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1. Oil and the Global Economy

Last week started with oil prices at their highest since the summer of 2008. NY crude traded close to $107 a barrel, and in London Brent crude was over $118 a barrel. Until the Japanese earthquake struck on Friday, trading was dominated by fighting in Libya where government forces went on the offensive and by the possibility of demonstrations in Saudi Arabia. Following the earthquake and the failure of significant protests to materialize in Saudi cities, oil prices fell to close out the week at $101 in NY and $113 in London.

Libya’s oil minister says that exports have dropped to as little as 300,000 b/d from 1.3 million before the uprising occurred. Momentum has shifted to the government as better equipped internal security troops launched offensives to the west and east of Tripoli to regain control of insurgent-held cities. The insurgent forces, which are little more than loose-knit groups of untrained youths likely numbering in the hundreds and armed with light weapons taken from government armories, are no match for the government forces armed with tanks, artillery, ships, and aircraft. Over the weekend there was heavy fighting around Brega, the last major town before Benghazi. Brega controls the natural-gas pipelines that distribute gas to power plants in Tripoli and Benghazi.

The issue of foreign intervention remains open with the western powers, after numerous meetings, still reluctant to become involved without approval from the UN Security Council. Although there is much discussion of a no-fly zone, in reality Libyan air power is not really necessary to defeat the insurgency given the great mismatch of the opposing forces. Developments on the ground may supersede the diplomatic wrangling and the issue may come down to the nature of a government assault on Benghazi which contains many thousands of the insurgency’s supporters.

Should Gadhafi succeed taking back Benghazi and tamping down the insurgency, he is not home free. His economy will be a shambles, his foreign assets frozen, and he will likely be facing many other forms of sanctions from the international community. Indiscriminate killing of civilians during an attack on Benghazi could trigger foreign military intervention that could quickly nullify the military advantage that Gadhafi currently enjoys. Reports of growing food and fuel shortages – Libya imports 90 percent of its food – may come to limit the mobility of both sides in coming days. Again, foreign -humanitarian‖ support may be critical to the outcome.

In the meantime, it appears that the fighting is doing at least some damage to the country’s oil infrastructure. With stockpiles at the export terminals running out, sanctions against the government in place, and most foreign oil workers out of the country, it is starting to look as if Libya will be exporting minimal amounts of oil for the immediate future.

A large police presence and strong government threats prevented the formation of street demonstrations on Saudi Arabia’s first -Day of Rage‖ last Friday. Small demonstrations numbering a few hundred protesters did occur on Thursday in the Shiite city of Qatif on the east coast. The prospects of protest in Saudi Arabia helped support oil prices until Friday, but traders lost interest after major demonstrations failed to develop.

Although OPEC shows no indication of formally increasing its production, reports that the Saudis have increased production by about 600,000 b/d continue to circulate. A point of contention is whether this surreptitious increase took place prior to the uprising in Libya and was intended to satisfy increasing demand from Asia. Last week there was a report that Kuwait, the UAE, and Nigeria were planning to increase production by 300,000 b/d in the coming weeks. If so, when combined with the increase in Saudi output there may be enough oil coming on the market to replace the lost Libyan production. This situation should be clarified in the next few weeks.

2. The earthquake

The 9.0 earthquake and subsequent 10-meter tsunami that engulfed much of northern Japan on Friday has added another dimension to the global oil situation for at least the rest of the year. When the word came that several large Japanese oil refineries had been closed due to the quake, tsunami, and in a few cases fires, oil prices dropped on the theory that Japan, which imported 4.4 million b/d during 2010, would not be importing as much oil in the immediate future. As the scope of the disaster became apparent over the weekend, including the forced shutdown of 10 nuclear reactors and at least five thermal power plants, analysts were forced to rethink their initial appreciation of the situation.

The tsunami struck largely agricultural areas so the bulk of Japan’s industrial capacity remains intact although there will be disruptions due to power shortages and transportation problems. At least five oil refineries with a processing capacity of 1.2 million b/d, roughly one quarter of Japan’s refining capacity, were automatically shut down by earthquake sensors. At least two of these were subsequently damaged by saltwater floods and are unlikely to be operational for many months.

The real damage came to the Japan’s nuclear generating stations where at least three reactors overheated and suffered what will likely be fatal damage. At least three of the other shut-down reactors are having cooling problems and may never return to service. Tokyo has already announced rolling blackouts, beginning today, Monday, 14 March, to cope with the lost generating capacity.

Just looking at the scope of the devastation, it is obvious that it will require prodigious amounts of energy, mostly in the form of diesel, over many years to clean up and rebuild from the damage. Simply moving and accommodating the hundreds of thousands who have lost their homes or been evacuated from around the ailing nuclear plants will require much added energy. The loss of agricultural land will likely require an increase in food imports. In addition, the Japanese will need to increase their imports of fuel oil and natural gas to compensate for the loss of so many electric power reactors. Rolling blackouts in the industrial parts of the country may cause many businesses and individuals to turn to backup generators, thereby increasing the demand for diesel and gasoline.

Balancing the likely increase in demand will be the temporary loss of thousands of motor vehicles in the flooding and the possibility that Japan’s industrial output will be slowed by the general disruption. Many observers, however, are saying that the need to clean up and replace the towns lost in the flooding may give an added boost to the economy.

The bottom line seems to be the likelihood that Japan will be boosting its imports of crude, natural gas, and petroleum products in coming months.

Quote of the week

“Two states is not necessarily bad for us. What would be the worst potential outcome is to have a kind of Somalia situation in Libya, that is no government for a long period of time. But if this happens, this will not just be Eni’s problem. It will be a problem for Europe, for everybody.”

— Paolo Scaroni, Chief Executive Officer, Eni

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

  • Piracy might prove a bigger risk to the flow of crude than the disruption of Libyan exports, as international sailors’ unions threaten to boycott “high risk” oil sea lanes out of the Middle East. While producers such as Saudi Arabia, the UAE, and other Arab Gulf states have raised output to make up for Libya, sea-lane security is now a major concern. (3/10, #11)
  • Supertanker owners are sailing ships at the slowest speeds in at least three years, reducing vessel supply and bolstering charter rates. The drop cuts the fleet’s capacity by 9%. The combination of ultra-slow steaming and violence in Libya has more than doubled daily returns for owners to $29,647 since the end of February. Traders of forward freight agreements anticipate the gains will last, with second-quarter contracts at $28,894. (3/9, #6)
  • A judge in NY has put a worldwide hold on enforcing the $18-billion Ecuadoran verdict against Chevron. The company is also ordered to submit a bond of $21.8 million. (3/8, #21)
  • BP CEO Dudley told the IHS-CERA energy conference that he believed the entire industry could learn from safety lapses in the Deepwater Horizon blowout. Exxon CEO Tillerson strongly criticized Dudley’s statement. (3/9, #16; 3/11, #12)
  • Lukoil is scouting for oil and natural-gas investments in US shale fields. President Alekperov says he wants to apply advances in directional drilling and hydraulic fracturing in Russia. The company already is experimenting in the Bazhenov formation in West Siberia. (3/9, #18)
  • Repeal of the ethanol-gasoline-blend tax credit is in a bill introduced by US Sens. Coburn (R., Okla.) and Cardin (D., Md.). They say the 45¢-a-gallon credit should be eliminated because federal law already requires blenders to put ethanol into gasoline. (3/10, #23)
  • Legislation to ban the US EPA from regulating greenhouse gases has met approval from the Energy and Power Subcommittee. The House Energy and Commerce Committee will begin debating the Energy Tax Prevention Act today, Monday, March 14. A similar bill to reverse a 2007 US Supreme Court decision has been introduced in the Senate. (3/11, #11)
  • Airlines are facing tough decisions to protect their profits under pressure from the strength in jet fuel outright prices. The fuel bill is estimated by the Int’l Air Transport Association to reach 29% of total operating costs in 2011, up from 26% in 2010. The price for delivery into Northwest Europe hit a high of $1,045.25 a metric ton. Barge prices reached $1,069.25 a ton, the highest since September 2008. (3/9, #8)
  • Unconventional extraction techniques are under scrutiny in Canadian provinces concerned about environmental damage. Quebec has halted shale-gas extraction while Alberta ordered tests on the effects of oil-sands production, both saying more study is needed. (3/10, #24)
  • The Iraqi northern oil export pipeline, damaged in a bomb attack last Wednesday, March 9, was to take 4-5 days to repair, according to a North Oil source, vs. an earlier Iraqi oil-source estimate of 1-2 days. Iraq exported an average 2.202 million b/d of crude oil in February, of which 494,000 b/d was from the north. (3/10, #17)
  • A powerful Iranian clerical body has appointed Ahmadinejad-backed Ayatollah Kani as its new chairman to replace former President Rafsanjani. Hard-liners have criticized Rafsanjani, one of the great survivors in Iranian politics since the 1979 Islamic revolution, for being too close to the reformist opposition. Meanwhile in Tehran Tuesday, security officers fired tear- gas canisters around Revolution Square to disperse demonstrators. (3/8, #17; 3/9, #11)
  • Eni warns against allowing Libya to end up as a failed state. The Italian company says it will halt all remaining output from Libya; production is already cut by 2/3. The biggest foreign oil producer in Libya pumped 280,000 boe/d from the country before the crisis. (3/11, #9)
  • Libya gasoline prices have fallen 25 percent since the revolution began last month, even as world fuel prices surge partly due to the battle to topple Gadhafi. Gasoline costs 46¢ a gallon, whereas the week before last the price was 62¢. Oil company officials in Libya say Gadhafi ordered the price cut to curry favor with his unhappy people. (3/12, #13)
  • Shell decries the rise in encroachment on its pipelines in the Niger Delta. The company has recorded over 22 incidents of oil spill between January and February this year, attributing all cases to sabotage. (3/9, #12)
  • Militia fighters have attacked the capital of south Sudan’s oil-producing Upper Nile state, the southern army says. The attack on Malakal, one of the south’s three main settlements, marks an escalation in clashes between the south’s army and militias which has aroused fears over the stability of the region in the countdown to its secession, due on July 9. (3/12, #18)
  • High oil prices are forcing Asian governments to contemplate rolling back fuel subsidies despite rampant food inflation. Vietnam and Pakistan have both raised fuel prices recently, although Pakistan quickly canceled half the raise in the face of domestic political opposition. If more countries cut subsidies, higher prices would slow the pace of the region’s oil demand growth. (3/10, #18)
  • Karachi Electric Supply Co. says it must increase load shedding in Pakistan’s largest city. While 100 million cu. ft. a day of gas has been supplied for the past couple of months, demand is at least 150 million. It has also become harder to fill the gap with furnace oil, whose price has increased 250% in the last two years. (3/12, #17)
  • China will not change its plan for developing nuclear projects but says it will learn a lesson after a massive earthquake in Japan resulted in radioactive leakage. From 2011-2015 China will launch nuclear energy projects with a combined generation capacity of 40 GW, according to the draft Five-Year Plan. In addition to boosting the construction of nuclear power plants in the coastal areas, new plants will be planned in central regions. (3/12, #20)
  • Demand for cars in China eased in February. The China Association of Automobile Manufacturers reported that total sales including buses and trucks fell 33% in February from the month before to 1.27 million vehicles. Sales of passenger cars dropped 37% to 967,200 vehicles. The 5% increase from a year earlier for all vehicles and 2.6% rise for passenger-car sales represented the slowest pace of growth in more than two years. (3/9, #13)
  • China’s trade deficit was $7.3 billion for February, its largest in seven years. Imports had risen 19.4% from February 2010, but exports rose just 2.4%. (3/10, #19)
  • China’s consumer price index rose 4.9% in February from the same month a year ago, slightly above economists’ estimates and identical to the rise in January. Food prices rose 11 percent, possibly affected by the Chinese New Year. The government says the producer price index, a measure of inflation at the wholesale level, rose 7.2%. (3/12, #19)
  • Recent rain and snow and a huge irrigation effort may have saved much of the northern Chinese wheat crop from drought. Following the driest winter in perhaps 200 years in parts of the country, under 1/3 of wheat acreage is still suffering from drought. (3/7, #11)
  • Food, not oil, may prove a bigger threat to global growth, disproportionately affecting developing economies that powered the latest economic recovery. Investors are pricing in only a small risk that Middle East unrest spreads to Saudi Arabia. But food prices are expected to remain elevated for some time, which concerns the IMF. (3/7, #6)
  • The Greenland and Antarctic ice sheets are losing mass at an accelerating pace, three times faster than that of mountain glaciers and ice caps, a new NASA-funded study finds. The longest study to date of changes in polar-ice-sheet mass suggest these ice sheets are overtaking ice loss from mountain glaciers and ice caps to become the dominant contributor to global sea level rise, much sooner than model forecasts have predicted. (3/10, #7)