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1. Oil and the Global Economy

Oil prices fell last Monday, at one point falling below $97 a barrel in NY as the dollar rose to a two-month high following a spate of bad news about the various debt crises in the euro zone. On Tuesday, however, prices bounced back to the vicinity of $100 after Goldman Sachs released a forcast that oil prices were heading higher as demand was outrunning the global oil production and economic recovery was picking up. Goldmans was soon joined by Morgan Stanley, JPMorgan, and Barcleys in forecasting considerably higher oil prices in he next 18 months. JP Morgan sees Brent crude trading at $130 a barrel by the third quarter of 2011 and Goldmans is forecasting Brent at $120 by the end of 2011 and $140 by the end of 2012. NY crude closed out last week at $100 a barrel and, in London, Brent crude settled on Friday at $115.

Last week’s economic news was mixed. US GDP and employment numbers were not as good as expected and the US housing market remains weak, but the G-8 announced that the recovery “is becoming more self sustained.” Despite the mixed economic data there seems to be optimism among oil traders that the demand for gasoline will hold up in coming months. AAA surveys say the motorists in the US do not plan to cut driving in the face of high gasoline prices, but will find other places to cut spending. NY gasoline futures climbed steadily last week to close on Friday at $3.09 a gallon. The national average gasoline price in the US is now $3.79 a gallon.

US oil consumption over the last month is down only slightly from last year despite gasoline prices that were in the vicinity of $4 a gallon three weeks ago. The weekly US stocks report showed a gain in refinery utilization which left crude stocks lower than expected the week before last and gasoline stocks much higher.

Unrest in the Middle East continues in a number of countries. Stepped up NATO air attacks on government forces in Libya seem to be moving the situation forward, but it likely will be some months before oil exports reach significant levels. The situation in Yemen and Syria continue to deteriorate with government forces gunning down demonstrators. Although additional threats to oil exports beyond those that have already occurred in Libya and Yemen do not seem to be imminent, the resliance that the “Arab awakening” continues to show suggests that the unrest will not be quelled quickly.

The financial press is starting to see the energy situation in the next six months as a balance between high prices that eventually will reduce demand in North America and the growing electricity shortage in China and other countries that will increase the demand for incrased oil imports to power essential emergency generators. The IEA and major financial institutions are saying that increasing demand for oil products in Asia will outweigh any drop in US demand for the immediate future.

2. China

Developments in China’s electric power crisis continue to be the top story affecting the global energy situation. Last week there was a steady drumbeat of pessimistic pronouncements from official Chinese sources as well as outside observers.

The drought in the Yangtze basin is the worst in 50 years with rainfall running 40 to 60 percent below average. Last week the government ordered that spillways at the giant Three Gorges Dam be opened so that there will be adequate irrigation water in provinces below the dam. The Yangtze river system sustains about two thirds of China’s paddy fields. Maintaining food production obviously outweighs hydro power generation as a national priority. Shortages of hydro generated power are looking to be worse than the the summer of 2004 – the worst year on record. Chinese sources are now saying that 85 percent of China’s total electricity output came from thermal power plants in the first quarter.

Despite the report last week that China’s coal production was up 11.1 percent in the first four months of this year, an impressive accomplishment, the electrical power situation continues to deteriorate. Some of this may be due to transportation problems of getting the newly mined coal from increasing remote locations to eastern plants, but, to hear the Chinese press tell the story, it is government price controls that are hurting the most. With the price of coal up 30 percent in the last few years, most power companies are operating at a substantial loss and are closing power plants for “maintenance” until the situation changes.

Official Chinese sources are now talking about a 40 Gigawatt power shortage this summer when the demand for air conditioning kicks in. Unless the summer rains are unusually heavy this year and hydro output is restored, we are in for an interesting second half. There are already reports that Chinese industrial output is beginning to slow due to a lack of electric power. Chinese oil and coal import numbers that will be coming in the next few weeks could show a marked increase as industrial firms struggle to keep production lines open.

3. Venezuela in the news

Last week started with the announcement that Caracas would be rationing electric power for the second year. The problem is a combination of rapid growth in demand and under investment in thermal generation plants and maintenance of the national grid. In mid-May an electrical failure forced the complete shutdown of the 305,000 b/d Cardon refinery and a partial shutdown of the 750,000 b/d Amuay refinery for several days. With demand growing, these problems can be expected to continue in the foreseeable future.

The more interesting development of the week however, was the announcement in Washington of expanded US sanctions against companies selling oil products to Iran, including the state-owned Venezuelan oil company PdVSA. The sanctions bar PdVSA from competing for US government contracts, obtaining US export licenses and receiving financing from the US Export-Import bank. The sanctions do not prohibit the import of Venezuelean crude into the US. In recent months the US has been importing about 1 million b/d from Venezuela, which represents about half the country’s 2 million b/d oil production and about 11 percent of US daily crude imports of 9 million b/d.

Reaction to the US sanctions came quickly with Oil Minister Ramirez telling reporters that saying that his country would provide an “adequate” response the the sanctions after studying their impact. Venezuela’s Foreign Minister said it could not guarantee regular oil shipments to the US and President Chavez once again threatened to reduce the amount of US-bound exports as he has done periodically over the years.

Most observers do not take Caracas’s threats seriously, noting that the sanctions are relatively mild as they do not involved Citgo and were intended to send a message rather than forcing the Venezuelans to cut their US exports to save face. Venzuelean oil is heavy and sour by international standards and is only suitable for specially equipped refineries designed for Venezulean crude. The short shipping distance also make it more profitable to sell crude to the US.

Venezuela’s oil production continues to slip slowly and is now down to about 2 million b/d of crude and another 300,000 b/d of natural gas liquids, despite its 500 billion barrels of heavy oil reserves in the Orinoco belt.

Quote of the week

“We must define the risks and develop sensible contingency plans. This means thinking critically about what we should be doing now if we knew that the oil price would soar over the next five years. Many of the possible courses of action could also help to accelerate our response to the parallel threat of climate change.”

— John Miles, Chairman, UK Industry Taskforce on Peak Oil and Energy Security

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

  • U.K. business leaders welcomed a commitment by the Government to work with the private sector on contingency plans to protect the UK and its economy from the growing risk of rising oil prices. It follows a meeting between Chris Huhne, Secretary of State for Energy and Climate Change, and representatives from the UK Industry Taskforce on Peak Oil and Energy Security. (5/25, #7) (5/27, #21)
  • U.K.-based oil explorer Cairn Energy said it will spend around $600 million to drill four wells in offshore Greenland this summer. The four wells off the western coast target reservoirs that could contain up to 3.2 billion barrels of oil equivalent. (5/24, #21)
  • Libya’s Oil Minister, Shukri Ghanem, missing for nearly a week and thought to have defected, will represent his country at the June 8 meeting of the Organization of the Petroleum Exporting Countries, according to a senior Libyan official. (5/26, #6)
  • Chinese patrol boats challenged a Vietnamese ship exploring for oil the South China Sea, damaging equipment and warning the crew that they were violating Chinese territory. Vietnam and the Philippines are pushing forward to explore for oil and gas in the area claimed by China. (5/28 #10, #11)
  • Stores and businesses in parts of Shanghai face being shut down on the hottest days this summer, as the city tries to juggle tight power supplies with spikes in demand. Most likely to be affected are industrialized areas that do not have large electric substations. (5/26, #19)
  • China’s Foreign Ministry said that energy cooperation with Russia was proceeding smoothly and the countries had no dispute over the East Siberia-Pacific Ocean crude oil pipeline. (5/26. #21)
  • Russian Energy Minister Shmatko said he doesn’t expect BP and Rosneft to be able to revive their landmark strategic alliance after it was blocked by BP’s existing Russian partners. “In its current form, the deal has become a burden,” Shmatko told reporters. (5/24, #22)
  • The US Commodity Futures Trading Commission cited three companies and two traders with attempting to manipulate crude oil prices on the New York Mercantile Exchange. The group made more than $50 million of unlawful profits from the scheme from January through April 2008, CFTC officials said. (5/25, #23) (5/27, #20)
  • US House Republicans are proposing to cut the US Commodity Futures Trading Commission’s fiscal 2012 funding levels by about 44%, or roughly $136 million less than the amount President Barack Obama requested for the agency. (5/24, #19)
  • Forecasts for the 2011 hurricane season, which runs from June 1 through November 30, agree that there will be an above normal number of hurricanes in the Atlantic this year. (5/28, #21)
  • Commercial adoption of aviation biofuels depends on building supply chains from farms to airlines, US government and industry officials said Thursday. “The technical part of this is pretty much resolved,” said US House Representative Jay Inslee, D-Wash. “We know how this works; we know we can fly airplanes.” (5/27, #23)
  • The number of rigs drilling for natural gas in the United States climbed 15 this week to 881, the first gain in three weeks. Horizontal rigs – the type most often used to extract oil or gas from shale – rose for the fifth time in six weeks, jumping 16 to a record high of 1,054. (5/28, #22)
  • The Pennsylvania state Public Utility Commission intends to declare natural gas pipeline company Laser Northeast Gathering a public utility, giving it the power to condemn private property by eminent domain. In a fiery dissent, Commissioner James Cawley warned of “grave implications for individual Pennsylvanians and their communities.” (5/24, #18)
  • Nearly six of 10 Americans, 57 percent, say they won’t buy an all-electric car no matter the price of gas, according to a USA TODAY/Gallup Poll. (5/26, #26)
  • Solar power may be cheaper than electricity generated by fossil fuels and nuclear reactors within three to five years, said Mark Little, the global research director for General Electric. GE announced in April that t had boosted the efficiency of thin-film solar panels to a record 12.8%. (5/26, #27)
  • Researchers at MIT report on the development of a new energy storage concept – a semi-solid flow cell (SSFC) combining the high energy density of rechargeable batteries with the flexible and scalable architecture of fuel cells and flow batteries. The new semi-solid lithium flow cell offers energy densities that are an order of magnitude greater than previous aqueous flow batteries. (5/27, #24)
  • Mexican state oil monopoly, Pemex, said it has discovered gas and condensates in a deep water well in the Gulf of Mexico, with initial production tests putting reserves in the deposit between 400 billion and 600 billion cubic feet. (5/26, #17)
  • Brazil’s oil regulator reduced the estimate for the Libra field after conducting a drilling program at the site. The field likely holds 5 billion barrels, down from a previous estimate of 15 billion. (5/27, #10)
  • Brazil’s Petrobras must triple the number of ships and deepwater drilling rigs it uses in order to double its oil and gas production by 2020. “We are going to have a very big challenge to add capacity,” CEO Jose Gabrielli told a shipping conference. (5/26, #16)
  • Ecopetrol SA, the Columbian oil producer which expects to more than double output this decade, said it plans to ship a greater share of its crude to Asia as growing demand in China competes for supplies with the US. The company may no longer ship most of its crude to the US in 10 years because Asia sales will be more profitable. (5/26, #20)
  • Germany’s moratorium on nuclear power generation will add around 25 million metric tons a year to the country’s carbon dioxide emissions, the International Energy Agency said. (5/28, #23)
  • The Swiss government announced plans to phase out the country’s existing nuclear plants and seek alternative energy sources, in a response to concerns following Japan’s nuclear disaster. Switzerland is the second country in Europe, after Germany, to drop nuclear energy as an electricity source. (5/26, #28)
  • The world’s global nuclear inspection agency, frustrated by Iran’s refusal to answer questions, revealed for the first time that it possesses evidence that Tehran has conducted work on a highly sophisticated nuclear triggering technology that experts said could only be used for one purpose: setting off a nuclear weapon. (5/25, #9)
  • Iran President Ahmadinejad said one of his ministers will take his place at the next OPEC meeting on June 8 in Vienna, a move seen as retreat in a power struggle with hardline rulers. (5/24, #6)
  • An explosion blamed on a gas leak rocked Iran’s largest refinery on Tuesday around the time of a visit to the plant by President Ahmadinejad, with some Iranian media reports saying at least two people were killed. The blast occurred just before the President was to inaugurate an expansion project at the 400,000 barrel per day refinery. (5/24, #7, #8)
  • Iraq signed an initial agreement to import 25 million cubic meters of natural gas a day from Iran for power stations. The agreement provides for the installation of pipelines within 18 months to transport gas from Iran to the Sadr and al-Quds power stations in Baghdad. (5/23, #5)
  • Saudi Aramco will study drilling again at its long mothballed, first oilfield. Dammam, now known as the “Prosperity Well”, is where the Saudis made their first oil discovery in 1938. (5/26, #7)
  • French industrial gases group Air Liquide signed a long-term agreement to supply nitrogen to Saudi Aramco. Under the 20-year deal, the French firm will supply at least 5 million cubic feet of nitrogen per day to support sea water injection into Aramco’s oilfields. (5/23, #10)
  • Fuel exports by Reliance Industries, India’s largest publicly traded company, climbed 25% in the first half of May from a month earlier as it shipped more gasoline to the US and demand for jet fuel grew. (5/23, #15)
  • Coal India, the world’s largest coal producer, may submit a final bid by the end of June to buy a stake in Indonesia’s PT Golden Energy Mines. To meet rising demand from consumers, mainly in the power sector, the company has been scouting for mining assets overseas. (5/27. #17)
  • South Africa is in talks with energy intensive users to reduce demand by 5,000MW or around 13% to prevent blackouts. South Africa’s national grid nearly collapsed in early 2008, forcing mines and smelters to shut for days and costing Africa’s biggest economy billions of dollars in lost output. (5/27, #9)
  • State-owned Nigerian National Petroleum Corporation said it has assumed operatorship of the Niger Delta oil blocks from which Shell has divested its interest, citing an existing agreement between the two companies. Shell sold its 30% stake in three onshore oil blocks in 2009 and is also in the process of completing divestment in four others. (5/24, #9)
  • Decarbonizing the world’s electricity supply, which in itself is an “unprecedented” challenge, would deliver a little less than half the reduction in carbon dioxide emission necessary by 2035 to limit the eventual increase in global temperatures to two degrees Celsius, the International Energy Agency said in a report. (5/27, #5)