Download Full PDF

1. Oil and the Global Economy

Oil prices increased a little in the first days of last week on concerns about the Iranian standoff but then fell as it became apparent that the new European settlement likely would have little effect on the current debt problem. NY oil settled at $99.41, down 1.5 percent for the week and London settled at $108.62, down 1.2 percent. US inventories were up the week before last, but these numbers are becoming more indicative of how many tankers arrived at US ports rather than the underlying direction of supply and demand. US gasoline consumption has been gradually falling for many months as US exports of refined petroleum products have been increasing.

US consumer sentiment was up last week, but this seems to have more to do with US gasoline prices which are now averaging $3.28 a gallon, down 15 cents in the last month. China is again talking about forming a $300 billion foreign investment fund to be split between the US and Europe – not enough to have a real impact.

While discussions about embargoing Iranian oil exports continued last week, no major action appears imminent. The debate over an EU embargo continues as disagreements remain as to whether Tehran or Europe would be hurt the worst. Greece and Italy would need help finding other sources of oil and the likely increase in oil prices would not do their economic problems any good. Tehran joined the debate last week by claiming that global prices would soon reach $250 a barrel if their oil is embargoed.

Other countries, including India, Japan, and South Korea, are under pressure from the US, EU, and conservative Arab states to reduce ties with Tehran. China’s role in all this will be crucial, as under current policies Beijing would be delighted to buy up all the Iranian oil they can get at discount prices.

Despite the endless bluster from hardliners in the Iranian government, many Iranian citizens are starting to worry about what could happen to their country should the situation worsen. The withdrawal of many European ambassadors and the revelation that US drones can orbit over their country at will is fostering a sense of isolation and a realization that taking on the US, EU, Israel, and several other Arab states cannot have a good ending. The continuing upheaval in Syria, a major Iranian ally, is simply adding to their problems.

For the immediate future, the Iranian confrontation remains the key issue that could have a major impact on global oil supplies.

2. Europe in the breach

The equity markets reacted tepidly to the new EU fiscal compact that is supposed to establish the framework for a long-term solution to Europe’s debt crisis. The main problem is that the agreement will likely take months of further wrangling and negotiations within the member states before it can go into effect. The problems it is designed to deal with are here now. German exports are falling, downgrades of EU banks and sovereign debt are in the offing and a major European recession is deemed likely in the immediate future.

The final agreement was a compromise, with Britain pulling out, Germany getting agreement for more fiscal discipline enforced by Brussels and France getting agreement that at least parts of the French banking system could be saved in the likely event that the massive loans it has made to Southern Europe go sour.

Most observers agree that the new agreement is more of a political fig leaf to shield European politicians from the wrath of the voters rather than a solution to a basically flawed financial system. Interest rates on much of the EU’s sovereign debt continue at unsustainable levels and large amounts of Italian debt are due to roll over next month.

It seems virtually certain that the EU is due for a tough year ahead; how far the contagion will spread remains the key question for the oil markets. There are already signs that China’s economy is being hurt by slowing exports to the EU. The IEA has been saying for some time now that, should the growth in global GDP fall by a couple of points next year, the increase in global oil consumption could fall to zero in 2012. This week’s developments in Europe make this possibility ever more likely.

3. China slipping

Evidence mounts that the slowing US and EU economies which account for some 40 percent of China’s exports are starting to have an effect. On Monday, China’s Purchasing Manager’s Index showed the service sector cooling to its weakest growth in three months. The Asian Development Bank reduced its forecast for China’s GDP growth in 2012 to 8.8 percent, while other observers believed it will be hard pressed to remain above 8 percent given the forces shaping up in global markets.

The good news of the week is that China’s CPI in November rose by only 4.2 percent, down from 5.5 percent in October. This news is letting Beijing relax some of the fiscal restrictions that have been in place most of this year.

The top development was the release on Saturday of China’s foreign trade figures showing that exports in November were only up by 13.8 percent and imports by 22.1 percent over last year. Beijing’s Commerce Ministry warned of “severe challenges” facing the nation due to economic problems in the US and EU.

Interestingly however, China’s oil refining in November surged to a record high of 9.22 million barrels as the major oil companies stepped up efforts to relieve the domestic diesel shortage. In addition to the stepped up refining, China imported an additional 1.6 million barrels of diesel in November and expects to import 500,000 barrels in December. China’s oil production in November fell by 6.4 percent to 4 million b/d after the government ordered the shutdown of a major offshore oil field in September due to a leak. Sporadic diesel shortages are still being reported. Some of these may be retailers holding back stocks in anticipation of a price increase.

In a related development the Beijing government announced a plan to use lower sulfur gasoline and diesel in its 5 million vehicles in an effort to cut down air pollution. As pollution grows worse, there is growing discontent in Beijing where the city is frequently shrouded in smog for days on end. The problem has been exacerbated by the US embassy which releases data showing how bad the small particle air pollution really is as compared with the official government data which traditionally ignores small particles.

Despite adherence to the mantra of rapid growth, Beijing appears to be taking the dangers of air pollution and climate change more seriously than a few years ago. The progress made at the Durban climate change conference over the weekend is one sign of this new concern.

4. Notes from the World Petroleum Congress

During the Congress held in Doha last week a number of CEO’s of major oil companies and oil ministers had an opportunity to sound off on the problems and prospects for the global oil industry. The CEO of Spain’s RESPOL told the Congress to forget about peak oil as the new technology implemented during the last few years that allows exploitation of oil and gas from shale formations and deep below oceans have made the issue moot. A vice president of Exxon seconded this sentiment. In a disappointing note, France’s Total, which for the last several years have been warning about geologic constraints to oil production in next decade, has changed its tune and is now talking about technology helping the world meet demand. Total’s CEO, however, did warn of the “huge investment” that will be necessary to implement all the new technology required – which is more to the point.

In a more realistic vein, however, the CEO of BP warned that high oil prices may threaten economic growth in the future. BP sees the US where oil taxes are very low as being most vulnerable to high oil prices. ARAMCO’s CEO said the Saudis would be very responsive to its customers’ crude requirements despite a recent announcement that the country was capping its production capacity at current levels.

PETROBRAS’s CEO warned of the increasing costs of drilling in deep water. He should be worried for Brazil in slated to undertake a major share of all the deepwater wells drilled in coming decades. The UAE’s oil minister noted that the “days of easy oil are over” and that it is imperative to look at alternative energy sources. OPEC’s Secretary General told the crowd that thanks to OPEC, there has been no oil shortage anywhere in the world and that Libya would be back to full production by the end of 2012.

Quote of the week

“The challenge for producers such as the (United Arab Emirates) is to continue producing oil and gas from existing reservoirs while, at the same time, developing new opportunities… It is no secret that the days of easy oil are coming to an end.”

— Mohammed Bin Dhaen al-Hamli, oil minister for the UAE

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

  • Iraqi Prime Minister Maliki said that Baghdad wouldn’t terminate ExxonMobil Corp.’s contract to develop the West Qurna-1 oil field in southern Iraq as punishment for signing a deal with the country’s semi-autonomous Kurdistan region. (12/10, #7)
  • Italian oil firm ENI and Shell confirmed they have been awarded a share in a deepwater oil block in Nigeria, ending a decade of legal dispute over the huge asset. (12/9, #9) (12/10, #9)
  • A provision forcing a decision on the Keystone XL pipeline appeared in a key end-of-year tax package introduced by US House Republicans. President Barack Obama warned that he would reject any attempts by Congress to link expiring payroll tax cuts and unemployment insurance with the controversial permitting process for the crude oil pipeline. (12/10, #14)
  • Chemicals found in a Wyoming town’s drinking water likely are associated with hydraulic fracturing, the EPA said, raising the stakes in a debate over a drilling technique that has created a boom in natural-gas production. (12/9, #16)
  • Colorado is poised to decide whether to force energy companies to publicly disclose the chemicals they use in hydraulic fracturing. (12/10, #15)
  • Americans have been driving fewer miles every month since March, a decline fueled by factors ranging from the weak economy to high gas prices to aging boomers and teens driving less. It’s the first time the nation has seen six consecutive monthly decreases since October of 2008. (12/10, #16)
  • Anglo-Russian venture TNK-BP announced plans to increase oil production from fields in Venezuela to 120,000 barrels per day by 2012. (12/9, #10)
  • The director at an Iranian oil company said increased production from major domestic fields could boost overall output by 450,000 bpd by early 2012. (12/10, #6)
  • PetroChina has discovered shale gas in China’s Sichuan province, confirming that the energy-hungry country is sitting on vast reserves of this unconventional fuel source. (12/6, #21) (12/8, #9)
  • The Japanese government may inject between $13 billion and $19 billion into Tokyo Electric Power Co in a de-facto nationalization of the operator of the crippled Fukushima nuclear power plant. (12/8, #10)
  • The cost of drilling oil wells in deep water is increasing in all parts of the world because demand for technical services is higher than the capacity of the industry. (12/7, #11)
  • The world will need at least as much oil from OPEC in 2012 as the group is producing currently, said the Executive Director of the International Energy Agency, Maria van der Hoeven. (12/7, #13)
  • China has indicated it might consider entering into a legally binding climate treaty after 2020. (12/7, #15)
  • The world’s airlines are braced for a steeper than expected fall in profitability next year, after their main representative body cut its collective net earnings forecast for the industry in 2012 from $4.9bn to $3.5bn. (12/7, #17)
  • Saudi Arabia, the world’s biggest crude exporter, boosted output last month to the highest in more than three decades. (12/7, #18)
  • Venezuelan President Chavez says his government would be open to negotiating with Exxon Mobil in a dispute over the nationalization of an oil project in the country. (12/7, #27)
  • The number of automobiles in China has shot past the 100 million mark. And it is expected to double within the next decade given that some 50 million cars were registered in the country from 2006 to 2010 alone. (12/7, #30)
  • Global emissions of carbon dioxide from fossil-fuel burning jumped by the largest amount on record last year, upending the notion that the brief decline during the recession might persist through the recovery. (12/5, #6) (12/6, #6)
  • Officials in Iraq’s southern oil hub Basra are trying to cancel a $17 billion Shell gas deal because they want a bigger say. This action highlights the pressure on central government to ease its control over the provinces. (12/6, #11)
  • Korea National Oil, a state energy developer, said it may spend as much as $4 billion next year on buying overseas oil assets to expand production. (12/6, #23)
  • BP is alleging that Halliburton destroyed evidence in the weeks following the Deepwater Horizon explosion in 2010 that demonstrated that the cement formula the firm used on the drilling operation was flawed. (12/6, #24)
  • Two US agencies have reached an agreement with ConocoPhillips on a plan in Alaska that could let the company be the first to drill for crude and gas in a national oil reserve in the state. (12/6, #27)
  • Royal Dutch Shell is in the early stages of planning projects to turn natural gas into liguid fuels like diesel in the US, of similar scale to its huge project in Qatar. (12/5, #23)
  • Range Fuels, a cellulosic ethanol company backed by as much as $156 million in US loans and grants from President George W. Bush’s administration, is being forced by the government to liquidate its only factory after failing to produce the fuel. (12/5, #24)