Download Full PDF: Peak Oil Review 09/04/12

1. Oil and the Global Economy

Oil prices were little changed for the week: first climbing on the threat posed by hurricane Isaac; then falling as the hurricane proved to be less of a danger to oil production; and finally recovering on Friday as Fed Chairman Bernanke hinted that the US might have to launch a stimulus program. Such a program would likely weaken the dollar, thereby boosting oil prices. NY oil futures closed at $96 and London at $114, a dollar or so below recent highs.

With a hurricane churning through the Gulf, US stockpile numbers become less meaningful. Imports rose the week before last as tankers rushed to unload cargoes and get out of the area before the well-advertised storm hit. Last week major oil import terminals were closed and about 24 percent of US oil production was shuttered for several days. Flooding and lengthy power outages in the Mississippi valley likely curtailed additional gasoline production and consumption.

US gasoline prices were much in the news last week as prices hit an all-time high for the Labor Day weekend. The high prices, which most analysts expect will ease shortly, were due to a combination of factors, including high crude prices and various pipeline and refinery outages. The national average for regular is now at $3.83 per gallon and $4.15 in California which has suffered a major refinery outage. Seven states are now above $4 a gallon. As a comparison, however, gasoline hit $9.50 a gallon in Italy last week. An Italian research group says that it now costs more to fill the average family car each week than to feed the family.

Despite lower domestic demand, US gasoline and diesel inventories are at their lowest level for this time of year since 2008. Part of this decline is due to refinery outages and part to a surge in US gasoline exports.

With the US elections only eight weeks away, the issue of releasing crude from the US and other strategic petroleum reserves in the OECD countries has surfaced again. The White House says the matter is under consideration; however, the G7 finance ministers issued a surprise statement saying they were ready to call on the IEA to take action to lower prices. On Friday, Rome and Berlin said they remain opposed to the release of oil stocks as the markets remain well supplied despite the Iranian sanctions. When stocks were released to offset the loss of Libyan oil production last year, the drop in prices lasted about eight days.

The overriding issue, of course, is the Middle East which seems increasingly likely to slide into a situation that could create a real emergency. With this in mind, the editors of Bloomberg published an editorial last week entitled “The Strategic Oil Reserve Is For Emergencies, Not Elections.”

Natural gas prices, which have been drifting down since peaking above $3.25 per million in late July rose Thursday on the news that warmer weather may continue into September. US natural gas stocks are at record levels for this time of year some 12 percent above the five-year average. A recent report suggested that the substantial drop in rigs drilling for gas in the past year does not necessarily correlate with immediate declines in production as some wells are producing both oil and gas and there is a lag between the drilling of the well and the time it is fracked and brought into production.


2. The Middle East

Syria and Iran remain at the top of the list as sources for the disruption of Middle Eastern oil supplies and much higher prices. Last week Tehran hosted the non-aligned summit, which it used to drum up opposition against Western sanctions on its oil exports and support for its supposedly peaceful nuclear program. The government trotted out Supreme Leader Ali Khamenei to reaffirm to the assemblage that Iran did not want nuclear weapons and was only enriching uranium for the benefit of mankind. The conference went downhill for the Iranians after new Egyptian President Mursi said that the Iranian-supported Assad regime in Syria must be overthrown.

From the Iranian point of view, the summit went on to hit rock bottom when UN Secretary General Ki-Moon, who showed up over strong American and Israeli objections, denounced his hosts for asserting that Israel should “be wiped off the map” or perhaps “removed from the pages of time”(depending on the nuances of the translation) and denying the Holocaust.

The summit was overshadowed last week by a new IAEA report saying the Tehran is stepping up the installation of nuclear centrifuges at its underground enrichment facility. This report prompted the White House to warn that “the window to resolve the nuclear issue diplomatically will not remain open indefinitely.” The Israeli’s, of course, took the report as confirmation of what they have been saying about the Iranians all along, and stepped up preparations for war. The Washington Post editorialized that perhaps the Iranians are seeking to provoke an Israeli strike as a means of rallying its people in the face of sanction-induced economic problems; an excuse to justify the open development of nuclear weapons; and turning world opinion against the US and Israel. The Post editorial concludes ominously that “Tehran’s refusal to negotiate seriously and its continuing buildup of nuclear capacity is nevertheless steadily increasing the danger that the Middle East will be engulfed by a new war – one that could interrupt oil supplies, damage the global economy and exacerbate the sectarian conflict already underway in Syria, Iraq and Lebanon.”

Conventional wisdom holds that a unilateral Israeli attack with the weapons they currently possess may only be enough to seal the tunnels to the underground enrichment facilities and would be unlikely to delay the Iranian program for long. For now, Israeli’s “war cabinet” remains split on the issue of a unilateral attack, but time seems to be running out and numerous developments could lead to a decision to strike.

In Syria, the situation continues to deteriorate for the Assad regime and its allies in Tehran. The government is losing control of the countryside and is resorting to indiscriminate air and artillery strikes against towns it can no longer control.  This is sending refugees streaming into Turkey, Lebanon, and Iraq in increasing numbers. The insurgents in turn have stepped up attacks on military airfields in an effort to slow the air strikes.

The Syrian situation now seems to be more of an issue of what happens in the post-Assad era and whether the animosities developed between tribes and religious affiliations during the uprising spread into more export-threatening troubles across the region.


3. EU

The next few weeks may turn out to be critical to the survival of the Eurozone. This week the ECB meets to go over its plan to buy government bonds and Greece presents its latest budgets cuts to EU inspectors who will rule on their sufficiency. Also next week Germany’s constitutional court rules on the legality of the Eurozone’s permanent bailout fund; elections in The Netherlands seem likely to lead to a coalition government unable to act decisively; and the EU finance ministers meet yet again. Any misstep in the carefully choreographed effort to bailout much of the EU could plunge the whole continent into recession or worse.

At the end of October, some €28 billion in Spanish debt comes due. As Madrid’s bond sales have not been going well of late, the government is almost certain to request help with its debt in addition to the €100 billion line of credit it has requested for its financial institutions. With Spain and Greece reaching fiscal crises at the same time, Europe must decide quickly to either have its central bank embark on a major bond buying program or let the two default with unknown consequences for the EU and the global economy. The EU’s few strong economies, most notably Germany, must decide whether to bailout the rest of Europe, let the weaker economies falter or attempt some sort of closer economic integration over the longer term.

Many Germans believe that the bond-buying plan is too risky and would simply bring down the German economy along with its weaker neighbors. There is clearly a titanic political struggle in the offing with major implications for the global economy. Until the future of the Eurozone is sorted out, the euro/dollar ratio is likely to be very sensitive to the twists and turns of the negotiations, taking oil prices along for the ride.


Quote of the week

  • “What’s new is high oil prices and … the economy hates high oil prices.”

– Richard Heinberg in PCI’s new video on Peak Oil


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

  • The US will loan one million barrels of crude from emergency reserves to Marathon Petroleum Corp after one of its refineries slowed output in the wake of Hurricane Isaac. (9/1, #17)
  • The US Interior Department has granted Shell permission to start limited drilling in the Chukchi Sea off Alaska‘s coast. Shell has spent nearly $5 billion and six years preparing to drill in the Arctic but has suffered a series of setbacks including, most recently, delays in refurbishing the 36-year-old Arctic Challenger spill containment barge, now in a Bellingham, Wash., shipyard. (8/31, #16) (9/1, #20)
  • A Canadian regulator announced it gave approval for pipeline company Enbridge to build a 400-mile pipeline to carry oil sands to British Columbia. The project “would bring additional crude oil transportation capacity into the Edmonton area by 2014.” A number of parties objected to the applications but after Enbridge altered the proposed route of the pipeline, several landowners withdrew their objections.” (9/1, #23)
  • French oil major Total insisted that the partners in the Shtokman natural-gas field in Arctic Russia are still studying the project’s economic viability but for now had concluded that under current conditions the development costs were too high. (8/31, #20) (9/1, #25)
  • Ampal-American Israel Corp., which invests in Israeli energy companies and other businesses, filed for bankruptcy protection after turmoil in Egypt forced Ampal to skip payments on some of its $298 million in debt. (8/31, #7)
  • Former Minister of Education, Dr. Ezekwesili, said Nigeria has lost more than $400 billion of its oil revenue to theft or mismanagement since 1960. (8/31, #9)
  • South Sudan hopes to resume oil production through neighboring Sudan after taking its unilateral decision to shut down oil production in January, accusing Khartoum of stealing its crude oil. (8/31, #10)
  • India’s economic growth languished near three-year lows during the first quarter, as gloom over high interest rates and political gridlock in New Delhi kept investment depressed. (8/31, #12)
  • Japan’s government, wary of public opinion ahead of an election, is leaning toward setting a target to eliminate atomic power by 2030 – a major policy shift for an economy that had planned to boost the role of nuclear energy before the Fukushima crisis. (8/29, #16)
  • The majority of Japanese say they want to end the country’s dependence on nuclear power, a new report says. The report says the majority of the public has expressed support for zero nuclear dependency because of a growing “distrust in policy-making processes on nuclear policy and anxiety over the safety of nuclear power generation.” (8/31, #13)
  • Statoil aims to expand its oil production in North America substantially and use rail to start transporting some of the products. Statoil said the Bakken and Three Forks oil plays in North Dakota would play a key role in plans to boost its production from 100,000 barrels of oil equivalent per day to more than 500,000 boepd by 2020. (8/31, #14)
  • For all the complaints about US gasoline prices, Americans spent 63 percent less at the pump in July than Norwegians did on a gallon of the fuel. The US ranked 49th of 60 countries, according to data compiled by Bloomberg, with premium gasoline at $3.75 a gallon on July 23, compared with $10.12 in top-ranked Norway. (8/30, #5)
  • Statoil said it aims for a world-leading 60% recovery factor at its fields on the Norwegian continental shelf, which could add more than 3 billion barrels to its reserves. The recovery factor is a measure of how much of the oil originally in place in a field is ultimately produced. (8/29, #22)
  • Statoil says it has discovered a high quality oil reserve in the North Sea off the coast of Stavanger. The find in the Geitungen field is estimated at between 140 and 270 million barrels of recoverable oil equivalents. (8/27, #14)
  • Tanzania has begun to develop its liquefied natural gas facilities. Deputy Minister for Energy and Natural Resources Masele has been in discussions with Norwegian energy company Statoil to convince BG Group to support building an LGN plant in Tanzania. (8/30, #10)
  • Brazil’s oil company said that July crude oil and natural gas output slipped 1.12 percent from the previous month due in part to planned stoppages for maintenance. Petrobras, as the company is known, said that domestic oil output dropped 1% to 1.94 million barrels a day. (8/30, #11)
  • Growing domestic demand for fuels has Brazil importing gasoline and diesel fuel. Petrobras is importing between 70,000 and 80,000 barrels of gasoline a day. (8/30, #12)
  •  Pemex has made its first big crude discovery in the deep waters of the Gulf of Mexico, near the Mexico-US maritime boundary. The initial estimate of a deposit in the Perdido area was between 250 million and 400 million barrels of light crude, using the industry’s broadest measurement of “proven, probable and possible,” or 3P, reserves. (8/30, #14)
  • The energy industry and advocacy groups expressed praise for a White House plan to increase fuel economy standards for cars and light-duty trucks. President Obama said his administration finalized plans to increase fuel economy standards for passenger vehicles to 54.5 miles per gallon by model year 2025. Mitt Romney, the Republican candidate for president, issued a statement describing the standards as “extreme.” (8/29, #19) (8/30, #18)
  • Canada has started a review of China National Offshore Oil Corp.’s $15.1 billion takeover bid for Calgary-based Nexen.  The review will take 45 days, but can be extended by another 30 days or more, and will decide whether the deal would be of net economic benefit to Canada. (8/30, #19)
  • Norway’s Petroleum and Energy Minister sees no reason to stop drilling in the Arctic. “I believe Norway’s future is reflected in the past. We hadn’t opened areas north of the North Sea 30 years ago, and that was a major discussion back then. Our confidence in ourselves increases as we develop new technology. Norway’s present boundaries end almost right up at the North Pole.” (8/30, #21)
  • The rapid decline in the amount of area covered by ice in the arctic waters suggests there are fundamental climate changes under way, a US scientist says. The National Snow and Ice Data Center, part of a research institute at the University of Colorado Boulder, said satellite records suggest arctic sea ice cover reached its lowest level in recorded history last weekend. (8/29, #7)
  • Iraq’s Kurdistan regional government threatened to stop oil shipments at the start of September, claiming Baghdad’s central government has continued to hold payments to oil companies. (8/29, #9)
  • Brazil’s state-owned energy giant Petrobras is to deploy the world’s first floating oil terminal capable of loading tankers on the high seas. Currently, crude oil must be ferried from offshore rigs to the coast where tankers come to fill up. (8/29, #12)
  • US Senator Feinstein is calling on the Federal Trade Commission to investigate a 30-cent rise in California gasoline prices since the beginning of the month. (8/29, #20)
  • Shale gas drilling poses risks to human health, a French environmental health association said in a statement. “Hundreds of chemical products are used in the exploration techniques, which are for the most part toxic or even carcinogenic.” (8/29, #21)
  • For the first time this year, slowing growth in oil demand is spurring analysts to cut estimates for earnings in the tanker industry‘s largest vessels. Rates for very large crude carriers, each hauling 2 million barrels, will average $21,250 a day in 2012, 5.6 percent less than previously forecast. (8/28, #5)
  • BP said two discoveries of natural gas were made in the shallow waters off the coast of Egypt. Samples taken from the offshore concession area in the Nile Delta confirmed the presence of natural gas. (8/28, #7)
  • Coal won’t win back much of the share of electricity generation that it has lost to natural gas in the US, Moody’s Investors Service said. “Coal will regain a bit of market share as natural gas prices recover somewhat, but most coal-to-gas substitution to date will be permanent.”(8/28, #15)
  • A fire on the pipeline carrying about a quarter of Iraq‘s oil exports forced the closure of the link and halted loading at Turkey’s Ceyhan export terminal. The cause of the fire on the Kirkuk-Ceyhan pipeline in Turkey’s Sirnak province near the Iraqi border was not immediately known, but authorities suspected sabotage. (8/27, #5)
  • A new report from MIT’s Joint Program on the Science and Policy of Global Change suggests that a tax on carbon emissions could help raise the money needed to reduce the US deficit, while improving the economy, lowering other taxes and reducing emissions. (8/28, #17)