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1. Prices and Production

The price jump that began two weeks ago sent prices up as much as $17 a barrel, reaching a high above $87 on Wednesday. On Thursday and Friday, prices pulled back to close at $84.92 on concerns that US stockpiles are continuing to build, and that the US economy is not recovering quickly enough to justify the higher prices. The ongoing Greek debt crisis and a weaker Euro continue to hamper increases in oil prices.

The EIA is forecasting that the national average gasoline price will climb from its current $2.86 a gallon to top $3 before summer. Natural gas prices fell last week to settle at $3.90 per million BTUs after government reports showed US inventories falling more than expected.

2. China’s drought

The drought in southwestern China which began last fall continues to intensify and may be starting to impact world energy prices. So far as many as 25 million people, 20 million acres of crops, and 12 million head of livestock have been affected.

Moreover, the drought stricken area, which is usually well-watered by monsoon rains, is the watershed for the bulk of China’s hydro-electric generating capacity, which in turn provides a substantial share of the power for the industrial plants along the southeast coast. Press reports speak of hydro power output having falling from 70 to 90 percent in some regions. Officials note that unless heavy rains come in the next month, many reservoirs will be empty and power stations will have to close down. For a country attempting to grow its GDP by 11 percent this year, electricity shortages that could run to 10 of 15 percent of national production could be a disaster.

Sixty years ago China could simply let remote villagers suffer whatever befell them, but today’s highly organized industrial China, sitting on trillions in foreign reserves, must do whatever it takes to mitigate the effects of the worst drought in 100 years.

Last year Beijing, the world’s largest coal producer, imported 100 million tons of coal and will likely to increase this total in 2010. In Hubei province where 30 percent of electric power comes from hydro, lower water levels behind the Three Gorges dam has already caused a shortage of 500 million KWh. In March, China increased its crude oil imports by 29 percent year over year to nearly 5 million b/d.

The course of drought conditions is difficult to predict, and the El NiƱo in the central Pacific which may be behind the drought seems to be disappearing. At the same time, the Chinese are reporting that drought conditions far to the north in Inner Mongolia are worsening.

Should the droughts persist, with hydro-power and food production continuing to fall over the next few months, there are likely to be major repercussions — particularly efforts to step up energy and food imports. All this suggests that the rapid increase in Chinese oil imports that we have seen in recent months may not be over.

3. Venezuela’s power crisis

The situation continues to deteriorate with the water level at the Guri dam falling another meter last week and three large thermo-electric generators going out of service. President Chavez announced it had started raining in the Guri watershed, though the national meteorological service said it was only a passing storm and that conditions necessary for heavy summer rains have not yet formed.

With 736 megawatts of thermal generating capacity going out of service in the last month, the situation at the hydro dams becomes even more critical. Government officials continue to reassure the public that the generators will be repaired soon and that new capacity will be installed this year, but most are skeptical. A Venezuelan newspaper reports that last week a group of government-owned generating plants were only operating at 20 percent of rated capacity. If heavy rains do not come by mid-May, there will likely be serious trouble affecting the oil industry by the end of May.

4. Oil prices and economic recovery

The jump in oil prices to a high of $87 last week has revived discussions as to whether prices will go still higher, thereby endangering the prospects of further economic recovery. Most observers are attributing the recent price increase to improving prospects for the economy; oil prices are rising despite the persistent increase in US crude inventories which should force down prices. Someday it may become apparent that rapidly increasing Chinese demand may have had more to do with the increase than is currently believed. For many months now crude has traded in the Saudi’s sweet spot — $70-80 a barrel – which is seen as high enough to meet the investment needs of oil producers and low enough to prevent major economic damage.

Now that prices have broken out of that trading range, eyes are again turned to $100+ oil prices. Some people now believe that oil prices will never go much higher the $140 seen two years ago as the demand for oil products would drop precipitously. Others point to the large number of countries subsidizing oil prices as a reason oil could go much higher without a significant reduction in demand.

Quote of the Week

  • “Triple-digit oil prices are going to threaten a world recovery.”

— Jeffrey Rubin, economist and author

The Briefs (clips from last week’s Peak Oil News dailies are indicated by date and item #)

  • The US and its western allies achieved a diplomatic breakthrough of sorts: China joined talks at the UN to consider a fourth round of sanctions against Iran. But both Beijing and Russia stressed they had not closed the door to diplomatic solutions to the stand-off with Iran over the country’s nuclear ambitions. Iran’s latest statements provide little optimism.(4/10, #4)
  • Falling global oil consumption has left Saudi Arabia sitting on its biggest supply cushion in years and allowed it to shift attention from oil to booming gas demand that is growing by 7 percent annually. Aramco officials said the focus on drilling for gas would continue, with 50 percent of the rigs in use hunting for gas. (4/9, #8)
  • Saudi Arabia plans to spend $80 billion on expanding its power generation capacity and transmission network in the next decade in order to combat shortages and meet rising demand. (4/7, #6)
  • A group led by Eni’s Angolan unit has reported two deepwater oil discoveries in about 1,400 meters of water. (4/9, #10) Angola expects new discoveries to boost crude output by 16 percent next year. Oil production will reach 2.2 million barrels a day by 2011, compared with 1.9 million barrels at present. (4/9, #11)
  • Chevron is just one of several companies and African governments taking a fresh look at West African prospects as they seek to replicate the huge subsalt discoveries made in a Brazilian region with a similar geology. Subsalt exploration is particularly critical for Gabon, whose mature oil basins have been declining from their 1997 peak of 371,000 barrels a day in 1997 to 235,000 barrels a day in 2008. BP has already made at least five significant discoveries in the Angolan subsalt. (4/10, #6) [see Commentary for related point]
  • $100/barrel oil would hurt developed economies more than emerging ones, as the latter are powering global growth and can afford fuel subsidies. The IMF estimates consumer petroleum subsidies will reach almost $250bn this year. (4/9, #4)
  • Chinese energy companies will likely participate in bidding for Brazil’s offshore subsalt oil reserves when auctions begin and are already seeking to buy stakes in existing oil projects, a top energy official told Reuters. Bidding for subsalt blocks was suspended in 2007 when Lula decided to change the country’s oil laws. (4/7, #10)
  • China’s $7.24 billion trade deficit in March, the first time the trade balance deficit since April 2004, mainly reflected strong imports of oil, raw materials and cars. (4/10, #10)
  • Petroleos Mexicanos’s crude production fell just 2 percent in March compared to 2009. Production from Ku-Maloob-Zaap climbed to 838,000 barrels a day in March from 800,000 a year earlier. Chicontepec output increased to 38,000 barrels a day from 27,000, while production at Cantarell fell to 531,000 from 724,000. (4/9, #15)
  • Uganda expects to earn $2 billion a year from its recent oil bonanza by 2015. The windfall may well change the country’s politics. But oil can be a curse. It is far from certain that all of the country’s 30m people will benefit. (4/7, #8)
  • Moscow agreed to pay Caracas $1 billion in bonuses to tap some of the largest oil fields outside of the Middle East, the Russian prime minister said in Moscow. (4/6, #10)
  • Venezuela announced that the recent suite of heavy-oil projects agreed to during its February bidding, plus the Junin block developments, will increase the country’s oil production from 3 million to 6 million b/d by 2016, with first oil being delivered by 2013. (4/6, #11) [Editors’ note: we suspect the chance of this forecasted doubling are remote.]
  • Canadian oil sands investments stop being economical below $65 a barrel. That proved especially painful in 2008 when the price of oil fell below $35. Some $90 billion (Canadian) of the country’s sands projects were shelved. If the economy hits another serious bump, oil sands investors are likely to suffer the worst. (4/6, #20)
  • Despite all the billions spent on offshore development, US oil production in the Gulf of Mexico has not grown in the half-decade since Hurricane Katrina left her mark. In fact, production in the region has only recently climbed back to its pre-Katrina mark of roughly 1.6 million b/d. (4/7, #18)
  • A report from the American Joint Forces Command predicts that in 2015 the world capacity for petroleum production could be 10 million b/d less than the demand. If this Pentagon hypothesis comes to pass, a third oil shock would hit the world economy, one that could be more violent than the two preceding ones. (4/7, #13)
  • Oil India, the state explorer that bid for Gulfsands Petroleum, said it has more than $2.5 billion cash available for acquisitions as it seeks producing assets overseas to help boost the country’s energy security. (4/5, #12)
  • Atlas Energy has formed a $1.7 billion joint venture with India’s private Reliance Industries Ltd. to exploit Marcellus shale gas in southwestern Pennsylvania. (4/10, #16)
  • Russian and German leaders marked the start of construction on the new Nord Stream pipeline from Russia to Europe under the Baltic Sea, with the deputy CEO of gas company Gazprom saying it had already signed up customers for the entire supply. (4/10, #18)
  • Russia doesn’t plan to cut natural gas production to support plummeting prices after Algeria suggested the Gas Exporting Countries Forum should seek to limit supply when it meets this month. (4/9, #25)
  • BP and ConocoPhillips’ Denali Alaska gas pipeline project said Wednesday that the cost to build a natural gas pipeline from Alaska’s North Slope into Canada would be $35 billion. (4/9, #22) [Editors note: the price was estimated at $20 billion during the early 2000s.]
  • US natural gas reserves likely increased for an 11th consecutive year at the end of 2009 to 250 tcf, their highest level in 35 years, the American Gas Association said. (4/10, #15)
  • US natural gas supply assumptions have been turned upside down in the last 3 years, panelists contended at the Annual Energy Outlook Conference put on by the US Energy Information Administration. (4/9, #5)
  • While EIA currently expects US LNG imports to increase by about 0.5 Bcf/d this year over last, the failure of global demand to keep pace with increased global supply could lead to even higher US LNG imports than currently forecast. (4/7, #15)
  • The U.S. Energy Department is preparing to make sweeping revisions to its U.S. natural-gas production data after finding it has been overstating output, raising new questions about the government’s collection of energy information. (4/5, #3)
  • There were 31,035,791 cars on British roads at the end of last year, a drop of 0.7 per cent compared with 2008 and the first decline since WWII. The figures were the latest evidence of the impact the recession has had on car owners and household spending. (4/9, #26)
  • Peabody Energy of the US bid $3.3 billion last week for Macarthur Coal. Peabody’s bid underscores the global appetite for Australian coal, just as the country’s iron ore and liquefied natural gas sectors are booming from China-fuelled demand. China’s move to the status of importer follows a clampdown on illegal and unsafe mining, forcing the closure of hundreds of small mines in the country’s key coal-producing area. (4/9, #16)
  • Coal shipments from Australia’s Newcastle port, the world’s biggest export harbor for the fuel used in power stations, rose 24 percent last week while the number of vessels waiting to load declined. (4/6, #13)
  • The US wind energy industry installed 10,000 megawatts of generation in 2009 to rank as the largest year in US history. Total US wind capacity is now 35,000 MW. (4/9, #21)