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1. Oil and the Global Economy

In a short US trading week, the most notable developments were the increasing spread between NY and London futures contracts and the warnings of higher prices ahead by several financial institutions. While NY crude gained $1.26 a barrel last week, Brent was up by $6.76, increasing the spread between NY and London to $23.33 a barrel. In NY, gasoline futures climbed by over 10 cents a gallon on Thursday and closed out the week at $3.10 a gallon, after the week’s stocks report showed a drop in US inventories. MasterCard reports that US gasoline consumption was up 2.4 percent last week, probably related to the holiday, but the EIA’s four week moving average shows demand lower than at this time last year.

Goldman-Sachs, Morgan Stanley, and Barron’s issued reports last week forecasting that oil prices will be much higher next year because of a stagnant supply situation. Goldman is saying the Saudis do not have nearly as much reserve capacity as Riyadh and the IEA claim and forecast oil at $140 a barrel next year. Barron’s is talking about oil reaching $150 next spring with spikes to $160 and $170 a barrel. Gasoline will be in the vicinity of $4.50 a gallon.

The balance between worsening economic prospects in the US, EU, and China, and the possibility of tighter oil markets in the months ahead has introduced much volatility into the oil markets. As each new report on economic developments is released, the oil markets are jolted, sometimes violently one way or another. Last week started with concerns about China’s economy and Portuguese debt. At mid-week, several major financial institutions issued reports predicting that oil prices will rise substantially in the next 18 months based on increasing demand from Asia outrunning supplies.

These forecasts and a preliminary report of a better employment picture in the US sent prices up on Thursday. On Friday the markets reversed when the official jobs report showed US employment growing only slightly – some analysts say US employment is actually falling – raising the prospects of less demand for oil products in the months ahead. This report sent US oil down by 2 percent in NY on Friday giving up most of the gains from earlier in the week, settling at $96.20 a barrel.

Prices in London, which are not as sensitive to the US employment picture fell 26 cents on Friday. A Platts survey showed OPEC production climbing by 530,000 b/d in June, still well below the loss in exports from the uprisings in Libya and Yemen.

The toll that high gasoline prices are taking on the US economy is beginning to dawn on many commentators. While US retail gasoline prices are down about 40 cents since early May, they are still nearly 90 cents a gallon higher than at this time last year. When the increased cost of gasoline and diesel are added, US consumers are now spending an additional $500 million a day on fuel – money that is not going for other retail spending. This week’s jobs report came as a major shock to economists that had been forecasting an economic recovery based on lower gasoline costs and reviving Japanese industrial production.

2. Venezuela

The announcement that President Chavez had been treated for cancer during his stay in Cuba has raised all sorts of questions about the future of Venezuela’s petroleum industry which he has dominated for over a decade. Although no details concerning the illness were released, knowledgeable observers say it is likely Chavez has colon cancer with widely varying prospects depending on how far the malignancy has advanced. If the cancer has been caught early, the prospects that Chavez will be around for the foreseeable future are excellent, but if it has spread very far, the prospects that he will be President much longer are greatly reduced.

Chavez’s policies of government control, expropriation, hostility towards private oil companies and siphoning off oil profits to pay for social programs have been the hallmark of Venezuela’s oil industry for the last 12 years. During this time oil production has fallen as foreign oil companies have been kicked out or become reluctant to invest because of government policies. The country’s Orinoco heavy oil deposits remain one of the world’s largest largely untapped resources of liquid fuels.

At this point, it is useless to speculate about all the possible outcomes of Chavez’s illness which range from his remaining in office for years, if not decades, to imminent political upheavals if he should be unable to govern. The US is currently importing about 900,000 b/d of Venezuelan crude, another 600,000 is going to China to repay debts and to various Latin American countries that Chavez has sought to influence.

Any successors to Chavez would likely do their utmost to keep the oil industry which is the country’s major source of income functioning. However, successions to one-man governments rarely go smoothly and the situation has the potential to get out of control restricting oil shipments.

3. China

Interpreting economic reports out of China in relation to future demand for oil is becoming increasingly murky. While headlines trumpet the “drop” in China’s import growth, the fine print says it is still growing at an annual rate of increase of nearly 20 percent. This is only weaker by Chinese standards. Oil imports for June were down by 12 percent over June 2010; however analysts attribute this drop to unusually extensive refinery maintenance outages which dropped demand for the month.

Beijing, however, still has a major inflation problem with retail prices for June up by 6.4 percent over last year. To cope with steadily increasing prices, China has raised interest rates five times along with nine increases in bank reserve requirements since October. Some observers believe that Beijing has gone about as far as it can go with these fiscal tools.

A combination of droughts and floods are having a major impact on the country’s food production. Last week Chinese buyers ordered an unexpectedly large 540,000 tons of US corn sending prices higher after a three-week slump. The USDA will update its expectations for Chinese purchase of US corn this week; some analysts are predicting that China will import some 5- 8 million tons this year. Last year China imported corn for the first time in 14 years, procuring 1.5 million tons from abroad.

Cumulative volume of China’s imports for the first half of 2009 is up 8.1 percent over last year, which is consistent with forecasts of an 8-9 percent increase in GDP for the year. The major question of whether this round of belt-tightening to control inflation will do more than shave a point or two off annual growth remains open.

4. Pakistan

The news out of Pakistan has been growing steadily worse for months now — last week was no exception. The endemic electric power shortage has been joined by a shortage of compressed natural gas (CNG). Sales of CNG were suspended on Thursday, Friday, and Saturday. Pakistan has some 2.7 million natural gas vehicles and 3,200 refueling stations – the highest in the world and nearly half the registered vehicles.

Riots protesting the power shortages, usually resulting in deaths and injuries, are reported almost daily in some Pakistani city. The country’s textile industry which was one of the mainstays of the economy, accounting for 60 percent of export revenue, is in tatters due to the rolling blackouts which sometimes last for 12 hours a day leaving tens of thousands jobless. Senior Pakistani officials estimated that 25,000 firms have been hit by the energy crisis with many going out of business and some 500,000 people are now unemployed.

The root cause of these problems is the failure of numerous past governments to anticipate the growth in demand while delaying new power plants and hydro dam projects. This has been compounded by drought conditions which have reduced hydro-electric power production and the high costs of imported oil, gas and coal. The government has acknowledged that the power cuts will continue for at least another seven years, but has no long term plan to increase energy availability. Pakistan has contracted to complete a gas pipeline to Iran, but completion is not scheduled until 2014. Such a pipeline would be a tempting target for the numerous dissident groups operating in the country.

Among the many problems that Pakistan faces is the theft of electricity by people connecting themselves to the power lines. In some areas it is estimated that 30 to 40 percent of the power is stolen – leaving the state-owned utilities unable to pay for their fuel. The government is considering increasing the penalties for power theft including high fines and prison terms. The retail tariff for electricity is still about 20 percent less than the cost of production adding to the problem.

With the economy spiraling downhill and energy shortages likely to increase, Pakistan seems sure to have further civil unrest with perhaps devastating consequences.

Quote of the week

“If you are a strong believer in the green economy and electric vehicles, then [lithium] demand is going to exceed supply by 2015-2016.”

— Peter Secker, CEO – Canada Lithium Corp.

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

  • Oil that spewed from an offshore drilling rig in northeastern China for two weeks last month has spread over 320 square miles, government officials acknowledged, amid public uproar over why it took so long for fishermen, local residents and environmental groups to be informed of the spill. (7/7, #25, #26)
  • Royal Dutch Shell will produce more gas than oil from 2012, Chief Executive Voser was quoted as saying. “The future belongs to gas. The known reserves will last for 250 years. Gas power plants complement renewable energies perfectly because power production can be adjusted to demand,” Voser told Swiss newspaper Finanz und Wirtschaft. (7/9, #7)
  • Amid the debate over raising the nation’s debt limit comes a vote in Congress on … light bulbs. The US House is going to try on Monday to block the federal government’s transition from traditional incandescent light bulbs to more energy-efficient options. (7/9, #15, #16)
  • A Japanese consortium including Mitsubishi has begun talks with a major Canadian energy company to jointly build a large plant on Canada’s Pacific coast to export shale gas to Japan. (7/9, #20)
  • Japan will require an estimated 55,000 b/d more oil over July-September to fuel its power plants, based on the latest assumption that none of the shutdown nuclear reactors in the country will be allowed to restart during summer. (7/7, #28)
  • Radioactive cesium-137 was found in Tokyo’s tap water for the first time since April as Japan grapples with the worst nuclear disaster in 25 years. The level was below the safety limit set by the government. (7/5, #26)
  • BP is seeking to end payments based on future losses from the $20bn compensation fund it formed in response to the fatal Macondo disaster, arguing they are unnecessary in the recovering Gulf of Mexico economy. (7/9, #21)
  • Some 1.3 million people have been driven off the UK’s roads this year as a result of rising motoring costs, according to new study. The staggering figure, released by Sainsbury’s Car Insurance, suggests one in 30 drivers have given up their cars over the past 12 months. (7/9, #24)
  • France raised the possibility for the first time of pulling out of nuclear power although its energy minister stressed that this was just one of many scenarios, not the one favored by the government. (7/9, #25)
  • Pakistan is to become a key buyer of Iranian natural gas at a time when relations with Washington are at their most strained in recent years. Work on extending the Iran-Pakistan gas pipeline will begin in the next six months and is set to be complete by 2014, according to Asim Hussain, the Pakistani natural resources minister. (7/7, #9)
  • For the third time in a relatively short span, the gas supply from Egypt to Jordan was interrupted because of sabotage. The explosion of the natural gas pipeline in the Sinai Peninsula is inevitably going to make it difficult for Jordan to meet its energy needs, already taxed by the summer season and the influx of expatriates and tourists. (7/5, #7) (7/7, #10)
  • Tullow Oil said it is progressing on plans for an Ugandan refinery with capacity of around 20,000 b/d in order to meet local demand for finished fuel products. (7/5, #18)
  • The state-owned Uganda Electricity Generation Co. shut down one of its thermal generators because of a fuel shortage. “We have run out of fuel because we are indebted to suppliers,” Managing Director Kiyimba said
  • An estimated 11 billion barrels of oil have been found off Namibia’s coast, with the first production planned within four years, mines and energy minister Isak Katali announced Wednesday. This could put Namibia on par with neighboring Angola, whose reserves are estimated at around 13 billion barrels and whose production rivals Africa’s top producer, Nigeria. (7/7, #18)
  • Transocean evacuated more than 100 workers from a deep-water drilling rig off the coast of West Africa Wednesday after it began taking on water. The company said that no one was injured in the incident off Ghana and that the rig, called the Marianas, was stable and wasn’t in immediate danger of sinking. (7/7, #19)
  • India’s imports of coal from South Africa fell 21 percent in the first half of 2011 from a year earlier while Chinese purchases rose 18 percent, according to India Coal Market Watch. (7/7, #20)
  • India is likely to pay an additional $6.8 billion more than budgeted in 2011/12 to state refiners as compensation for selling fuel at subsidized prices. Upstream companies and explorers — Oil and Natural Gas Corp , Oil India Ltd and GAIL — have to sell crude oil and products at a discount to retailers, which sell diesel, kerosene and LPG at government-capped prices. (7/7, #27)
  • After decades of waiting, commercial airlines have been given the go-ahead to use fuel made from algae, wood chips and other plants. On July 1, ASTM International, an American organization that sets worldwide technical standards for the airline and other industries, gave approval for carriers to mix fuel made from organic waste and nonfood plants with kerosene, which is conventionally used to power planes. (7/7, #33)
  • Eucalyptus leaves might soon be known for being more than just the staple diet of koala bears: Virgin Australia plans to turn the foliage into jet fuel. (7/6, #21)
  • US regulators said Tuesday that Shell can drill an exploratory oil well in its Appomattox prospect, the deepwater project in the Gulf of Mexico that environmental groups have targeted for a major legal test of post-Macondo permitting. The permit, approved Friday, allows Shell to drill 7,256 feet below the water surface, or 43% deeper than BP’s Macondo well. (7/6, #12)
  • In the next weeks and months, Lisa Jackson, the EPA administrator, is scheduled to establish regulations on smog, mercury, carbon dioxide, mining waste and vehicle emissions that will affect every corner of the economy. She is working under intense pressure from opponents in Congress, from powerful industries, from impatient environmentalists and from the Supreme Court, which just affirmed the agency’s duty to address global warming emissions, a project that carries profound economic implications. (7/6, #13)
  • Cheap and abundant natural gas has revitalized the Gulf Coast’s petrochemical industry, after demand for its plastic products took a beating in the recession. But some of the chemical comeback isn’t coming back to Texas. Discussions about the petrochemical industry’s growth are increasingly focused on the northeast, in the Marcellus Shale region. (7/6, #14)
  • The IEA dismissed any suggestion that its decision to release 60 million barrels of oil from strategic stockpiles was aimed to pushing oil prices lower. “We don’t have any price objective. It was not a price-motivated action and there are many other factors at play in the price formation and in the market which is still pretty volatile,” Didier Houssin, director of energy markets and security, told journalists in a telephone briefing. (7/5, #5)
  • Warming air from climate change is not the only thing that will speed ice melting near the poles – so will the warming water beneath the ice. Jianjun Yin of the University of Arizona and colleagues report the warming water could mean polar ice melting faster than had been expected. (7/5, #6)
  • Iran’s oil exports to India are continuing with no plans to halt supplies after a warning about delays in paying for the crude. “A warning was sent to indebted refineries but sending this letter doesn’t mean Iran’s oil exports to India were cut,” Mohsen Qamsari, the National Iranian Oil Co.’s head of international affairs, said on the Oil Ministry’s website. (7/5, #8)
  • The Iraqi parliament’s oil and energy committee has called for lawmakers to ban the Baghdad central government, as well as regional and provincial governments, from signing any new oil and gas contracts until a long-delayed hydrocarbon law is enacted. (7/5, #9, #11)
  • New York State environmental authorities have determined that hydraulic fracturing can be safe, but the first permits to apply the controversial drilling technique won’t likely be issued this year. (7/5, #29)
  • Britain may create a central stockholding agency for oil reserves following a warning that the country could face emergency stock shortages within the next 10 years, a spokesman at the Department of Energy and Climate Change (DECC )said.(7/5, #33)