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1. Oil and the Global Economy

Last week the oil markets were dominated by the Libyan uprising. Brent crude nearly touched $120 a barrel on Thursday before settling to close Friday at $112 after President Obama, the IEA, OPEC and the Saudis all assured the markets that the shut-in Libyan crude would be replaced. Areas controlled by the protestors in Libya increased during the week as numerous armed forces units announced their allegiance to the revolution. By week‘s end, security forces still loyal to Gadhafi controlled little more than parts of Tripoli and some small towns. Oil production seems to have fallen by at least 75 percent as foreign oil workers fled the country. Any remaining production will likely go to domestic refineries with little if any available for export. Rumors that Gadhafi intends to sabotage oil facilities continue to surface. The natural gas line from Libya which supplies about 10 percent of Italy‘s consumption has been closed by the disturbances.

Given the brutality of the regime‘s suppression of the protestors, Gadhafi and his closest supporters seem to have left themselves few choices except to fight on, thereby prolonging the conflict and the interruption in oil exports. Given the uncertainty of the situation, the possibility of a prolonged civil war and the lack of a clear successor government, it may be weeks or even months before Libyan oil production of 1.6 million b/d returns to normal.

In NY, oil continued to trade about $14 a barrel lower than in London, closing near $98 a barrel after reaching $103.41 on Thursday. US crude inventories increased by 800,000 barrels the week before last, but total commercial inventories fell by 12 million barrels.

Beijing increased retail gasoline and diesel prices this week, a move some believe will stimulate demand for crude by making oil refining more profitable. It is still not clear how a major crop failure in China will affect the country‘s demand for oil, but drought continues in the country’s grain growing region.

Fears are increasing as to how high oil prices will affect global economic recovery. Conventional wisdom now seems to say that a prolonged price spike above $120 a barrel will do damage similar to that witnessed in past oil price shocks. So far the equity markets have been slow to react, despite warnings from the IEA, the financial press, and the major investment banks. Some analysts are suggesting that this price spike will have a larger impact on the developed OECD countries than on emerging markets.

2. Replacing Libyan oil

Oil prices fell rapidly on Thursday after assurances that even a prolonged outage of Libyan oil production could easily be compensated for by increased OPEC production and withdrawals from strategic reserves. As the shutdown of Libyan oil production seems to be growing and soon may be total, the question of just how much sustainable spare capacity OPEC really has may soon be answered.

At week‘s end there were reports that the Saudis had increased their production to over 9 million b/d from the 8.6 billion they pumped in January. As the winter heating season slackens, this is the time of the year when there is usually a decrease in demand and indeed Oil Movements, the leading tanker tracker, is forecasting a 310,000 b/d drop in OPEC shipments between mid-February and mid-March.

Most of Libya‘s exports consist of light, sweet crude which is shipped to refineries in Europe that can only refine the better grades of crude. If OPEC is to “replace” the lost Libyan production, it must not only come up the necessary quantities of oil but also the right qualities. Last week there was discussion of redirecting shipments of the light West African crudes to Europe and letting the Saudis send more oil to Asia which can better handle the heavy sour crudes.

During the week there was much discussion of OPEC‘s 4 or even 6 million b/d of spare capacity. Many experienced observers remain skeptical that anywhere near this quantity can be brought into production quickly. So far we have one unofficial report that the Saudis have increased output by 400,000-500,000 b/d, way below what would be necessary to compensate for what seems likely to be the lost Libyan production of 1.6 million b/d. Indeed if the Saudis are to compensate for most of the lost output, they would have to exceed the 10 million b/d figure that many doubt they still can, or would want to, achieve.

The other option is to draw on what the IEA says is 1.6 billion barrels of already produced reserves. Some of this, however, is simply part of the production pipeline and is not available for use elsewhere. Objections are already being raised about tapping strategic reserves just to control prices. With the possibility that other Middle Eastern oil producers could be subject to domestic unrest many feel that these reserves should be saved for truly critical situations.

This question should be resolved in the next few weeks when shortages of Libyan crude start developing at European refineries. Either OPEC will have increased production of the right grades of crude sufficiently to offset the loss, the IEA will have authorized releases from stockpiles, or oil prices will be still higher.

3. The Middle East upheaval

Given what has resulted from the uprisings in Libya, the possibility that a second or third Middle East oil producer might suffer the same fate has the oil markets very nervous. The loss of another million or two barrels of daily oil production already has analysts talking of oil at $220 a barrel as there seems to be little chance that OPEC could compensate for that much lost production.

Candidates for a popular uprising among the Middle Eastern oil producers abound. In recent weeks we have seen demonstrations in Algeria, Kuwait, Iran, Bahrain, Iraq, Yemen, Oman, Sudan, and even a small one in Saudi Arabia. So far these demonstrations have been contained by the local security forces. However, given the speed with which demonstrations in Tunisia, Egypt, and Libya exploded into full scale revolutions most observers are no longer a sanguine about the stability of less-than-democratic Middle Eastern regimes.

The top concern of course is Saudi Arabia, with its 9 million b/d of production. Should domestic unrest reduce or stop production of this scale, the global economy would become a different place overnight, with oil prices at unimaginable levels. The Saudis are clearly worried too. Last week the King announced a package of financial support worth about $36 billion in an effort to avoid what happened in Egypt and Libya. The package included a 15 percent pay raise for public employees and financial aid for students and the unemployed. While this sort of largess may suffice for a while, the Saudis have numerous systemic problems that could ultimately subject them to the kind of unrest sweeping the region.

Quote of the week

“Jeremy Gilbert, BP‘s former chief petroleum engineer, is deeply skeptical of Saudi Arabia‘s ability to deliver much more oil in the short term, stressing the length of time it would take to bring mothballed fields and equipment back on stream. “You can‘t operate wells at half the potential off-take one day and then double it the next – it‘s just not physically possible. I have grave doubts about the numbers that are talked about as spare capacity.'”

— David Strahan, author of The Last Oil Shock

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

  • Natural gas futures rose, gaining for the first week in five, on speculation that an 9 percent price decline this year was enough to boost demand. (2/26, #2)
  • The US economic recovery was weaker than previously estimated at the end of last year- 2.8% vs. 3.2% for the fourth quarter–which could add to concern about its ability to withstand the impact of higher oil prices driven by turmoil in the Middle East. (2/26, #7)
  • Libyan rebels in eastern Libya said on Friday they now controlled most of the oil fields east of the town of Ras Lanuf, and said they would honour oil deals as long as they were in the interest of the people. If oil contracts were unfair or based on corruption, however, the interim leadership of Benghazi said they reserved the right to renegotiate them. (2/26, #10)
  • Militants attacked Iraq’s largest oil refinery on Saturday, killing four workers and detonating bombs that touched off a raging fire and shut down the plant. (2/26, #11)
  • Iraqi security forces used water cannons and tear gas to disperse thousands of angry protesters in Baghdad on Friday as a “Day of Rage” across Iraq left 15 demonstrators dead in clashes with police. (2/26, #12)
  • Iran told atomic inspectors this week that it had run into a serious problem at a newly completed nuclear reactor that was supposed to start feeding electricity into the national grid this month, raising questions about whether the trouble was sabotage, a startup problem, or possibly the beginning of the project’s end. (2/26, #13)
  • Interior Secretary Ken Salazar said the oil industry hasn’t yet persuaded him to re-start deep-water drilling in the Gulf of Mexico, and that he won’t “respond to political pressure” on the issue. (2/26, #14)
  • A new study says that developing Alaska’s outer continental shelf could produce almost 10 billion barrels of oil and 15 trillion cubic feet of natural gas, create around 55,000 new jobs and produce $145 billion in new payroll nationally. (2/26, #18)
  • Spain will lower highway speed limits, cut train ticket prices and use more biofuel under an emergency energy-saving initiative because of soaring oil prices brought on by unrest in Libya. (2/26, #21)
  • Deutsche Bank said oil above $120 a barrel would be an inflection point for global economic growth. At that price, oil as a share of global GDP starts to move above 5.5 percent, historically a point where global growth has come under pressure. (2/25, #3)
  • No two oil shocks are alike, but the chances are that emerging economies could suffer a little less than the developed world if the latest price surge to 29-month highs is sustained. (2/25, #7)
  • The Algerian government Thursday ended a 19-year state of emergency, a key concession to the opposition as it moves to address a broad range of social and political grievances. (2/25, #14)
  • Mexico’s state-owned oil company Pemex said Thursday that crude oil exports in January averaged 1.444 million barrels a day, slightly lower than December’s 1.501 million barrels a day, but higher than the full-year 2010 average of 1.361 million. (2/25, #15)
  • US refiners say the price increases at the pump won’t make them rich. Indeed, analysts warn that the high prices for crude threaten the refiners’ tentative comeback from the recession, when gasoline use slumped-a comeback that is closely tied to the U.S.’s economic recovery. (2/25, #21)
  • Recent EIA data shows growth in world supplies, and growth in OECD consumption and net imports, while Non OECD supplies/demand have temporarily flattened. (2/25, #24)
  • Major banks warned on Thursday OPEC needs to act quickly to arrest the oil price rally, which could get out of control and derail economic recovery should unrest spread beyond Libya to other major oil nations. (2/24, #3)
  • A sustained and significant rise in oil prices could derail the U.S. economic recovery by stirring inflation and putting the brakes on spending. (2/24, #5)
  • For decades, the agricultural policy of the Middle East and North Africa region has been extremely simple: hydrocarbon exports pay for carbohydrate imports. The MENA area has little farmland and even less water, so over the past 40 years it became the world’s largest importer of food commodities, notably of cereals. Egypt is the world’s biggest buyer of wheat while Saudi Arabia is the top importer of barley. (2/24, #9)
  • CNPC, China’s largest oil producer, on Thursday said its facilities in Libya had been attacked, marking the first confirmation of violence against oil producers as unrest sweeps the country. (2/24, #14)
  • King Abdullah of Saudi Arabia announced financial support measures, worth an estimated $36bn, in a bid to avert the kind of popular unrest that has toppled leaders across the region and is now closing in on Libya‘s Muammer Gaddafi. The measures include a 15 per cent salary rise for public employees to offset inflation, reprieves for imprisoned debtors, and financial aid for students and the unemployed. (2/24, #16)
  • Armed clashes between Southern Sudan’s army and a rebel militia that killed about 200 people this month are clouding the region’s preparations for independence in July and threatening future oil exploration. (2/24, #17)
  • Chevron Corp. expects to be able to resume its ambitious drilling program in the deep waters of Gulf of Mexico before the first half of 2011 is over. (2/24, #18)
  • US airline passengers should prepare themselves for sticker shock this year. Carriers have already increased their fares four times since the start of the year, compared with only three increases for all of 2010. (2/24, #19)
  • The real danger from the Middle East is not the risk of temporary supply disruptions, or the speculative betting that it will encourage. It is that we lose sight of the levels that oil prices had climbed to even before this latest crisis began, and the basic supply-and-demand forces that pushed them there. (2/24, #20)
  • The discount of West Texas Intermediate crude, the U.S. benchmark, to North Sea Brent will narrow to $7 a barrel from about $12 currently as U.S. refineries resume operations, Goldman Sachs Group Inc. said. (2/23, #8)
  • China National Petroleum Corporation and Kazakhstan‘s state-run oil and gas company KazMunaiGaz has signed an in-principle agreement to jointly develop the Urikhtau natural gas field in the Central Asian nation. (2/23, #18)
  • Ohio is bracing for a shale oil boom as companies gobble up leases covering millions of acres in the eastern half of the state. While no one’s yet proven the commercial potential of the Utica formation, an oil-rich layer of rock that underlies this area, some believe it will yield crude on par with the largest shale reservoirs in the U.S. (2/23, #19)
  • Frontline Ltd., the world’s biggest supertanker operator, may return to profit this quarter after its biggest loss since 2002 as oil demand from China curbs a glut of vessels that sent freight costs to a 13-month low. (2/22, #10)
  • The U.S. economy, higher traditional consumption in spring and rising demand from China and other countries are likely to push gas to near $4 a gallon by midsummer. If persistent unrest spreads into the Persian Gulf countries, gas could hit $5 a gallon. (2/22, #22)
  • U.K. oil giant BP agreed to pay as much as $9 billion for a 30% stake in oil and natural-gas assets controlled by Reliance Industries of India, in a deal that highlights the lure of India’s fast-growing energy market for Western energy companies despite the country’s uncertain regulatory environment. (2/22, #24)
  • A robotics professor at Carnegie Mellon has developed a method of inexpensively converting a gasoline powered automobile to electric power. Currently, according to Nourbakhsh, a Honda Civic can be converted for approximately $14,000. (2/22, #31)
  • The sun is waking up from a long quiet spell. Scientists are warning that earth should prepare for an intense electromagnetic storm that, in the worst case, could be a “global Katrina” costing the world economy $2,000bn. ((2/21, #5)
  • Iran, OPEC’s second biggest producer after Saudi Arabia, has over 20 million barrels of unsold crude oil stored on tankers in the Persian Gulf, shipping sources said this week. (2/21, #12)
  • Petroleum Development Oman, the largest producer in the Persian Gulf country, found a “material” discovery of oil holding some 300 million barrels as the nation seeks to further raise output of crude, which last year was up 6.4% to 864,600 barrels/day. (2/21, #15)
  • Nigeria’s President Goodluck Jonathan was to meet with leaders of major oil companies operating in the Nigeria’s multi-billion dollar industry last Monday as oil exploration slumped to its lowest in a decade. Exploration in Nigeria, which depends on oil proceeds to service over 90 per cent of its budget, slumped after oil majors backed away from investment in anticipation of the passage of the Petroleum Industry Bill into law. (2/21, #18)
  • China increased retail gasoline and diesel prices for the first time this year, by nearly 5% to $1.02 per liter aiding state refiners under pressure. That is about 20% higher than an average price p in the USA of 84 cents per liter. (2/21, #22)