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1. Oil and the Global Economy

The week started with oil prices continuing to fall until Friday morning when NY futures reached an eight-week low of nearly $85 a barrel largely on signals that the Saudis would be increasing production to slow price increases. Weaker US economic data and a jump in US crude inventories helped the decline. On Friday, however, the seriousness of the demonstrations taking place in Egypt and other Middle Eastern countries set in and oil prices surged $3.70 a barrel in NY to close at $89.73 on fears that the protests could spread to other oil-producing countries. In London Brent crude rose to a daily peak of $99.63 a barrel, the highest level since September 2008. Friday saw the biggest one-day jump in crude prices since September 2009.

Although Egypt produces only 670,000 b/d, the Suez Canal and the accompanying Sumed pipeline moves some 2.9 million b/d of Middle Eastern crude and products to European and other destinations. So far there have been no indications that the demonstrations to unseat Egyptian President Mubarak have slowed oil production or transport in the region.

During the week, the gap between NY oil prices, which at one point were approaching $85 a barrel, and London prices, which closed near $100, increased to an all-time high of more than $12 a barrel. The problem remains at the NY futures delivery depot in Cushing, Okla., where Canadian oil arriving by pipeline crowds out tank space supposedly set aside for delivery of oil from expiring NY futures contracts, thereby pushing down NY oil prices. In London futures settlements are in cash so there is no need to deliver actual oil. Most observers are now saying that the Brent benchmark represents the current value of oil and that NY prices are a temporary technical aberration.

In NY wholesale gasoline prices rebounded from a 15 cent per gallon decline and are now only a few cents below the recent highs established two weeks ago.

Leaving aside the dangers of much higher oil prices stemming from widespread political unrest in the Middle East, the global oil market remains tight. Saudi Oil Minister al-Naimi predicted that strong demand from China and India this year would lead to an increase in global oil consumption of as much as 1.8 million b/d this year exceeding IEA forecasts of a 1.41 million b/d increase. While al-Naimi predicted that prices would remain stable and suggested increases in Saudi output, others are not so sure. IEA Director Tanaka called the oil price situation “alarming.”

Goldman-Sachs suggested last week that oil may be entering a “structural bull market” as spare capacity is brought into production to meet rising demand. A leading Saudi bank says that the kingdom will increase production from 8.2 to 8.4 million b/d this year.

A Chinese trade group announced last week that Beijing’s oil refining may increase by 7.5 percent this year. The Saudis already have announced that they will increase crude shipments to China’s biggest refiner, Sinopec, by 10 percent in 2011.

2. Deepwater Drilling

The standoff between the US government and those seeking to resume drilling in the Gulf of Mexico shows no sign of easing. Last week the Interior Department said it is still refusing to issue deep-water exploration permits because the drillers have not shown they have immediate access to and can deploy containment devices to deal with out-of-control wells.

The American Petroleum Institute (API) released a study warning that continued delays in issuing permits would negatively impact deepwater drilling in the Gulf as well as jobs and the nation’s energy security.

The study claims that nearly one-third of US deepwater drilling projects could become uneconomical due to the increased costs attributable to the new regulations. The API claims that unless the policies are reversed, as much as 619,000 b/d of oil and gas production could be at risk by 2019 or 12 percent of current US daily production.

In the meantime the new majority in the US House of Representatives has passed a bill rolling back the government’s budget to the fiscal 2008 level. This bill would deny funding for the additional inspectors that the administration has sought in the wake of the Deepwater Horizon oil spill.

3. China’s ongoing drought

Disaster alerts have been raised to their highest level as the three-month-old drought continues across half a dozen provinces around and south of Beijing in northern China. Rainfall in some areas has been less than 20 percent of normal and forecasters say the situation is likely to get worse in coming months. The situation is compounded by rapidly falling aquifers in the region and below average crop prospects in North America, Australia, and South America. Growing conditions in China’s main wheat growing areas are said to be the worst in 60 years.

While the government is not yet quantifying the extent of the disaster, scattered reports suggest that about 20 percent of the winter wheat crop which accounts for 90 percent of China’s annual wheat harvest already has been affected. Hundreds of thousands of people and farm animals are without their normal sources of water and are being supplied by tanker. Beijing has already moved to step up food imports.

Given the extent of the problem, food prices which have been rising rapidly in recent months seem destined to go still higher. Whether these problems eventually grow so large that they begin to have a significant impact on China’s rate of growth and demand for oil remains to be seen.

With the northern China aquifers in danger of drying up in the foreseeable future, Beijing is trying to mitigate the problem by diverting water from a tributary of the Yangtze river into the region. This massive project is behind schedule and is not expected to deliver water for another three or four years.

The last great famine to strike China was between the years 1958 to 1961 when crop production fell from 200 million to 143 million tons. Although Beijing is far better equipped to deal with grain shortages than it was 50 years ago, there is a serious possibility that China’s efforts to cope with this year’s shortages could drain global food reserves leading to global unrest in the near future.

Quote of the week


— IEA Executive Director Nobuo Tanaka, referring to current oil prices

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

  • Developing new Arctic oilfields could cost more than first thought, according to the USGS. Scientists had previously estimated the region could yield 7.5 billion barrels of oil. But assuming production costs of up to $100 a barrel, only 2.5 billion barrels could be lifted economically. Based on exploitation costs of $300 a barrel, only 4.1 billion could be raised. (1/28, #10)
  • Russian billionaire owners in TNK-BP have asked a London court to halt a share swap and Arctic exploration deal between BP and Rosneft, claiming exclusive rights to business in Russia with BP. (1/28, #22)
  • Exxon says global natural-gas use will increase 2 percent a year through 2030, raising last year’s 1.8-percent estimate. It expects the world in 2030 to burn seven quads more than predicted a year ago. By 2030 gas, surpassing coal, will supply 26 percent of energy needs to oil’s 32 percent. Gas usage is expected to grow thrice as fast as oil and coal. (1/28, #9)
  • The world may have 250 years of natural gas at current levels, double previous estimates, thanks to “unconventional gas,” IEA says. The total, including shale and coal beds, may even be revised upwards but depends on price, technology, and supply accessibility. (1/25, #4)
  • Flood cleanup in Queensland, responsible for 19 percent of Australia’s economic output, may cost $19.8 billion. (1/25, #9)
  • Governments toppling in Tunisia and Lebanon and protests in Egypt are being monitored in Iraq, where an only month-old government faces rising violence and unrest. (1/26, #7)
  • Saudi King Abdullah is convalescing in Casablanca. His recent medical troubles raise concern over whether another reformist or a conservative will succeed him. (1/24, #13)
  • France’s Areva will sign an agreement with Binladin Group for nuclear and solar energy, as Saudi Arabia says it wants to cut fossil fuel use within the next several decades. (1/24, #14)
  • Israel’s gigantic gas fields generate domestic controversy. Corruption in the burgeoning industry is reportedly rife; officials seem intent to raise taxes; and academics warn the country to avoid the economic troubles of oil and gas exporters. (1/25, #5)
  • Somali pirate attacks are increasing, spurred by a 36-fold jump in ransoms in five years, threatening vessels carrying 20 percent of world trade. The raids are adding $2.4 billion to transport costs because some vessels are going around southern Africa rather than through the Suez Canal, adding 12 days to a journey from Saudi Arabia to Houston. (1/26, #6)
  • Shares in Indian refiners declined in Mumbai after an Iranian trade official said Iran may halt crude sales to India in two weeks if a payment impasse isn’t resolved. (1/28, #16)
  • China has renewed import pacts for 2011 for Iranian crude oil, keeping volumes steady at some 460,000 b/d. Sources say Zhuhai Zhenrong has agreed with NIOC to buy 240,000 b/d in 2011. Refiner Sinopec has agreed to take 220,000 b/d from NIOC. (1/24, #12)
  • Beijing has conducted its first ever license-plate lottery, as the number of cars has quadrupled to 4.76 million between 1997-2010. Plates given out numbered 17,600 out of 210,178 total applicants. (1/26, #9)
  • Cairn will choose up to four prospects to drill off western Greenland in 2011 as it maintains 10-12 potential well locations. Its 2010 three-well exploratory campaign has identified three oil types but not significant target reservoir rocks. After shooting 2D in 2010, Cairn plans to shoot 3D seismic off Greenland this year, subject to approvals. (1/28, #21)
  • Canadian National Railway is discussing exports of crude oil by several producers from Saskatchewan via railway to West Coast ports, possibly to US refineries, as well as China. The province’s PetroBakken says it is participating in discussions. (1/24, #17; 1/25, #12)
  • TransCanada’s approach to obtain easements for its Keystone XL pipeline is attracting rural Texans to Sierra Club meetings in protest. The 1,700-mile pipeline is to carry heavy, high-pollutant oil from Alberta tar sands to refineries near Houston and Port Arthur. Oklahomans and Nebraskans have also mounted opposition to the pipeline. (1/25, #11)
  • Various Texas organizations say the state should be regarded as the nation’s “energy breadbasket.” In 2009, Texas produced 403 million barrels of oil, one-fifth of total domestic production; and it had the largest proved-oil-reserves increase, 529 million barrels, or 11 percent. Proven gas reserves grew 80 percent from 2000-2008; in 2008 the state produced 30 percent of the nation’s total gas. Texas uses twice the coal of any other state, producing 1/3 of what it consumed in 2009, or 35 million tons, costing $16.67 a ton. (1/25, #10)
  • Crude producers and distributors are turning to railroads to ship oil from North Dakota as production from the Bakken Shale rises faster than pipelines can be built. ND crude output jumped 83 percent to 329,000 b/d in August from two years earlier. Shipping capacity, now 125,000 b/d from Williston Basin, may double or triple in the next 2-3 years. (1/28, #20)
  • A 261 MPG US diesel plug-in hybrid electric vehicle prototype has debuted at Qatar Motor Show. Volkswagen says the car has an all-electric range of 22 miles and total range of 342 miles. (1/26, #14)
  • The developing world is stockpiling food staples, driving agricultural commodity prices even higher, contributing to recent social unrest across North Africa and the Middle East. Wheat has reached a 2½-year high. Rice orders are up 2-4 times usual quantities. (1/28, #11)