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1. Oil and the Global Economy

Oil prices have now fallen steadily since reaching a high above $83 a barrel in early August. Friday‘s close of $73.82 a barrel was only slightly above the lowest prices we have seen in the last three months. A stronger dollar, weaker equities and a surfeit of bad economic news is behind the decline. The announcement that commercial inventories of oil and products are now at their highest level in nearly 27 years did not help prices. The major support for oil prices at the minute are fears that one of the many hurricanes that are expected to spring up in the Atlantic during the next two months will tear up oil production. There is also the lingering fear that Asian oil demand, though apparently slowing at the minute, may still work its way through OPEC‘s spare capacity in the next 18 months.

Analysts at Goldman Sachs are concerned that global oil demand is already outrunning supply as evidenced by the rapid decline in the amount of crude in floating storage. If this analysis is valid, we should be seeing a decline in commercial stocks and upward pressure on prices in the next few months. Goldman foresees higher prices in the next six months. Numerous commentators have pointed out that recently oil traders have been ignoring traditional supply and demand signals and have been trading oil in sympathy with the equity markets.

An in-depth analysis of how OPEC crude supplies have been responding to price changes suggests that the cartel may have only some 2 million b/d of marketable spare crude production capacity left. If this is indeed the case and global demand continues to grow at the rates forecast by the EIA and IEA, then there will be very little spare production capacity left by the end of 2011. The moratoriums, delays and new regulations resulting from the Deepwater Horizon explosion are likely to slow the pace at which new offshore oil comes into production for the next few years.

An analysis of total OPEC revenues shows them climbing back past $800 billion next year. The revenues hit an all-time high of over $900 billion in 2008 when prices spiked to $140 a barrel. The precipitous decline that followed sent OPEC revenues below $600 billion for 2009 as production and demand declined. With global production now on the order of 87 million b/d and prices around $70-80 a barrel, OPEC revenues are again doing well.

A new analysis of China‘s -apparent‖ oil demand in July shows that it fell by 5.6 percent to 8.47 million b/d from the June high. Chinese oil imports have always been volatile. Recent slowing of industrial production, coupled with heavy rains, floods, mudslides and a major oil spill at an import terminal have all help to slow or disrupt oil imports. The overriding factor, however, is that even a -slowing‖ Chinese economy is still growing at 8 to 10 percent a year so that until major setbacks occur, Beijing‘s demand for oil is likely to continue at the rate of about 5 percent that we have seen in recent years.

2. Iran in the news

Tehran made news on many fronts last week. A development that stood out was a Reuters‘ analysis of Iranian gasoline imports which concluded that the UN and special US/EU sanctions have choked off nearly 90 percent of the gasoline that Iran was importing last year. As Iran was supposed to be

importing around 40 percent of its gasoline requirements in recent years, an embargo anywhere near as effective as that suggested by Reuters is remarkable. Conventional wisdom has been saying that any effort to embargo Tehran‘s gasoline would fail as Beijing would make up the difference. Venezuela and Turkey have announced that they would help the Iranians in their time of need, but neither is in a position to supply the necessary quantities of gasoline.

As oil is becoming tougher to produce, even in Iran, Tehran has been looking toward large increases in its natural gas exports to offset an inevitable decline in oil production. Hampering Iranian natural gas exports is an area where the sanctions have some teeth. As long as sanctions are in place, it is unlikely that natural gas export pipelines will be built to Europe. Liquefying natural gas is a difficult technology and Tehran is unlikely to build LNG liquefaction plants plants without help from the West, unless, of course, Beijing decides to develop and provide the technology.

The New York Times reports that the US has assured the Israelis that continuing difficulties inside Tehran‘s nuclear program means that the Iranians will not be able to build a nuclear weapon for at least another year. This assurance is said to have pushed off the possibility of an Israeli military strike against Iranian nuclear facilities for another year.

In the meantime, Tehran started up its first nuclear power station last week with Russian help. As Moscow is providing the enriched uranium and taking away the spent fuel, the new reactor will have no impact on Tehran‘s capability to produce nuclear weapons. President Ahmadinejad announced a new law that requires Tehran to build a new nuclear enrichment facility to provide for medical research reactors. The law also requires that Iranians cooperate with the IAEA only to the extent required by the Non-Proliferation Treaty.

Quote of the Week

“People want to believe that everything is OK and I think this report and the way it is being discussed is giving many people a false sense of confidence regarding the state of the Gulf.”

— U.S. Rep. Ed Markey (D.-Mass.) during a hearing last Thursday

Energy Stat of the Week

In July 2010 world production of all liquid fuels increased by 860,000 b/d from June according to the latest figures of the International Energy Agency (IEA), resulting in total world liquid fuels production of 87.22 million b/d. Total oil production capacity in July 2010 increased by 820,000 b/d from 90.16 million b/d in June 2010 to 90.98 million b/d in July. (The Oilwatch Monthly, August)

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

  • Venezuela’s state oil company PDVSA is at a crossroads: act now to salvage the skills and equipment that once made it a rival to Brazil‘s Petrobras, or risk tipping irrevocably into the type of decline suffered by Mexico’s Pemex. So far, it appears more likely to take the same path as Pemex. (8/20, #10)
  • The US Department of Energy still projects Iraq will expand its oil production from 2.4 million barrels per day in 2008 to 2.6 in 2015, 3.1 in 2020, 3.9 in 2025, 5.1 in 2030, and 6.1 in 2035. This expansion is critical in offsetting declines in the production of other major exporting states. (8/20, #23)
  • Sudan, the third-largest producer of crude in sub-Saharan Africa, wants to raise output to 650,000 b/d next year from its current level of as much as 480,000 b/d. European and Arab investors show more interest in exploring for crude and China continues to expand its operations, according to Sudan‘s oil minister. (8/19, #7)
  • Anadarko Petroleum Corp said it made the first documented deep-water oil find off the coast of East Africa in Mozambique’s Rovuma Basin. The deposit probably won’t be commercial to develop; it appears to have low permeability and low porosity. However, the well will provide information for further exploration in the region. (8/18, #8)
  • Nigeria’s crude oil exports, which had stabilized at 2.5 million b/d in the last three weeks, declined as Shell declared force majeure on the export of Bonny Light following a recent attack on its pipelines in Rivers State. (8/19, #8)
  • Equatorial Guinea expects oil production to increase by more than 100,000 b/d within two years as new offshore developments come online. The country is already one of sub-Saharan Africa’s largest oil suppliers with about 300,000 b/d of output, although production has been falling in recent years as existing fields mature. (8/16, #10)
  • Afghanistan discovered an oilfield containing an estimated 1.8 billion barrels of crude in the north of the country, a Mines Ministry official said. (8/16, #7)
  • Cuba plans to drill seven exploratory oil wells in its Gulf of Mexico waters over the next two years. If this drilling finds significant oil, production could start as early as 2014. The USGS has estimated 4.6 billion barrels are in Cuba‘s offshore areas. Cuba currently produces about 60,000 barrels of oil per day, all from onshore wells. Part of Cuba’s Gulf of Mexico zone is within 50 miles of Florida, where U.S. politicians fear that Cuban drilling could lead to an accident like the huge BP oil spill off the Louisiana coast. (8/19, #9)
  • In Greenland five exploratory wells were drilled in 1976-77. Exploration was discontinued in late 1978 after all wells were declared dry by the operators. Re-investigations of the well data in 1997 uncovered evidence that many areas had been abandoned prematurely. Greenland oil and gas activity could pick up again as oil and gas operators worldwide set their sights on the Arctic’s untapped resources. The USGS estimated that Eastern Greenland holds an estimate 31 billion BOE; Northern Greenland holds 3.3 billion BOE; and Western Greenland/Eastern Canada contains 17 billion BOE. (8/18, #14)
  • At a value of 333 billion dollars, Petro China now has a larger market value than ExxonMobil. Of course, Saudi Aramco would have a greater value if that company were listed on a stock exchange. (8/16, #27)
  • Data from EIA shows that between 2005 and 2008, petroleum consumption within OPEC increased by more than 1 million b/d, from 6.5 million to more than 7.5 million. (8/19, #16)
  • Saudi Arabia’s King Abdullah issued a decree Saturday to appoint former Chevron Corp. CEO and Chairman David O’Reilly to the board of directors of Saudi Aramco. (8/22, #4)
  • Shell says it has intensified efforts to clean up a major oil spill in the Bonny area of the Niger Delta. Bonny is made up of about 90 tiny islands and one large one. Community leaders say current efforts have been unsuccessful and oil has gushed from the damaged well for 18 days. (8/22, #5)
  • ExxonMobil’s withdrawal from a controversial $4 billion agreement to buy a stake in a vast oilfield off Ghana’s coast may indicate the oil giant is seeing cheaper deepwater opportunities elsewhere after the Deepwater Horizon oil spill. Small companies may get squeezed out of their deepwater leases because of tougher drilling rules or higher costs. (8/22, #6)
  • Petroleos Mexicanos expects to hire foreign oil companies for the first time to explore and produce in the Gulf of Mexico as it seeks to arrest a five-year decline in output. Pemex expects Exxon Mobil, Royal Dutch Shell and Chevron Corp., to help develop reserves after changes to Mexico’s oil laws in 2008 allowed it to hire foreign companies. (8/22, #7)
  • The IEA’s chief economist Fatih Birol has been repeating the phrase -the era of cheap oil is over‖ at numerous interviews recently. (8/17, #26)
  • Fuel consumption in Baghdad has reached a record of 6.5-7 million liters per day, an oil ministry official said Tuesday, as Iraqis increasingly turn to private generators because of frequent power cuts. (8/18, #6)
  • New Orleans Mayor Landrieu said Thursday he will “politely” raise the issue of ending a ban on deepwater oil drilling with President Barack Obama when the president visits the Gulf Coast region Aug. 29. (8/20, #20)
  • BP’s massive oil leak is complicating the belief that the Gulf of Mexico is the nation’s best source of oil and natural gas. Experts predict that production will slow while regulation and deep-water drilling costs will increase. (8/16, #25)
  • Weeks before the Deepwater Horizon drilling rig exploded, the crew was warned not to let down its guard in a sternly worded memo from the rig’s owner. “Do not be complacent… Remain focused on well control,” drilling company Transocean wrote in a 10-page “operations advisory” on April 5. The memo was prompted by a frightening but small blow-out on another Transocean drilling rig two days before Christmas 2009. (8/18, #12)
  • Saudi Aramco is shifting its exploration and production focus to developing gas output as it looks to meet rising domestic demand from power plants and the petrochemical industry. (8/16, #6)
  • Shell plans to spend as much as $50 billion in Australia over the next decade, more than in any other region, as Europe’s largest oil company continues a shift to gas production. Shell is among energy companies planning more than a dozen liquefied natural gas projects in Australia targeting Asia. (8/20, #13)
  • Devon Energy’s CEO said he expects a wave of merger and acquisitions to happen in the next two years among independent natural gas producers as companies face persistent lower commodity prices, rising costs and lack of investment. Much of the current drilling for natural gas in the US isn’t profitable at current prices, he added. (8/19, #12)
  • Not only will Middle East nations need more of their own fossil fuels to fund domestic construction, but the improvement of leased, foreign farmland to match their above-trend population growth will also require fossil fuels. (8/18, #15)
  • With higher energy prices and a limited supply of fossil fuels, the modern food system that evolved while oil has been cheap clearly cannot survive as it is currently structured. (8/18, #18)
  • Supporters of high-speed intercity rail believe it will cut US dependence on foreign oil, reduce climate-changing pollution and fatten wallets by triggering economic development. Opponents say high-speed intercity rail is too expensive and won’t save energy. (8/19, #17)
  • Coal stockpiles at US power plants fell 1.4 percent this week and were 19.2 percent smaller than a year ago, Genscape said Tuesday, as the summer drawdown steepened due to hot weather. Inventories of coal typically grow in spring and autumn when demand for heating and cooling drops. Stockpiles shrink in summer and winter when demand for interior climate control rises. (8/18, #13)
  • India may soon face a shortage of coal as more power plants are built and domestic production lags. Coal imports could go up sharply over the next few years in spite of large domestic reserves. Companies building power projects are also acquiring coal mines around the world. (8/17, #19)
  • What if we’re overestimating the amount of coal left? If coal is soon going to get harder to reach and more expensive, an enormous investment in carbon capture and storage may not make sense. And if there’s much less coal than widely assumed, climate change may not be humanity’s biggest problem. (8/19, #20)
  • The Chinese economy eclipsed the Japanese economy in size in the second quarter after Japan posted poor economic growth figures for the period, increasing the chances that China will officially overtake Japan as the world’s second-largest economy for the year. (8/16, #14)
  • China’s power consumption rose 14 percent in July from a year earlier. The nation also has used 20 percent more electricity year-to-date in 2010 from the year-earlier period. (8/16, #18)
  • China approved 24 power projects last month to help meet rising energy demand in the country’s less developed northern and western provinces. (8/17, #17)
  • China, determined to become a world leader in green technology, says it plans to invest billions of dollars over the next few years to develop electric and hybrid vehicles. (8/20, #24)
  • The new Advanced Research Projects Agency – Energy is intended to finance high-risk, high-reward projects. The goal of this agency, whose budget is $400 million for two years, is to realize profound results-to succeed in -the hunt for miracles,‖ primarily for replacements for oil. (8/19, #21)