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1. Oil and the Global Economy

It was an unusually active week with oil prices setting a new two-year high above $88 on Thursday and then plunging nearly $3 a barrel on Friday on fears that China’s economic growth would be stifled by efforts to fight growing inflation. Oil in NY closed the week at $84.88 while in London, Brent closed at $86.34. Fears of a default on Ireland’s sovereign debt sent the euro lower and the dollar higher despite the start of the Federal Reserve’s new quantitative easing program. The price decline on Friday erased nearly half of the month’s oil price increase. Gold, other commodities and the equity markets fell along with oil prices.

The week also saw the release of the IEA’s controversial annual report on global energy – World Energy Outlook 2010 and its monthly Oil Market Report which forecasts near record-breaking increases in the demand for oil in 2010. OPEC too released its monthly report on oil demand that is at considerable variance from the way the IEA sees the coming year.

Globally oil demand remains strong by recent standards. The IEA increased its growth forecast for 2010 by 200,000 b/d to 2.3 million b/d. Growth in oil consumption for 2011 is now seen as 1.2 million b/d, demand thereby averaging 87.3 million b/d in 2010 and 88.5 in 2011. The IEA reports October oil production was 87.6 million b/d. Much of the unexpected increase came from higher demand in OECD countries.

Accompanied by much bluster, Tehran agreed to return to the negotiating table to talk about its nuclear program. The IEA points out that the Iranian government spent $66 billion subsidizing the retail cost of fossil fuels last year, more than any other country. This, accompanied by the UN, special US and EU sanctions, may be causing more trouble than Tehran cares to admit.

In Baghdad, the feuding parliamentary factions announced an agreement for a power-sharing deal. The next day the Sunnis walked out of the first meeting of parliament in months claiming that the Shiites were not living up to the deal. The danger in all this is that the stalemate could devolve into increased fighting, threatening even current Iraqi oil exports much less the large increases that are expected in future years.

Opinions vary as to whether Friday’s price plunge has any meaning beyond a more violent than usual price collection. Some China watchers believe that Beijing has enough fiscal tools to control inflation without doing much damage to economic growth and oil demand. Others think China is just one big economic bubble. Prior to Friday many analysts were calling for $90 oil by the end of the month and $100 dollar oil this winter or next spring. If the IEA forecast of a 3.5 million b/d increase in demand during 2010-2011 turns out to be valid, the global oil industry would seem to be hard pressed to keep up with the increased consumption.

2. World Energy Outlook 2010

One of the more interesting occasions each year is learning just how far the International Energy Agency has come in the last 12 months towards publicly admitting that days of boundless cheap oil are over, just how high global oil production will ever get, and when the inevitable decline in production will set in. The Agency, of course, is not a completely free agent in formulating its discussion of peak oil, for it must take into account the collective positions of the 28 member countries that pay for its services. For the most part, these nations are not yet willing to admit to their peoples that two centuries of rapid economic growth based on easily available cheap fossil fuels is drawing to a close.

This year’s report, while another step towards reality, is still projecting production levels during the next 25 years that are impossible to achieve. While acknowledging that production of conventional oil from existing fields will fall from 70 million b/d to less than 16 million by 2035, the Agency projects that increases in heavy oil production from Venezuela and Alberta, more natural gas liquids and the discovery and development of another 50 million b/d of “new oil” production will delay the peak in oil production until circa 2035. Peak demand is now projected to be around 99 million b/d in 2035 (down from the prediction of 106 million by 2030 last year). But then, this is all unrealistic window dressing for it says nothing about the ability to fulfill the demand.

Because of the realities of the IEA’s political environment, an increasing share of information and insights in the report comes from between the lines where it must be ferreted out by careful reading, analysis, and reflection. Given that it is politically impossible to project major setbacks in the course of industrial civilization, the Agency must write around some major issues while still maintaining its credibility.

When the Agency says, “The oil price needed to balance markets is set to rise, reflecting the growing insensitivity of both demand and supply to price,” it is making an important pronouncement that has ominous implications for all our futures, but readers are left to figure this out by themselves.

Besides restating the obvious, that China and India are slated to grow rapidly and that the OECD nations are going to stagnate in coming decades, this year’s report takes on the issue of global disarray over climate change and the implications this has for energy consumption. New scenarios have been developed outlining where we might be if the major countries do try to increase energy efficiency and make cuts in emissions.

While, as usual, there is much detailed information that will provide fodder for analysis over the next year, meaningful conclusions as to where we are really going are sadly lacking.

3. China

The IEA got it right when it said last week that “it is hard to overstate the growing importance of China in global energy markets.” With demand for oil at best tepid within the OECD, China with its economic growth rate circa 10 percent a year and its demand for oil increasing by at least 400,000 b/d each year will determine, in conjunction with India and a few others, where oil prices go over the next couple of years. Even the merest suggestion that Chinese growth might falter is enough to send oil prices spiraling down, at least for a while.

Despite last week’s pessimism, occasioned by a 4 percent year-over-year jump in inflation, China’s implied demand for oil increases by 12 percent year-over-year in October to a new monthly high of 8.92 million b/d. The current spike in demand seems to have been at least in part prompted by Beijing’s efforts to increase its nationwide energy efficiency by shutting down inefficient generating stations and in some cases reducing or eliminating grid power to operating factories. In turn these factories started up diesel generators which increased the demand for oil. The situation is currently being exacerbated by early snows across northern China, which is increasing the demand for heating oil and is likely slowing coal shipments. Shortages and rationing of diesel fuel is reported from some parts of China and the government is said to be increasing diesel imports, including the usually undesirable high-sulfur variety.

The issue will likely be decided in the next few weeks when Beijing moves to deal with what is likely to be deemed an unacceptable inflation rate. Analysts are split on whether the government can rein in inflation without significantly damaging economic growth. If Beijing does not relax the policy of cutting back electricity production which is due to run until the end of the year, the oil prices which seem to be driven by Chinese demand could move higher by the end of the year.

Quote of the week

“Recovery of deepwater drilling in US waters will be very slow and will take several years.”

— Beth Sewell, a managing partner at Quantum Power & Gas Services.

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

  • IEA’s World Energy Outlook says that global gas oversupply is set to exceed 7 trillion cu. ft. next year, a “major barrier” to the development of renewable energy, cleaner coal plants and nuclear power. Focusing more on consumption than production, the report urges G20 nations to slash their $312 billion in annual fossil-fuel subsidies. (11/9, #12, 17; 11/10, #3)
  • The price of coal burned to generate power may jump 12 percent next year on Asian demand and supply constraints in producer nations. Imports by China jumped 16 percent in September from the previous month, the fourth consecutive such increase. In India, demand may triple in the next two decades to 2 billion tons. (11/9, #18)
  • Oil and gas companies will increase spending on exploration and production to $380 billion this year, up $19 billion from 2009, Wood Mackenzie says. By 2012 or 2013 spending may recover to a record level set in 2008. (11/11, #6; 11/12, #8)
  • Seadrill has entered into a contract to build at Samsung in South Korea up to four new ultra-deepwater drillships for under $600 million each. (11/11, #9)
  • The US Gulf oil spill commission suggested that at a critical phase of a deep exploratory dig at Macondo, Deepwater Horizon operators took their eyes off the high-pressure deposit pushing up from 20,000 feet beneath Earth’s surface. (11/01, #19)
  • Natural gas futures fell as a new US storage record was set. EIA reports that 19 billion cu. ft. were added during the week ended Nov. 5. That pushed domestic storage over the record of 3.837 trillion cu. ft. set last November to an all-time high of 3.84 trillion. (11/11, #4)
  • Chevron expects natural-gas production of its pending acquisition, Atlas, to grow seven-fold, or 100,000 boe/d – 1 percent of current US gas production. (11/12, #24)
  • EPA will give states broad leeway to decide how to limit emissions of heat-trapping gases. API and food-industry groups have sued over EPA’s E15 decision. (11/9, #32; 11/11, #21)
  • The GOP capture of the House may lead to a change in policy on biofuels. (11/13, #18)
  • Despite support from President Obama and the new Republican House, a big build-out of nuclear power plants remains unlikely unless someone ponies up more money. (11/12, #27)
  • IEA predicts that by 2035 China will use 20 percent of global energy, which will reach 16.74 billion tons of oil equivalent. China’s energy demand will jump 75 percent between 2008 and 2035, accounting for 36 percent of projected global growth. Factories in southern provinces have found a way around Beijing’s power rationing, and the result has been a significant jump in the sales of diesel-powered generators. (11/10, #17; 11/11, #15, 17; 11/13, #16)
  • In Iran, more price hikes are expected, including for cut-rate gasoline, as Islamic leaders start trimming $100 billion a year in subsidies. BP says it will shut down a natural-gas field in the UK North Sea that it jointly owns with Iran. (11/9, #20; 11/10, #9; 11/11, #23)
  • The MEND, Nigeria’s main militant group, has kidnapped seven foreign workers of four oil servicing companies in Akwa-Ibom State. Among those abducted in the attack on Afren’s offshore Okoro oil field are two Americans, two French, two Indonesians and a Canadian. MEND says it will start attacks on oil installations in the Niger River delta in “coming days.” Also, off the southern delta coast, in an oil-rig attack for which no group immediately claimed responsibility, gunmen in speedboats kidnapped five workers and wounded two others. (11/9, #23-25; 11/12, #12, 13)
  • In Angola, a convoy of Chinese workers contracted with state-oil company Sonangol were attacked by separatists. One soldier and a civilian driver were killed. (11/13, #10)
  • In Norway, natural-gas output rose to 330 billion cu. ft. in October from 290 billion a year earlier, while crude-oil production slipped from 2.009 million b/d to 1.868 million. Norway pumped 365,000 b/d of condensate and natural-gas liquids; in the year through September, average oil production has been 1.8 million b/d. (11/9, #34)
  • Britain could save $1.1 trillion by 2050 if it continues to use gas as a major fuel, according to a report. This assumes gas will continue to be used for power generation and heating; that technology for carbon-capture and storage will be rolled out; and that dual-fuel heating will limit the need for gas to peak-load demand. The energy ministry has opened a $15 billion competition to fund CCS technology to gas-fired projects. (11/13, #20)
  • Russia’s Gazprom may start supplying natural gas to South Korea in 2017. (11/10, #20)
  • Nepal for the next two years will face load-shedding of up to 16 hours per day during the dry season. Nepal Electricity Authority may go bankrupt. Nationwide hydropower capacity is not well known – it may be as little as 40,000 MW or as much as 200,000. (11/13, #17)
  • Australia has granted environmental approval for Shell’s proposed Prelude to be the world’s first floating liquid-natural-gas vessel. It will produce 3.6 million tons of LNG, 1.3 million tons of condensate and 400,000 tons of liquefied petroleum gas each year. (11/12, #20)
  • Mexico by summer 2011 will award oil contracts to private firms for the first time since the sector was nationalized in the 1930s. Violence by drug gangs has stopped some oil workers from reaching northern installations and costs Pemex $350,000 per day as it has shut down the equivalent of 100 million cu. ft. per day of natural-gas production. (11/9, #26; 11/13, #13)
  • Petrobras reported another quarter marked by rapid growth and expects it could surpass ExxonMobil as the world’s largest oil producer within a decade. Petrobras is producing 50,000 b/d oil from the Tupi presalt field offshore in 2011. (11/13, #11, 12)
  • Negative perception of Canada’s oil sands could slow growth if the industry doesn’t make a compelling case for continued development, says a US consulting firm. (11/11, #22)
  • The US, China, Western Europe, Japan and Brazil could hypothetically turn over 90 percent of vehicle fleets to alternative powertrain/fuel by 2050. General Electric plans to deploy 25,000 electric cars by 2015 by converting half of its global fleet of 30,000 cars to electric and purchasing 12,000 Chevy Volts from GM. New Zealand-based Halo Inductive Power Transfer has developed an electric vehicle that can be recharged wirelessly using magnetic resonance. (11/10, #22; 11/12, #28; 11/13, #24)