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1. Oil and the Global Economy

NY oil climbed a couple of dollars a barrel on Monday, then continued to trade around $85 for the rest of the week. The driving factors last week were how fast Libya would resume significant oil exports and whether the US Federal Reserve would resume quantitative easing in the near future. In London, futures which traded as low as $105 barrel on Monday amidst the euphoria surrounding the insurgent takeover to Libya, climbed steadily all week to close at $111.36. As the week wore on, the complications surrounding Tripoli’s resumption of oil production became apparent, dampening the enthusiasm.

Federal Reserve Chairman’s Bernanke’s announcement that it would be September before any decision on further economic stimulus would be made sent equity and oil prices down at first. They rebounded after the Chairman said growth will resume and the Fed has the tools to make this happen. For now NY oil is stuck in a trading range around $85 a barrel as the markets try to sort out various conflicting forces.

US commercial crude inventories fell by 2.2 million barrels last week due to more refining and lower imports. Platts believes that the reduction would have been significantly larger were it not for the movement of oil from the US’s strategic to commercial reserves. IEA is still saying that global oil consumption is outrunning production.

Gasoline futures climbed nearly 9 cents a gallon on Thursday in reaction to hurricane Irene’s threat to east coast refineries, settling on Friday at $2.93 a gallon — about 15 cents below where it traded during much of July. Hurricane Irene appears to have done little damage to east coast refineries and transportation so that the reduction in demand from reduced driving during the storm may turn out to be the most important effect of the hurricane. MasterCard reports that US gasoline consumption the week before last was down by nearly 5 percent from last year. The combination of a weak economy, increasing unemployment, and high gas prices is taking its toll on gasoline consumption.

After much refinery maintenance in June, Chinese oil consumption seems to be rising again with apparent demand in July up 7 percent over last year. Analysts expect Beijing’s oil consumption to keep rising for the rest of the year in accordance with seasonal patterns. As China does not release official oil demand statistics, they must be calculated by outside analysts from other data such as imports and refinery throughput.

Iran’s oil industry may be in trouble with the natural decline rate of its crude production falling by 8-11 percent a year. A recent report points out that a combination of the international sanctions that prevent western investment and oil fields some of which are 50 to 60 years old means that the country no longer has the resources to maintain production. With domestic demand rising, Iran may not be OPEC’s number 2 exporter five years from now.

2. Restarting Libyan exports

Last week an inordinate amount of attention was devoted to the question of just how fast the new Libyan government can revive oil exports to something approaching the pre-uprising level of 1.3 million b/d. There seems to be little disagreement that little serious damage was done to Libya’s oil fields and other facilities during six months of fighting and that 300-600,000 b/d of production could be started up in a few weeks. To get production much beyond this level in going to require the assistance of the tens of thousands of foreign oil workers that left the country when the fighting began. Therein lies the problem.

The foreigners were all in the country working with Libya’s national oil company under a maze of contracts and agreements signed by the Gadhafi government. Some of these agreements were corrupt with oil going to foreigners at bargain prices and profits going to the Gadhafi family and associates. Last March when Gadhafi’s security forces were threatening to overrun Benghazi and slaughter his opponents, several countries, most notably Russia, China, and Italy, were less than enthusiastic about giving up the lucrative contracts. Some are already saying that there is no way oil companies from these nations will be allowed back in Libya.

The overriding problems however are the lack of security and any political or legal infrastructure in the country. At the minute, the remnants of Gadhafi’s forces and Gadhafi himself are still on the loose. It is uncertain just how much authority the National Transition Council from Benghazi will have when it settles into Tripoli and even if things go well, how long it will take to negotiate new oil agreements.

At the minute there are serious shortages of almost everything in Libya and the facilities left by the departing foreign oil companies have been thoroughly looted. Given the record of other countries that have tried to revive oil production following political upheavals – Russia, Venezuela, Iraq, Iran – some astute observers are saying that while in may be technically possible to revive production in a matter of months, the politics of the situation say it is more likely to take years.

3. The Keystone pipeline

The announcement by the US State Department last week that it can see no show-stopping environmental impacts from the construction of a new 1,700 mile pipeline to bring oil from the Canadian tar sands to the Texas gulf has set off a storm of controversy. While the pipeline itself may be relatively harmless, it has become a proxy in the fight over global warming and the release of greenhouse gas.

The Canadian tar sands contain one of the largest reserves of petroleum-like hydrocarbons in the world, and for many offers one of the best hopes of maintaining adequate oil production for many years. Given the sands’ proximity to US markets and the lack in political entanglements endemic to most oil exporters, many see the expansion of pipelines from Alberta to US markets as a no-brainer. They argue that if the pipeline is not approved, the Canadians will just build one to their Pacific coast and sell the oil to the Chinese. There is little doubt that Beijing would be delighted to build the Canadians their own pipeline to Asian markets in return for substantial access to Canadian oil production.

For environmentalists the expansion of production from the Alberta sands is madness as it will result in massive increases in greenhouse gases into the atmosphere. Proponents of the plan say they are working to lower or eliminate the release of CO2 as a byproduct of exploiting the hydrocarbons.

The remaining step in the permitting process is for the State Department to rule on whether the pipeline is in the “national interest.” Some believe that the new pipeline would simply give the Canadians the opportunity to sell their oil to other countries through gulf ports, while other believe the pipeline would be a guarantee of adequate oil supplies to the US in future decades.

The Keystone decision is coming to be seen as a definitive test of the Obama administration’s commitment to controlling greenhouse gases. Protests have been taking place in front of the White House for the last two weeks. NASA climatologist James Hansen says that if the pipeline is approved, the increase in tar sands production will mean “game over” for the planet.

4. Gas in the Marcellus shale

The publication by federal geologists of a new estimate that the Marcellus shale contains some 84 trillion cubic feet of undiscovered, technically recoverable natural gas has evoked some interesting reactions. The New York Times notes that the new estimate is drastically lower than the 410 trillion cubic feet publisher earlier this year by the Department of Energy and the 262 trillion reported by the National Energy Technology Laboratory. The EIA says that as a result of the new assessment, the Administration will cut its official estimate by 80 percent, raising all sorts of questions as to how it develops its estimates and the role played by industry-tied consultants.

In reporting the development, the Oil & Gas Journal points out that the last assessment by the US Geologic assessment made in 2002 estimated that the Marcellus shale contained only 2 trillion cubic feet of recoverable natural gas. The Journal also points out, optimistically, that the new study also says there is a 5 percent chance that the shale contains as much as 144 trillion cubic feet.

The new estimate of 84 trillion cubic feet is less than four years of US consumption and would take many decades to exploit with unknown, but possibly serious environmental consequences. As with all estimates of undiscovered resources, the new 84 trillion number has a probability of 50 percent of being the minimum amount that can be exploited. The 95 percent probability number is only 43 trillion cubic feet – a real reduction from the official EIA number of 410 trillion. There may not be as much natural gas in our future as some claim.

Quote of the week

“If the country is going to embrace natural gas as the fuel of the future, there needs to be a lot more transparency in how these estimates are calculated and a more skeptical and informed discussion about the economics of shale gas.”

Bill Powers, editor of the Powers Energy Investor

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

  • Broad areas around the stricken Fukushima Daiichi nuclear plant could soon be declared uninhabitable, perhaps for decades, after a government survey found radioactive contamination that far exceeded safe levels according to several major media outlets. The formal announcement, expected from the government in coming days, would be the first official recognition that the accident could force the long-term depopulation of communities near the plant. (8/22, #9) (8/23, #20)
  • China has shut down over 1,000 illegal coal mines in a countrywide crackdown. As many as 86 people have been arrested on charges related to mine safety. (8/27, #9)
  • The US Energy Department will purchase 1 million barrels of ultra-low sulfur diesel fuel in September for shipment to the government’s reserve in the Northeast U.S. The move will complete the conversion of the government’s Northeast Heating Oil Reserve from a 2-million barrel facility designed to cover emergency winter needs for heating oil to a 1-million-barrel facility containing the cleaner burning fuel that is used in diesel engines and is increasingly required for use as heating oil in the Northeast. (8/27, #18)
  • Estimates that the US Environmental Protection Agency and others have used for greenhouse gas emissions from shale gas production probably are overstated, IHS Cambridge Energy Research Associates said in a new report. The estimates are based on assumptions that do not reflect current industry practices and should be reevaluated. (8/27, #19)
  • Nuclear experts will reassess the design of dozens of US reactors in the wake of Tuesday’s earthquake in Virginia that drew scrutiny when the plant temporarily lost electricity from the grid – the result of earthquake sensors geared for the Western parts of the US, not the East. (8/27, #23)
  • New Jersey Gov. Christie conditionally vetoed a bill prohibiting hydraulic fracturing in the state, but imposed a 1-year ban so the state’s Department of Environmental Protection can study the matter more fully. (8/26, #17)
  • A California-based solar energy developer has won US Department of the Interior approval to build a five-mile transmission line across public lands to connect its 250-MW solar facility to the transmission grid. (8/26, #20)
  • A yearlong drought from Kansas to Texas has created the driest conditions on record for farmers preparing to plant winter wheat, dimming crop prospects for a second straight year in the world’s largest wheat exporter. (8/25, #4)
  • The US is set to start importing crude oil from Saudi Arabia via Japan, an unusual route that highlights the growing importance of Asian oil supplies for America’s Pacific refineries as production from Alaska’s North Slope declines. (8/25, #19)
  • Ukraine aims to have auctions for the right to tap into its shale natural gas deposits. Ukraine and Poland have some of the riches shale gas deposits in Europe, with Ukraine leading the way with as much as 88 trillion cubic feet of recoverable shale reserves. (8/25, #20)
  • Inhabitat reports that Russia has “approved” the long talked about Bering Strait rail tunnel and energy corridor. The high speed railway and tunnel will be a private public partnership whose economic impact could be startling. 100 million tons of freight could be moved per year using the most efficient known way of transport. (8/25, #24)
  • The biggest market rout in two years is squeezing credit for oil rig owners in a replay of the crunch that followed Lehman Brothers collapse. “It’s exactly the same as what happened during the financial crisis after Lehman Brothers’ bankruptcy,” Seadrill CEO Alf Thorkildsen said. (8/24, #5)
  • Royal Dutch Shell’s Nigerian unit declared force majeure on its Bonny Light crude oil exports after “several pipeline incidents.” The force majeure is a legal clause that allows the company to miss scheduled deliveries for circumstances beyond its control. (8/24, #12)
  • The Vietnam’s Mekong Delta is home to more than 17 million people, who have relied for generations on its thousands of river arteries. But rising sea water caused by global warming is now increasing the salt content of the river water and threatening the livelihoods of poor farmers and fishermen. Vietnam is among the countries most threatened by rising water levels with only the Bahamas more vulnerable. (8/23, #21)
  • Pike Research forecasts that cumulative sales of plug-in electric vehicles (PEVs), the category that includes both plug-in hybrid and battery-electric vehicles (PHEVs and BEVs), will reach 5.2 million units worldwide by 2017, up from just under 114,000 vehicles in 2011. (8/23, #27)
  • Xstrata Inc., the world’s largest exporter of power station coal, began its court defense of the $6.2 billion Wandoan coal mine in Australia. The project’s opponents say the mine threatens the Great Barrier Reef. (8/22, #7)