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1. Oil and the Global Economy

Oil prices saw a volatile week as traders’ attention shifted from the uncontrolled nuclear reactors in Japan to the fighting in Libya and uprisings across the Arabian Peninsula. Some days prices swung as much as $3-4 a barrel; however, prices closed about where they began on Monday: $101 for NY oil and $114 in London. Over the weekend the Japanese seemed to be making progress in cooling the six runaway nuclear reactors thereby reducing the possibility that their economy will be disrupted by major leaks of radioactive material.

Tokyo has announced that the six tsunami-damaged reactors will be permanently closed and that plans to build additional reactors are on hold. With some 25% of its generating capacity currently shut down, the Tokyo area is being subjected to rolling blackouts which have forced the closure of many major industrial facilities thereby disrupting parts shipments to factories around the globe.

Operations at Japanese refineries are returning to normal and the demand for oil imports is expected to return to normal soon. Japan’s Petroleum Association announced that 780,000 b/d of refining capacity is expected to be restarted this week. Over the longer term Japan’s demand for imported crude, oil products, and LNG is likely to increase significantly to replace the lost nuclear generating capability and support the cleanup and rebuilding of those towns destroyed by the tsunamis.

Last week’s US oil-stocks report showed the gradual buildup which is normal for this time of the year continuing. Total US commercial-oil-product inventories, however, fell by 5.1 million barrels, while US oil consumption remains the same as last year at 19.4 million b/d.

2. Conflict in the Middle East

Major changes in the Middle Eastern situation came last week when the UN voted to use military force to prevent the Gadhafi government from using force against civilians, and the Saudis sent troops into Bahrain to help quell the protests. Within days of the UN vote, western forces had destroyed the pro-Gadhafi forces firing on Benghazi, eliminated much of the country’s air defense, and grounded Gadhafi’s air force. The coalition of powers attacking Libya seems to be taking the position that any military equipment such as tanks, artillery, and military transport found outside of military bases is a threat to Libya’s civilian population and will be attacked. Given the great disparity between the power of Gadhafi’s forces and those of the alliance arrayed against him, the government is unlikely to continue its offensive against the insurgent forces in eastern Libya and will likely be forced to withdraw to the West.

One of the key questions of the next few days is whether pro-Gadhafi forces can or will attempt to damage the key eastern Libya oil export terminals as whatever is left of these forces withdraws towards Surt. With the terminals permanently in insurgent hands, the revenues from any resumption of oil shipments would likely go to whatever government is established in Benghazi.

The future of Libya and its 1.3 million b/d of crude exports is murky. Gadhafi still seems to enjoy support among the tribes in western Libya who fear what would happen to them if the country were taken over by eastern tribes. Some see a stalemate developing that may last for an extended period as neither side has the power to overcome the other. Whether some or all of Libya’s potential oil exports remain on hold through this period remains to be seen. With Libya forced to import 90% of its food it seems likely that major humanitarian issues will arise shortly, at least in those cities controlled by Gadhafi.

The situation on the Arabian Peninsula deteriorated further last week with the government of Bahrain forced to call on Saudi Arabia and the UAE for troops to help it control protests that seemed destined to get out of hand. With riots in Yemen turning more violent and protests taking place in Syria and Lebanon, the Saudis are clearly becoming worried. The king has made an unusual TV address to his subjects and is now offering new social spending worth some $93 billion in hopes of forestalling social unrest. It is noteworthy that the government has yet to make any concessions to demands for political reform. A small demonstration took place in Riyadh over the weekend by relatives demanding the release of recently jailed dissidents.

For now the conflict between the ruling Sunnis and majority Shiites in Bahrain seems to have the most potential to grow into trouble for the Saudis. Tehran has denounced use of Saudi troops to suppress peaceful Shiite protesters. The whole situation clearly has many chapters to run, with the future of a major portion of the world’s oil supply hanging in the balance.

3. The global oil balance

Developments last week increase the possibility that Japan will soon start to recover from the effects of the 9.0 earthquake and radioactivity leaks with an increased demand for imported oil and LNG. At the same time, the UN-sponsored intervention in Libya seems to increase the possibility that the near cessation of Libya’s exports could be prolonged due to war damage and economic sanctions. The IEA is already warning that the Libyan export outage could be a long one and that continued high oil prices will lead to a slowdown in global economic growth.

Last week the IEA released its monthly report showing that global oil supply rose to an all-time high of 89 million b/d in February. The Agency says that Libyan production dropped by 200,000 b/d in February, but that this was partially offset by higher production in the Gulf states. As the unrest in Libya was only getting started in February, the report due on 12 April should give a better insight into how well OPEC is coping with the loss of nearly all of Libya’s exports. There is talk of a special OPEC meeting to assess the changing situation.

Beijing announced that electricity consumption in China increased by 15.8% in February over the previous year, suggesting that the Chinese economy is still growing rapidly. Other reports suggest that Chinese bank loans still remain at high levels despite efforts to control inflation. In the coming week the Japanese energy situation should be clarified, possibly removing an impediment to oil prices moving higher. In the meantime, political unrest in the Arab Peninsula shows no signs of abating.

Quote of the week

 Libya’s “exports could be off the market for many months due to both war-inflicted damage on oil infrastructure and international sanctions.”

— IEA’s monthly oil market report

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

  • Gasoline supplies in Libya are running low: sanctions and perceived shipping risks have dropped the usual 6-8 monthly import cargoes to nothing. Before the rebellion, cranes dotted Tripoli’s skyline, and luxury housing projects were on offer, loans backed by foreign bank branches in the city. But now currency is down 30% in two weeks, the bazaar is empty, and shops are increasingly bare. Bread lines run long and bakers have fled across borders. (3/18, #6; 3/19, #10)
  • Al-Naimi, veteran oil minister of Saudi Arabia, is once again in the spotlight to reassure the oil market. For him, the Libyan crisis is the latest of a long list: price collapse in 1998-99, Venezuela strike of ’02, Iraqi war of ’03, Hurricane Katrina in ’05, and price spike 2005-08. It could be his last: the market has been abuzz about his retirement for months as part of a reshuffle of the Saudi cabinet. (3/19, #11)
  • Beijing has suspended approval for nuclear plants across China, 40% of the world’s planned reactors, in response to the Japanese nuclear crisis. Europe is split: France, Russia, Turkey, Czech, Italy, and Poland aren’t following Germany, which has idled 1/3 of nuclear capacity. Russia and Turkey say they won’t change plans for Russia to build Turkey’s first nuclear power station. “[O]ur country is on a seismically dangerous territory,” Turkey Prime Minister Erdogan said, “But … this nuclear power station will be able to withstand a 8-9 [magnitude] earthquake.” (3/17, #17, 20)
  • Gazprom says Japan’s crisis will prompt a revision of Russia’s plans to build nuclear power plants. New safety standards will mean a 40-50% increase over the current cost of building a plant, now $7,000-8,000 a kW of installed capacity. (3/17, #21)
  • To meet projected Japanese energy demand, Russia PM Putin has ordered officials to accelerate development of a Rosneft-led oil & gas project. LNG suppliers like Qatargas will support increased requirements, and Indonesia will provide more coal. (3/16, #6)
  • Uranium is the most volatile market since the Japanese earthquake. Trading has soared as some hedge funds and banks unload their positions. Three million pounds of the metal changed hands in the spot market last week, five times more than average. After an 80% run-up over the past eight months, reaching a three-year high of $73 a pound in February, prices fell to $49.25 last Wednesday. (3/19, #21)
  • South Korea has signed its first oil-field contract with the UAE. Starting in 2014, state-run Korea National Oil Corp. with Abu Dhabi National will develop fields with reserves of over 1 billion barrels of oil worth $97 billion. KNOC joins Exxon and Shell as international companies developing fields in UAE, OPEC’s fourth-largest crude producer. (3/14, #15)
  • China has signed a $2-billion contract to build the world’s tallest dam in Iran, the latter’s energy minister says. Construction is slated for the next Iranian year, which begins today, March 21. China’s Sinohydro and Iran’s Farab would build the dam in Lorestan province. At 1,033 feet high, it would support a 1,500-MW power station. (3/15, #14)
  • China’s central bank to counter inflation will force large domestic institutions to hold a record 20% of deposits in reserve, locking up as much as $56 billion. Meanwhile new renminbi loans in February were double the pre-crisis run-rate. Total system-wide loans outstanding doubled the total from February 2007. Annual consumer price inflation was 4.9% in both January and February, exceeding a 4% target. Prices of new homes rose in January from a year earlier in all but two of 70 cities. (3/16, #20; 3/19, #13)
  • Colombia says oil output will climb to a record this year amid investments from China and billionaire Carlos Slim. Spending on exploration and production may surpass $3.5-4.0 billion this year, when annual output will exceed a 1999 peak to reach a record of 850,000-900,000 b/d. Transport capacity is scheduled to reach 1.2 million b/d within two years, and output will reach 1.4 million b/d in 2014. (3/17, #12)
  • In Iraq, the Beiji refinery, the country’s largest, has restarted operation following an attack on Feb. 26. Oil exports began flowing again to Turkey last Monday, March 15. Security forces have arrested at least 27 people in connection with the attack. (3/15, #13)
  • International companies in Iraq’s oil sector have been largely unable to secure visas for essential personnel since February. The prime minister’s office is responsible, says the Interior Ministry. As a result of the visa stoppage, oil companies, embassy contractors, security firms, and prospective investors are facing an imminent crisis. Oil contractors have said it’s only a matter of time before their work in the field slows down. (3/17, #10)
  • India seeks to import from Nigeria 18 million metric tons of crude a year starting in 2012-13 vs. 13.2 million in 2009-10. Refining capacity has significantly expanded, says India’s petroleum minister. LNG needs are projected to go up 12-15 million tons a year. (3/16, #22)
  • In Nigeria, militant group MEND has pledged further strikes on oil infrastructure after claiming responsibility for a Wednesday attack on an onshore facility of Agip, a subsidiary of Italy’s Eni. The government says it is ready to engage in peace talks to stave off bombings in Lagos, Abuja, and the Niger Delta. The Joint Task Force, a special military unit, says it will ensure adequate protection for foreign oil companies. (3/16, #15, 16; 3/17, #11; 3/18, #7)
  • Pemex expects 2011 oil production to surpass 2.6 million b/d. Previous forecast was 2.55 million. (3/19, #12)
  • Chevron is appealing an Ecuadorian court order that it pay $17 billion for environmental damage to the Amazon region. A provincial court in Lago Agrio, an Amazonian town founded as an oil base camp, had ruled Chevron was responsible for pollution caused by Texaco from 1964-1992. Chevron, which bought Texaco in 2001, says the areas remediated by Texaco pose no substantial risk to humans or the environment. (3/14, #10)
  • The number of rigs drilling for natural gas in the US in the past week was 875, the lowest since January 2010. The oil rig count rose by 12 to 839, the highest in 20 years for a second week. The number of horizontal rigs, 2/3 of which are drilling for gas, rose by five to 986 on the week, surpassing the record reached in February. (3/19, #20)
  • Increased US oil production won’t have an immediate effect on global prices but could supply other important economic benefits, experts tell a US House committee. The EIA administrator warns against expecting greater access to federally controlled resources to immediately result in increased production. (3/18, #10)
  • BOEM has issued a deepwater drilling permit to ATP Oil & Gas, BOEM’s 3rd deepwater permit since the Interior Department rescinded its ban. The permit is to drill the Mirage well offshore Louisiana. The ATP permit is one of the seven that a federal judge in New Orleans had ordered BOEM to decide within 30 days, which order was postponed Wednesday by a federal appeals court. (3/19, #19)
  • Legislation to reverse an Obama administration limit on oil & gas exploration in the Outer Continental Shelf will be introduced soon by US Rep. Hastings, R-Wash. Two bills are to boost production in the Gulf of Mexico and help reduce gasoline prices, Hastings says at a hearing on the slow pace of permitting. Meanwhile more deepwater permits in the gulf are forthcoming, BOEM Director Bromwich tells a House subcommittee. (3/17, #18; 3/18, #11)
  • Should energy commodities regulation include new curbs on speculation? As the US Commodity Futures Trading Commission considers how to implement its new authority under the Dodd-Frank financial reform law, 13 US senators have asked CFTC Chair Gensler to raise margin requirements for speculative oil contracts. (3/19, #18)
  • Oil exporting countries are cutting holdings of US government debt, helping depress the dollar. Treasuries owned by oil producers and Middle East-proxy institutions fell 9% in the 2nd half of 2010 to $654.6 billion. The currency fell to 61.3% of global foreign-exchange reserves in the 3rd quarter, from a peak of 72.7% in 2001. (3/14, #5)
  • The US State Department will require an additional environmental review of TransCanada’s 1,700-mile expansion to the Keystone XL pipeline, saying it will decide on approval by year’s end. (3/16, #26)
  • Environmental groups claim victory as a unit of Australia-based Ambre Energy withdraws its application for a coal export terminal at Longview, Wash. Millennium Bulk Terminals, which plans to reapply following an impact study, seeks to meet booming demand for US coal in China. The Sierra Club, Earthjustice, the Washington Environmental Council, and Climate Solutions are among opponents of the terminal. (3/16, #25)
  • Penn State researchers have developed a new, more environmentally friendly method of separating bitumen from oil sands utilizing ionic liquids. The method can also clean oil spills from beaches and separate oil from drill cuttings. The method uses little energy and water, and all solvents are recycled. (3/18, #13)
  • First Solar plans to build a $300 million manufacturing center near its Tempe, Ariz. headquarters, doubling its US production capacity. The new facility could produce over 250 MW worth of advanced thin-film photovoltaic modules a year. (3/18, #15)
  • DOE researchers have found that adding hydrochloric acid to the typical sulfuric acid electrolyte in vanadium redox flow batteries increases their storage capacity by 70% and expands their operating range of temperatures. (3/18, #16)