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1. Oil and the Global Economy

In New York oil futures traded between $92-93 a barrel early in the week but dropped $2.50 on Thursday after Beijing announced a raft of statistics showing rapid economic growth. This revived concern that China’s economy was overheating and that the demand for oil could drop. A larger-than-forecast increase in US stocks helped the decline. Resumption of shipments through the Trans Alaska pipeline also stemmed fears of shortages along the west coast. NY futures continued falling on Friday to close at $89.11.

In London, however, Brent crude climbed to a close of $97.60. Observers attribute the $8.49 differential between the two crudes to high inventories in the US particularly at the NYMEX contract delivery point of Cushing, Okla. where there is 9 percent more oil in storage than last year. Sentiment is growing that London crude is becoming a better benchmark for global oil prices than NY crude which is beset with local issues.

Despite worries that Beijing’s efforts to stem inflation will slow economic growth, China’s demand for oil remains strong with apparent demand in December up 18 percent over December 2009 and up 7 percent over November 2010.

The IEA’s announcement last week that it was increasing its global oil consumption forecast for 2011 by 320,000 b/d to an average of 89.1 million b/d has raised the question of just what is going to happen to oil prices this year. Actually the IEA’s projected increase of 1.4 million b/d in consumption between 2010 and 2011 seems rather conservative as compared to the 2.7 million b/d average increase that took place last year.

This projection moves global demand into new high ground and assumes the Saudis really have enough spare capacity and the will to turn on another million or two b/d of production. If this increase in output does not happen, or if the growth in global demand, particularly from China, turns out to be higher than forecast, then much oil higher prices in the year ahead seem inevitable. As we saw three years ago, much higher oil prices will again kill demand and slow economic growth.

The financial markets could play an outsized role in the oil markets this year. Outside observers note that the government is making very little progress in its efforts to regulate and control speculation in commodities. Some fear that oil prices will be pushed much higher than warranted by market fundamentals as increasing amounts of speculative money enters the futures market. The euro/dollar ratio is yet another important factor in the months ahead as the EU attempts to manage its debt crisis and Washington continues quantitative easing.

2. Iran’s nuclear program

The latest round of talks between Tehran and the western powers regarding Iran’s nuclear program ended in failure last week. Tehran continues to insist on unacceptable “preconditions” such as lifting of the sanctions and recognition of its right to enrich uranium before discussing safeguards. Higher oil prices give the Iranians confidence that they can weather the international sanctions despite recent indications they may be having an effect on Iran’s economic development. Last week the Swiss government joined the western powers in tightening economic sanctions on Tehran beyond those in the UN resolution.

While this standoff remains one of the premier threats to global oil supplies should it ever deteriorate to hostilities, the status quo is likely to continue for a while. The retiring chief of Israel’s intelligence service recently noted that he does not believe the Iranians can achieve a nuclear-weapon capability before 2015. With Iran apparently gaining influence with the new Iraqi government, oil prices likely to increase, and Tehran’s program of withdrawing domestic oil subsidies going well, it would seem that the Iranians have little incentive to make concessions until some change in the situation takes place.

3. China

It is becoming impossible to track the global oil situation without a weekly look at developments in China. Unlike in the US and other OECD countries, where the demand for oil and its production, and even the economy moves up or down at a relatively measured pace, in China changes in supply and demand, fiscal policy, coupled with unprecedented growth, are happening constantly as 1.3 billion people try to build better lives for themselves.

Last week it was announced that China’s economy grew unexpectedly by 9.8 percent in the fourth quarter and 10.3 percent for the full year, despite Beijing’s efforts to rein-in growth. This news spooked the markets with fears that even tougher austerity measures will be necessary to combat inflation. Beijing did announce that inflation in December fell back to 4.6 percent from a two-year high of 5.1 percent in November. Most analysts are skeptical about Beijing’s inflation numbers and are expecting prices to accelerate in the 1st quarter.

Last year China’s electric power generation capacity increased by 10 percent and power generation increased by 13 percent as compared to a 6.4 percent increase in 2009 and a 5.5 percent increase in 2008. Thermal powered electricity now amounts to 73 percent of total generation capacity. Electricity generation grew by only 5 percent in December as the Chinese temporarily closed inefficient plants to meet year end efficiency goals. The shortfall was made up by using diesel-fired emergency generators to keep some factories in operation.

The Chinese economy is approaching some sort of a turning point in the next few months. Beijing and the IEA are looking for 8-10 percent GDP growth this year while the IEA is talking about the demand for oil increasing by only 5-6 percent as compared to 11.4 percent last year. The whole situation is further complicated by unusually cold snowy weather in parts of China which is slowing coal production and transport, and the floods slowing Australia’s coal exports.

If China can neither increase coal production or imports by a sufficient amount, they may have to increase oil imports more than anticipated in order to achieve their goals for GDP growth.

4. Unrest in the Arab world

The rioting and overthrow of the government in Tunisia serves as a reminder of just how fragile the political base is on which much of the world’s oil supply rests. The entire region is rife with political repression as hereditary or dubiously elected leaders rely on bribery and their military and security services to remain in power. Even in seemingly stable countries, the increasing number of young unemployed workers is a growing problem and a major source of political instability. As most of the Middle Eastern oil exporters are unable to grow enough food to support their populations, the threat of global food shortages and restrictions on exports from food surplus countries could become a major threat to political stability in the next few years. Add to this mix centuries-old political and religious conflicts and the likelihood that US and EU military forces may not continue in the region much longer, and the threat to smooth production of Middle Eastern oil increases yet more.

The Saudis announced last week that 87-year-old King Abdullah who has been in New York for the last two months undergoing medical treatment will return home soon. His successor Crown Prince Sultan is also in his 80s and is not in good health. The next in line for the throne may be conservative Interior Minister Prince Nayef who is only 76. While the Saudis have a track record of effecting transitions of power within the royal family, this will come to an end someday. Should factional fighting or civil unrest erupt, even the temporary loss of the Saudis’ 8-plus million b/d of oil production would be a major disaster for the global economy.

Quote of the week

“For Russia to maintain production at or above 10 million barrels per day, the investments required are huge. Decline rates in West Siberia are very steep and projects in East Siberia are fairly limited.”

— Amrita Sen, commodity analyst at Barclays

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

  • OPEC faces growing calls to boost production as crude in Asia and Africa exceeds $100 a barrel. Nigeria’s Bonny Light has hit triple digits for the first time since October 2008. Malaysia’s Tapis and Indonesia’s Minas breached it a week earlier. (1/21, #4; 1/22, #2)
  • Venezuela says it has surpassed Saudi Arabia for the most proven crude oil reserves in the world, with 297 billion barrels. Iran will submit new reserve estimates, an increase from 137 billion barrels to 150 billion, to OPEC’s secretariat. Canada, at 147.5 billion barrels including non-conventional oil, is next behind Saudi Arabia, according to BP. (1/18, #15; 1/21, #10)
  • Brazilian pre-salt oil deposits hold at least 123 billion barrels of reserves, vs. a 50 billion-barrel government estimate, according to a university study by a former Petrobras geologist. The researcher, who set out to show government figures were too optimistic, instead got the opposite result, with 90-percent probability. (1/20, #6)
  • Shareholder groups have filed resolutions with companies like Chevron and Exxon urging disclosure of plans for managing water pollution and financial risks associated with fracking. (1/22, #12)
  • Crude oil exports from Kurdish oilfields will resume by Feb. 1 after a suspension of 1½ years, the Kurdish prime minister says. Agreement with the Iraqi PM means Kurdistan can now export 100,000 b/d, increasing gradually to 200,000 b/d by year’s end. (1/18, #12)
  • Suicide bombers targeting security forces around Iraq killed dozens of people in two days last week. Tuesday in Tikrit, a bomber blew up in a crowd of police recruits, killing at least 49. On Wednesday an ambulance exploded outside a police headquarters in Diyala province, killing a reported dozen; a separate attack targeted a provincial politician’s convoy. (1/19, #9)
  • Qatar has begun talks to supply natural gas to China’s Sinopec. Qatar has already committed to supply 12 million metric tons a year of LNG to PetroChina and CNOOC. Qatar is focusing on Asia after US demand for LNG virtually dried up due to shale gas. (1/18, #14)
  • Geologists have identified 38 oil and gas deposits in part of the South China Sea. Also found are rich oil and gas deposits at the edge of the Songliao basin in northeast China, Yin’e in the north and at the Qiangtang Basin on the Tibet-Qinghai plateau, a government official says. Coal deposits of 192.7 billion tons were discovered in Xinjiang province and four 10,000-ton uranium deposits were found in Xinjiang and Inner Mongolia. (1/17, #12)
  • China probably has exceeded Japan as the world’s second largest economy. China’s GDP in 2010 reached $5.88 trillion, vs. a forecast US GDP of $14.62 trillion. (1/20, #8)
  • China’s CNPC plans to “intensify” oil and gas acquisitions globally in the five years through 2015. (1/20, #12)
  • Ahead of a visit to Washington last week Chinese President Hu said the international currency system dominated by the US dollar was a “product of the past.” Hu also said China was taking steps to replace it with the yuan, its own currency. (1/17, #9)
  • Indian Oil loses $35 million a day selling diesel and cooking fuels at state-set prices and currently has no plan to raise diesel prices. State fuel retailers have raised gasoline prices but cannot raise the price of diesel, kerosene and cooking gas in line with increasing crude oil prices because of the guidelines. The oil ministry aims to accelerate a decision on Cairn’s proposal to sell a stake in its Indian unit to Vedanta. (1/17, #10; 1/20, #14)
  • In Pakistan, gas supply to industrial units of Faisalabad was suspended for four days, part of load-shedding occurring across Punjab. Meanwhile outlaws destroyed a high-pressure pipeline linked with Sui gas field, a second such incident within a week. (1/18, #16; 1/22, #8)
  • BP’s Arctic-Reserves deal with Russia’s Rosneft may give the UK driller access to 50 billion barrels of oil in place and 12-15 billion of recoverable crude. The deal is a boost to Russia’s investment climate despite political and oil tax uncertainties, say analysts and bankers. For BP, the share-swap is equivalent to immediately replacing most of the reserves sold off to pay for the Gulf of Mexico oil spill last year at under half price. The areas likely contain more oil than gas, enabling BP to avoid Gazprom’s monopoly on gas exports. (1/17, #14, 15)
  • Buyers of coking and thermal coal from Queensland, Australia, are warned to brace for dramatic price rises. Flooding has affected more than 46 Queensland mines with 55 percent of Australia’s coal exports, and 91 percent of hard coking coal. (1/18, #21)
  • BHP Billiton says floods in Australia will likely disrupt its Queensland coal operations for another six months as the world’s biggest miner reports a 24 percent decline in coking coal production for the quarter to the end of December compared with the three months to September. Production at its Queensland coal unit dropped 30 percent in that period but sales fell only 15 percent due to “healthy” inventory levels. (1/20, #13)
  • In Nigeria, MEND warns that it will launch a fresh attack on oil installations, including refineries, in protest of the continued detention of its leader, Henry Okah. Nigeria’s federal government has deployed troops in response. (1/19, #11, 12; 1/21, #8)
  • Mexico’s crude-oil production will likely dip slightly this year to 2.567 million b/d from 2.578 million in 2010, according to the Energy Ministry. A series of drilling tenders will allow Pemex to end a seven-year slide in 2012 with a boost to 2.635 million b/d and to continue to gain through 2025, when Mexico could approach Pemex’s 2004 peak of 3.4 million b/d. (1/21, #9)
  • Could energy rationing hit the US? British MPs have suggested it for their country within 10 years to meet carbon emission targets and prepare for fossil-fuel scarcity. A set number of tradeable energy quotas each worth 1 kg of CO2 would be issued free to citizens and at auction to others, to be surrendered on the purchase of energy. To use more than one’s personal allowance would require payment of a market rate. (1/20, #15, 16, 17; 1/22, #16)
  • With Republicans’ capture of the US House, Rep. Bartlett’s posts on the armed services, science, and small-business committees put the Marylander at the fulcrum of two key debates in the 112th Congress: on climate change and on the future size and shape of the US military. Unlike many fellow Republicans, Bartlett sees an urgent need to respond to climate change by using less oil and more renewable energy. (1/22, #14)