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1. Oil and the Global Economy

NY crude continued the fall last Monday which took prices down from the vicinity of $113 a barrel to below $106. For the remainder of the week prices slowly rebounded to close on Friday at $109.39. In London Brent crude traded some $14 a barrel higher closing out the week at $124. The spread between NY and London oil widened a bit as the IEA reported that stockpiles at Cushing, Okla., reached another all-time high.

The pressures moving the oil markets were diverse. On Monday it was rumors of peace talks in Libya. On Tuesday, the IEA reaffirmed its projection that global demand was still on track to grow by 1.4 million b/d this year despite increasing prices and new estimates that the Saudis did not produce as much oil in March as had been widely believed. Concerns that high oil prices would stifle economic growth were noted by analysts as a factor contributing to the price pull-back. By the end of the week, however, the EIA report that US gasoline inventories had dropped by an unexpectedly large 7 million barrels coupled with solid economic growth in China and expectations of better economic conditions in the US combined to send prices higher. Underlying all this is the continuing unrest in at least half a dozen Middle Eastern countries which could eventually lead to further reductions in regional oil production. Concerns about the aftermath of the Nigerian presidential election are also a factor.

There were several warnings that the oil markets are about to tighten further last week. In addition to holding to its estimate that global demand will increase this year despite demand-reducing higher prices, the IEA warned that another 3 million b/d of regional oil exports could be threatened by unrest in Oman, Sudan, Yemen, and Egypt. It also noted that OECD stocks were starting to shrink as was spare OPEC production capacity. “There are real risks that a sustained $100-plus price environment will prove incompatible with the currently expected pace of economic recovery,” the Agency said. Last week, OPEC again agreed with the IEA estimate that demands for oil will increase in 2011 by marginally increasing its forecast for global demand this year.

Of more interest was the release of chapters from the International Monetary Fund’s semi-annual World Economic Report which for years has been ignoring the threat to global economic growth from depleting oil resources. In its current report the IMF noted that global oil demand had increased by 3.4 percent in 2010, the rate it had been projecting, while in the meantime the supply of crude is responding -sluggishly.‖

2. China continues to grow

Outside of the unrest in the Middle East, the course of China’s economy is likely to be the major factor influencing oil prices in the coming months. For the last 4-5 months, Beijing has been fighting a serious inflation problem which has been accompanied by a series of interest rate and bank reserve increases as well as retail oil product prices. At each announcement of fiscal tightening, oil prices have dropped on the hypothesis that China’s double digit growth would be slowing soon and along with it increases in Beijing’s demand for oil.

Last week the Chinese reported that retail price inflation during January and February had been 5.4 percent, the highest for the first two months of the year since 2008. Beijing also announced that its GDP had grown by 9.8 percent in the first quarter year over year, down from 9.8 percent from the last three months of 2010, but still ahead of the 9.5 percent economists had been expecting. This growth in GDP is considerably less than the 12 percent that we saw in the early months of 2010. Although not quite in double digits, these are very impressive numbers for an economy the size of China’s. Beijing also announced that its foreign exchange reserves reached $3.04 trillion at end of March, up 24.4 percent year on year.

A new analysis of China’s implied oil demand in March suggests that it increased by 11 percent year on year in March. While this is down by about 4 percent from implied demand in February it shows, if correct, that demand is running well ahead of the 6.5 percent annual increase that the IEA has been predicting for 2011. The analysis by outside observers places China’s consumption in March at 9.16 million b/d which is down from the 9.53 million b/d apparently consumed in February. Beijing does not publish consumption numbers as it considers its oil reserves a state secret.

March is refinery maintenance season in China when demand is normally low. With spring plowing underway and the start of the construction season, oil consumption is expected to increase in the second quarter. Beijing increased retail oil prices by about 5 percent on April 7. This increase is considerably less than the roughly 20 percent increase in world crude prices which has taken place since China’s last retail price increase. Thus Chinese consumers are receiving a nice state-mandated subsidy for their oil and gas purchases.

It is hard to predict where this situation of robust growth accompanied by spiraling inflation will go. For now however, Chinese oil consumption does not appear to be slackening to the 6.5 percent growth level predicted by the IEA for 2011. If this does not happen soon, higher oil prices would appear to be in the offing as the growth in global oil demand outpaces growth in supply.

3. Saudi Production

Until last week, the mainstream media held that the Saudis and a couple of their smaller Gulf allies had raised oil production by enough in March to offset the1.3 million b/d taken off global markets by the Libyan uprising. For weeks now Saudi spokesmen have reiterated that the kingdom is ready and able to produce 12.5 million barrels of crude per day if needed by the markets. Recently these assertions have been accompanied by background briefings holding that skeptics’ claims that the Saudis would never be able to pump more than 9.5 million b/d were simply untrue.

Thus it came as a surprise last Tuesday when the IEA stated that the Saudis’ response to the Libyan export crisis was far less than had been popularly thought; and in fact the Saudis were producing less than 9 million b/d. Given that Libyan production was down by at least a million b/d, the IEA said that OPEC’s production in March was down by 890,000 b/d.

It is now thought that while the Saudis did increase their output by an average of 310,000 b/d in the first quarter, it seems to have dropped when the tsunami drastically cut Japanese demand as roughly one third of Japan’s refining capacity was out of service for a time. Whether or not the Saudis could supply the necessary grades of sweet light crude to European refineries that had been coming from Libya was also an issue affecting Saudi production. The sudden drop of roughly 270,000 b/d in Japanese demand, coupled with inability to ship the quality oil demanded by Europe apparently was enough to cause a reduction in Saudi production during March.

Japanese demand for oil is expected to increase markedly in the second quarter as refineries get back into operation, reconstruction gets underway and oil/ LNG is imported to make up for lost nuclear generating capacity.

Some observers are beginning to question whether there is a political dimension to lack of a meaningful Saudi response to the recent price spikes which now has crude selling some $40 a barrel above the Saudi’s -target price‖ set last year. Given the Western support for regime change in Tunisia, Egypt, Libya and likely other Middle Eastern countries, the Saudi royal family’s priority of not allowing the global economy to succumb to high oil prices becomes saving themselves at all costs from what someday may become uprisings in the kingdom itself.

If this has indeed happened, then the Saudis’ first interest is in raising as much money as possible as quickly as possible to buy-off potential domestic opponents and bolster its defenses against domestic unrest. For the Saudis, higher oil prices in the short term to save the regime may be trumping long-term global stability.

Quote of the week

“The surest remedy for high prices may ultimately prove to be high prices themselves.”

— IEA’s Oil Market Report

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

  • Libya’s civil war has left many domestic refineries out of order or in rebel hands, triggering fuel shortages and forcing the country to search for more fuel abroad. In recent weeks, sanctions blocked a Libya-bound gasoline cargo, while Tunisian activists forced fuel trucks to return empty to Libya. Sanctions have stymied access to cash reserves abroad and crude-sale revenue, but also cut into refined products from abroad. (4/16, #7)
  • In Nigeria, Shell’s SNEPCo has resumed production at its Bonga deepwater oil field after statutory inspection and maintenance. Bonga capacity exceeds 200,000 b/d of oil and 150 million cu. ft. of gas. (4/15, #14)
  • Nigeria government revenue in March was $4.1 billion, down 14.8% from February, due to lower oil production. Nigeria’s oil windfall account, a buffer also used to finance the budget, stood at $6.9 billion at the end of March, from near $3 billion in Dec. 2010. (4/12, #17)
  • In Nigerian elections April 16, unofficial results gave President Jonathan an insurmountable lead. The incumbent had planned to end fuel imports if he won. Because its refineries are in poor condition, Nigeria imports above 8 million gallons a day of refined products. (4/14, #10)
  • Politicians and military leaders – not militants – are responsible for the majority of oil thefts in Nigeria’s southern delta, according to a leaked US diplomatic cable from Jan. 2009 quoting a Nigerian official. A government panelist on troubles in the Niger Delta implicated General Yar’Adua, whose brother became president, and former Vice Pres. Abubakar. (4/12, #18)
  • Indian inflation edged up again to 8.98% in March from 8.31% in the previous month. Fuel and power sector reported a six-months-high inflation of 12.92%. Cotton-textile prices shot up 27.45%. Fruit-price inflation increased to 23.21%. (4/15, #20)
  • To save energy this summer, Japanese companies like Sony and Toshiba want employees to take multiple weeks off work and may switch work hours. (4/15, #23)
  • Japan’s Nippon Keidanren business lobby has asked its 1,300 major member firms to compile by April 20 electricity-saving plans for the summer. By then the government will require that they cut peak consumption by 1/4. (4/11, #11)
  • Toyota will continue running its Japanese auto plants at half-normal volumes May 10-June 3 after its 12-day annual spring holiday. Due to disruption in the parts supply, its Australian unit will cut production at Altona, Victoria state, by half next month, with a similar outlook for June; the company will suspend production at five plants in Europe from late April to early May; and plants in North America will shut for five days in April. (4/15, #21)
  • Nuclear-power experts say Japan could get by with far fewer nuclear reactors if it more efficiently utilized the ones it has. Its reactors have worked at 2/3 of capacity, owing to extended maintenance periods. This regulatory approach has helped usher in multi-reactor facilities such as Fukushima Daiichi. (4/13, #16)
  • Seoul’s Samsung Heavy shipyard has orders to build six LNG carriers for Golar and another customer, good for $1.2 billion of its total $4.7 billion of orders this year. (4/11, #12)
  • Saudi Aramco has substituted some heavier crude in its supply to India for May. The overall volume under India’s term contract, 500,000 b/d so far this year, is unchanged. (4/14, #7)
  • In Saudi Arabia dozens of unemployed university graduates and teachers staged rare protests. Over 20 gathered outside the education ministry office in Jeddah while around 20 collected in Riyadh. (4/11, #8)
  • Iraq Parliament Oil and Energy Committee Chair Janabi says Parliament must approve oil and gas contracts, including deals already awarded in the licensing rounds. (4/12, #16)
  • Kuwait will attempt to seize Iraq oil assets abroad when international legal protections end on June 30. Kuwait Airways will seek to enforce a 2006 English court ruling against Iraqi Airways for stealing $1.2 billion of equipment during the first Gulf War. (4/14, #8)
  • Greenland will license 20,000 sq. mi. off Northeast Greenland in 2012-2013. (4/13, #20)
  • Germany is set to accelerate its shift from nuclear power to renewable energy and increased energy efficiency, adding major new budget strains. (4/12, #30)
  • With a 2-year drought in Cuba dropping reservoirs to 1/5 normal levels, water trucks bring essentials to tens of thousands of families. Leaky pipes compound the problem for 100,000 in Havana. (4/14, #11)
  • Venezuela’s PDVSA says it is still building a domestic gas pipeline system extending toward Colombia, and it may be 2013 before it can start exporting gas. The two countries had agreed several years ago that Colombia would export (100-150) million cu. ft. of gas a day to Venezuela while the latter would construct the pipeline; the direction of gas flow between the countries was to reverse in January 2012. (4/15, #15)
  • Chile is exploring alternatives to coal and gas to avoid electricity rationing. Due to this year’s low rainfall, water reserves have fallen by 32% vs. last year. (4/16, #11)
  • US BOEMRE may expand its regulatory reach beyond offshore oil and gas well operators. It needs Congress’s assent to increase the 30-day offshore permit approval time. (4/14, #16)
  • US Bureau of Land Management will review development of oil-shale and tar-sands in Colo., Utah, and Wyo., reversing a Bush-era plan that opened millions of acres. (4/14, #17)
  • Natural-gas futures rose after the EIA said US gas stockpiles rose by 28 billion cu. ft. last week, short of estimates for a 33-billion cu. ft. build. Inventories as of April 8 stood at 1.607 trillion cu. ft., 0.6% above the five-year average and 7.9% below 2010 levels. (4/15, #5)
  • A new California law requires the state to obtain 1/3 of its electricity from renewable sources such as wind, solar, and geothermal power by 2020. By end-2010 three large utilities had reached 18% vs. a 20% target. Two of the utilities back the new law. (4/13, #18)
  • Pacific Gas & Electric has asked the Nuclear Regulatory Commission to delay its application for 20-year license renewals for its two nuclear-power plant reactors in Diablo Canyon, Calif., until it can complete new seismic studies. (4/12, #24)
  • Two studies suggest the rush to develop the US’s vast, unconventional sources of natural gas is logistically impractical and likely to do more to warm the planet than mining and coal- burning. Larger quantities of heat-trapping methane escape into the atmosphere than previously thought, with up to 7.9% puffing from shale-gas wells. (4/12, #26; 4/13, #23)
  • Shale-gas discoveries in the Utica and Upper Devonian may rival Pennsylvania’s Marcellus Shale. Optimism ranges from drill operators to Penn State Geosciences Prof. Engelder, whose Marcellus estimates in 2008 first drew publicity to the region’s potential. (4/12, #27)
  • Shell expects to start drilling in Alaska’s Arctic waters in the summer of next year. It still has to obtain federal permits for its $3.5 billion investment. It will wait until September before making a final decision to start deploying the system needed to drill next summer. (4/16, #14)
  • US House Republicans have pushed a trio of bills through a congressional committee that would boost offshore oil drilling and ease regulations on oil companies. (4/16, #15)
  • Drilling regulators from a dozen countries have agreed to form a working group that could eventually develop global offshore drilling standards. US Interior Sec. Salazar suggested the idea at a summit on offshore drilling safety. Summit representatives from the UK, the EU, Russian Federation, and Australia may meet again in Oslo, Norway, in 2012 (4/16, #4)
  • The chief US drilling regulator won’t single out BP for extra conditions as the latter resumes exploration in deep waters. “A company that has had a long record — which BP, and many other operators have had — that has one even very egregious incident, I’m not at all sure that this should be disqualifying,” says BOEMRE Director Bromwich. (4/16, #16)
  • A new “capping stack” spill-containment device, unveiled by a consortium of oil companies led by Exxon, aims to allow emergency responders to plug deepwater oil spills similar to the one in the Gulf of Mexico last year. (4/16, #17)
  • Natural-gas drilling rig count in the US fell by four to 885 while the oil-rig count fell for the first time in seven weeks, pulling back from its highest levels in Baker Hughes data since 1987. Horizontal rigs, 2/3 of which are seen drilling for gas, fell by six to 1,003. (4/16, #20)
  • Tennessee Valley Authority promises to close 18 of its coal-burning generators over the next six years while spending $3-5 billion on pollution controls. Coal is over half of the total fuel TVA burns; this will eliminate 16 percent of its coal capacity. (4/16, #21)
  • What about Peak Uranium? The world’s 440-odd nuclear plants ate through about 68,000 tons of uranium in 2010, but uranium mining industry supplied only 55,000 tons. The rest came from secondary sources including mining stocks, reactor building company stocks, reprocessed spent fuel, recycled atomic warheads, military uranium stockpiles, etc. (4/16, #23)
  • Duke Energy Renewables will install a 36-MW battery system, the world’s largest power storage system for a wind farm, at its Notrees Wind Project in Texas. Duke won a $22 million grant from the U.S. Department of Energy to install a large-scale battery at the 153-megawatt Notrees site. Duke matched the grant to fund the project. (4/16, #24)
  • What’s this about a low-cost, lightweight, 400-mile-per-charge battery from Germany? DBM Energy’s Kolibri lithium-metal-polymer battery has made some headlines, but it could turn out to simply be a very big 98-kWh battery pack. Unanswered questions include: What would a commercial DBM pack cost? Would it fit into a car, and what does it weigh? How many watt-hours per kilogram? What is the recharge time? (4/15, #27)