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1. Oil and the Global Economy

It was one of the most volatile weeks in recent memory with oil prices fluctuating over a $6 range during three separate trading sessions as the markets digested the flood of economic news. There was little new affecting oil market fundamentals last week and most of the activity stemmed from concerns about the prospects for US and EU economic growth and the future of the dollar and euro.

The week started with the settlement of the US debt cap crisis and ended with S&P’s downgrade of US government debt. In between a major sell-off in the equity markets took oil prices down by some $7 a barrel in NY and $10 a barrel in London. During the week Brent crude traded over a range of $17 a barrel, closing at $109 a barrel or 6.3 percent loss for the week. New York crude touched an eight month low of $82.87, wiping out all the price gains seen during 2011, before rebounding to close at $86.88.

From here the oil markets are entering uncharted territory. The downgrade of the US debt could send the dollar lower and oil higher; however this could easily be overcome by lower demand as new austerity measures are implemented in the US and EU. Some analysts are saying that the US and EU have reached the limits of what can be done by fiscal stimulation and quantitative easing and that from here on there will be little but austerity.

A Dow-Jones survey reports that OPEC production in July rose by 607,000 b/d to 30.3 million b/d, the highest level since November of 2008 when production reached 31.1 million b/d. This is an increase of 1.7 million b/d since March, which in theory compensates for the loss of 1.6 million b/d from Libya. According to the survey, Saudi production rose by 350,000 b/d in July to 9.81 million. A considerable portion of Saudi Arabia’s production increase, however, is being used domestically to generate electricity and desalinate water during the summer. Some analysts are saying that despite the increased production, there is still not enough oil being exported to meet global demand and that as the 3rd quarter global stockpile numbers become available, they will show a drawdown for the period. Tehran, which is having a variety of production problems this summer, is unhappy with the rapid drop in revenues and is already talking about a special OPEC meeting to lower quotas.

High oil prices have boosted spending by oil companies for exploration and production. A recent survey shows that E&P spending will increase by 12 percent to $406 billion this year. While the 2010 increase of 19 percent was larger, the industry was coming out of a drop in spending during the period of low oil prices in 2008-2009.

An increase in US gasoline stockpiles led to a drop in gasoline futures even more spectacular than the drop in crude prices. NY futures which had touched $3.15 a gallon fell so rapidly during the week that at one point they touched $2.67 a gallon, a decline of 48 cents before settling at $2.82. So far retail gasoline prices have only fallen about 3 cents since last week, but analysts are expecting another 30 cent a gallon drop before Labor Day unless there is a turnaround in the oil markets.

2. Pakistan

If there is a major country in the world that seems to be on course to succumb as a viable state in the near future due to inadequate energy supply, it is Pakistan. This is a serious matter as the country has a population of 190 million people, of which nearly 60 million live in cities. Moreover the country is square in the middle of numerous ethnic, religious, cultural, and political disputes with global implications. It also has a stockpile of atomic weapons.

Shortages of electricity and natural gas are now widespread. Pakistan produces about 60,000 b/d of oil and consumes some 360,000. A large portion of the 300,000 b/d of imported oil comes from the Saudis at subsidized prices. Demonstrations, sometime violent, against power outages are almost a daily occurrence. Recently natural gas shortages have been added to the country’s woes. The current natural gas shortfall is about 500 million cu. ft. per day, but this is projected to increase to about 2 billion per day or about 50 percent of total demand by winter. The government recently began limiting the amount of gas available to filling stations in a country where there are 2 million cars powered by compressed natural gas.

In addition to the hardships imposed by load electricity outages which now seem to be averaging more than 12 hours a day is the damage being done to industrial production, mostly of textiles, with tens of thousands being thrown out of work. There is no immediate solution in sight for the troubles.

Last week a Pakistani delegation showed up in Beijing to attend the first meeting of the Pak-China Joint Energy working group. The group was to discuss at least 18 projects ranging from a pipeline to bring in Iranian natural gas to new dams, power stations, and distribution systems. Even if Beijing decides to make major investments in Pakistan’s energy industry, realization of these projects is still many years away and the shortages are growing worse.

3. China

Beijing is currently preoccupied with Typhoon Muifa which is headed for Shandong province, southeast of Beijing and has already forced the evacuation of 600,000 people from the coastline. Meanwhile a drought in Guanqxi province in southern China is causing the most severe power shortage in 20 years. The electricity shortfall, which is running about 30 percent of demand, has already forced the closure of more than 1,000 factories and businesses in the province.

Elsewhere in China things seem to be running reasonably well as heavy rains have restored hydro power production to normal levels and the summer power shortfalls that were feared a few months back do not seem to have materialized. China’s manufacturing slowed slightly last month according to the purchasing managers’ index which provides a snapshot of economic conditions. Analysis of the index suggests that manufacturing in China is stabilizing after four months of decline.

Incidents of dissidence are appearing across the country, but the government continues to move quickly with massive force to prevent any “popular awakening” from taking hold. There is even talk of closing down China’s version of twitter to prevent the sharing of dissident thoughts.

Meanwhile China’s economy seems to be growing apace despite too much inflation. The government reported that crude refining will rise 8.5 percent year over year in 2011 to an average 9.24 million b/d. This is higher than the 6-7 percent growth predicted by analysts and is one of the reasons many are looking for a global supply shortfall in the remaining months of this year. The government also noted that natural gas demand could rise by 16 percent this year and when coupled with the 10 percent increase in coal consumption suggests that the Chinese economy continues to grow rapidly.

In a rather bizarre development, the Russians are threatening to pay back the $10 billion 20-year loan they received from the Chinese to pay for the construction of the new crude pipeline that supplies oil to China. The Russians say the Chinese are not paying in full for the 300,000 b/d they are supposed to receive for the next 20 years. The matter may go to court.

Quote of the week

“If the inevitability of peak oil is ignored and the event overtakes us unprepared, the unintended consequences could easily spiral into a sequence of ever-worsening conditions that would create not just twilight in Saudi Arabia, but twilight also for the lifestyles we all now enjoy.”

— Matthew Simmons (April 7, 1943 – August 8, 2010)

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

  • Royal Dutch Shell faces having to pay compensation of potentially more than $410m after the Anglo-Dutch oil group admitted liability for two spills in Nigeria following a legal claim brought in the UK. (8/4, #9) (8/6 #14)
  • A shipment of oil produced in South Sudan has been prevented from leaving Port Sudan for dispute over fees. Garang Deng, South Sudan’s oil minister said that the oil tanker contained 600,000 barrels and that Port Sudan authorities refused to let it proceed to its destination unless its service fees are paid up front. (8/6, #15)
  • Venezuelan fishermen inspect their catch of blue crabs on the edge of Lake Maracaibo, concerned about the greasy oil stains covering their shells. The crustaceans will be processed and shipped to seafood restaurants in Maryland and New York where they are considered a delicacy. But scientists and fishermen worry that the crabs may not be safe for consumption. (8/6, #16)
  • Foreign oil company activity in Iran has plunged in the past year, according to a US congressional report this week which says that half of the 41 companies identified in a previous report in early 2010 had withdrawn or were in the process of withdrawing from commercial activity in Iran. (8/5, #4)
  • A landmark United Nations study into the long-term environmental impact of oil production in Nigeria says that oil spills have led to acute health risks for area residents and widespread environmental damage that may take as many as 30 years and $1 billion to clean up. (8/5, #9, #11)
  • Exxon Mobil’s Angolan operating unit is ceasing production at its Xikomba oil field as the deposit’s life cycle of about seven years is “ending now,” said a company spokesman. (8/5, #12)
  • Australian export terminal, Dalrymple Bay, shipped 25% less coal in July compared with a year earlier, as its eight coal producer customers — including Anglo American, Macarthur Coal and Peabody — struggled to maintain adequate deliveries after excessive rainfall earlier this year. (8/5, #14)
  • The Department of the Interior granted Royal Dutch Shell conditional approval of its plan to begin drilling exploratory wells in the Arctic Ocean next summer, a strong sign that the Obama administration is easing a regulatory clampdown on offshore oil drilling that it imposed after last year’s deadly accident in the Gulf of Mexico. (8/5, #15)
  • Flint Hills Resources and Golden Valley Electric Association of Fairbanks have begun engineering work for a natural gas liquefaction plant at Prudhoe Bay on the North Slope of Alaska and plan to build the facility in time for deliveries in 2014. (8/5, #17)
  • Royal Dutch Shell said it is considering a reversal of its Houma-to-Houston pipeline system in order to provide additional crudes to the U.S. Gulf of Mexico refining complex. Such a move would reverse the existing Ho-Ho service to connect the Houston and Port Arthur, Texas, markets with the Louisiana markets, the company said in a news release. (8/5, #18)
  • The head of the London Intercontinental Exchange said the WTI crude contract no longer reflected global oil prices, adding that the price divergence from the Brent contract “may continue for some time.” ICE owns the Brent contract while rival exchange CME Group Inc owns the NYMEX WTI contract. (8/4, #4)
  • The latest US oil inventory data contradict a widely held notion among oil traders that a huge glut of Canadian and US shale crude oil is accumulating in the middle of the United States and causing the record gap in global oil benchmark prices. (8/4, #5)
  • Iran’s lawmakers approved a sanctioned senior official from the powerful Islamic Revolutionary Guard Corps as oil minister, as hardliners scored a major victory in tightening control over the country’s most strategically important sector. (8/4, #6)
  • A consortium of Nigerian and South Korean companies said this week they plan to build Africa’s largest gas-to-liquid plant in Ogoni area of Rivers State, costing $5 billion, to be ready by 2016. (8/4, #11)
  • Scientists examining the microbial degradation of the oil slick from last year’s spill in the Gulf of Mexico said they were shocked by how quickly it happened. The authors note that microbes were able to metabolize a significant portion of the oil that leaked from the wellhead. (8/4, #15)
  • Cairn Energy shares fell more than 5% after the Edinburgh-based explorer said it failed to discover a commercially viable quantity of oil at one of the four exploratory wells it is drilling off the coast of Greenland. (8/4, #17)
  • Demolitions of supertankers, which carry about 20 percent of the world’s oil, are slowing as ship owners accept unprofitable rates rather than write off assets This is creating the industry’s biggest glut in 29 years. (8/3, #6)
  • Israel’s National Planning Council has given final approval for a plan to establish a floating LNG terminal off the country’s central Mediterranean coast. The terminal, which is due to be completed by the end of 2012, will serve Israel Electric Corp and other natural gas consumers and be a backup for local natural gas supplies. (8/3, #7)
  • Occidental Petroleum and South Korea’s Kogas have received their first cargo of crude oil as payment for helping to develop Iraq’s Zubair oilfield, according to shipping sources. (8/2, #8)
  • Brazil crude production advanced year-on-year in June as several offshore platforms idled by maintenance shutdowns came back on stream, the country’s oil regulator said. (8/2, #10)
  • The United States was so dependent on foreign oil that by 2008 it imported two-thirds of what the country’s refineries needed to produce enough gasoline, diesel and the other petroleum products to meet the country’s needs. But recently the federal Energy Information Administration reported that in 2010 imports had fallen far more than many realized – to 49 percent of the country’s needs. (8/2, #19)
  • Mexico’s state-owned oil company Petroleos Mexicanos, or Pemex, said it has set Aug. 18 as the date for the final awarding of its first incentive-based contracts allowed under a 2008 energy reform. (8/1, #10)
  • Japan’s second-largest power utility Kansai Electric received its first LNG delivered on a Q-Flex vessel at its gas-fired Sakai plant in western Japan. (8/1, #13)
  • Most European major oil companies posted a surge in quarterly profits last week, but their results were overshadowed by a trend that continues to trouble Wall Street: Nearly every major oil company reported year-to-year oil-and-gas output declines, often in the double-digits. (8/1, #16)