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1. Oil and the Global Economy

For four days last week oil prices hovered around $75 depending on the latest report on economic growth prospects in the US, EU, and China. On Friday the US jobs report showed, that aside from temporary census-taker hiring, there were almost no new jobs created in the US during May. This report sent oil prices down $3.10 on Friday to settle at $71.51. A falling Euro, news of a Greece-like financial crisis developing in Hungary, and weak equity markets added to downward pressure.

US commercial crude inventories fell the week before last as did gasoline inventories. US consumption of petroleum products over the preceding four weeks is up by 8.1 percent compared to last year. Numbers like these contributed to the oil market’s strength earlier in the week. MasterCard reported that US gasoline consumption in late May was the highest since 2007. Retail gasoline prices in the US have fallen 19 cents a gallon in the last month, but are still 15 cents above last year’s levels.

OPEC output for May is reported to be up slightly, with gains in Iraqi production balancing falling production in Nigeria.

2. Deepwater Horizon

On Thursday BP succeeded in placing a containment cap over the roughly sheared-off riser pipe in an effort to trap and bring to the surface as much of the oil as possible. By Sunday morning, BP CEO Hayward was announcing that 10,000 b/d of oil was being captured. As the blowout was estimated to be spewing 12,000-19,000 b/d before the riser was cut off, and still more after that, it is not clear if BP is capturing “the vast majority” of the spill or less than half.

This effort will be the last to control the well before a pair of new relief wells that are being drilled to intercept and cement-in the oil flow from the leaking well. BP says these relief wells should be completed in August, but outside observers warn that locating a well pipe thousands of feet below the seabed is difficult and it may be months before the well is permanently closed.

Another problem will be the 2010 hurricane season that has just started and already is forecast to be unusually active. Should a hurricane approach the oil capture rig and the rigs drilling the relief wells, operations will have to be suspended for a week to ten days. This would allow the full quantity of the leak to resume flowing into the Gulf.

The environmental impact

Last week oil from the spill started to appear at Mississippi’s barrier islands and the beaches of Florida’s northern panhandle. Thus far the damage to beaches has been minimal. These beaches are far easier to clean than Louisiana’s marshes and estuaries. One third of the Gulf’s federal waters have been closed to fishing and the count of dead and injured birds and marine animals is climbing.

While the containment cap may have reduced the flow into the Gulf, no end to the problem is in sight and marine scientists are starting to warn of long-term consequences. A combination of the oil and the 1 million gallons of dispersant that have been sprayed into the Gulf could create giant dead zones where no sea-life can survive. The region’s eco-system could be disrupted for decades. There are three extensive deep-water reefs lying directly below the oil slick. Marine scientists are starting to speak of the possibility of marine life being wiped out along hundreds of miles of the Gulf Coast.

Last week the Obama administration gave in to demands from Louisiana Governor Jindal that a 45 mile sand berm be built along Louisiana’s coast. Federal engineers and scientists, however, are skeptical that the proposed non-continuous berm will do any good and that it might simply trap oil in the wetlands.

New supercomputer studies say it is very likely that ocean currents will carry oil from the spill around the tip of Florida and thousands of miles up the US East Coast this summer. Some are saying that the fragile wetlands, which are used by three quarters of US waterfowl and 90 percent of the Gulf’s marine species, could be damaged for a generation.

The economic impact

So far tourism, seafood, and oil well drilling are the three industries which have been hit hardest by BP’s oil spill. While beaches can be cleaned up relatively quickly after the leak has been sealed, the commercial and recreational fishing is another matter. With a third of federal waters already closed to fishing, no one really knows the ultimate impact on the seafood industry. It could revive before the year is out or be damaged for decades.

Offshore drilling for oil and supporting the industry is another matter however. With the administration’s May 27th ban on deepwater drilling in the Gulf, the active oil well rig count has already fallen by two thirds to nine rigs from 27 a week ago. Thirty-three rigs are to be shut down. Local politicians are obviously concerned about the loss of jobs from the reduced drilling. Governor Jindal says that as many as 6,000 jobs will be lost immediately and 20,000 in the next year when organizations supporting Gulf drilling lose business. Naturally, an array of interested parties is calling on the Obama administration to rescind the ban and permit drilling to continue. Many fear that the ban will be extended beyond the six months of hearings to allow for new technology, such as better blowout preventers, to be designed and built.

While the immediate job-loss is a concern, there is a possibility that the rigs will be moved to less-regulated areas such as the coasts of Africa and Latin America where they would remain for years. Should the US impose stiffer and costly regulations on offshore drilling, it is felt that drilling in the Gulf could be set back for years. At a minimum, safety and insurance costs are certain to increase markedly and near term earnings for many companies will be lower.

On the global scene, it is possible that whatever new regulations result from the Deepwater Horizon spill will be implemented globally by the companies that have the technical competence to carry out such operations. In that case there could be a general slowdown in offshore drilling that, within five or ten years, could have an impact on the global availability of oil some 40 percent of which is supposed to be coming from deepwater sources by the end of the decade.

The political Impact

With the inability of BP to stop the spill quickly, popular anger is rising with much of it directed at the Obama administration’s alleged failure to take prompt enough action. With his popularity sinking, the President has moved on a number of fronts to show that the government is concerned and doing all in its power to contain the situation. Rejecting such notions as use of nuclear weapons, and turning the problem over to the Pentagon, the President has made himself and the appropriate cabinet members far more visible along the coast and in the BP offices where decisions are being made.

Over the weekend, the President cancelled a trip to the Far East and attacked BP for its decisions to pay out a $10 billion quarterly dividend to its shareholders and to spend millions on PR while thousands were losing their jobs as a result of the company’s actions. Earlier in the week, the President blasted the Republican Party for what he claimed was decades of loosening of regulations that allowed the disaster to take place. The Justice Department has launched an investigation into possible civil and criminal wrong doing on the part of those involved in the explosion.

Much of the political heat is coming from Republican Governors and Senators from Southern states who are caught in the double predicament of damage from the spill and Washington’s temporary hold on further deepwater drilling. Their preferred solution is to take the risk of more deepwater

blowouts to maintain jobs. The Party of “Drill Baby, Drill”, small government, and minimal regulation of industry may have trouble hanging the blame for the disaster on the Democrats. Sarah Palin is already blaming the Deepwater Horizon on “extreme environmentalists” that forced the oil companies away from onshore and shallow water drilling to the deepwater.

The future of BP

With profits projected to be on the order of $30-$40 billion this year, there is little doubt that the company can pay for a lot of damage resulting from the oil spill. Besides, they have some junior partners, such as Anadarko, involved with the project who will have to chip in.

Despite the threat of federal criminal charges, it is currently deemed unlikely individual employees will be indicted unless evidence of a cover-up emerges. CEO Tony Hayward continues to maintain he has the full support of the board and will not resign. BP’s share price has fallen some 35 percent since the disaster and there is already talk of a takeover by some better-off rival such as Shell, Exxon, or China Incorporated.

Evidence is emerging from Congressional hearings and subpoenaed documents that BP knew the well was in trouble weeks before the explosion and clearly did not take the proper action in time.

So far, BP says it has spent about $1 billion in efforts to stop the leak and to pay for cleanup and damage to Gulf businesses. With the oil still flowing, it is still too early to assess the ultimate extent of the damage. If the leaking oil is brought under control and the seafood industry revives, damages may be well within BP’s ability to pay. If the damage turns out to be of apocalyptic proportions such as the extinction of the Gulf seafood industry, then the liability could be in the trillions.

3. Has the EIA admitted to Peak Oil?

While we were all watching BP’s ROV’s flit around the bottom of the Gulf, the U.S. Energy Information Administration quietly released highlights of its annual International Energy Outlook. In an obeisance to reality, the EIA now has reduced its forecast for global oil production for 2020 to 92 million b/d from 96 million b/d in last year’s estimate. Give that we are currently producing 86 million b/d the projection says that the annual increase over the next 10 years will be on the order of 600,000 b/d each year or close to flat.

The EIA goes on to project increases between 2020 and 2035, but this is nothing but fairy dust – there is no rational basis for projecting with any precision what the global economy and oil production will look like 20 or 25 years from now.

Without mentioning the “P.O.” words, the US government is now effectively in the peak oil camp by forecasting little to no change in global oil production over the next decade. On at least two occasions during recent days, President Obama, again without saying the words “peak oil”, has warned of the dangers facing the US if it continues its dependence on oil at present rates.

Quote of the Week

  • “[EIA’s] forecasts to 2020 are 2-3 mbpd lower than that of traditionally dour Total, the French oil major. And they are below our own forecasts at Douglas-Westwood through 2020. As we are normally considered to be in the peak oil camp, the EIA’s forecast is nothing short of remarkable, and grim.”

— Steven Kopits, director NYC office of Douglas-Westwood

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

  • Nobel, the Houston-based operation drilling off Israel, announced that the Leviathan block may contain as much as 16 trillion cubic feet of gas and the nearby Tamar field 8.4 trillion. This would allow Israel to one day become a natural gas exporter in addition to becoming energy independent. (6/4, #7) [Editor’s note: even if the gas fields prove out, the assertion here is so enormously challenging as to be facile.]
  • The Nigerian government is revisiting concerns expressed by foreign oil companies about its Petroleum Industry Bill, but the legislation should still be passed before the country’s presidential elections next year, a state oil company official said Thursday. (6/4, #8)
  • Qatar, the world’s biggest producer of liquefied natural gas, is idling at least eight full or partially-loaded tankers in the Gulf of Oman as prices for year-end delivery exceed those for next month by 18 percent. A global natural-gas glut is developing because of weaker- than-expected demand and plentiful “unconventional” supply in the US. (6/4, #6)
  • A global scramble for oil-storage facilities is boosting profitability and the share prices of both storage operators and the companies that build new capacity. Storage capacity, typically located near ports or key distribution areas, allows traders to sit on cargoes until prices improve. (6/1, #5)
  • South Korea, Asia’s fourth-largest buyer of oil, increased crude imports by 21.5 percent in May as refiners expanded fuel production to meet overseas orders. (6/1, #10)
  • The financial crisis and the global recession had limited effect on efforts to lower production costs for Canadian oil sands, companies including Statoil ASA and Canadian Oil Sands Trust said. (6/4, #18)
  • Deepwater production – anything under more than 500 meters of sea water – has quadrupled from less than 2 million b/d in 2000 to 8 million today, precisely because onshore and shallow offshore supplies are running down. The industry only drills at such extreme depths because there are very few alternatives, and it is a clear sign of impending peak oil. Ironically one impact of the BP spill, the US moratorium on deepwater drilling, is likely to hasten and worsen the effects of the global production peak. (6/3, #18)
  • Senate Majority Leader Reid alerted Senate committee chairmen Thursday that he plans to move comprehensive energy legislation in July. Reid asked the chairmen to recommend legislation to deal with the Gulf oil spill before July 4 so that leaders can include those ideas in the comprehensive energy package. Sen. Lindsey Graham (S.C.) has argued that expanding offshore drilling would be essential to winning Republican support for an energy and climate bill. (6/5, #6)
  • Algae: In Japan, the UK and the US, green energy advocates and some well-heeled investors are obsessed with perfecting a way to turn the scum that coats ponds, lakes and fish tanks into a substitute for gasoline, jet fuel and diesel. With Solazyme Inc., CEO Jonathan Wolfson expects to lower to costs down to $60 to $80-a-barrel range by 2012. The US DOE has provided more than $185 million in grants for algal biofuels. (6/4, #20)
  • In southern Pakistan, temperatures spiked to a record 129 degrees F (53.7 deg. C). The electricity has cut out for eight hours each day as part of a severe load-shedding regime that has caused riots in other parts of Pakistan where cities are experiencing a severe heat wave. According to NOAA, 2010 is shaping up to be one of the hottest years on record, worldwide. (6/3, #4)
  • In southwestern China, a drought lasting nearly six months has cut water available for hydropower generation. This has caused an increased demand for coal fired electricity, and has caused China to start building up its coal stocks. The province of Shandong has ordered utilities to increase stockpiles of coal to 30 days of consumption, up from 15. (6/5, #5)
  • Chinese passenger-vehicle sales surged 77% year-on-year in the first quarter. Yet apparent gasoline demand rose by just 3%. Indeed, consultancy JBC Energy reckons Chinese demand for gasoline has been flat since last July. (6/1, #8)
  • In India, a rebound in manufacturing and recovering farm output drove quarterly economic growth to 8.6 percent, the best in two years, as Asia’s third-largest economy returns to pre-crisis levels of expansion. Growth for the financial year ended March was 7.4 %. (5/31, #5)