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1. Oil and the Global Economy

After reaching a 27-month high of $92.58 on Monday, oil prices slipped last week to a three-week low settling at $88.53 on Friday. In the absence of overriding news concerning supply or demand, prices moved on the US dollar which increased 3.3 percent vs. the euro last week on concerns about the EU‘s various debt crises. Friday‘s report that the US economy added only 103,000 jobs in December, well below what economists had been expecting, added to the downward pressure as did a report from MasterCard that US gasoline consumption fell by 13 percent in the last week of 2010. In London Brent crude settled at $93.43 a barrel. At one point Brent was trading at a premium of over $6 vs. New York crude, the widest differential in nearly two years.

The stocks report for the last week of 2010 showed the US crude inventory falling by 4 million barrels. Now that the end of the year inventory tax-assessing date has passed, US inventories are expected to start rising again. A fire at an Alberta tar sands production facility cut output by 110,000 b/d for an indefinite period.

Over the weekend the trans-Alaska pipeline was closed due to a leak at a pumping station shutting in over 600,000 b/d of North Slope oil production. Large stocks of crude are maintained at the Valdez shipping port so shipments from Alaska should not be affected immediately; however, if the leak is not repaired quickly prices could move higher this week.

2. Colder Weather

Unusually severe winter weather is causing disruptions to energy supplies and changing normal demand patterns in many parts of the world. In Australia, which has already had a third of its coal industry disrupted by the floods, the rains continue with more towns threatened with inundation. Many key road and rail lines have been washed away. It may take many months before flooded mines can be pumped out, transportation links repaired and exports returned to normal. Some of the damage may take years to repair. Nearly half the world‘s production of coking coal has been shut-in by the flooding suggesting that not only will coal prices go much higher, but that there will be disruptions in the Asian steel-making industry this spring.

Reports from China continue to speak of ice and sleet storms which have destroyed crops and disrupted travel across much of southern China. In several places electrical generating stations have been forced to close due to lack of coal. The China Southern Power Grid has declared a Level-2 disaster and warned that persistent cold weather may threaten parts of the grid. China Petroleum is increasing shipments into the affected areas 24 percent compared to last year. In the meantime, a new outbreak of unusually cold Arctic air is rolling into China and is likely to increase the demand for oil and gas and coal over the next week or so. Higher prices for imported coal are likely to increase inflationary pressures.

The increase in record snowfalls across the eastern US, Europe, and China is starting to raise questions as to whether warming of the Arctic can be behind the outbreak of cold and snow across the northern hemisphere. A recent paper points out that the Arctic which is usually dominated by low pressure in the winter has recently reversed and that higher pressure in the region allows colder air to spill southward. These reversals have occurred periodically during the last 160 years of recorded climate history.

If the current pressure reversal is linked to outbreaks of Arctic air, then, when combined with increased moisture in the atmosphere, it should lead to more heavy snowfalls across the northern hemisphere in the years ahead.

3. Recovery threatened?

With rising oil prices comes increased talk of the damage high prices can inflict on renewed economic growth. A number of recent articles have pointed out that demand for oil from Asia has been rising faster than production and if this trend continues there may be consequences ahead. Most writers accept at face value OPEC‘s assertion that it has enough spare capacity to pump out a few million additional barrels per day. They also seem to accept that the Saudis and a few other producers have spare capacity and will turn it on in the coming year rather than let prices rise by many tens of dollars per barrel as they did in 2008.

Last week, the International Energy Agency noted that cost of imported oil rose by 30 percent, or $200 billion, to $790 billion in 2010. The Agency called on oil importers to cut their consumption and for OPEC to step up output before another price spike threatens the global economic recovery. In its mid-December report, the IEA was forecasting an increase of global demand in 2011 of 1.3 million b/d as compared to the 2.5 million increase that took place in 2010. The January 2011 report is due on the 18th. Some analysts are already saying that a 1.3 million b/d increase this year is too low given that China, short of some sort of major setback, is on track to grow by roughly 8 percent this year.

In the meantime, the US economy is still not creating enough jobs to support any kind of meaningful economic recovery and the Federal Reserve plans to continue quantitative easing. The API released yet another study showing that all will be well again: if only the government would not tax the oil industry and would lift all its onerous drilling restrictions, the US could produce another 4 million b/d of equivalent and create another 530,000 jobs.

4. The return of al-Sadr

Last week the outspoken anti-American Shiite cleric Moqtada al-Sadr, returned from a three-year self-imposed exile in Iran to insert himself into the Iraqi political scene. Shortly after the US invasion, Sadr‘s Mahdi Army militia fought pitched battles with US forces and was blamed for much of the sectarian slaughter.

Most Iraqi observers saw Sadr‘s return to take an active role in Baghdad as a positive step. Noting that his followers constitute a large bloc in the new parliament, senior Kurds and Sunnis seem to believe that there will never be a stable political situation in Iraq without him.

In his first public speech Sadr blasted the US and called for an immediate withdrawal of US forces. The cleric has been quoted as having doubts about the numerous oil and gas agreements that have been signed with foreign oil companies.

Most analysts are counting on increases in Iraqi oil production to play a part in controlling price spikes in the next few years. Last week the government announced that thanks to the work of the foreign oil companies, crude oil production is up 300,000 b/d to 2.7 million barrels. The government hopes to reach 3 million barrels by the end of 2011.

From there, the climb to the government‘s ultimate goal of 12 million barrels per day will be more difficult and most doubt it will ever be achieved.

Quote of the week

“Today’s reports confirm that, unfortunately, post-crisis America is still not back to its good economic self.”

— Mohamed El-Erian, chief executive of Pimco.

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

  • Oil production in November 2010 slightly exceeded the previous high month of July 2008 – when oil was over $140 – according to reports by both IEA and OPEC. These are early numbers subject to revision. The EIA‘s production estimate for November will not be available for another month. (1/5, #6)
  • The US natural gas rig count declined for a fifth week, falling by five to 914, which is the lowest level in 10 months. Oil rigs rose by 12 to 777, the most since at least 1987. Total rig count climbed by six to 1,700. (1/8, #12)
  • In the latest in a series of mishaps at various Canadian oil sands operations, the upgrading plant at Canadian Natural Resource‘s Horizon in northern Alberta caught fire, indefinitely halting output at the 110,000 b/d facility. (1/8, #14)
  • North Dakota may contain twice the oil previously estimated, which could push it to #2 in the US behind Texas; its already record crude production may double within the decade. The state was pumping 350,000 b/d of crude on pace to produce 110 million barrels in 2010, up from 79.7 million in ’09 and double the amount produced three years ago. (1/6, #19)
  • Iraqi Oil Minister Luaibi has announced an increase in output to record production from oil fields, and a fourth bidding round for a dozen exploration blocks. (1/3, #5)
  • Oman will spend $78 billion to further develop its oil industry. (1/3, #6)
  • India hopes to resolve an oil payments dispute with Iran before February without upsetting the US. The Indian central bank’s move to block dollar or euro payments for Iranian oil threatens to swell a record current-account deficit. Bond yields are forecast to climb, and a Mumbai bank estimates the rupee may fall 4.5 percent this year. (1/4, #7; 1/8, #6)
  • Iran invited some IAEA envoys to visit certain nuclear facilities this month. Russia, China and EU president Hungary were invited but not the UK, France, Germany or the US. The EU says it won‘t take the tour. (1/4, #6)
  • Iran will conduct tests by mid-January to prepare its first nuclear power plant, a 1-GW reactor, to start operations in February, later than planned. (1/3, #7)
  • Iran is president of OPEC for the first time in 36 years, taking over from Ecuador. At its Vienna meeting OPEC agreed to keep its oil production at 24.8 million b/d. Meanwhile Qatar’s oil minister says currently high crude prices aren’t driven by supply shortages, and OPEC will only call an emergency meeting if there is a market shortage. (1/4, #4; 1/6, #4)
  • Seaborne exports from OPEC excluding Angola and Ecuador are forecast to fall by 310,000 b/d down to 23.60 million b/d in the four weeks to January 22. (1/7, #6)
  • Kazakhstan, producer of 2 percent of oil worldwide in 2009, has doubled its oil export tax to $5.46 a barrel. Central Asia’s biggest producer first taxed crude exports in May ’08; dropped the duty to zero in January ’09; and raised it to $2.73 in August for 40 producers. (1/6, #10)
  • Russian oil output rose by 2.2 percent in 2010 to a record 10.1 million b/d. Many analysts expected only a 1.1 percent increase. Russia was the only country to produce over 10 million b/d last year. Natural-gas output increased by 11.5 percent in 2010, while coal output grew by 6.5 percent. Russia recovered 23 trillion cu. ft. of gas in total last year, exporting 28 percent. (1/3, #18; 1/4, #21)
  • The Kremlin’s ambition of turning Gazprom, the world’s biggest gas company, into a global energy titan is undermined by Soviet-style thinking, poor management and corruption, according to leaked US diplomatic cables. (1/6, #23)
  • The ESPO pipeline between Russia and China is now in operation. It will move 15 million metric tons of crude oil a year until 2030. The pipeline is helping overturn decades of Russian dependence on Europe for oil markets. (1/3, #20)
  • China’s central bank estimates 2010 GDP growth will reach 10 percent. Annual refined oil output may reach 310 million metric tons by 2015; oil output may hit 190 million tons this year, while gas production will exceed 3.5 trillion cu. ft. China plans for a rapid increase in power generation but a much slower rise in oil-refining capacity. By 2015 nuclear capacity is to increase by 38 GW, hydropower by 140 GW. (1/5, #11; 1/6, #13; 1/7, #14, 15)
  • Pakistan’s government, reeling from the recent loss of key coalition partners and the assassination of a ruling party governor, has announced the reversal of a recent fuel price increase. (1/7, #11)
  • Dutch lawmakers will grill Shell for the first time over its operations in the Niger Delta. Oil spills, which Shell blames on militant attacks, have befouled the delta. Amnesty Int’l. says hundreds of polluted sites compromise water, food and livelihoods. (1/4, #10)
  • Cairn says it has contracted two dynamically positioned drillships operated by Ocean Rig to drill up to four oil-and-gas exploration wells this year offshore Greenland. (1/4, #18)
  • UK lawmakers doubt the oil industry could tackle a blowout similar to the Deepwater Horizon in the North Sea. Parliament’s Energy and Climate Change Committee has called on the government and regulators to compel companies to improve their spill response plans, install extra failsafe equipment on rigs, and increase financial provisions for spill costs. (1/6, #22)
  • Production from Pemex hit its lowest in 20 years after autumn storms in the Gulf of Mexico. In June-August Pemex had posted its first 12-month gains in output since 2006. (1/6, #11)
  • BP is set to face criminal charges over last year’s oil spill in the Gulf of Mexico, US legal experts say. The explosion triggering the spill was avoidable and resulted from management failures by BP and contractors, a presidential commission has concluded; it also says that the accident reflected systemic failures by oil companies and regulators. (1/6, #18; 1/8, #16)
  • The skyrocketing cost of rare-earth metals coming out of China is pushing up the cost of gasoline production in the US. Prices for the catalyst component of refiners’ gasoline-making fluid catalytic cracking units, or FCCUs, have risen exponentially, increasing catalyst costs by as much as 25 percent. The increase could raise gasoline production costs by about a penny a gallon and potentially lead some refiners to cut back on fuel production. (1/8, #4)
  • Demand for commodities has boosted demand for miners around the world. Some say the oil-gas industry is increasingly competing with mining companies for skilled workers. (1/4, #5)
  • The UN’s food price index reached a record 214.7 in December. The prior record of 213.5, in June 2008, was followed by violent food riots in several nations. Food inflation in Asian countries like China and India is in double digits. Strong recent crops are helping many developing countries manage; while rice in Asia costs $535 a metric ton, half of 2008 levels. (1/6, #14, 15)
  • Argonne will license its new lithium-ion-battery material to General Motors and LG. The material increases energy storage capacity, lifetime, and safety of lithium cells. (1/7, #20)