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1. Prices and Production

Oil prices have moved up steadily for two weeks, rising by almost $10 a barrel, and now are back in the vicinity of $80. A potpourri of developments is behind the move, including a fluctuating dollar, a small increase in US discount rates and lower inflation, the Iranian situation, a refinery strike in France, the European financial crisis, and the persistent hope that the US economy is about to start growing. The future of China’s economy-rapid growth or bursting bubble-is still on everyone’s mind.

The API reported that total US oil consumption is now at the lowest level, 18.4 million b/d, in 12 years despite the fact that gasoline rose steadily in January. US gasoline consumption is now about 8.7 million b/d as opposed to a high of 9.6 million reached in July 2007. Consumption of low sulfur diesel fuel, used in heavy trucks is down by 11.5 percent, a bad sign for the US economy.

Natural gas prices fell to their lowest level in 10 weeks, $5.04, on anticipation that the weather in the US is turning milder.

The net of all the forces at play seems to be that while US and OECD demand will remain weak for the foreseeable future, it will not fall that much further and that increasing demand from Asia and oil-producing nations will gradually overcome the drop in OECD demand.

For the coming week, the refinery workers’ strike against the French oil company Total could dominate the market. The union is protesting the closing of a refinery in northern France and says that spot shortages will start developing in 2-3 days. Total supplies about 50 percent of French oil consumption, but the union is also threatening to shut refineries run by other companies. France has enough fuel in stockpiles to last for 10-20 days before shortages become widespread. If the strike continues, exports of gasoline to the US could be threatened.

2. The Iranian Standoff

New leadership at the IAEA is taking a much stronger stance against Iranian claims that they are not developing nuclear weapons. In a forthcoming report, the Agency says it has credible evidence that Tehran continued efforts to develop a nuclear warhead past 2004. This report has led to a spate of dramatic headlines that strengthens the case for stronger sanctions against Iran.

The Iranians, including the supreme leader, Ayatollah Ali Khamenei, continue to deny that they intend to build nuclear weapons and continue to issue a stream of invective against the Western powers. This includes threats of what Iran will do to the world, by restricting oil exports and fomenting trouble, if harsh sanctions are imposed.

Now that the Russians seem to have joined the “something-must-be-done” camp, only Beijing, which has a lot invested in its relationship with Tehran, stands out as the major power still pushing for diplomacy rather than sanctions. During the past week, there were indications that even the Chinese are starting to appreciate the danger posed by the situation and may be moderating their policy. Suggestions continue that the Saudis may be willing to make up for any restrictions on Iranian oil exports that could arise from the confrontation.

3. Nuclear Power for the US

Last week President Obama announced an $8.3 billion loan guarantee to help build a nuclear power plant in Georgia. Although the US has 104 nuclear power plants, none have been built in the country for 30 years. Leaving aside the environmental fears, the plants have become very expensive (on the order of $8 billion plus) take many years to build and start earning returns, and banks are unwilling to make construction loans without federal guarantees.

The loan guarantee announcement was met with mixed reactions. While the New York Times hailed the move, Time Magazine pointed out that the exorbitant costs of approving and building nuclear reactors will eventually kill the chances that many will ever be economically viable.

Despite many problems, nuclear power plants are very popular with the Congress and more loan guarantees seem likely.

In a related development, a freight-car-sized nuclear reactor, which will cost and produce only one tenth that of the conventional nuclear plant, is emerging as a possibility. The idea is that smaller 125-140 megawatt plants based on ship reactors could be built quickly and installed in large numbers to replace aging fossil fuel generating stations.

The future of all this is still up in the air. While increased efficiency and conservation in the use of electrical energy is still by far the best path, a rapid decline in the availability of cheap liquid fuels and even coal over coming decades, coupled with widespread use of electric, cars could make nuclear power more attractive no matter what the price.

One issue that has not received much attention is the availability of uranium to power the hundreds of new reactors people are talking about. Some observers are saying that in the not too distant future the availability of uranium will be a major impediment to more nuclear power.

Quote of the Week

  • Sanctions [against Iran] are a long-term solution. They may work, we can’t judge. But we see the issue in the shorter term maybe because we are closer to the threat… So we need an immediate resolution rather than a gradual resolution.”

— Prince Saud al-Faisal, Foreign Minister of Saudi Arabia

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

  • Saudi Arabia is gradually reducing crude oil exports to the US as it is pushing deeper into China and other fast-growing Asian markets. Exports to the US fell to 837,000 b/d in November, the lowest level in 21 years. Last year, Mexico was ahead of Saudi Arabia as a crude exporter to the US, supplying about 951,000 b/d despite a plunge in those exports. Nigeria also overtook Saudi Arabia, with its exports to the US climbing to a 15-month high of around 984,000 b/d in November. (2/19, #9)
  • Iraqi oil Minister Hussein al-Shahristani assured foreign companies contracted to develop its major oilfields that security is not a problem anymore. But as parliamentary elections scheduled for March 7 approach, al-Qaida and other militants are keeping up their attacks. In 2003-05, there were 200 attacks on oil and gas pipelines. By 2007, there had been more than 600, with exports reduced to a trickle. (2/20, #9)
  • Iraq: In the history of the modern oil industry, no country has increased output with the speed the Iraqis envisage. Over the next seven years Iraq intends to go from producing 2.5 million b/d to 12 million, a target that exceeds Saudi Arabia’s current output by more than 30%. But progress will be slower than oil minister Hussein al-Shahristani has led voters to believe. The industry does not have enough qualified specialists. And there is growing opposition to Iraq’s oil surge from its neighbors (2/19, #10)
  • Pemex is mulling a $377 million upgrade of crude oil treatment facilities to fix quality problems in its main export blend. People familiar with the plan said they think the problems are linked to natural field decline. As the amount of water produced at Cantarell exceeds Pemex’s processing capacity, wells must be shut down, speeding up the decline of the field.(2/19, #12)
  • The North Sea oil rig Ocean Guardian arrived in Falklands waters on Friday in defiance of the warnings from the Argentine authorities. HSBC and Barclays are thought to be on a list of companies that could be hit in revenge for the exploration, which Buenos Aires claims is a “violation of sovereignty”. (2/20, #14)
  • US Energy Secretary Chu will travel next week to the Middle East “to strengthen and expand” relationships in the region. The trip comes as the Obama administration continues its efforts to wean the US off oil imports and targets the petroleum industry for tax hikes and greenhouse gas emission reductions. (2/19, #14)
  • Because of overbuilding in the late ’90s sparked by deregulation of energy markets, there are so many¬†US gas-fired power plants that on average, they are used only about 25 percent of the time. A few gas companies have begun to offer long-term contracts to utilities at a price that comes close to making it competitive for base-load generation. (2/19, #15)
  • State regulators are doing a good job overseeing a key natural gas production technique called hydrofracking and there’s no evidence the process causes water contamination, a senior official with the US Environmental Protection Agency said Monday. (2/16, #16)
  • Nearly all the major oil companies are looking across Europe for shale gas, an unconventional energy source that has transformed the US energy market. Unlike in the US, Europe does not have as many as land rigs available to search for shale gas-an estimated 20 land rigs in Europe vs. well over 1,500 in the U.S. (2/19, #18b)
  • Russia is poised to seize control of Kovytka, one of the world’s largest gas fields, from TNK-BP, a joint venture between BP and four Russian oligarchs. A $20 billion development project is under way, but after 10 years there has been no production. TNK-BP was originally asked to sell its stake in Kovytka to Gazprom, the Russian state energy monopoly, in 2007 but talks stalled after years of wrangling on price. (2/19, #20)
  • Bank of America and Barclays Capital have told clients to brace for crude above $100 a barrel by next year, before it pushes relentlessly higher over the decade. B of A analyst blames oil demand growth from China and India by 2015 (5.3 million b/d) combined with non-OPEC production declines of 4.9 percent per year. (2/19, #21)
  • What constitutes an acute oil crisis? At a 5% decrease in the oil volumes that are accessible to the Western world, the U.S. President may give permission to release oil from the strategic oil reserve. A decrease of 7% would trigger an “international crisis under emergency treaties”, and a decrease of 10% would be a disaster which, according to an energy expert, would be “so off the chart that we cannot even model it”. The United States does not have a plan to handle such a never-occurred-before situation. (2/19, #25)
  • Two of the world’s leading companies in the enzyme business, Novozymes and Danisco of Denmark, announced this week that they had found a way to produce enzymes that could reliably and affordably convert agricultural waste into cellulosic ethanol. According to Novozymes, advances in the enzyme development have reduced costs by 80 percent over the past couple of years, bringing the cost of a gallon of cellulosic ethanol within striking distance of $2 a gallon. (2/19, #27)
  • Middle Eastern oil producers are scrambling to protect their market share in Asia amid rising competition from a new Russian pipeline to the Far East. The new pipeline’s current capacity, about 600,000 barrels/day, will rise to 1 million barrels (2/18, #9)
  • In Saudi Arabia, one lesson thoroughly learned is that very high oil prices – even for short periods – have nonlinear effects on people’s behavior in a way that is probably irreversible… Delhi is a case in point. A recent high court judgment required a changeover from petrol to compressed natural gas overnight. It generated protests but it was done and now all public transport is gas powered. (2/18, #10)
  • Solar PV: Using arrays of long, thin silicon wires embedded in a polymer substrate, a team of scientists from the California Institute of Technology has created a new type of flexible solar cell that enhances the absorption of sunlight and efficiently converts its photons into electrons. The solar cell does all this using only a fraction (as little as 1/50th) of the expensive semiconductor materials required by conventional solar cells. (2/18, #13)
  • Offshore Mexico, a new oil field was identified in the southern Gulf that could help rescue Mexico’s lagging industry. The field is located off the coast of the Mexican state of Campeche, and contains an estimated 900 million barrels. The discovery is one of the largest in the past decade. Production could begin in about two years, when up to 150,000 barrels a day could be pumped out, offsetting one-third of recent declines. (2/17, #6)
  • The U.S. economy could lose $2.4 trillion over the next two decades if the federal government does not allow oil and natural gas drilling in restricted onshore lands and in offshore areas previously closed to energy companies, according to a new study prepared for the National Assoc. of Regulatory Utility Commissioners released on Monday. (2/17, #9)
  • Exxon Mobil added 2 billion barrels of oil equivalent to its proved reserves last year, replacing 133% of 2009’s production, including additions from its liquified natural gas projects in Papua New Guinea and Australia. That helped put the reserve addition at the highest level of the decade for the oil giant. (2/17, #11)
  • To supply a plug-in hybrid fleet with lithium batteries, Mitsubishi estimates that the world will need 500,000 tons of lithium per year. The Salar di Uyuni deposit in Bolivia holds at least 9 million tons, although the country has, in total, perhaps as much as 73 million tons. But for a variety of reasons, the production of much lithium from Bolivia might be a bit further in the future than they currently expect. (2/20, #25)
  • Canada, faced with growing political pressure in the US over the extraction of oil from its highly polluting tar sands, has begun courting China and other Asian countries to exploit the resource. (2/16, #19)
  • In Utah the state regulators oblige Questar, the natural gas provider, to sell half their gas to retail natural gas vehicle owners at the cost of production. This is an excellent example of government market distortion and is a recipe for sweated assets. (2/16, #24)
  • Last November Nigeria’s president, Yar’Adua, a chain smoker who has been ill for years, went to Saudi Arabia for treatment and has yet to return, and the peace process – and all Nigeria – were left in limbo. Recently the parliament decided that the president is too sick to rule, and promoted Goodluck Jonathan to acting President; he will need more than luck to fix Nigeria. (2/15, #10)
  • Troubled talks on a global climate change treaty suffered a further setback on Thursday with the resignation of the United Nations official heading the process. (2/19, #4)