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1. Oil and the Global Economy

A number of factors combined last week to push oil prices to a three-month high, the longest run of weekly price gains since April 2009. Fueling the increase were falling global petroleum inventories; the perception that the EU is making progress in settling its financial crises; increasing unrest in Syria; revival of concerns about Iran’s efforts to develop nuclear weapons; easing inflation in China; and optimism that improvements in a handful of US economic numbers are harbingers of better times ahead. By week’s end, NY oil had climbed by $23 a barrel from the lows set in early October to close at $98.99. Brent crude, which has been more volatile during the past six weeks due to the twists and turns of the EU’s debt crisis, closed out the week at $114.16.

The major factor exerting downward pressure on oil prices remains the debt crises in Greece and Italy and the threat that they could spread to engulf the rest of the OECD nations and spark a still deeper recession. While oil and equity prices rose on the optimism surrounding the resignation of Prime Ministers Berlusconi and Papandreou, most observers see no fundamental solution to the debt problems in sight and maintain that an EU fiscal meltdown in the next year or so remains a distinct possibility. Recent economic numbers from the EU are not good and many are expecting a recession there next year no matter what happens regarding the debt crisis.

The weekly US stocks report showed a 1.4 million barrel decrease in US crude stocks the week before last, but total commercial petroleum inventories down by 15.3 million barrels. Distillate stocks dropped by 6 million barrels and are pushing the bottom of the normal range for this time of year. Many places around the world, including parts of China, are reporting diesel shortages. US diesel prices are running some 78 cents a gallon higher than last year.

The revival of Libya’s oil production seems to be going better than expected. The IEA reports that production is now about 500,000 b/d and is expected to reach 700,000 b/d by the end of the year. For next year the Agency expects production to hit 1.1 million b/d by the end of 2012. Much of the recent production increase, however, has gone to refill pipelines and tank farms so only an estimated 180,000 b/d were exported in October as compared with 1.3 million b/d before the uprising. For November, exports are only expected to be on the order of 200,000 to 250,000 b/d leaving a shortfall of over a 1 million exportable barrels.

Beijing reported last week that inflation fell sharply in October to 5.5 percent year on year, the third straight month to post a falling rate of inflation. The rate of growth of China’s exports slowed somewhat to 15.9 percent year on year from 17.1 percent a month earlier. Imports, however, grew by 28.7 percent year-on-year in October showing that China’s economy is still growing robustly and with it the demand for increasing amounts of oil and natural gas.

2. The IEA’s November Oil Market Report

The IEA reports that global oil supply rose by 1.1 million b/d in October to 89.3 million b/d. This increase was largely due to recovering Libyan production, but higher output from several countries including Saudi Arabia, Angola, Brazil, Russia, and the US contributed to the jump. It should be noted that a large share of the 1.2 million b/d increase in “oil” production in the past year is made of natural gas liquids which has only limited utility as compared to conventional crude.

For next year, the IEA forecasts that despite slowing growth in the OECD countries, the demand for oil will rise to 90.5 million b/d by the 4th quarter of the year. This number, however, is based on 3.9 percent global economic growth next year and there are numerous signs, ranging from the problems in Europe to the flooding in Thailand, of more economic slow-downs ahead. Projected increases in demand for oil are highly sensitive to the pace of economic growth so that faltering economies could result in little or no increase in demand.

Global oil stockpiles continue to fall slowly, indicating that oil consumption is still above production, and is the key reason behind firm oil prices despite the fiscal turmoil in Europe. OECD stocks fell by 11.8 million barrels in September and preliminary data indicate a drop of another 34 million in October, more than double the five year average decline of 14.4 million barrels during the month.

3. The IAEA’s report on Iran

Last week the International Atomic Energy Agency issued its most detailed report yet indicating that there was indeed “credible” evidence that Tehran was carrying out activities related to the development of nuclear weapons that could be carried on ballistic missiles. The report set off a spate of charges and counter-charges concerning the truth of the allegations. Increasing tensions arising from the standoff are likely to have contributed to rising oil prices last week as traders consider the consequences that could arise from either an attack on Iranian nuclear facilities or very harsh sanctions on Iran.

Thus far, the sanctions imposed on Tehran, while hurting the country economically, have not been sufficient to force a change of course on the part of the country’s rulers. Israel, which has a history of bombing nascent nuclear weapons facilities in Iraq and Syria, has already threatened unilateral military action against Tehran if the UN or western powers do not do something to keep the Iranians from acquiring nuclear-tipped ballistic missiles. The US Secretary of Defense said last week, however, that a strike on Tehran could have “unintended consequences” and would only delay Tehran’s nuclear weapons programs by three years, thereby damping speculation that the US would sanction a military strike on Iranian facilities.

Tehran’s trump card in all this is its ability to threaten or even block the 16 million b/d flow of crude through the Straits of Hormuz. Even temporary interruption of this vital shipping lane would be sufficient to bring much of the world to its economic knees and would send oil prices to undreamed of levels. Such an action on the part of Tehran, of course, would be tantamount to a declaration of war and would likely lead to military hostilities.

The key to all this rests with Russia and China which, because of economic interests and great power politics, have chosen to give Iran the benefit of the doubt and vote limit the scope of economic sanctions against the country. Neither of these countries as yet seems to have developed an appreciation of the dangers to the world’s energy supply that would ensue from nuclear-armed Iran and Israel confronting each other.

The Middle Eastern situation is being further complicated by the impending withdrawal of US forces from Iraq and the deteriorating situation in Syria, Tehran’s “best friend” in the region. The course of all this is impossible to predict, but the danger to oil exports remains substantial.

4. The Keystone pipeline decision

The decision by the Obama administration last week to delay a decision on the $7 billion Canada-Gulf Keystone XL pipeline may eventually prove to be a turning point in the nation’s environmental policy. The Administration was caught between labor unions which see the pipeline project as a substantial creator of jobs, the oil industry which likes the security of Canadian oil, and the environmental movement which sees the pipeline as symbolic of whether the nation will ever move to stem global warming. Nebraska’s government, which feared that possible leaks from the proposed line would end up in its main aquifer, had asked that the pipeline be rerouted through less sensitive areas thereby giving the administration a year’s reprieve and removing the issue from next year’s election.

Reactions to the decision ran from elation in the ranks of the environmental movement, to disgust on the part of the oil industry who maintain that the Keystone project vital to the nation’s energy security and economic wellbeing.

Of more interest is the reaction of the Canadians, some of whom, ignoring the environmental issues, want the country to become an oil superpower, but need a way to get their oil to market. Some Canadians believe that a year’s delay will kill the project permanently and are reviving a proposal for a new pipeline from the Alberta tar sands to the west coast where oil from the sands could be shipped to Asia.

Quote of the week

“Governments need to introduce stronger measures to drive investment in efficient and low-carbon technologies. The Fukushima nuclear accident, the turmoil in parts of the Middle East and North Africa and a sharp rebound in energy demand in 2010 which pushed CO2 emissions to a record high, highlight the urgency and the scale of the challenge.”

— IEA Executive Director, Maria van der Hoeven

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

  • Rising energy demands could result in irreversible global warming by 2017 without strict new standards, the IEA said this week in London. (11/10, #11, #14) (11/12, #4)
  • Exxon could lose its current contract to develop the West Qurna oil field in Iraq if it proceeds with an agreement to explore for oil in the Kurdistan region of the country. (11/11, #9) (11/12, #7)
  • Brazilian regulators gave Petrobras more time to explore one of the country’s recent deepwater oil discoveries, where one well could prove to be the country’s biggest yet. (11/12, #10)
  • Chinese airlines aim to take the EU to court by the end of the year over its plan to enforce emissions curbs on flights to and from the region’s airports. (11/12, #19)
  • Russia’s Prime Minister Putin said his country, which currently leads world oil producers in output, plans to work closely with the Organization of the Petroleum Exporting Countries. (11/11, #5)
  • China Petrochemical, Asia’s biggest refiner, will pay $3.5 billion for a 30 percent stake in Galp Energia’s Brazilian unit, China’s largest overseas acquisition this year. (11/11, #16)
  • The Bangladesh government has raised domestic petroleum prices by 6-10percent to cut growing losses faced by state-owned Bangladesh Petroleum and reduce subsidies on imported petroleum products. (11/11, #18)
  • The US Department of Commerce said that crude oil imports into the US in September fell 4.26%, or 416,000 b/d, to 9.338 million b/d, from September 2010. (11/11, #19)
  • As the country awaits results from a nationwide safety study on the natural gas drilling process of fracking, a separate government investigation into contamination in a place where residents have long complained that drilling fouled their water has turned up alarming levels of underground pollution. (11/11, #21)
  • Preliminary findings from a study on the use of hydraulic fracturing in shale gas development suggest no direct link to reports of groundwater contamination. “From what we’ve seen so far, many of the problems appear to be related to other aspects of drilling operations, such as poor casing or cement jobs, rather than to hydraulic fracturing, per se,” said Dr. Groat, a university geology professor who is leading the project. (11/11, #23)
  • Fossil-fuel consumers worldwide received about six times more government subsidies than were given to the renewable-energy industry, according to the chief adviser to the IEA. (11/10, #16)
  • A section of the pipeline carrying natural gas from Egypt to Israel and Jordan was blown up yet again in northern Egypt. (11/10, #19)
  • Neglect of basic maintenance was to blame for a pipeline spill that threatened Basra’s water supply and last week contributed to a brief reduction in Iraq’s southern oil exports. (11/10, #25)
  • London-listed Aggreko has halted power generation at a 50-megawatt emergency thermal-power plant in Uganda due to a diesel shortage. (11/10, #27, #28)
  • Some of Royal Dutch Shell’s oil production in Nigeria has been shut in following the outbreak of a pipeline fire. (11/10, #29)
  • The Brazilian unit of US oil major Chevron is working to contain an oil leak at the company’s Frade field in the offshore Campos Basin. (11/10, #30)
  • China’s imports surged in October as exports grew at their slowest rate in months, suggesting efforts to tilt the economy toward domestic demand may be offsetting the external weakness that has dragged on economic growth this year. (11/10, #31, #32, #33)
  • Some parts of central and south China are facing power cuts and electricity rationing as soaring coal prices discourage power plants from producing at full capacity. This heightens concerns that the country will have to live with power shortages over the next few months. (11/10, #34)
  • The EPA is set to make final the new air-pollution standards for coal-fired power plants by mid-December, sparking disagreement among power companies about how quickly aging coal plants need to be taken offline. (11/10, #39)
  • The EU is expected to overtake the US as the world’s biggest oil importer in 2015. (11/10, #45)
  • The first results from wells in Poland show Europe is unlikely to match the US boom in shale gas. (11/10, #49)
  • The cost of solar cells and microchips has nowhere to go but down because of a supply glut for the commodity they’re made from, a brittle charcoal-colored semiconductor baked in ovens at 600 degrees centigrade. (11/10, #51)
  • The US is reaping its smallest corn harvest in three years after a drought damaged what was seen as a record crop as recently as July, driving prices to an all-time high and curbing an expansion in global food supplies and feed stocks for ethanol. (11/8, #9)
  • Israel’s reserves of natural gas, now under development in the country’s Mediterranean waters, are poised to rise substantially in the near future, according to a senior government official. (11/8, #11)
  • Repsol’s discovery of a huge amount of shale oil in the south of Argentina could boost its energy reserves by 44% and mark a massive potential windfall for the country and the oil company. (11/8, #15)
  • Australia’s plan to tax carbon emissions cleared its final political hurdle on Tuesday but industry groups remain critical of the scheme, arguing it’s too expensive and will deliver few benefits to the wider economy, or succeed in cutting pollution. (11/8, #17, #18)
  • China will phase out incandescent light bulbs beginning next October. Under a three-step plan, imports and sales of incandescent bulbs 100 watts and higher will be prohibited. (11/7, #15) (11/8, #39)