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1. Oil and the Global Economy

Oil prices opened and closed last week in the vicinity of $79 a barrel. At one point the news of record US crude imports sent prices down briefly to $77 a barrel. This decline was erased when it was learned that much of the excess imports were the result of speculators selling to refineries large quantities of oil that had been stored off shore in tankers awaiting higher prices.

The report on Thursday that the US GDP slowed in the second quarter and that revised calculations show that the US economy had contracted more during 2009 than previously thought increased concerns about an economic recovery. This news, however, was offset by a survey showing increased consumer confidence. Thus, the struggle between optimism and pessimism that has been going on for many months continues.

Some analysts looking at increasing Asian demand with little to no increases in output believe that oil is underpriced. Others looking at large inventories and sluggish demand from the OECD countries, plus a stalling recovery, believe oil should fall further. Still others, including OPEC spokesmen, say all is well and that oil should remain in a $70-$80 trading range for the immediate future.

July was a bad month in Iraq with violence increasing to levels not seen since 2008. New figures show that 535 people were killed in bomb attacks and other forms of violence. With US forces withdrawing and the country caught in a political deadlock, many are wondering if Iraq will be able in achieve large increases in oil production, even with the help of many of the world’s major oil companies. Baghdad hopes to increase its oil production by 150,000 b/d in the next six months and by many million over the next five years. So far the lack of the most rudimentary political stability and a deteriorating security situation suggest these ambitious goals will be difficult, if not impossible, to achieve.

Last week the EU announced harsher sanctions against Iran, matching those imposed earlier by the US. China and Russia have denounced the special sanctions in order to maintain their economic relationships with Tehran, but both appear to be genuinely concerned about the destabilizing effect Iranian development of nuclear weapons would have on the region. Additionally, Tehran announced last week that China has now invested $40 billion in Iran’s oil and gas industry.

Judging from the increasingly harsher rhetoric, threats, and warnings coming out of Tehran, the latest round of sanctions may be having some effect. Last week Moscow issued a sharp rejoinder to Iranian criticism of Russian President Medvedev for saying that Tehran was moving closer to the potential to build nuclear weapons. New figures show that China’s import of Iranian crude fell by almost a third during the first half of the year. Senior US officials will go to Beijing later this month for talks with the Chinese about the sanctions.

2. The Macondo Well

If all goes well, BP hopes to begin pumping mud into the leaking well and could have it permanently sealed by the end of this week. With oil no longer spewing into the Gulf, cleanup operations will move from skimming surface oil to cleaning up the oil which has already washed ashore. Investigations, litigation, and possible criminal indictments will go on for many months. The most common concern is that once the well is sealed, BP will do its utmost to back away from the problem and the economic harm it has caused.

So many lawsuits have been and will be filed, for damages resulting from the spill, that a special judicial panel is considering just how and where to deal with this explosion of litigation.

BP has announced a $32 billion pre-tax charge to pay for the damages, and is already selling off some $30 billion in assets. The company also said it will write off the cost of the oil spill on its tax bill thereby costing the US government some $10 billion in lost revenue.

The economic harm caused by the government’s moratorium is already becoming the top concern. With the US economy continuing to lag, revenue and job loss from the drilling moratorium is creating an uproar in the Gulf states. The petroleum industry has launched a PR offensive to convince the government and public that a blanket prohibition on deepwater drilling is not necessary and that any additional precautions needed should be imposed on a case by case basis and not for another three months on the entire industry.

Some workers and a rig or two have been moved out of the Gulf, but most appear to be staying in place in hopes that the moratorium will be lifted soon. Interior Secretary Salazar toured the Gulf over the weekend in a trip billed as gathering information for a decision on revising or even lifting the drilling ban prior to its November 30th expiration.

3. In the Congress

Following the failure to garner sufficient votes for a bill to cap carbon emissions, Senate Democrats introduced a new energy bill last week that covers less controversial issues such as the liability cap on oil spills, promotion of energy efficient appliances, and wider use of natural gas vehicles.

Congressional Republicans immediately objected to removing the liability cap on oil spills saying it would drive out of the Gulf small oil companies that could not afford BP-sized liabilities, thereby causing 265,000 to lose their jobs.

A surprise addition to the new energy bill that would require natural gas drilling companies to disclose what chemicals they were using to fracture wells immediately brought protests from the Natural Gas Alliance. The companies claim the chemical formulations they are using to fracture wells are proprietary and cannot be publically disclosed. Meanwhile the dispute over whether these chemicals are finding their way into drinking water continues. At present, prospects for the bill’s passage are not strong.

Quote of the Week

“Now the shale play for natural gas is very large, but my geological research indicates that these fields are not perhaps as good as some people suggest. They won’t solve all of our energy problems; they’re not that good, that big or that long lasting…As I calculated, we are in a lot of trouble in energy in the United States and around the world by about 2012-2015.”

— Charles T. Maxwell, senior energy analyst, Weeden &Co.

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

  • Tullow Oil said it has found a major new field offshore Ghana, potentially adding a billion barrels of oil equivalent to the resource estimate for the area. (7/27, #11)
  • The Iraqi government in Baghdad accused the semi-autonomous government of Iraq’s Kurdistan region of exporting crude oil and oil products “illegally.” (7/26, #6)
  • An investigation has been launched into the unexplained damage suffered by a Japanese oil tanker in the Strait of Hormuz near Oman. Mitsui OSK maintained on Thursday that its oil tanker was probably attacked. (7/29, #8)
  • If the global economic recovery continues, and in particular if OPEC is willing to restore their production cuts at prices that don’t derail that recovery, then it appears likely that the July 2008 liquid fuel production level will be exceeded. (7/28, #5)
  • Dark oil slicks are spreading from the middle of Venezuela’s Lake Maracaibo towards the shores — the wetlands, mangroves, beaches and docks. Oil is permeating fishing nets, coating the garbage dumped into the water, killing off wildlife and driving away residents and tourists. The lake suffers some 100 leaks a week from a pipeline system that is roughly 50 years old and is poorly maintained. (7/29, #10)
  • China Petroleum & Chemical Corp., Asia’s biggest refiner, said BP declined an offer by the Chinese company to buy some of its assets. (7/30, #5)
  • China has spent at least $21 billion on overseas resources in the past year to meet domestic demand, including the acquisition in April of a stake in a Canadian oil-sands project by Sinopec’s parent. The world’s largest energy-consumer relied on imports to meet more than half of its oil needs in 2009. (7/30, #5)
  • China will invest $5 billion in various projects across Venezuela in the coming years, including three power plants, state-owned oil company PDVSA said Friday. (8/1, #12)
  • President Chávez threatened to cut off oil sales to the US if Venezuela is attacked by Colombia in a dispute over allegations that Venezuela gives haven to Colombian rebels. (7/26, #9)
  • BP’s disaster in the Gulf of Mexico will keep the planet’s biggest pot of untapped oil and gas under the Arctic ice for now as regulators toughen drilling rules and demand better ways to handle spills. (7/29, #20)
  • Shell said Thursday its flagship deep water field in the Gulf of Mexico, Perdido, has been shut down since April because of the U.S. drilling moratorium and will only resume production at a slower than expected rate in October. Perdido’s shutdown came less than a month after it started production; it was expected to produce 100,000 barrels a day of oil within a year or so, but will now reach that target more slowly than expected. (7/29, #21)
  • North Dakota overtook Oklahoma this week as the third-most active state in drilling for oil and natural gas. The number of active North Dakota rigs jumped by two to 128. North Dakota pumped 251,000 barrels a day on average in March, up 29 percent from the year before and up 74 percent from 2008. Most of North Dakota’s new oil comes from the Bakken and Three Forks formation. North Dakota now produces close to 5% of US oil but provides just 1.3% of US consumption. (8/1, #32)
  • More than one million gallons of oil may have spilled from a pipeline into the Kalamazoo River this week, significantly more than the pipeline’s owner initially estimated, federal officials said. (7/29, #25)
  • US government regulators warned Canada’s Enbridge Energy Partners seven months ago that it wasn’t properly monitoring corrosion on the pipeline that ruptured earlier this week, triggering one of the largest oil spills in Midwest history. (7/30, #15)
  • Western Resource Advocates released a report written by Dr. Cutler Cleveland, a Professor of Geography and Environment at Boston University, evaluating the studies conducted to date on the energy value of oil shale. What Cleveland’s analysis shows is that oil shale is, at best, a marginal energy source. -We cannot yet say with certainty that the EROI for oil shale is unequivocally greater than 1.‖ (7/30, #16)
  • China consumed 22 percent more natural gas in the first half compared with a year earlier as the country boosted production and use of the cleaner-burning fuel to cut emissions. (7/27, #13) China’s unconventional gas production will climb sharply to 2030 to help meet the country’s growing demand for gas, but China will have to boost its imports over the next decade, says a study by Wood Mackenzie. (7/27, #12)
  • A new study released by the American Petroleum Institute says natural gas production in the Marcellus Shale region — if developed — could create 280,000 new jobs and add $6 billion in new tax revenues to local, state and federal governments. (7/26, #14)
  • China may impose a cap on the country’s coal production by 2015 and enforce energy consumption targets to cut carbon emissions and reduce reliance on fossil fuels. The world’s biggest user and producer of coal, China wants 15 percent of its energy mix to come from non-fossil fuel sources by 2020 to help meet emissions targets. (7/29, #12)
  • Saudi Arabia wants to go nuclear. Like many developing nations, the kingdom has seen its electricity demand soar in recent years-more than 8 percent annually-and is actively searching for alternatives to fossil fuels. (8/1, #11)
  • In Russia, all week long temperatures have soared to records. On Thursday, they reached a new high for Moscow, 100 degrees. July has been the hottest month since the city began taking such measurements 130 years ago, officials said. Forest fires have erupted. Drought has ruined millions of acres of wheat. More than 2,000 people have died from drowning in rivers, reservoirs and elsewhere in July and June, often after seeking relief from the heat while intoxicated. (7/29, #26)
  • Heavy rain on the Yangtze River created a surge that neared last week’s record. China’s worst flooding in a decade has killed at least 823 people and left 437 missing. China’s Three Gorges Dam has faced a second test as floods pushed the water in its reservoir to near its capacity. (7/28, #12)
  • More countries face electricity shortages. This is not just a matter of insufficient fuel or high energy prices as the world has a glut of natural gas, the fuel of choice for thermal power generation. Instead, it mainly reflects poor government planning and neglect of essential infrastructure. (7/26, #3)
  • The costs of solar photovoltaic systems have declined to the point-at $0.16/kwh-where they are lower than the rising projected costs of new nuclear plants, according to a paper published this month. (7/28, #23)
  • British, American and Norwegian engineers are in a race to design and build the holy grail of wind turbines – giant, 10MW offshore machines twice the size and power of anything seen before – that could transform the global energy market because of their economies of scale. The “Aerogenerator”, a machine that rotates on its axis and would stretch nearly 275m from blade tip to tip, could be built in 2013-14 following two years of testing. (7/27, #24)
  • AFS Trinity, a company with a different approach to the electric car battery problem got a small boost recently when the Patent Office said it would issue a patent on its concept: using a capacitor in conjunction with a traditional battery. (7/27, #25)
  • China’s manufacturing activity expanded at the slowest pace in 17 months in July, reflecting that tightening measures introduced earlier this year and growing uncertainty over global demand continued to weigh on the country’s economic expansion. (8/1, #12)