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1. Oil and the Global Economy

Oil prices moved up sharply last Thursday and Friday with NY crude closing just below $108 a barrel and London crude at $118.70 – the highest settlement since August 2008. There were several reasons for the move. In Libya, the fighting seems to have reached at least a temporary stalemate thereby decreasing the chances that any of Libya’s 1.3 million b/d of crude exports will be reaching the market anytime soon. There is growing concern that the recent increases in Saudi and other Gulf State oil production is not enough to cover the loss of Libyan crude. So far the shortage has been mitigated by winter maintenance which has temporarily shut many refineries around the Atlantic basin. In April, however, these refineries will resume normal operations and will be seeking replacement supplies for the lost Libyan crude. Some analysts are optimistic that we will see a surge in OPEC oil production in April. Bloomberg is saying that the Saudis still have the ability to increase production by another 2 million+ b/d within 30 days.

Weakness of the dollar and hopes that a slightly improved employment situation in the US will eventually lead to an increase in demand contributed to the rally. The EIA issued revised figures showing the US demand for oil in January was up by 593,000 b/d to 19.12 million b/d from a year earlier. In the meantime, US gasoline prices, which now average $3.65 a gallon for regular and are well above $4 a gallon in California, are starting to reduce demand. Market technicians say NY crude has broken through key resistance levels and can easily move to $110 and higher in coming days.

Japan’s nuclear power situation continues to grow worse. Some analysts estimate that it will take the equivalent of 400,000 b/d of oil, coal, and LNG to replace the energy that was coming from the shut-in plants. Coal prices hit an all-time high of $130 a ton last week for shipments to Japan. The price reflects the increasing demand for coal from China and India as well as the damage done by the floods in Australia.

Going into the year, conventional wisdom, and the IEA, held that the increase in China’s demand for oil would be about half of what it was during the boom year of 2010. The idea was that increasing inflation in China would force so much economic tightening that the increasing demand for oil would slow markedly. While we do not yet have official data, preliminary indications are that the economy is moderating rather than slowing with the manufacturing sector continuing to expand. Foreign observers are still talking about China’s economy growing by 9 percent this year. In the meantime China’s largest oil trader has halted diesel exports in order to build inventories.

US corn futures surged last week closing at $7.36 a bushel after the USDA announced that US stocks were down by an unexpected 15 percent. Corn prices are now only 30 cents a bushel below the all-time high hit in the summer of 2008. There have been reports recently that the Chinese may be buying large quantities of US corn. The UN-world-food-price index is now at a record high. It appears that corn prices will have to go still higher to slow demand. Goldman Sachs now is forecasting corn reaching $8.60 in coming months and some analysts are talking about the possibility of running out of corn stocks prior to the next harvest.

This of course raises the issue of the of corn-based ethanol production in the US and whether the Congress will move to slow or halt production should food prices move much higher.

The damage to the US and global economy from high oil prices is a topic of growing concern. Oil and gasoline prices are clearly at a level where in the past they have led to recessions. Unlike in 2008 where there was a relatively quick surge in prices to $140 a barrel followed by an equally rapid retreat, this time we are seeing numerous factors come together to slowly pressure prices higher. Other than a major drop in demand, forces that would lead to lower prices are not apparent.

2. Conflict in the Middle East

By recent standards, it was a relatively quiet week in the Middle East. Other than the ongoing fighting in Libya and continuing demonstrations in Yemen and Syria, there was little new that seemed to threaten oil exports from the region. Concerns about the stability of Saudi Arabia are on hold as the situation in Bahrain was relatively quiet.

Over the longer term, the situation is still serious. In Syria, President Assad is dissembling over demands to reform oppressive measures and his security forces continue to fire on and kill unarmed demonstrators. The key to Middle Eastern oil exports remains Saudi Arabia with its 9 million b/d of production. So far the Saudis have remained firm in their opposition to reform, choosing instead to stifle dissent with a combination of massive grants of money to the least well-off and stepped up security. Whether this formula continues to work as protests grow across the region remains to be seen.

3. Japan

Problems resulting from the earthquake and tsunami-damaged nuclear reactors continue to multiply. Although the reactors themselves are stable, highly radioactive water from the cooling operations continues to leak into the sea. Efforts to contain the leaks have been unsuccessful and the government is saying it may be many months before the situation is under control. With the cost of the disaster now estimated at $300 billion and Japanese industrial production now at a two year low due to facility damage and power outages, it is difficult to predict just where Japanese demand for oil will go.

Assuming that the leakage of radioactive material does not get much worse and that evacuations and -stay-indoors‖ do not expand much beyond the 200,000 people currently affected, Japan could be on the road to recovery in a few weeks. The electricity shortage, however, is likely to drag on for many months or possibly years and coping with it has become a top priority for the Japanese government. Beside the six units at the Fukushima nuclear facility, three other nuclear plants, six coal-fired plants and 11 oil-fired plants were initially shut down. Roughly 11 percent of Japan’s total generating capacity of 20 percent in the Tokyo region is shut down. As Japan is one of the world’s most energy-efficient countries, the room for conservation is small. Besides turning out lights, and rearranging retail and working hours, major reductions in the use of air conditioning next summer seem in store in order to keep industrial facilities working. All of this will require increased consumption of fossil fuels.

The wider implications of Japan’s nuclear reactor disaster have yet to be fully appreciated. There are currently some 440 nuclear power plants operating in 30 countries and an additional 65 are under construction. Many countries now have frozen construction of new nuclear facilities while their safety is being reevaluated. Some countries are planning to close existing nuclear facilities and questions are being raised about many others built in seismically active regions. While many countries are likely to continue with their nuclear power programs as the most cost effective way to keep the lights burning, many others seem destined to slow their nuclear programs and even close vulnerable facilities. This is will almost certainly increase the demand for coal, oil, and natural gas for use in generating power over the coming decades.

4. Obama’s Energy Plan

Since the failure of the US energy bill last year, the US has been without any coherent national policy to deal with the increasing costs of imported energy and the highly controversial issue of controlling carbon emissions. Last week President Obama announced a new set of goals for reducing imports of foreign oil by one-third in the next 15 years through a combination of increased domestic production, conservation, and increased use of alternative fuel. The President promised to speed up the issuance of drilling permits and will adopt incentives to encourage federal lease holders to speed up efforts to produce oil from leases they already hold.

Where all this goes is an open question that will be fought out in Washington over the coming months and years. The new majority in the House of Representatives believes that increased domestic drilling coupled with more nuclear reactors will be all the country needs to reduce high energy costs. They also believe that efforts to control emissions at this time are premature and will only hamper badly needed economic growth. Much of the US Senate majority holds diametrically opposed views. This issue will likely take years, much higher oil prices, several elections, and further deterioration of the climate to work out.

Quote of the week

“If things go as planned we will be reaching around 2.5 million barrels a day from southern oil field alone by the end of this year.”

— Dhiaa Jaafar, director-general of Iraq’s South Oil Co.

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

  • Exxon is boosting oil product shipments to northeast Japan by 40-50% to 207,570 barrels in March. Of Exxon’s 360 gas stations in northeast Japan, 70% are now operating, compared with just 31% on March 19. (3/30, #11)
  • Taiyo Oil, one of Japan’s smallest refiners, is getting steady supplies of Saudi Arabian Super Light crude and its Saudi intake won’t change for the new fiscal year starting in April. Saudi output has risen to 9 million b/d, 1 million above OPEC target. Petrobras is also taking a 950,000-barrel cargo of Arab Super Light for processing in Okinawa. (3/31, #9)
  • The world’s five biggest oil-tanker companies, whose ships can hold enough oil to supply Japan for 100 days, will still travel to the ports of Tokyo Bay. All vessels will keep 30 miles away from the Fukushima Dai-Ichi nuclear plant, 220 miles north of Tokyo. (3/31, #12)
  • China energy use may rise 6% to 3.45 billion tons coal equivalent this year. (3/28, #10)
  • China energy companies CNPC, Sinopec, and CNOOC have invested $48 billion on oil and gas abroad. Western oilmen privately complain that the high valuations Chinese oil companies pay for assets and their perceived lack of accountability to shareholders distort the global playing field for energy resources. But IEA reports, “There seems to be a high degree of independence of the [Chinese] national oil companies from government.” (4/1, #14)
  • China’s consumer prices are expected to rise 5.3% in March, the highest in two years, vs. a rise of 4.9% in each of January and February. Food prices are likely to jump 12.3% from a year ago while a lower comparison basis would contribute 3.4% to the CPI rise. (4/2, #11)
  • Exxon will begin exploratory drilling off central Vietnam in late April, potentially angering China, which has objected to similar plans in the past. It is not clear if the project, off Danang city and Quang Ngai province, is in a disputed area claimed by both countries. (4/1, #15)
  • Pakistan will raise petrol prices by up to 13% a month after it was forced to reduce another planned hike. The government will continue to subsidize oil prices this month. The price of motor spirit in the past five months has risen 35% internationally vs. 15% in Pakistan. The domestic cost of high-speed diesel has gone up 18% vs. 40% globally. (4/1, #7)
  • In Iraq, Karbala and Dhi Qar provinces are pushing to develop local oil fields, but the oil ministry says it alone has the authority to sign oil contracts. (4/1, #6)
  • Shell, Malaysia’s Petronas, and the Iraqi state have signed a $200-million deal with UK’s Petrofac to develop the Majnoon oil field in southern Iraq. Petrofac will build a new early-production system comprising two trains each with a total capacity of 50,000 b/d. Shell is also holding talks with Iraqi authorities to build a small pier in the Shat-al-Arab waterway and planning to transport 40,000 metric tons of materials in the coming months. (4/2, #6, 7)
  • The Iraqi Oil Ministry and Shell have removed the last obstacle to their signing a $12-billion joint venture. The main dispute has been over the rights of export. (3/30, #20)
  • Iraq’s South Oil is talking with CNPC, BP, Eni, and other international oil firms about building three pipelines worth up to $500 million to link the Rumaila North, Tuba, and Nahr Ben Umar fields with oil deposits in the Faw peninsula. The firms are boosting crude output capacities by 600,000 b/d from now to the end of the year. (3/29, #9, 10)
  • In Kirkuk, Iraq, many want American troops to stay longer. A tense standoff on the edges of town the week before last led to deployment of Americans. But if the troops leave by the end of the year, many fear that could lead to ethnic strife, even civil war. (3/29, #11)
  • Saudi Arabia is supplying European oil companies with a new “special brew” crude. Aramco has sold three shipments for March and April delivery to Austria’s OMV and the UK’s BP for a total of 2 million barrels. The new grade boasts an improved API gravity, 41-44 degrees, and sulphur content 0.5-0.8%. The mystery, though, lies in the pricing. (3/31, #6, 7, 8)
  • Total continues to produce liquefied natural gas in Yemen at close to normal levels, says its chief executive, despite protests against the regime. (3/29, #12)
  • OPEC will reap $1 trillion in export revenues this year for the first time if crude prices remain above $100 a barrel, according to IEA. The new assessment shows the total number of barrels exported by OPEC in 2011 would be slightly lower than in 2008. (3/30, #3)
  • Venezuela could pay $2.5 billion to Exxon and Phillips for assets seized by the government during a nationalization campaign four years ago. Exxon was seeking $10 billion. PDVSA won’t need to sell assets to make the payments. Meanwhile Venezuela is shipping 470,000 b/d to China, expected to increase to 600,000 b/d by year’s end. (4/1, #9, 10)
  • Shell has sold its stake in Niger Delta license OML 40 to UK-Nigerian consortium Elcrest Exploration and Production, and it expects to conclude the sale of its stakes in three more onshore licenses soon. The consortium has won the auction for the 45% stake in Niger Delta license OML 40, comprising Shell’s 30% stake, Total’s 10% stake, and Eni’s 5%. (4/1, #8)
  • Tullow will sell 1/3 stakes in three Ugandan exploration areas to Total and CNOOC for $2.9 billion. The deal will enable Uganda government approval for a $10 billion program to develop the license areas, targeting oil production of 200,000 b/d around 2015, construction of a refinery, and a pipeline to the Indian Ocean. (3/30, #8)
  • In what may prove Norway’s biggest discovery in 10 years, Statoil and Eni have struck oil and gas at the Skrugard prospect in the Barents Sea. The discovery holds as much as 250 million barrels of recoverable reserves, Statoil says. (4/1, #19; 4/2, #19)
  • As Total and others ready rigs outside Paris and plan for drilling in southern France, local environmental groups raise concerns about damage to water tables. Bringing the nascent search for shale gas and oil to a halt has been Jose Bove: the French environmental activist, farmer, McDonald’s Corp. antagonist, and onetime presidential candidate. (4/1, #20)
  • Mexican oil production dropped 1.1% from an 8-month high hit in January to reach 2.55 million b/d in February. Exports fell 14.4% in February to 1.23 million b/d. (3/29, #13)
  • Pemex says crude proved reserves dropped for a 12th consecutive year. Reserves fell 1.4% to 13.8 billion boe in 2010. Production dropped 1% to 2.576 million b/d last year. After two years of delays, Pemex will open production projects to private companies. (3/31, #11)
  • Over 2/3 of offshore leases in the Gulf of Mexico, potentially holding 11 billion barrels oil and 50 trillion cu. ft. of gas, are idle, the Interior Department is to report tomorrow, Tuesday, April 5. Also, 45% of onshore oil and gas leases are inactive. (3/31, #18)
  • Alaska Gov. Parnell has asked the US interior department to move ahead in allowing new oil development in the Arctic Ocean. The governor has introduced legislation to slash oil-production taxes put in place by the last Gov. Palin. His goal is 1 million b/d through TAPS within 10 years vs. current production of 600,000 b/d and 2 million b/d 20 years ago. (4/2, #16)
  • Pa. Gov. Corbett’s Marcellus Shale Advisory Commission has four months to recommend how to stoke the economic potential of natural-gas drilling and stave off environmental problems. In their first meeting last Friday, April 1, the commissioners were briefed by the state’s top natural-gas regulator, shown slideshows by experts who have researched the economic and social implications of the drilling, and blasted by citizens angry about what they view as the state’s weak response to water pollution and other issues. (3/28, #12)
  • Employees of Transocean, which owned the Deepwater Horizon, are refusing to testify before federal investigators. The interior department has subpoenaed three employees to hearings on the blowout preventer. (4/2, #17)
  • US auto sales rose 17% in March with Chrysler, Nissan, and Ford leading gains. (4/2, #15)
  • California lawmakers have passed a bill requiring 1/3 of power to come from renewable sources by 2020. The law would make the state the most aggressive adopter of renewable energy in terms of the amount of new generation needed. (3/30, #17)