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1. Oil and the global economy

After the brief euphoria following Beijing’s un-pegging of the Yuan on Monday, oil prices slipped lower for most of the week. On Friday, however, concerns about the effects the first gulf hurricane of the season might have on oil production sent prices sharply higher to close at $78.86, the highest since early May. As of Monday morning, it appears that Hurricane Alex will remain in the Western Caribbean where it will not be a threat to work on the leaking oil well or US oil production.

US crude inventories continued to increase during the week before last. American driving over the holiday weekend is forecast to increase by 18 percent over last year. This forecast sent gasoline futures up 7 cents on the NYMEX to close at $2.17 a gallon.

The general outlook for future economic growth in the US and EU does not look good, leaving the dynamic between stagnant OECD oil demand and more robust Asian demand in place. If the Yuan moves higher, dollar-denominated oil will be cheaper for China to import and should in the longer-run bolster demand, but the austerity measures being implemented across the EU could well reduce oil demand, thereby moderating any overall increase.

In a revised estimate, the IEA now forecasts annual demand growth for oil at just 1 percent per year through 2015, or 940,000 barrels a day this year, down from their earlier forecast growth of 1.9 percent, or 1.62 million barrels a day, in 2010. The Agency projects that global consumption will be 91.9 million b/d in 2015 as compared to 86.3 million b/d this year.

Car bombs continue in Baghdad as unusually high summer temperatures have led to serious electricity and water shortages, which in turn have led to some domestic unrest. With the Iraqi election from last March still not settled and no oil law in place, major increases in Iraqi oil production may be difficult to achieve in coming years.

2. The Deepwater Horizon

Developments last week

BP continued to collect about 24,000 of the 35,000-60,000 barrels that are currently estimated to be leaking from the well each day. For a brief time last week the cap that is collecting much of the leaking oil had to be removed for repairs after it was bumped by a remotely operated vehicle.

Most of the news last week centered on a Louisiana Federal Judge’s order that the administration’s temporary ban on deepwater drilling be lifted. The administration is appealing the ruling and none of the companies drilling in the Gulf are expected to resume operations until the litigation is settled. As US unemployment continues to grow, many feel that the risks of renewed drilling, especially in an era of super-caution on the part of the oil companies, are minimal in comparison to even the temporary loss of thousands of highly-paid offshore jobs.

After the judge’s order to lift the ban, Interior Secretary Salazar said he would issue a new order banning drilling that made clear the magnitude of the risks that were being taken and the federal government’s authority to issue the ban.

The furor surrounding the ban will increase the pressure on the administration to complete the investigation of the Deepwater Horizon explosion as quickly as possible and to lift at least parts of the drilling ban.

The near term

Provided Hurricane Alex does not interfere with BP’s oil capturing operations this week, new equipment being moved to the site could increase the daily oil collection rate to as much as 53,000 b/d by the end of this week. Plans are being prepared for a new collection system that could boost the amount captured to 80,000 b/d if that much oil is actually coming from the well.

In the meantime, progress is being made on the pair of relief wells that are being drilled to intercept and plug the leaking Macondo well. As the relief wells draw closer to their target depth, however, drilling must stop while the drill string is pulled to the surface and is replaced by electro-magnetic sensors that can detect electrical pulses sent down the casing of the blown well. While the relief wells are currently close to the depth required to block the original well, casing these wells and then locating the pipe to be blocked is expected to take another 4-6 weeks.

Although this week’s hurricane may not turn out to be much of a threat, we are just at the beginning of what is forecast to be an active hurricane season with new storms forming regularly for the next few months.

The economic impact

In the two months since the Deepwater Horizon explosion, the economic costs of the disaster continue to spread outward like ripples in a pond. The drilling moratorium has cost thousands of jobs. The collapse of BP’s stock value has endangered pension funds around the world. The seafood and hotel industries have been badly damaged. Last week British Prime Minister Cameron warned President Obama that BP could be destroyed which is not in anybody’s interest if the pressure is kept up. The Prime Minister is probably concerned that the US will seek to impose billions of dollars in fines on BP in addition to the billions it will cost the company to stem the leak and pay for the damages.

The one point that is emerging from the furor surrounding the disaster is that the cost of deepsea well drilling is bound to go much higher as governments and the companies themselves introduce tougher drilling rules and emergency preparations. Insurance costs for offshore drilling are increasing rapidly.

Environmental impact

With oil continuing to flood the Gulf, the cost to marine life continues to expand at deeply impactful proportions. The Fish and Wildlife service reports a growing toll of birds and marine mammals being found along the coast and oil is starting to reach the beaches of northern Florida. People are increasingly worried about what will happen if a large hurricane passes across the spill this summer.

The future of BP

As BP’s liabilities grow, not only Britain’s Prime Minister but many others are worried about the company’s future with earnings likely to be tied up for many years paying off claims and government fines. Capital for new drilling projects will become increasingly scarce and there is much talk of BP’s selling off major assets to remain solvent.

In recent weeks, BP has upped its cash and lines of credit from $15 to $20 billion dollars as the credit-default swap market continues to believe that the risk of a BP default within the next year is growing. Many analysts point out that a bankrupt or significantly weakened BP would be a major threat to US energy security.

3. Venezuela continues nationalizations

Last week, Caracas nationalized 11 drilling rigs belonging to the US firm Helmerich & Payne. The nationalization came after the company halted drilling in a dispute over $49 million that PDVSA

owed it. In 2007, President Chavez nationalized billions of dollars worth of heavy crude facilities and last year took over dozens of small oil service companies.

Venezuela’s Oil Minister said the government would pay for the nationalized rigs, but would not allow equipment to stand idle while payments to private firms were being disputed. The minister noted that five additional rigs being operated by a subsidiary of Chevron were also in danger of being nationalized. Since oil prices collapsed in 2008 PDVSA has become notoriously slow in paying its bills to foreign oil service providers. Last week the company announced that it had reached settlements with 32 companies that were owed money.

In the long run this frequent resort to nationalizations will only weaken Venezuela’s oil industry –reducing production and driving away private foreign investors and service providers.

Quote of the Week

  • “The data resoundingly rejects … peak oil. In all aspects, I find the peak oil model an inadequate empirical representation of historical patterns. This is not to say that oil production may eventually peak. It does say that the peak oil model will have little, if anything, to say about it.”

— John R. Boyce, University of Calgary economist

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

  • Brazil‘s state-controlled oil company said its seventh well in the offshore Tupi field confirmed the potential of light oil in pre- salt reserves. The seventh well reinforces earlier estimates that Tupi holds 5 billion to 8 billion barrels of recoverable light oil and natural gas, the company said. (6/26, #4)
  • Mexico’s Pemex said Friday that crude oil production during the January-May period dipped 1.9% year-on-year to an average of 2.601 million barrels a day. Yet it appears that Pemex’s crude production is starting to bottom out after a steady decline since it peaked at 3.4 million barrels a day in 2004. Pemex’s crude exports, most of which go to the U.S., hit the highest level in two years at 1.591 million barrels a day in May. (6/25, #10)
  • Oil and gas production in Russia will start declining gradually after 2011 if the government does not change laws to stimulate geological exploration, LUKoil head Vagit Alekperov said on Wednesday. (6/21, #16)
  • India’s government fears that substantial deregulation of petroleum product prices will stoke inflation. It refuses to see that countries without price controls-the US, Europe, Japan, Philippines-have just 2-3% inflation while India with all its controls has 10% wholesale and 14% consumer price inflation. (6/26, #5)
  • Kazakhstan plans to resume an export tax on crude oil and begin the levy for certain metals to increase government revenue. (6/22, #8)
  • Under the pressure of earlier Western sanctions, Iran has prepared for new sanctions over the past four years by reducing its dependence on foreign imports of refined oil products from about 40 percent of its domestic needs to just under 30 percent, according to analysts. (6/24, #3)
  • State-run Indian Oil Corp, a large oil retailer, is incurring a daily revenue loss of Rs1.15 billion ($24.9 million) on fuel sales in the domestic market, its chairman told reporters on Wednesday. BM Bansal said petrol prices are currently Rs3.2 per litre below desired market prices, while diesel prices need to be raised by Rs3.4 a litre. (6/23, #9)
  • In China, oil prices rose 2 percent early in reaction to the government’s moves to loosen its exchange rate, but analysts said the knee-jerk reaction faded, as costlier exports may slow exports, reducing the manufacturing sector’s oil needs. (6/22, #12)
  • The number of US rigs drilling for oil and natural gas in the U.S. climbed to 1552 this week as 13 were added onshore. (6/25, #20)
  • About three miles off the coast of Alaska, BP is moving ahead with a controversial and potentially record-setting project to drill two miles under the sea and then six to eight miles horizontally to reach what is believed to be a 100-million-barrel reservoir of oil under federal waters. But BP’s project, called Liberty, has been exempted as regulators have granted it status as an “onshore” project even though it is about three miles off the coast in the Beaufort Sea on a 31-acre artificial island built by BP. (6/24, #15)
  • Oil companies don’t have much incentive to measure spills accurately, and government officials haven’t always needed to get a reliable count. (6/26, #10)
  • The notion that the world is approaching “Peak Oil” is just not supported by the facts. We may still be getting closer to a peak, but the world has far more untapped oil than anyone could have imagined 10 years ago. (6/23, #28)
  • Norway’s natural gas should secure the Norwegian economy in an era of rapidly falling oil production. That is the government’s standard response to questions about the near future. But researchers at Uppsala University have presented results indicating that Norway’s gas production will decline rapidly. (6/22, #24)
  • Pakistan’s foreign minister expressed hope the sanctions against Iran over its nuclear program would not affect his country’s gas pipeline deal with Tehran. (6/22, #7)
  • Liquefied natural gas traders are taking advantage of the lowest shipping rates in five years and rising prices in the U.K. to store fuel on tankers and profit from higher values in coming months. (6/22, #5)
  • Encana Corp. and China National Petroleum Corp. signed an agreement under which they would negotiate a joint venture to develop Encana’s Northeast British Columbia gas plays. (6/26, #13)
  • Natural gas will provide an increasing share of America’s energy needs over the next several decades, doubling its share of the energy market to 40 percent, from 20 percent, according to a report to be released Friday by the Massachusetts Institute of Technology. The increase, the report concluded, will come largely at the expense of coal and will be driven by abundant supplies of natural gas. (6/26, #12, #14) [Editor’s note: consider us skeptical, due to potential cost discrepancies between current and future shale gas.]
  • Natural gas futures show the hurricane season in the Gulf of Mexico will do less damage to production than in 2005 as supplies from offshore wells decline. (6/25, #19)
  • Natural gas producers are cutting back production from wells in the Haynesville Shale, a prolific natural gas-bearing rock formation in Texas and Louisiana, as a way of boosting the overall efficiency and life span of those wells. (6/22, #19)
  • Overwhelmingly, Americans think the nation needs a fundamental overhaul of US energy policies, and most expect alternative forms to replace oil as a major source within 25 years. Yet a majority are unwilling to pay higher gasoline prices to help develop new fuel sources. (6/22, #26)
  • The Obama administration on Tuesday backed a proposal to spend up to $6 billion more on subsidies for electric vehicles, amid renewed interest on Capitol Hill in measures to cut petroleum consumption in response to the Gulf of Mexico oil spill. (6/23, #29)
  • Over the past several months, as utilities have rolled out smart meters in homes throughout the country, they’ve been met unexpectedly with consumer backlash. Shortly after roll-out, reports starting surfacing that consumers were getting a noticeably higher bill the very next month. The smart grid industry is moving quickly to respond. It’s forming industry groups and hosting conferences and microsites focused on consumer education, but it’s playing a game of catch-up (6/26, #16)
  • California is headed for another showdown over greenhouse gases. A citizen’s ballot initiative approved Tuesday could suspend AB32, the state’s landmark 2006 law mandating a 25 percent reduction in industrial greenhouse gases by 2020. Backed by manufacturers and Texas oil companies Valero Energy Inc. and Tesoro Corp., the ballot initiative would halt enforcement of the law until California unemployment, now at over 12 percent, sinks to 5.5 percent for at least a year. (6/25, #18)
  • A change in Italy’s public incentives for renewable energy investment has brought financing for the sector to a halt, stunning aspiring players in the green economy that many hoped would be a driver of growth. (6/23, #26)