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1. Oil and the Global Economy

Oil prices continued to move upwards this week from the low of $70 two weeks ago. On Wednesday oil touched $78, then closed at $77.18 on Friday. US crude inventories rose by 1.7 million barrels the week before last, raising concerns about long-term oversupply. The usual factors of Chinese economic growth, US and EU economic stagnation, the Euro, and the EU debt crisis balanced out to produce limited up and downside price movements.

The IEA continues to warn that global oil output could fall by 900,000 b/d by 2015 if more countries follow the US lead and impose moratoria or much harsher regulations on deepwater drilling.

Record summer temperatures are settling into the Persian Gulf, setting new records for electricity and water demand. Kuwait reported desert temperatures above 53oC (nearly 130oF) last week. Reduced water flow in its major river is allowing salt water to push deeper into Iraq – inflicting heavy damage on agriculture in the southern part of the country. Record low water in the Tigris and the Euphrates has forced the closure of hydro electricity plants, adding to the power shortages which in turn led to riots in Basra last week. This situation suggests that the Iraqis may have trouble meeting their ambitious goals for major increases in oil production.

The Saudis reported last week that during 2009 56 percent of their exports went to Asian markets. The US share of Saudi exports dropped from 20 to 14 percent between 2008 and 2009 while the EU’s share dropped from 12 to 10 percent.

2. Deepwater Horizon

Tar balls from the oil leak have begun to wash ashore as far east as Panama City in northern Florida. Gulf fishermen are now saying that the economic impact of the spill is worse than Hurricane Katrina. For a while last week, BP was capturing as much as 25,000 of the 35-60,000 b/d that are now estimated to be leaking each day. BP is working on enhancements to the collections systems that could increase the total collected to as much as 50,000 b/d by the end of June and 80,000 b/d by mid July. The plans call for a new cap that will be sealed over the blowout preventer to capture all the escaping oil and bring it to the surface. Equipment and ships for the new capture system are currently enroute from Brazil and the North Sea.

The political impact

Most of the activity surrounding the oil leak last week was political, with President Obama giving a prime-time nationwide speech on efforts to solve the problem; the Congress raking BP’s CEO over the coals; nearly everybody in Washington and the affected state capitals trying to gain some form of political advantage from the incident; and Anadarko, BP’s partner in the venture, saying that BP should pay all the costs as the firm acted recklessly.

BP agreed to pay $20 billion into a fund that would be administered by a third party and would get the company out of the controversial claims adjudication business which is likely to go on for years. After testifying before Congress, BP’s CEO withdrew to England where he will no longer have an active role in managing the spill.

President Obama sought to make the case that the oil spill shows why his energy legislation needs to be passed. This brought instant rejoinders from the financial press and his political opponents who maintain that the government’s role should be to stop the leak as soon as possible, keep the oil from reaching the shore, and lift the drilling moratorium and onerous regulations which are only making the situation worse. This debate is likely to continue through the November elections.

The longer term

Outside observers are beginning to question both the duration and the ultimate costs of the Deepwater Horizon crisis. BP and the government continue to imply that with the “completion” of the relief wells in early August, the leak will be sealed and the crisis over. Last week BP announced that the first of the relief wells is ahead of schedule and should be closing in on the leaking well soon.

Drilling experts note that while technologies have improved, the last relief well which was drilled in the Timor Sea last year took five tries before the borehole was located. It is still extremely difficult to intersect a foot-wide bore hole in bedrock. In another incident off Mexico in 2009 it took 4 months to seal a leaking well after the relief wells were “completed.” BP has ultra-modern drill bits that contain numerous sensors scanning the bedrock ahead of the drill. But lurking in the background is also the possibility of hurricanes interrupting the relief well effort.

The cost of the spill continues to increase. To cover that cost, the London Sunday Times reports that BP will raise $50 billion from bond sales, bank loans and asset sales. If civil and criminal fines are eventually assessed by the government, the costs could reach into the hundreds of billions, threatening a company even as large as BP.

The US Government Accountability Office has expressed concern as to whether the US government has the ability to monitor and regulate increasingly complex deepwater drilling operations to ensure safe operation of the leases.

As the full impact of what has happened in the Gulf sinks in, financial analysts are beginning to predict that the explosion will have consequences spanning many years and could change the nature of the oil industry. Just the deepwater drilling moratorium, which is due to last until November unless lifted sooner, will have major consequences for the availability of oil within the next few years.

On the plus side, oil rig builders in Korea and Singapore are looking forward to good years as tougher regulations may force a wholesale replacement of aging drilling rigs over the next decade.

As the flow of oil from the leaking well seems to be increasing, some observers are beginning to worry about the integrity of the well’s casing. Should it crack before the relief wells seal off the flow, we could be in for an extended period, some are talking several years, of leaking oil.

3. Peak oil and the President’s speech

After assuring the nation that his administration was indeed doing everything possible to stop the leaking oil and to mitigate the effects of the spill on the economy of the Gulf, President Obama came as close to admitting publicly that the nation is facing a peak oil crisis as any President yet. “After all, oil is a finite resource. We consume more than 20% of the world’s oil, but have less than 2% of the world’s oil reserves….For decades, we have known the days of cheap and easily accessible oil were numbered. For decades, we have talked and talked about the need to end America’s century-long addiction to fossil fuels….And for decades, we have failed to act with the sense of urgency that this challenge requires.”

In the speech, the President never once uttered the words “peak oil” which have apparently been relegated to the niche in administration’s lexicon for topics too potentially explosive to handle such as depression, deflation, or market crash.

After telling us we had a long-term problem and that his administration has been working on it since day one, the President called for rapid passage of the pending energy and climate bills. This of course brought forth strings of vituperation from opponents of these bills who feel they are unneeded and unaffordable.

If nothing else, the speech showed that the President indeed grasps the general idea of peak oil but perhaps not the real urgency of the situation. This will have to wait for higher gas prices and shortages.

Quote of the Week

  • “What some observers call the shale gas ‘revolution’ might turn out to be no more than one of those mammoth ‘spin’ jobs that are mainly concerned with increasing somebody’s money and power. Personally, for reasons given below, I remain skeptical to a large part of the shale gas song-and-dance, but admittedly I could be completely wrong.”

– Ferdinand Banks, energy economist and widely published author

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

  • In May 2010 world production of all liquid fuels decreased by 570,000 b/d from April according to the latest figures of the International Energy Agency (IEA), resulting in total world liquid fuels production of 86.31 million b/d. (6/16, #23)
  • In China, aggressive asset purchases and mergers will push net overseas oil and gas production by their three large national oil companies to a record 1 million b/d equivalent this year, says a study by Wood Mackenzie. Aggressive activity continues for China National Petroleum Corp. and its overseas unit PetroChina, Sinopec Group, and China National Offshore Oil Corp. WoodMac called international activity by those companies over the past 12 months “intense.” (6/18, #8)
  • Nigeria cautioned Exxon Mobil about oil spills off the Niger Delta, saying while the output lost was minor it was worried by their frequency and the damage they could do to fragile coastal communities. Africa’s biggest energy producer has had just over 2,400 oil spills involving its foreign oil partners since 2006. (6/16, #6)
  • Big oil spills are no longer news in Nigeria. The Niger Delta, where the wealth underground is out of all proportion with the poverty on the surface, has endured the equivalent of the Exxon Valdez spill every year for 50 years by some estimates. The oil pours out nearly every week, and some swamps are long since lifeless. (6/17, #9)
  • BHP Billiton is capable of spending as much as $20 billion to acquire Gulf of Mexico assets, including BP project stakes that may come up for sale after the worst oil spill in US history, Citigroup Inc. said.
  • The chairmen of four of the world’s largest oil companies broke their nearly two-month silence on the major spill in the Gulf of Mexico on Tuesday and publicly blamed BP for mishandling the well that caused the disaster. (6/16, #16)
  • The oil spill in the Gulf of Mexico has triggered fresh questioning inside the oil industry about the safety of deep offshore drilling, one of Britain’s top inspectors has told the BBC. (6/16, #20)
  • The governments of Norway, Kuwait, China and Singapore have lost 3.4 billion pounds ($5 billion) on BP’s share slide since the Gulf of Mexico oil spill started in April. (6/16, #22)
  • Libya wants assurances from BP after its handling of the Gulf of Mexico oil spill but will allow it to start deep-water drilling in the Mediterranean, the country’s top oil official said Monday. (6/15, #4)
  • Mexico’s state-owned oil company Pemex produced an average of 2.572 million b/d of crude from June 1 to June 13, a dropoff from earlier this year. The National Hydrocarbons Commission published preliminary figures on its website, showing lower output at major fields compared with May and a slip from an overall average of about 2.6 million b/d this year. (6/19, #5)
  • European Union governments will target Iran’s oil and gas industries in backing US calls for widened sanctions against the Iranian nuclear program. (6/17, #5)
  • Traditional fossil fuel resources face serious supply constraints and an oil supply crunch is likely in the short-to-medium term with profound consequences for the way in which business functions today, according to a recent report from Lloyd’s Insurance and Chatham House. (6/15, #17)
  • The BP oil spill in the Gulf of Mexico is unlikely to create enough momentum to pass a comprehensive climate bill sought by President Barack Obama, say leading Senate Democrats. Many Democrats don’t want to vote in this election year on whether to cap the greenhouse-gas emissions linked to climate change, saying they prefer to work in the coming months on legislation directly responding to the spill. (6/16, #19)
  • America’s Plan A for the future of its oil supply was to reverse the nearly 40-year decline in domestic oil production. Ironically, oil production in the Gulf had climbed back to pre-Katrina levels only months before the blowout at the deep-water Macondo well became America’s all-time worst environmental disaster…Plan B can only be less oil consumption. (6/17, #23)
  • US exploration and production (E&P) expenditures are now expected to rise at a faster rate than previously forecast, with an 18 percent spending increase to $85 billion among 220 companies surveyed, according to the mid-year update to the Barclays Capital’s Original E&P Spending Survey. (6/19, #4)
  • The number of rigs drilling for oil in the US climbed by 12 this week, but the gas rig total was nearly unchanged despite rising prices for the fuel. The total number of oil and gas rigs increased to 1,539, according to data from oil-field services company Baker Hughes. (6/19, #22)
  • U.K. natural-gas is headed for its biggest second-quarter rally-up 54 percent as European buyers drain fuel at a record pace and North Sea production wanes. Gas for next-month delivery has gained 54 percent since the end of March. (6/16, #21)
  • In Canada, the conventional gas reserve base is shrinking, and in the near future more equity or debt will be needed to fund replacing the gas produced today, according to a report from the Ziff Energy Group in Calgary. The report notes that production from unconventional reservoirs is moderating the Western Canada decline but not arresting it. Low prices for gas raise questions about competitiveness. (6/15, #16)
  • The 16 percent jump in natural gas prices in the past month may prompt US power producers to move to coal, as rising temperatures boost air-conditioning demand. Gas surpassed $5 per million British thermal units yesterday in New York for first time in 16 weeks. (6/15, #13)
  • British businesses need to invest in measures to cope with flooding and drought in the coming decades even if substantial reductions in greenhouses gas emissions are achieved. That is the stark warning from the insurance industry today after a new report from the Met Office warned that global water cycles will continue to be disrupted in the coming decades even if average temperatures stabilize and begin to decrease. (6/18, #18)
  • Iran is ready to resume stalled nuclear talks with major powers if conditions Tehran will announce soon are met, President Ahmadinejad said a week after the country was hit by new U.N. sanctions. (6/17, #6)
  • Power generated by burning wood, plants and other organic material, which makes up 50 percent of all renewable energy produced in the United States, according to federal statistics, is facing increased scrutiny and opposition. That, critics say, is because it is not as climate-friendly as once thought, and the pollution it causes in the short run may outweigh its long-term benefits. (6/19, #26)
  • A Hong Kong company that is partly owned by the Chinese government has quietly purchased a 5.1 percent stake in the only American-owned provider of enriched uranium for use in civilian nuclear reactors. (6/19, #6)