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1. Dubai’s early impact

A week which started with an Iranian air defense exercise and yet another increase in US crude inventories turned into a mini-panic on Thursday when Dubai asked for a payment moratorium on $60 billion in debt. Oil prices, which briefly approached $80 a barrel on Monday, fell to the point that oil was trading at $72.39 a barrel. Prices later recovered, however, to close out the week just above $76 a barrel. Gold prices, which had reached a new high, and the dollar, which had reached a recent low, both reversed on the news from Dubai as the dollar and US securities started to look like a safer investment than indoor ski slopes in the desert.

Although Dubai’s debt is relatively small by global standards and does have an as yet unknown amount of backing from the UAE’s oil wealth, the potential default is seen as symptomatic of the troubles that could be facing much of the heavily-in-debt, interconnected world. These problems are seen as slowing economic recovery and the demand for oil.

Dubai has large investments in the fragile US commercial real estate market. Although it was initially thought that much of the country’s $60 billion debt was held by European banks, on Friday many banks scrambled to say their exposure was limited. Some of the reason for the plunge in oil prices was thought to be thin trading markets over the Thanksgiving weekend.

In the long run Dubai’s problems may turn out to have only a minor impact on the global economy. Last week the Chinese and Russians joined with the US and Europe in censuring Tehran for continuing to conceal nuclear enrichment operations. Heretofore, Beijing and Moscow have been more interested in the economic opportunities provided by continuing to trade with Iran than in the dangers of nuclear proliferation and the stability of the Middle East. This week’s vote suggests that these attitudes could be changing and that Russia and China are starting to step up to their responsibilities as global powers.

Unless Dubai’s troubles triggers off a wave of defaults and a still weaker global economy, the underlying oil market situation remains the same. Weak global demand, except from China, suggests that oil prices should move lower, while increasing US deficits continue to weigh on the dollar and push oil prices higher. Most agree that another $20 increase in the price of oil would occasion a serious impediment to economic recovery.

2. China in 2010

Beijing’s “Politburo” (shades of Stalin’s USSR) announced on Friday that it will continue its “proactive fiscal policy and moderately easy monetary policy” next year. The announcement, which mirrors the language used to describe its policies during the last year, suggests that Beijing will continue policies that resulted in bank lending and capital expenditure growing by 30 percent. The government claims that China GDP increased by nearly 9 percent in the third quarter, although many outside observers believe that Beijing is only creating a bubble at a time when exports – the mainstay of its economy – are weak.

These observers say the investment is going into unneeded plant in infrastructure in government-owned firms and much higher real estate prices. The government realizes it may have overdone things in 2009 and directed banks to increase their capital and called for more efficiency in investment.

As in the US and much of the world, Beijing realizes that it must do something to maintain economic development in the face of faltering economies. Whether the government is making progress, as it claims, or is creating a gigantic economic bubble remains to be seen.

Beijing’s announcement of another year of stimulus suggests that its consumption of oil will continue to grow, perhaps rapidly, for another 12 months. Whether this growth will be enough to offset reserve capacity and new production during 2010, sending oil prices higher, is an open question.

3. Copenhagen

Prospects for the Copenhagen climate talks improved last week with the announcement of specific emission targets by China and the Obama administration. However, the announced goals are far more modest than what is deemed necessary by most climate scientists.

Many issues remain. Among the most important is how much the richer nations will pay to the poorer ones to forego economic development opportunities and pay for emissions-curbing technology. Last week Brazil joined the Arab oil exporters in demanding that the rich nations pay for any loss of income stemming from a global agreement on emissions.

The fundamental problem remains that while most governments see the need to do something, nobody is willing to lock their country into higher energy costs or perpetual poverty unless they are assured that everyone else is sharing the burden equally. Given the great discrepancies in energy consumption around the world, this would be very difficult. Even the new Chinese plan still allows for unlimited economic growth and emissions, while calling for more efficiency in the use of fossil fuels.

The furor over the hacked emails at University of East Anglia’s Climate Research Unit—those that purport to show that some evidence for anthropogenic global warming has been exaggerated—continued last week. Climate change deniers around the world have seized on the emails to bolster their case. Some commentators are going so far as to warn that prospects for the Copenhagen conference have been damaged by the leaks.

The major climate scientists say the emails amount to nothing more than the usual academic feuding, and that if anything the global emissions situation is growing worse rapidly. Given the reluctance of many to forego short term economic benefits in return for forestalling climatic disasters that may be decades ahead, this fight likely will continue for many years.


Last week’s story on the possibility of uranium shortages ahead incorrectly attributed the story to the Swiss Federal Institute of Technology. While the story’s author, Michael Dittmar, worked for the Institute, the research for and publication of the report were carried out independently and were not under the auspices of the Institute.

Quote of the Week

  • “Whether [geologist/writer Art Berman] or his critics are closer to the truth about shale gas decline rates, it does seem clear to me that Wall Street has underestimated the real cost of shale gas, and overestimated how fast its production can be expanded.”
    — John Dizard, The Financial Times

The Briefs

  • US crude production for 2009 is on target to have its biggest one-year jump—from 4.95 million b/d average of 2008 to 5.268 million barrels per day (b/d) through October 2009 (up 6.4%)—since 1970, according to a Platts analysis of industry data Platts concluded that with the jump in the deepwater Gulf of Mexico production, combined with the Bakken Shale oil play and other trends, it appears the US has a chance of at least maintaining oil output in the range of five million to six million b/d for some years to come. (11/27, #15)
  • Estimated reserves of light crude oil from Iraqi Kurdistan are greater than even the most optimistic expectations, said Gulf Keystone Petroleum Ltd. (11/26, #10)
  • Iraq aims to install four new floating oil terminals and three new undersea oil pipelines that they claim will boost export capacity to 8 million barrels per day from a current 1.9 million b/d. (11/28, #10)
  • Pemex has spent approximately $11.1 billion dollars and has earmarked over $2 billion in 2009 alone for the heavy-oil Chicontepec field. Pemex set a 70,000 b/d target from Chicontepec in 2009 but had only hit 30,000 b/d by the end of September. (11/27, #10)
  • Russia will suspend duties on crude oil exports from 13 fields in East Siberia next month in an effort to boost production for Asian markets. (11/27, #19)
  • Iraq hopes a petrodollar gush it will uncork by tripling oil output will drag it out of chaos into prosperity, but there is just as much chance the new wealth will fuel fresh conflict. Rampant corruption, political inertia and ethnic feuding over oil-producing regions like Kirkuk mean that years of sectarian bloodshed could just as easily be followed by years of fighting for control of oil, experts and Western officials say. (11/23, #9)
  • To date no oil has been found in Greenland’s waters, despite an optimistic assessment by the US Geologic Survey. Even if discoveries are made in new areas under exploration, the most optimistic estimates say commercial production is at least 10-15 years away because of the long time-scale involved when developing offshore oil and gas fields. Even so, Greenland is getting prepared for future drilling. (11/28, #19)
  • The Arctic is thawing fast because of global warming but a big “Cold Rush” for offshore oil and gas looks unlikely because of icebergs and high costs, a new book says. (11/27, #21)
  • Barclays Capital estimates that oil demand in the OECD nations will actually be down 8,000 b/d in 2010 compared with 2007, while US demand will be down by 754,000 b/d. (11/26, #20)
  • Growing world oil use will likely outpace the rate of new supplies in 2010, eroding the huge stockpiles of crude which have mounted around the world since the start of the global economic crisis, according to a Reuters poll of ten top oil-tracking analysts and organizations. (11/25, #3) [Ed. Note: This situation is also known as “peak oil.”]
  • Shell expects global crude demand to pick up in the second half of 2010, after declining the most since 1980 this year, according to Chief Executive Officer Peter Voser. (11/17, #8)
  • Offshore crude storage, which has declined sharply from record levels in April, may rise again in the US Gulf as front-month US oil futures trade at a steep discount to barrels for later delivery. Reports indicate storage on large tankers declined from a peak of 100 million barrels in April to between 32 and 40 million barrels recently. (11/265, #8)
  • Frontline, the world’s largest operator of supertankers, posted its first quarterly loss in seven years on slumping demand. The company plans to eliminate single-hull carriers from its fleet by the end of next year. Shipping rates will be “pushed in a positive direction” by the scrapping of about 12 percent of the fleet that have single hulls. (11/27, #6)
  • China’s Sinopec signed a preliminary agreement to provide financing of $6.5 billion for the construction and development of oil refineries in Iran. (11/25, #8)
  • The number of US oil and gas rigs climbed to 1,137, up 24 rigs from the previous week, according to data from oil-field services company Baker Hughes Inc. (11/26, #18)
  • Kuwait could follow Saudi Arabia and switch its benchmark for pricing oil sold to US customers to the Argus Sour Crude Index from Platt’s West Texas Intermediate. (11/25, #7)
  • Global liquefied natural gas supplies will exceed demand for a second successive year in 2010 as new projects begin production to more than match the expected rise in fuel demand, Sanford C. Bernstein & Co. said. (11/24, #7)
  • The Obama administration has damped the anti-Russian rhetoric against the building of Russian natural gas pipelines under the Black and Baltic seas. (11/28, #20)
  • Chinese cities are grappling for a second week with the most serious natural gas shortage in nearly a decade, triggered by unusually early winter weather…At the same time, China is stepping up construction of a domestic gas pipeline network. (11/26, #15-16)
  • A Mexican energy commission said it will enforce strict new rules to reduce the flaring of natural gas by Pemex. (11/28, #13)
  • Fitch’s downgrade of Mexico’s credit rating by a notch to BBB on Nov. 23 was a warning. Mexico has too many problems to keep going as it has. Oil production from Pemex, the state-owned monopoly operator, averaged 2.61 million barrels a day in 2009, down 7% from 2008 and 22% from the 2004 peak. Exports are falling even faster – down 13% from 2008 and 35% from 2004. (11/27, #11)
  • The world’s container ports industry is facing a sharp reversal in its fortunes as the sector’s first ever year-on-year fall in volumes forces an abrupt change from breakneck expansion to retrenchment. (11/27, #7)
  • A sharp rise in Chinese car sales and vehicle ownership, set to increase by 24%, hasn’t been reflected in nationwide gasoline consumption this year, an anomaly that has some analysts scratching their heads in the search for answers. Some say the Chinese are being rational: they are driving less — even as they buy more cars — as high fuel prices and slower income growth force households to manage their regular expenses wisely. (11/16, #17)
  • The Obama administration’s push to solve the nation’s energy problems, a massive federal program that rivals the Manhattan Project, is spurring a once-in-a-generation shift in U.S. science. (11/26, #22)
  • China’s Guangdong Nuclear Power Holdings Co., one of the country’s two nuclear-energy firms, said it will need more than 100,000 metric tons of uranium between 2009 and 2020 to feed its growing fleet of nuclear-power plants, a huge jump from current demand levels that underscores the scope of China’s nuclear-energy ambitions. (11/27, #14)
  • Canadian ethanol emits 62 percent less greenhouse gas than conventional fuel, taking into consideration all stages of the fuel’s production from planting a crop to burning the fuel, according to a new report prepared for Canada’s biofuel industry. (11/28, #25)
  • In late 2007, Congress mandated that refiners blend at least 15 billion gallons of biofuels into gasoline by 2012. However, with the recent drop in US gasoline consumption and more efficient cars, updated projections suggest that the country is unlikely to be able to use all the ethanol that Congress has ordered up. (11/28, #18)
  • New research by alternative energy research firm New Energy Finance finds that solar power will cost about 50 percent less at the end of 2009 compared to one year earlier. Those costs should drop even lower when factoring in government subsidies. (11/28, #24)
  • To safeguard its supplies of rare-earth metals, a Chinese ministry is proposing a total ban on exports of terbium, dysprosium, yttrium, thulium, and lutetium and a restriction on neodymium, europium, cerium, and lanthanum to a total of 35,000 tons a year, which is far below global needs. Many of these metals are vital to energy-efficient technology. (11/28, #27)