. This compares with 1,958 rigs working in the comparable week last year. (9/8, #20)
  • The French Energy Minister says the government is committed to closing the country’s oldest nuclear reactor by 2017. Two people were burned in an accident there earlier this week. (9/8, #24)
  • The US’s’ first commercially licensed grid-connected wave energy device is in its final stage of testing before the scheduled launch next month in Oregon. The 40-foot-wide, 260-ton PowerBuoy, developed by New Jersey company Ocean Power Technologies, will extend more than 100 feet into the sea and rise another 30 feet from the surface. (9/8, #26)
  • Scientists in the Arctic are warning that this summer’s record-breaking melt is part of an accelerating trend with profound implications. Norwegian researchers report that the sea ice is becoming significantly thinner and more vulnerable. Last month, the annual thaw of the region’s floating ice reached the lowest level since satellite monitoring began more than 30 years ago. (9/7, #5)
  • The United Nations said progress was made at the latest climate talks in Bangkok. The talks, which concluded Wednesday, were intended to prepare the way for major climate change meetings Nov. 26-Dec 7, in Doha, Qatar. (9/7, #6)
  • One or more insiders with high-level access are suspected of assisting the hackers who damaged some 30,000 computers at Saudi Arabia’s national oil company last month. The attack using a computer virus known as Shamoon against Saudi Aramco – the world’s biggest oil company – is one of the most destructive cyber strikes conducted against a single business. (9/7, #10)
  • South Africa says it will allow fracking to explore for shale gas in the semi-desert Karoo region known for its vast plains. Cabinet ministers agreed to lift a year-old moratorium on hydraulic fracturing, based on a report by a technical team. (9/7, #11)
  • US ethanol production rose 10,000 b/d for the reporting week ended August 31 to a two-month high of 829,000 b/d as weekly ethanol stocks rose 238,000 barrels to a month-high of 18.7 million barrels. (9/7, #18)
  • Exploration and development of shale gas in Europe could help the EU keep its dependency on gas imports at 60 percent, according to one of three studies commissioned by the European Commission that were published Friday. (9/7, #22)
  • Nigeria’s oil production has fallen below government projections. The Ministry of Finance had projected in this year’s budget that the country’s output would be 2.48 million b/d. The Central Bank of Nigeria has reported that instead the nation produced 2.12 million b/d of oil in the second quarter of 2012, resulting in a deficit of 36,000 b/d. (9/6, #8)
  • Mexico’s state-owned oil company Pemex said in a preliminary report that crude-oil production in August hit the highest level for any month this year at 2.56 million b/d, and exports also likely reached their highest point this year. (9/6, #10)
  • The government of Guangzhou, that is one of China’s biggest auto manufacturing centers, introduced license plate auctions and lotteries last week that will roughly halve the number of new cars on the streets. The crackdown by China’s third-largest city is the most restrictive in a series of moves by big Chinese cities that are putting quality-of-life issues ahead of short-term economic growth. (9/6, #11)
  • A new race for water is rippling through the drought-scorched US heartland, pitting farmers against oil and gas interests that use powerful streams of water, sand and chemicals to crack the ground and release oil and gas. A single such well can require five million gallons of water, and energy companies are flocking to water auctions, farm ponds, irrigation ditches and municipal fire hydrants to get what they need. (9/6, #16)
  • Chesapeake Energy, the once hard charging shale gas company who took Pennsylvania’s Marcellus Shale by storm back in 2009, is losing its hold as the market leader within the state. New state production reports out this week show Chesapeake does not own any of the top producing 25 wells in Pennsylvania. (9/6, #17)
  • Consol Energy will temporarily idle one of its biggest coal mines due to weak global demand for steel-making coal. (9/5, #16)
  • A US railroad said it was expanding its rail network in the Great Plains to accommodate the need to transport oil. BNSF Railway, which operates 32,000 miles of rail in the US and Canada, said it was investing $197 million to extend tracks in North Dakota and Montana. The expansion would allow the railroad to transport 1 million barrels of crude per day from the region. Because the region developed so quickly there is a shortage of pipeline capacity. (9/5, #18)
  • King Abdullah II of Jordan moved quickly to block a recent increase in fuel prices after angry protesters took to the streets over the weekend, raising the specter of renewed social and political unrest in the kingdom. Already shaken by protests inspired by other revolts in the region, Jordan, a country of six million, is now contending with an influx of refugees from Syria, putting further strain on the country’s finances and stability. (9/4, #6)
  • Saudi Arabia is expected to net its highest ever oil export earnings of nearly $335 billion in 2012 because of high crude prices and a slight rise in its production, according to the Gulf Kingdom’s largest bank. (9/3, #7)
  • Russia extracted oil at a record pace of 10.38 million b/d in August, a level unseen since the collapse of the Soviet Union. (9/3, #18)