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1. Oil and the Global Economy

Oil prices climbed steadily last week with NY oil futures closing over $104 a barrel and London’s Brent crude closing just below $116 a barrel. As the fighting in Libya shifts to areas around oil terminals, estimates of how much oil is being shut-in continue to grow. Although some tankers are still making it in and out of oil ports, the best estimate is that only 300,000-600,000 b/d are still being exported as compared to 1.3 million b/d before the uprising.

Heavy fighting took place in several towns last week. The situation is confused with both sides claiming progress. Casualties are said to be heavy. With the Gadhafi government now facing prosecution for crimes against humanity and the protesters facing death at the hands of the regime, the fighting seems destined to continue for a prolonged period. The chances of Libya’s oil exports resuming to normal levels at any time in the foreseeable future continues to get worse. Given the intensity of the fighting and the desire to deny the opposition sources of revenue, it seems likely that damage will be inflicted on at least some parts of the oil infrastructure, further reducing exports. While foreign intervention seems unlikely at the minute, this could change should civilian casualties reach unacceptable levels.

The Saudis continue to say they are making up for the missing Libyan exports by increasing production by roughly 600,000 b/d to over 9 million. Many foreign observers are skeptical that the Saudis have increased their production by this much in a short time. They suspect that while the 9-million-plus b/d figure may be true, the Saudis were increasing production prior to the Libyan uprising in order to meet increasing domestic and Asian demand.

Saudi success in making up for lost Libyan production should be apparent shortly as either the IEA is forced to release reserve stocks to European refineries, or the price of crude climbs considerably higher.

Although other oil news pales in comparison to the loss of Libyan exports, US crude stockpiles did take an unexpected dip of 365,000 barrels last week as compared to analysts’ expectations of a 750,000-barrel increase. US gasoline prices continue to soar with AAA reporting that the average US price of regular is now over $3.50 a gallon. Although US demand for oil products has been running ahead of last year in recent weeks, rapidly increasing prices, which many are forecasting to be over $4 a gallon by summer, are sure to dampen demand.

Early reports of OPEC production are fraught with uncertainty, but preliminary numbers suggest that OPEC production remained roughly unchanged in February as the approaching end of winter cut the demand for heating oil and Libyan shipments dropped precipitously in the last week. The drop in Libyan production was compensated for by increases in Saudi production and smaller increases in Kuwait, Qatar, and UAE’s production.

2. The Saudis besieged

Collapse would not be too strong a term to apply to the global economy should Saudi oil production of 9 million b/d be halted or severely restricted by domestic unrest. With the Saudis virtually surrounded by popular uprisings in Yemen, Bahrain, Oman, Jordan, Iran, and Iraq, the kingdom’s rulers are clearly worried, as are the global oil markets. Websites in Saudi Arabia have already called for a “Day of Rage” on March 11 and 20, and small demonstrations of fewer than 100 people have already broken out in Shiite towns of Eastern Province. So far the demonstrators have called for the release of activists jailed for demanding a constitutional monarchy.

The Saudi government has reacted to the threat by announcing a $36-billion giveaway program to buy-off potential protesters and announcing demonstrations are “strictly” prohibited under Saudi law. The situation in Bahrain, where Shiites face discrimination by Sunni rulers, may be the most analogous to Saudi situation where 10 to 15 percent are estimated to be Shiite. Last week a crowd of 100,000 demonstrated for reforms in Bahrain, and over the weekend tens of thousands surrounded the government buildings. Some fighting between Sunnis and Shiites has already broken out. The Bahraini protests seem to be aimed at a major constitutional overhaul that would leave the heredity rulers as figureheads and a lot poorer. The island nation, which is connected to Saudi Arabia by a causeway, has released 300 political prisoners, reshuffled the cabinet and reduced housing costs by 25 percent.

Similar demands have already surfaced in Saudi Arabia where demands for a constitutional monarch will not set well with the ruling family. While the Saudis have effective security forces, so did Mubarak and Gadhafi. The days when guns can be used against tens of thousands of protesters seem to be drawing to a close in an era of instant digital communications.

While there is as yet no apparent threat to Saudi oil production, Qatif, the main Shiite town of Eastern Saudi Arabia where demonstrations took place last week, is located right next to the Saudis’ main oil-export and refining center of Ras Tannura.

3. China’s National People’s Congress

Next to the turmoil in the Middle East, China’s demand for oil in the next year or two is likely to have the most influence on oil prices and the balance between supply and demand. While the People’s Congress bears little relationship to parliamentary bodies in most other countries, it is a time when “the brilliant achievements” are reported and plans for the future are unveiled. While fighting inflation is the immediate priority, China’s GDP is slated to grow at an average rate of 7 percent each year for the next five years. Although a similar number was mentioned in the last five-year-plan, in fact the actual GDP growth is reported to have been 11.2 percent annually.

The newly announced energy policy envisions a cap on Chinese energy consumption of 4 billion tons of coal equivalent annually, up by 4.24 percent annually from the current 3.25 billion tons equivalent. While the use of renewables is to grow rapidly during the next five years, fossil fuels will still constitute the bulk of China’s energy consumption.

What is left unsaid in all this is the mix of oil, coal, and natural gas the Chinese are envisioning for the next five years. A few months back a report was circulating in Beijing that after 15 years of 10-percent annual increases in coal production, China could no longer increase its domestic coal production and would be capping it only a little higher than current output. Beijing has already started to import significant quantities of foreign coal and is scrambling around the earth trying to sign up more.

While it is too early to say, the implications of the new report seem to be that while China plans to reduce its rate of economic growth, it may be forced to step up, or at least maintain relatively high levels of oil, coal, and natural-gas imports to meet its goals. This of course flies in the face of IEA and EIA projections for global oil demand over the next two years which foresee a substantial drop in the pace at which Chinese oil imports have been increasing in the past year. This issue should be resolved in the next six months unless it is overtaken by further decreases in Middle East production.

Quote of the week

“I think if this energy shortage continues, the public will get fed-up, and there are chances of an uprising like in Tunisia or Egypt, although the cause might be different.”

— Mahfooz Elahi, President of Islamabad Chamber of Commerce

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

  • Shell CEO Voser believes the $116 oil price caused by the Middle East crisis will soon ease back, but warns of a longer-term shock where “supply cannot meet demand”. Lack of investment over the past 2-3 years will most likely be the biggest driver of high oil prices, he says. Voser says he has confidence in OPEC to compensate for the loss of 1 million b/d of production from Libya. (3/5, #3)
  • Militants in Iraq killed four engineers and destroyed three production lines at Beiji, Iraq’s biggest oil refinery. Beiji, which produces 2.9 million gallons of gasoline, 1.8 million of benzene, and 1.2 million of kerosene daily, has drastically reduced capacity for 1½ -3 months. Beiji, in northern Salahaddin province, was taking in just 75,000 b/d vs. its nameplate capacity of 310,000 b/d. (2/28, #12; 3/1, #14)
  • Pakistan will ask Kuwait to supply half of the diesel it exports to Pakistan for free while extending the credit period on the other half. In 1998 Pakistan was granted such a reprieve by Saudi Arabia in the aftermath of nuclear-weapons tests; whereas in 2008 Iran rebuffed similar requests. International donor agencies have rejected more aid to Pakistan until it undertakes drastic reforms to the energy sector and tax collection mechanisms. (2/28, #13)
  • Pakistan hikes oil prices to $3.50 a gallon from $3.20 due to spikes in international oil market prices, the country’s oil regulator says. Opposition parties and others denounce the rise and transit workers threaten to strike. Meanwhile thousands in Karachi protest unavailability of fuel due to a strike by Petroleum Dealers Association. (3/1, #16, 17)
  • As industries close and the cost of living rises across Pakistan due to electricity cuts and gas shortages, widespread frustration is heating public sentiment to a boiling point. (3/1, #26)
  • Shell is close to selling four of its onshore oil blocks in Nigeria to local producers. The sales are part of Shell’s plan to reduce its footprint onshore Nigeria, where militant attacks and oil theft have slashed company output since 2006. Nigeria is also considering legislation that could make it easier to confiscate non-producing/dormant oil fields from companies. (3/5, #7)
  • Nigeria’s 2011 projected oil export revenue may fall below expectation following production shut in at the 180,000 b/d Bonga deepwater field, which started production in 2005. Field operator Shell says the floating production, storage, and off-take vessel will be shut down for maintenance. (3/4, #9)
  • Kenya has floated an emergency tender for the importation of 45,449 metric tons of diesel, expected to arrive in Mombasa between March 19-20. National Oil Corp. of Kenya was to have delivered a 56,500-ton consignment and then another 59,700 tons but had not as of last Monday; Nock had expected the larger delivery between March 1-3. (2/28, #14)
  • In Tanzania, authorities plan to shut down major hydro plants, the country’s main source of power, due to severe drought. Manufacturers in East Africa’s second-biggest economy are staring at major revenue losses that could pressure prices of key commodities. (3/1, #18)
  • Venezuela has assigned new gas exploration rights to Russia’s Gazprom for $20 million, because the company found nothing in two Gulf of Venezuela blocks where it won exploration rights in 2005. Venezuela has yet to produce any commercial gas. (3/1, #21)
  • Developing countries across Asia are shoring up strategic petroleum reserves, which could propel crude even higher amid turmoil in Libya. Philippines has announced it will require its oil companies to maintain 15 days of reserves, and refineries to keep enough oil to last for 30 days. Other big regional oil importers like China and India are likely to accelerate strategic-reserves purchases of crude. (3/3, #12)
  • China and India have sharply increased imports of Mexican crude in recent months, according to Pemex. China and India imported an average of 123,000 b/d of Mexican crude in January and the last two months of 2010, almost as much as Mexican shipments to Europe. In the first 10 months of 2010 Pemex exported 40,000 b/d to Asia. (3/1, #19)
  • About 32,000 Chinese workers, mostly in construction projects or oil field services, had been whisked from Libya as of Wednesday, with another 3,000 waiting to be airlifted out of the desert in the country’s deep south. Beijing is taking unprecedented steps to aid with the evacuation, sending charter flights and ferries along with military transport planes and dispatching a navy frigate to provide security for its nationals in Libya. (3/3, #13)
  • Population of China is 1.341 billion people. At the end of 2009, it had 1.335 billion; in 2008, it had 1.328 billion. Neighbor India has an estimated 1.2 billion. The population of China’s farmer-turned workers increased 5.4% year-on-year to 242.23 million at the end of last year, while the number of rural workers working outside their hometowns rose 5.5% from 2009 to top 153.35 million. China has 26.88 million people living in poverty in rural areas. (3/1, #23)
  • China’s energy consumption rose 5.9% in 2010 to 3.25 billion metric tons of coal equivalent. The country consumed 5.3% more coal, 12.9% more crude oil, 18.2% more natural gas, and 13.1% more electricity than in 2009, according to preliminary data. Energy consumption per unit GDP, aka energy intensity, fell 4.01% in 2010. GDP rose 10% in 2010, and the government’s target for average annual growth over the next five years will be 7%, down from a 7.5% target in the past half decade, according to Premier Wen. (2/28, #16)
  • China’s refiners slashed exports of gasoil in January to 95,886 metric tons, a drop of 79.31% year on year, 44.19% down from December levels, and the lowest since November 2008, when exports sank to 28,478 tons. (3/2, #12)
  • Droughts in China are reduced after rain and snow. Total area of drought-hit farmlands in eight wheat-producing provinces was 2.52 million hectares a week ago Sunday, down 4.91 million from the worst. Since the start of February, governments focused on irrigating 7.83 million hectares of crops, 40 percent of the total in the eight provinces. Governments mobilized 14 million people to irrigate 12.6 million hectares since autumn. (2/28, #17)
  • India will give a total cash subsidy of $7.73 billion this financial year to state-run fuel retailers Indian Oil, Bharat Petroleum, and Hindustan Petroleum for selling diesel and cooking fuels at government-mandated discounted prices. Next year, the government is expected to give $4.4 billion to the retailers, which also are partly compensated through discounts on crude and product sales by upstream companies. (2/28, #19; 3/1, #25)
  • Thailand has increased its diesel subsidy to oil companies by 7.5 cents a gallon to 75 cents a gallon to keep the retail price from rising above $4.50 a gallon. This will deplete the state oil fund soon, Energy Minister Charnnukul says, adding that the government must raise pump prices or decrease excise taxes. (3/4, #11)
  • In Norway, Statoil and Eni are among companies with plans to drill a record number of wells in the far north this year to help the world’s second-largest gas exporter to sustain output. So far, they’ve struck out: All four wells drilled in the Barents and Norwegian seas this year have failed to find oil or gas, adding to two dry wells in the North Sea, the biggest number of failures to start the year since the country’s oil era began in 1966. (3/4, #17)
  • As concerns grow in the US about the environmental impact of fracking, companies have set their sights on Europe. But from Britain to Poland, critics warn of the potentially high environmental cost of this looming energy boom. (3/2, #18)
  • BP’s deepwater oil production in the US Gulf of Mexico and Angola has fallen by 15% in 2010 to 508,000 b/d, highlighting how the Horizon blowout and oil spill have hurt deepwater operations, which were a fifth of BP’s output last year. Gulf deepwater production fell to 338,000 b/d, from 387,000 b/d in 2009. In Angola, where BP has suffered technical problems, production fell to 170,000 b/d in 2010, from 211,000 b/d in 2009. (3/4, #18)
  • China’s holdings of long-term US Treasury securities totaled $1.16 trillion at the end of December 2010, 30% above a previous estimate, and a reduction of $4 billion vs. November. Japan raised its holdings to $882.3 billion in December, while the UK boosted holdings to $272.1 billion vs. $242.5 billion in November. (3/1, #22)
  • Calls have grown in Congress for the Obama administration to tap the strategic petroleum reserve, now at full capacity of 727 million barrels. Senator Bingaman (D-NM), chair of the Energy and Natural Resources Committee, urges the president to consider a significant sale of oil from the reserve to stabilize prices and temper any disruption in supply. Other committee members say a sale could produce billions of dollars to ease pressures on the federal deficit and accelerate policies intended to reduce oil consumption. The energy secretary has reiterated the president’s stance that the US has no plans to tap the reserve, despite unrest in Libya and the Middle East. (3/2, #13; 3/4, #14)
  • When natural-gas prices leapt above $13 per thousand cu. ft. in mid-2008, Chesapeake Energy was riding high as the darling of the shale-gas drillers. Since late 2008, prices have been mired around $3-4, and Chesapeake President McClendon has decided to sell off a good portion of the company’s shale-gas assets in order to concentrate on oil trapped in shale. Gas-drilling-rig counts in North America slipped from 1,600 at the end of August 2008 to under 700 in mid-2009, settling at 906 last week, according to Baker Hughes. (2/28, #20)
  • The number of natural-gas rigs in the US last week hit its lowest level since Feb. 2010, according to Baker Hughes. There were 899 rigs, down by seven from last week’s count. Despite the declines from 2010’s high near 1,000, the current level of activity is still seen yielding strong production: Barclays Capital analysts estimate the count would have to fall to 800-850 to lead to production declines. The horizontal rig count fell, by 11, to 970. (3/5, #16)
  • US-based Overseas Shipholding Group expects all crude-storage tankers to be released due to the tightness in the oil market amid the conflict in Libya. “The only tankers used for storage right now are the ones that the ITC (International Tanker Corporation) has, there are no GLCCs or Suez-max being used for storing crude oil,” says OSG CEO Arntzen. “There is one VLCC storing jet fuel in Singapore, that’s all.” (3/3, #5)
  • US oil production last year rose to its highest level in a decade, thanks to unconventional techniques. Analysts believe the US was the largest contributor to last year’s global supply increase, and it is on track to increase domestic production by 25% by the second half of the decade, still not enough to end dependence on imports. Domestic production of liquids rose 3% last year to an average of 7.51 million b/d, enabling a 2% drop in imports to 9.45 million b/d, in spite of rising demand, according to EIA. (3/3, #14)
  • Noble has won the first US deep-water drilling permit in the Gulf of Mexico since the BP oil spill. It is the first company to meet new requirements for safety and spill control, according to the Bureau of Ocean Energy Management, Regulation and Enforcement. More permit approvals are expected in “coming weeks or months,” the bureau says. (3/1, #28)
  • The Obama administration says it may have to reject seven deepwater-drilling permits if a federal judge forces a quick decision on the applications. (3/5, #12)
  • Republican congressional energy leaders have introduced bills aimed at stopping EPA’s implementation of greenhouse gas regulations under the Clean Air Act. House Energy and Commerce Chair Upton, of Mich., and Senate Environment and Public Works Ranking Member Inhofe, of Okla., each says his bill is to prevent new energy taxes. (3/5, #13)
  • US auto sales were expected to gain 20 percent from a year earlier in February, but the recent rise in oil prices could derail the industry’s recovery. For the fifth consecutive month, the annualized sales rate is expected to hold above 12 million vehicles in February. GM CEO Akerson says the industry isn’t yet prepared to respond to a major surge in gas prices, though car makers are in a better position than when prices spiked in 2008. (3/1, #29, 30)
  • Range Resources has signed a deal to sell its Barnett Shale properties in Texas for $900 million. The company has been selling non-core properties in recent years, using proceeds to develop areas with higher returns. The sale comes despite EPA accusations that Range contaminated drinking wells in Texas. (3/1, #31)
  • Arkansas authorities have ordered Chesapeake and Clarita to temporarily stop injecting wastewater into deep underground storage wells, as regulators investigate if they are linked to a recent spate of earthquakes. The companies haven’t opposed the order but say their operations aren’t related to the 850 mostly minor quakes since September. (3/5, #14)