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1. Oil and the Global Economy

Oil prices moved up steadily last week with NY futures closing at $113.93, the highest level since mid-July 2008. In London, Brent crude closed out the week at $125.89 a barrel, up 7.3 percent during April. The falling dollar, rapidly increasing gasoline prices, continued unrest in the Middle East, power shortages in China, and a very tight global supply/demand balance are behind the move. While US crude stocks increased last week due to a surge in imports, gasoline stocks fell. In NY gasoline futures closed out the month at the highest level since July 14, 2008, suggesting that nationwide gasoline prices may soon top the record average price of $4.11. Oil prices have now risen for an unprecedented eight straight months.

The AAA reports that US gasoline prices now average $3.94 a gallon, up 32 cents in the last month. The EIA reported that a reevaluation of US gasoline consumption shows that it fell 3.9 percent in February from earlier estimates. Current data shows US consumption down 1.6 percent from last year.

The US Federal Reserve signaled that it will keep interest rates low suggesting continued weakness for the US dollar and higher oil prices in the weeks ahead. In the meantime, US GDP growth slowed in the first quarter to 1.8 percent with consumer spending falling.

The IEA’s chief economist Fatih Birol warned that high oil prices will disrupt economic recovery as the demand for oil increases by 3 million b/d over the next few months to meet summer consumption. Birol noted that despite the talk about speculators, the market is providing an accurate price for oil given the current state of supply and demand.

2 . A turning point for global oil?

The implications of Saudi Arabia’s announcement that it had cut oil production to 8.2 million b/d as the markets were “oversupplied” are starting to set in for many analysts. With the loss of Libyan production and the cutback in Saudi output, OPEC production is settling back to the lowest level seen in recent years. Increasing unrest in the Middle East suggest that further drops in oil exports may be in the offing.

Some analysts are already saying that global oil production has fallen below global consumption by as much as 1 million b/d with the balance coming out of stockpiles. All indications are that while US gasoline consumption may fall in the coming months due to very high prices, the rest of the world will continue to increase its oil consumption. Recent reports suggest that China’s economy will continue to grow robustly for at least a while longer, while price subsidies around the world continue to shield consumers in many countries from the ever increasing prices.

Many believe that in order to stabilize world oil prices, the Saudi’s will have to increase production to 10 million b/d in coming months in order to stem the slowly rising oil prices. All indications are that the prospects for this happening are not good. With turmoil increasing all across the Middle East, the Saudi royal family must muster all its resources if it is not to fall prey to the pro-democracy sentiments sweeping the region. The first resource is money which Riyadh is handing out copiously to quiet potentially restive youth of the country. More money requires higher oil prices and in the past maintaining the welfare of the global economy was a high priority for the Saudi government. Now with the possibility of regime change staring it in the face, the Saudi’s trump card is its spare capacity to produce oil, and in extremis, its exports. This is a very powerful bargaining chip, for the loss of Saudi oil production would bring the global economy to its knees.

National priorities can and do change and as we have seen recently in country after country, a regime’s highest priority is to remain in power. Thus the prospects of further increases in Saudi oil production in the near term just to keep global oil prices from rising further seem remote. Instead, the Saudis will watch the situation closely and will make every effort to extract the highest possible political and diplomatic price in return for any production increases.

2. China

After weeks of belt-tightening, China’s economy appears to be slowing a bit as a new survey shows manufacturing down with price increases falling as well as export orders. Overall, however, China’s GDP is still forecast to grow by 9.5 percent this year as compared to 10.3 percent in 2010. Meanwhile reports of power shortages in the industrialized coastal provinces continue to be received.

The major news of the week was the growing coal and power shortages that are reported in the eastern industrial provinces. In recent years, Beijing has closed thousands of smaller (and dangerous) coal mines, shifting the production to large government controlled operations. Coming amidst an annual 10 percent increase in coal consumption, this has been a hard order to fill and Chinese coal imports have grown markedly. Given that China must move in excess of 3.2 billion tons of coal long distances each year, strains on the rail and road network are a major bottleneck. New rail capacity is expected to be completed around 2013, but this does not help the current situation.

Electricity shortages usually develop during the hot summer months, but this year they have come 2-3 months early suggesting more trouble ahead. There are already reports of factories that are heavy users of electricity being closed two days a week in several southeastern provinces. As in the past, the larger more modern factories have their own power generators. Although power from emergency generators in very expensive, in many cases it is far cheaper than shutting and restarting elaborate production processes. This source of power, of course, will likely increase the demand for imported oil in coming months.

Another new development affecting China’s energy situation was the announcement that the small refiners, known as “teapots,” will be closed and replaced with increased refining by the large state-owned oil companies. The large refiners are scheduled to complete 3 million b/d of additional refining capacity in the next four years. As the teapots currently supply 10 to 15 percent of China’s oil products, unless the closures are managed carefully, fuel shortages are likely in some regions. The small refineries mostly use imported fuel oil as a feedstock as only the state oil companies are permitted to import crude.

With the first third of 2011 gone by, it still looks as if China’s oil and coal consumption this year will turn out to higher that that forecast by the IEA and EIA.

Quote of the week

“We are in the danger zone now with prices and how the economy is responding.”

— Fatih Birol, IEA chief economist

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

  • A 14 percent reduction in its 2011 fiscal-year budget will force the Energy Information Administration to cut back some energy data and analysis. The budget for the fiscal year ending Sept. 30 provides $95.4 million for the EIA, the independent analytical and statistical wing of the Department of Energy, a drop of $15.2 million from the fiscal year 2010 level. (4/30, #3)
  • IEA chief economist, Fatih Birol, said high oil prices are threatening to disrupt a still-fragile global economic recovery. “We are in the danger zone now with prices and how the economy is responding,” said Birol. He also said that oil use is set to increase by as much as three million barrels a day over the next few months, and prices could march higher unless major producers pump out more crude. (4/30, #2)
  • A bomb exploded on a natural-gas pipeline crossing Egypt’s Sinai Peninsula, causing the second supply interruption to electric power plants in Israel and Jordan in three months due to sabotage. (4/27, #4) (4/28, #5)
  • The Brazilian oil and gas producer Petrobras said it expects to invest a total of $73 billion to develop projects in the pre-salt area in the Santos Basin, southeast Brazil, through 2015. (4/30, #10)
  • Petrobras announced late Thursday the discovery of a new oil field in the Campos Basin pre-salt, in the Albacora field, 107 kilometers off the coast. “Preliminary volume estimates indicate an economically recoverable volume potential of approximately 350 million barrels of good quality oil,” Petrobras said. (4/29, #9)
  • The US offshore drilling regulator may be able to expand oversight of rig contractors without congressional action, Interior Department official Michael Bromwich said on Monday. Interior’s Bureau of Ocean Energy Management has been examining its options for regulating rig contractors after official reports on the BP oil spill blamed actions by BP’s contractors, Transocean Ltd and Halliburton, for contributing to the accident. (4/26, #24)
  • Libyan rebels say it will take four weeks to assess damage to two key oil fields that came under attack by troops loyal to Libyan leader Qadhafi earlier this month. (4/26, #7)
  • Libya imported gasoline from Italian refiner Saras in early April, taking advantage of a loophole in United Nations sanctions that permits purchases by companies not on a U.N. list of banned entities. Shipping sources with direct knowledge of the transaction said the cargo was transferred to a Libyan ship in Tunisian waters before sailing to Libya. (4/26, #6)
  • Political instability in Libya has slowed the progress of the Kenya-Uganda oil pipeline – one of the most critical regional infrastructure projects in East Africa. Tripoli was financing the project. (4/25, #11)
  • US President Obama reiterated his call to end billions of dollars in tax breaks for oil companies and instead invest in alternative energy sources. Obama said the government should be spending more money on developing new energy sources, such as solar- and wind-power, and encouraging the development of energy-efficient technologies. (4/25, #19) (4/30, #14) (4/30, #15)
  • Without sufficient investments in oil field development and the use of new, advanced technologies, Mexico faces becoming a net oil importer in 10 years, according to research by Rice University’s Baker Institute and Oxford University. Mexico’s oil production peaked at about 3.9 million b/d in 2004. Since 2005, output has fallen by more than 25% to 2.98 million b/d in 2010. (4/30, #12)
  • Coal India Ltd., the world’s biggest coal producer, said Tuesday it will soon seek bids from 16 overseas companies for coal, as energy hungry India tries to secure enough supplies to run its power plants. (4/27, #11)
  • India plans to export gasoline and diesel to Pakistan to help meet its energy needs and to open up a new market for Indian refiners such as giant Reliance Industries. (4/25, #9)
  • India is looking at using Turkish banks to pay Iran for crude oil, a senior Indian oil ministry official said. A US official said Turkey’s commercial banks should avoid transactions with Iranian banks the U.S. has identified as conduits for financing Tehran’s nuclear program. (4/28, #8)
  • Iran‘s deputy oil minister says the country will increase its crude oil production by more than 100,000 b/d by March 2012. Masjed Soleiman, Yadavaran, Mansouri, and Hengam oilfields are the four main drilling projects that will contribute to the increase. (4/30, #7)
  • With oil prices well above $100, an export bottleneck in Iraq is preventing some of its newly increased oil production from reaching export markets. Ravaged by years of war and international sanctions, the crumbling infrastructure in the south of Iraq is proving inadequate to support increasing production from Iraq’s southern oil fields. (4/25, #6)
  • A Russian state study warns the government that it faces a future light crude oil shortage and that it can only sustain its world leading production rates for another 15 years. The annual ministry of natural resources survey painted a bleak Russian energy picture that also pointed to problems in future export rates of natural gas. (4/27, #20) (4/27, #21)
  • Russia decided to halt exports of gasoline and switch the flow to domestic markets to fight shortages and price increases. Deputy Energy Ministry Sergei Kudryashov suggested that the export restrictions would apply only for the month of May and then be followed by higher gasoline export duties aimed at keeping most future sales within Russia. (4/27, #19) (4/28, #25)
  • Venezuela will charge an increased tax in lieu of royalties as long as crude trades above $70 per barrel. “Oil companies are doing well,” Oil Minister Rafael Ramirez said at a press conference in Caracas. “I have the revenue and profit numbers, and this windfall tax is not going to hurt them,” he said. (4/25, #14) (4/27, #7) (4/27, #8)
  • Turkey plans to build a canal from the Black Sea to the Marmara Sea, turning the city of Istanbul into “two peninsulas and an island” and diverting shipping traffic from the Bosporus, a winding waterway that runs the through middle of the city of 12 million people. The “Istanbul Canal,” which will be 30 miles long, 150 meters wide and 25 meters deep, will carry as many as 160 ships per day, including the largest oil tankers. (4/28, #24)
  • Japanese factory output suffered a record decline in March as the tsunami crippled supply chains across the economy. The government said production plummeted 15.3 percent in March from February, the biggest decline since records began in 1953, and worse than analysts had expected. (4/25, #17) (4/28, #17)
  • China’s census shows its population grew to 1.34 billion people by 2010, with a sharp rise in those over 60. This census, the first in 10 years, comes after a decade of rapid economic growth that has led to significant social change. The results revealed that almost half of all Chinese – 49.7% of the population – now live in cities, up from about 36% 10 years ago. (4/28, #13)
  • Nepal faces its worst fuel crisis since 1990 as the Nepal Oil Corporation is on the verge of running out of its diesel and petrol stock, informed sources revealed to the Himalayan Times. (4/29, #12)