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1. Oil and the global economy

Crude futures jumped 5 percent last week, moving from $72 to close over $76 a barrel on Friday. Oil prices continue to be linked with the equity markets which in turn are linked to news about the prospects for economic recovery. Although news on the global economic situation remains decidedly mixed, investors continue to buy equities on snippets of good news in hopes that a substantial economic rebound is underway. Last week optimism pushed the markets higher as the IMF forecast a better year ahead, with the global economy growing by 4.6 percent in 2010, and the steady increase in US unemployment seemed to moderate a bit.

In addition to the prospects for an economic rebound, market fundamentals played a role in last week‘s price jump. US crude inventories fell by 5 million barrels and Chinese oil imports continued to rise. There are signs that the world oil supply may be tightening. In the last few weeks much of the crude that had been sitting in floating storage was sent off to customers around the world. Forecasts for OPEC production during July show only a slight increase over June‘s production.

The embargo of Iran continues to make news as major EU and other oil companies are cancelling contracts with Iran. Iran‘s airliners appear to be having difficulty refueling in some countries. In the meantime Turkey and China seem to be Iran‘s major suppliers of imported gasoline. Tehran is now saying that increasing oil prices will offset any damage done by the US and UN sanctions.

2. The Deepwater Horizon Saga

Developments: After a two-week delay caused by bad weather, BP appears to be on track in its efforts to install a new cap on the Macondo well. If all goes well, a big IF, all the flow could be captured and piped to the surface for disposal by the end of the week. There is even a possibility that the new cap may be strong enough to contain the flow should a hurricane interrupt surface operations before the relief wells have sealed the hole. The scheduled date for permanently stopping the leak is still mid-August, but if all goes well this could happen before the end of July.

In the meantime, the old cap has been removed as preparations for installing the new cap are being made and nearly all of the oil flow is spilling directly into the Gulf.

The economic impact: With the end of the leak in sight, attention is turning to the government‘s six-month moratorium on further drilling. Even though a federal appeals court upheld the lower court‘s decision to allow drilling to resume, companies drilling in the Gulf are reluctant to resume operations until the government officially gives them the go ahead. The administration is currently preparing revised drilling rules which should be announced this week.

In the meantime the political furor over the spill and drilling moratorium continues on numerous fronts. A dispute has broken out over the competence and ideological leanings of President Obama‘s commission investigating the spill. None of the commission members have any experience in petroleum engineering and some have already spoken out against offshore drilling. In the meantime, the EIA estimates that a six-month moratorium will cut Gulf oil production by 31,000 b/d in the fourth quarter and by 82,000 b/d in 2011.

The EU‘s Energy Commissioner has come to the administration‘s aid by recommending that European countries stop issuing deepwater drilling permits until the results of the investigation are known.

Environmental impact: The US Navy has started low-level blimp patrols over the region of the oil spill looking for slicks and distressed wildlife. Scientists are still debating the spill‘s ultimate impact on the Gulf. Some say the spill‘s effects will pass quickly while others fear the Gulf‘s already fragile ecosystem will be pushed over the brink, causing serious long-term damage to the seafood industry.

The future of BP: With the total cost and liabilities of the blowout now estimated to be upward of $30 billion, rumors are rampant about what will happen to BP. Anadarko Petroleum, which owns 25 percent of the Macondo well, is refusing to pay for its share of the cleanup saying the whole disaster was caused by BP‘s reckless behavior.

BP executives have been running around the Middle East in an effort to raise money from sovereign wealth funds by selling off a stake in the company, possibly to Abu Dhabi. The papers are full of reports about what BP will or will not do. Selling off assets, including its stake in Alaska Prudhoe Bay for $12 billion, is a popular theme. BP has denied a Sunday Times report that a takeover by Exxon is under consideration and insists it can stay afloat without new cash to pay for the oil spill.

3. China

Beijing‘s thirst for foreign oil continues unabated with June imports setting a record of 22.1 million tons (5.3 million barrels per day), surpassing the previous record of 20.9 million tons set in April. Purchases of crude in the first half of 2010 were 117 million tons, 30 percent more than last year. The Chinese may be taking advantage of the recent drop in oil prices to fill newly-built storage tanks.

Despite a 44 percent year-over-year surge in exports last month, most observers doubt that increases at this pace can continue for very long. There are already indications that the pace of manufacturing growth is starting to slow as the government dampens lending. Car sales in China are at the lowest level in 15 months and industrial use of electricity was down in June.

With new oil supplies just barely balancing worldwide oil depletion, it is clear that increases in Asian oil consumption at anywhere close to current rates cannot continue much longer without leading to a major spike in prices. Even the much talked about double-dip recession is unlikely to reduce OECD demand for oil sufficiently to offset China‘s growing demand. Be they weeks or months away, higher oil prices seem to be in the offing.

Quote of the Week

  • Another reason for the timidity on reducing U.S. consumption is that the easiest change, a tax on oil, is the riskiest politically. “A price signal on oil – that could be your climate change policy; that could be your energy policy. But it’s difficult because it’s not politically expedient.”

Matthew Kotchen, professor of environmental economics and policy, Yale University

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

  • Ecuador exported 332,742 barrels a day between January and May, down slightly from 335,417 barrels a day a year earlier. (7/11, #6)
  • Saudi Arabia’s King Abdullah told Saudi scholars studying in Washington that he had ordered all Saudi oil exploration to cease “in order to keep the earth’s wealth for our sons and grandsons‖. Saudi Arabia’s domestic demand will rise to 8.3 million barrels a day of oil equivalent in 2028 from 3.4 million barrels in 2009 unless the kingdom becomes more efficient, Aramco’s al-Falih said in April. (7/5, #5)
  • A survey of 21 predictions (from national governments, oil producers, energy analyst firms and retired oil geologists and oil engineers) shows a decline in global oil production beginning anytime up to 2020. Of these 21 predictions, the mean statistical date for global oil production decline is 2013, just three years from now. (7/9, #27)
  • The first completed segment of the $26 billion East Siberian-Pacific Ocean pipeline is boosting competition between Russia and the Middle East, the world’s two biggest oil suppliers. Russia is sending record amounts of oil to Asia as refiners in South Korea and Japan increase purchases from a source that’s three weeks closer by ship. (7/8, #20)
  • US oil imports from Russia have gone from zero to an estimated 100,000 barrels a day in a matter of months since a pipeline bringing crude from Siberia came online. These shipments have held down fuel prices on the US west coast. Traders have been caught off guard because the oil pipeline was built to serve fast-growing Asian markets. (7/6, #21)
  • Russian oil producer Lukoil plans to drill twelve wells off the coast of Guinea in West Africa over the next two and a half years, the company said Monday. (7/6, #8)
  • The recent oil finds off the Brazilian coast, although huge, involve highly complex drilling operations if they are to be exploited. They lie about 7km below the seabed, which is about 2km below the ocean surface. But if all goes according to plan, Brazil could be producing 5.7 million bpd by 2020. (7/8, #8) [Editor’s note: we wouldn’t bank on that 5.7 mb/d just yet.]
  • BP’s oil spill in the Gulf of Mexico should be considered an accident and the Brazilian government will wait for results from investigations to see if more stringent regulations are needed in Brazil’s offshore drilling sector, Marcio Zimmermann, Brazil’s Mines and Energy Minister, said last Tuesday. (7/6, #9)
  • Several service company owners in Venezuela report that they were owed millions by PDVSA before the nationalization. Since being expropriated they haven’t been paid anything at all. Minister Ramirez now says they won’t be paid because they’re “golpistas”. (7/9, #12)
  • Helmerich & Payne is issuing press releases that warn other oil-field-services companies doing business in Venezuela after the drilling contractor saw 11 of its idled rigs expropriated last week by the government of President Hugo Chavez. (7/7, #7)
  • The Kurdistan Workers’ Party has claimed official responsibility for bombing a section of Iraq‘s secondary oil export pipeline in southeastern Turkey in a show of force that highlights how Iraq‘s unresolved political conflicts continue to complicate oil development. (7/6, #4)
  • Even as the US imposes new sanctions on Iran, one of the biggest gaps in the American strategy is in Iraq, where hundreds of millions of dollars in crude oil and refined products are smuggled over the mountains of Iraqi Kurdistan every year. (7/9, #9)
  • Iran is to halt the sale of subsidized petrol from late September as part of plans to phase out subsidies on energy products, ISNA news agency reported on Monday. (7/7, #5)
  • Global deepwater production capacity in 2,000 feet (610 m) of water or greater has more than tripled since 2000, according to research compiled by IHS CERA, rising from 1.5 million b/d in 2000 to more than 5 million b/d in 2009. Projections before the April 20 blowout in the Gulf of Mexico showed deepwater production capacity had the potential to rise to 10 million b/d by 2015, a rate of expansion well above the expected average rate of global supply growth. (7/7, #24) [Editor’s note: -Had the potential‖ struck us as an enormous reach.]
  • Transocean drills in some 30 countries, employs more than 18,000 people, and owns nearly half of the 50 or so deepwater platforms in the world. For the last two years, BP has been Transocean’s largest customer, accounting for 12 percent of its $11.5 billion in operating revenue in 2009 (7/8, #18)
  • Chinese firms seeking a toehold in Canada‘s oil sands, the largest known crude deposit outside the Middle East, have opted for joint ventures and partial stakes to avoid the kind of political uproar sparked when CNOOC tried to take over Unocal in 2005. (7/8, #19)
  • A battle over whether the U.S. should curb its use of oil produced from Canada’s oil sands is straining ties between the countries and comes amid a wider debate about the safest and cleanest ways to extract fossil fuels. This year, Canada’s oil sands are poised to become the biggest single source of imported crude to the U.S. (7/8, #18)
  • BP probably will postpone exploratory drilling at the Liberty field off Alaska’s coast until next year, as it responds to inquiries from federal and state regulators about the safety of the enterprise, a company spokesman said Wednesday. (7/8, #17)
  • Florida Gov. Crist has called a special session of the state Legislature to get a constitutional ban on offshore oil drilling in Florida waters on the November ballot. Crist on Thursday said the session will be held July 20 to July 23. (7/9, #23)
  • Israeli plans to drill for gas in the Mediterranean Sea have alarmed Lebanon, which says it also has major gas reserves but may lose out because it lags behind in exploration and the hostile neighbors have no sea border. The discovery of the Leviathan prospect in Israeli waters, which may have deposits of 16 trillion cubic feet (tcf), has sent Lebanese politicians scrambling to approve an energy law. (7/11, #4)
  • Onshore natural gas operations in the United States face a serious and distracting problem. Hydraulic fracturing – the now common industry process of injecting water and chemicals into reservoirs to fracture rock and free up gas and oil – is in the cross hairs of shareholders and environmental groups, and is drawing scrutiny from Congress, which is considering increased regulation. (7/7, #22)
  • A push in the US to cut emissions of carbon dioxide by 20 percent, by replacing coal with gas to generate electric power, would strain domestic supplies of natural gas and require a new supply of energy from nuclear and renewable sources for power generation, according to a study from Rice University‘s James Baker Public Policy Institute. The study says the development of gas supply able to maintain the shift from coal to gas is doubtful. (7/8, #15)
  • World nuclear power generation slipped again in 2009, continuing its slide since its peak in 2006. The data show peak production in 2006, with declines each year since 2006. With aging facilities, it may very well be a pattern we can expect in the future, at least in the parts of the world with aging nuclear facilities. (7/11, #24)
  • The differences in views about China’s oil demand outlook have enormous policy implications. If the EIA is right, and China will forget how to grow, then pressures on the oil supply will be modest. On the other hand, if China is to develop like other countries in Asia, the pressure on the oil supply will be crushing, with oil shocks, recessions, and war all conceivable outcomes. The energy–as well as the economic and security–policy differences between the two scenarios are like night and day. (7/8, #9)
  • China’s Premier Wen Jiabao has promised to use an “iron hand” this summer to make his nation more energy efficient. The central government has ordered cities to close inefficient factories by September. (7/5, #9)
  • China plans to extend a tax on oil, gas and coal output to the entire nation, stepping up efforts to raise funds for development of poorer inland provinces in a move that will reduce earnings for resource producers. (7/8, #9)
  • A searing heat wave that has scorched much of China has brought the country’s electricity generation to its highest level ever, up 6 percent from last year‘s record high. (7/7, #8)
  • In India, protests against a recent increase in fuel prices shut down markets, schools, airports and businesses across the country on Monday, and thousands of people were arrested as violence flared in some cities. (7/6, #12; 7/8, #10; 7/5, #7)
  • As politicians around the world begin to toil with the decision of whether to approve new dirty coal and nuclear plants, energy efficiency will become more and more attractive as a solution to the growing energy crisis. (7/8, #23)
  • Alternative energy will never -pencil out‖ financially until it‘s too late: wild price swings will always undermine the financial viability of alternative energy. (7/8, #24)
  • Soon after President Barack Obama took office, his administration received a forceful warning about the dangers of offshore oil drilling. The alarm was rung by a federal appeals court in Washington, D.C., which found that the government was unprepared for a major spill at sea, relying on an “irrational” environmental analysis of the risks of offshore drilling. Despite its pro-environment pledges, the Obama administration urged the court to revisit the decision. Politically, it needed to push ahead with conventional oil production while it expanded support for renewable energy. (7/6, #21)