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1. Oil and the Global Economy

A variety of developments sent oil prices 6.7 percent higher last week closing on Friday just below $87 a barrel. In London Brent Crude closed above $88. The week began with the announcement that China’s manufacturing expanded at the fastest pace in six months. Later in the week it was announced that Chinese value-added industrial production will grow 13.5 percent this year. China is stepping up petroleum refining to new highs to combat fuel shortages in some regions. The crop harvest, unusually cold weather, and efforts to increase energy efficiency by shutting down older power plants are contributing to the problem. For the first time in several years there are reports that some Chinese factories are using their diesel-hungry emergency generators to maintain production.

Wednesday morning we learned that US petroleum inventories which have been at record levels are starting to decline. US supplies of diesel and heating oil are now at their lowest since July. The big news of the week, however, came Wednesday afternoon when the Federal Reserve announced that indeed it was going to resume its controversial policy of quantitative easing by purchasing some $600 billion worth of US Treasury securities by mid-2011. The purchases are aimed at stimulating the economy by expanding the money supply, but many believe the program will drive up inflation and depreciate the dollar without generating much growth. At any rate, anticipation and the announcement of the move drove down the dollar and pushed up oil prices nearly all week. For a while on Thursday the dollar was at its lowest against the euro since January.

Oil prices were given another boost when Saudi Oil Minister Ali Al-Naimi said last week that Riyadh is now comfortable with oil prices as high as $90 a barrel vs. the previous top of $80. This suggests that we still have a ways to go before the Saudis start increasing production, if they really can do so significantly, in an effort to keep a lid on prices. Other OPEC members, who are not as sensitive to the dangers of very high oil prices, are talking of $100 oil as a way to offset the losses they are incurring due to the falling dollar.

The week ended with the announcement by the US Labor Department that the economy added 151,000 jobs in October. Some, however, are skeptical of this number saying such a conclusion is not supported by the underlying data and that it will be eventually be revised downwards.

All indications seem to be pointing to higher oil prices ahead. Chinese demand is strong; either the US economy will grow, or the dollar will fall, either of which will lead to higher prices. The real question is how high and how quickly will oil prices move and how much economic damage will price increases cause. The major Wall Street firms are talking of oil in the $90s later this year and going above $100 in 2011.  Economists employed by financial firms are schizophrenic about their predictions. While striving to give an accurate picture of where oil prices are going, they realize that if they start talking about prices similar to those in 2008, they are really predicting that the economy will be damaged and equity markets will fall. Thus there are increasingly frequent incidences where oil price analysts are saying that while oil prices might pass $100 next year, they will certainly not return to the 2008 high of $147.

In the meantime, US sales of trucks and SUVs climbed to 54 percent of the light-vehicle market in October, the largest market share since 2005. It is clear that $2.80 gasoline is not bothering those Americans who are still buying new cars.

2. The US Elections

The next two years likely will see gridlock possibly coupled with a search for compromise in Washington. With the majority of the newly elected representatives adamantly opposed to taxes or caps on carbon emissions that could threaten economic recovery, there will be little or no movement on climate legislation for at least the next two years and likely for much longer. Battles will be fought over the powers of the EPA to regulate greenhouse gases. Although some are calling for legislation to stop the EPA, this is unlikely to pass as long as President Obama is in office.

While the new Republican majority can stop legislation it will have trouble pushing new initiatives past the Senate and the President without some kind of bi-partisan agreement. In the field of energy legislation this will be difficult to achieve. The new House majority has already said it will investigate climate science and its conclusion that global warming is at least partially caused by carbon emissions. A recent survey concluded that 50 percent of the newly elected representatives do not believe that climate change is caused by man-made emissions and that most of the rest are opposed to any legislation that increases government revenue or threatens job creation.

While not abandoning the EPA’s mandate to regulate greenhouse gases, President Obama has suggested that he may be willing to compromise on the imposition of new EPA regulations. Some see nuclear power and expanded use of natural gas as areas where bi-partisan agreement could be achieved.

The real issue in all this is what happens to global efforts to control emissions. Without the agreement of the US Congress it is unlikely that serious emissions control efforts on a global level will make progress. While the EU recognizes the long term dangers, China, Russia and at least half of the American people believe that economic development is still more urgent than controlling emissions – at least until the situation changes and the dangers of climate change become patently obvious to all.

The one interesting development last week was that California voters rejected the proposal to suspend the 2006 climate law. The voters however, perhaps unknowingly, did pass a referendum broadening the definition of a tax so that it could require a two-thirds vote in the California legislature to implement any kind of emissions control program.

3. Iraq

Another round of highly coordinated suicide bombings, a bloody assault on a Christian church, and the parliamentary impasse over the formation of a government raises the question of whether the security situation in Iraq is stable enough to permit a substantial increase in oil production. In the wake of the attacks, Reuters ran a story about the resilience of “daring investors” who are unlikely to be deterred from developing Iraqi oil by suicide bomber attacks in crowded cities.

The general thesis is that the giant international oil companies that have contracted to develop or expand Iraqi oil fields and build new infrastructure have already weighed the risks and are still prepared to do business in Iraq. Most of the construction activity will take place in the desert and construction and logistic support will come from guarded and fortified camps.

The other side of the argument is that so far there has been no concerted effort by al Qaeda or Sunni insurgents to attack the country’s oil infrastructure or foreigners working in Iraq. Small bombings and attacks continue daily punctuated by larger attacks that kill and maim hundreds.  While the oil infrastructure in southern Iraq is largely unscathed, the northern pipeline to Turkey is bombed on a monthly basis.

At present, most oilmen seem more concerned about the interminable feuding amongst the Shiites, Sunnis, and Kurds over the formation of a new government than terrorist attacks. The Kurds have now signed 30 contracts for the development of their oil without permission from Baghdad, and the recent awarding of natural gas development contracts by Baghdad has been met with threats of violence from local Sunni officials who do not like the Shiites giving away “their” natural gas to foreigners.

Iraq’s oil production infrastructure is crumbling from age. Major failures in pipeline and pumping systems can come at any time. The government is well aware of these problems and is letting contracts replace the aging system thereby exposing still more contractors to the danger of doing business in Iraq.

Even the prospect of Saudi-scale riches so far has not been enough to overcome ancient animosities such as the Sunni-Shiite dispute that has been going on for 1300 years. The next year or two should give some insight into whether the Iraqis will be able to get their act together and increase production enough to offset global oil depletion in the foreseeable future.

Quote of the week

“Without a government, there’s no stability, and without stability, it is not easy to invest,”

— Necdet Pamir, a Turkish University professor, commenting on the situation in Baghdad.

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

  • The IEA warns that if governments fail to implement pledges to fight climate change and cut fossil-fuel subsidies, oil prices will inflate. New environmental policies would see demand for oil 10 percent lower by 2035. (11/4, #4)Some US states are more dependent on oil and vulnerable to price increases than others; most aren’t doing enough to lessen dependence, according to a report by NRDC. (11/5, #18)
  • The number of horizontal rigs drilling for oil and natural gas in the US rose by 24 to a record high of 943 this week. Two-thirds of the rigs are for gas, analysts estimate. (11/6, #14)
  • Swiss freight forwarder Panalpina admitted in US court to bribing officials from 2002-2007 in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan. Panalpina, Shell and five oil services companies agreed to pay $236.5 million to settle. (11/5, #14)
  • BP’s costs related to the Gulf of Mexico oil spill have reached $39.9 billion through the third quarter. Mitsui, with a 10-percent stake in Macondo, received a $1.9 billion bill from BP for clean-up. Shell will sell its interest in six Gulf of Mexico oil and gas fields with eight percent of its total daily production to W&T for $450 million. (11/2, #19; 11/3, #19, 22; 11/5, #19)
  • Shell, eager to win approval for its stalled plan to drill in the Alaskan Arctic, is beginning a public lobbying campaign. BP’s extensive pipeline system that moves oil, gas and waste throughout operations in Alaska is plagued by severe corrosion. (11/4,#18; 11/6, #11)
  • US Interior Sec. Salazar proposed establishment of an ocean energy safety institute to facilitate R&D, training, and implementation of safe standards and practices. It would involve the Department of Energy and Coast Guard as well as experts from the oil and gas industry, academia and the scientific community. (11/3, #14)
  • The profit from shipping gasoline from Europe to the US slumped to a 20-month low in October as strikes in France which shut nine of 11 refineries and cost processors $327 million caused domestic shortages, cutting exports. The number of tankers chartered for the US Atlantic Coast from Europe dropped to 10 last month, from 28 in September. (11/5, #6)
  • GM won’t have to pay $45.4 billion in taxes on future profits, according to a federal rule for companies that received money under the Troubled Asset Relief Program. (11/3, #17)
  • Some in the nuclear industry are focused on a second 20-year permit extension beyond reactors’ initial 40-year license and the 20-year extension already allowed. For example, Constellation sees its Nine Mile Point 1 reactor in Scriba, NY – one of the oldest operating in the US – as a candidate for a second permit extension. (11/3, #29)
  • Sinopec plans to process a daily record 583,000 tons of crude oil in November, exceeding the October record by 5,900 tons a day, in a bid to avert diesel shortages as farmers and factories burn more. Processing will increase 10 percent from a year earlier. (11/4, #12, 13)
  • China says it will reduce its rare-earth export quotas next year but not by much. (11/3, #12)
  • China has begun tallying its population for the first time since 2000. Counting scores of millions of migrant workers in big cities will likely make the task tougher. (11/1, #15)
  • China will become the world’s biggest airplane market after the US over the next 20 years likely requiring 4,330 new commercial airplanes valued at $480 billion, with the bulk of new deliveries expected to be smaller, single-aisle planes, according to Boeing. (11/2, #14)
  • China’s booming car sales have had a devastating effect on the environment, warns the government in its first-ever report on pollution caused by vehicle emissions. In Hamamatsu, Japan, car makers, parts factories and local governments are joining forces to prepare for a future of electric vehicles. BMW has inaugurated Germany’s first factory to mass-produce battery-powered cars. (11/3, #27; 11/6, #17, 18)
  • China called for restarting Iran nuclear talks as soon as possible. Iran said it was ready to talk with the UN Security Council G5+1 if preconditions were met. (11/2, #5; 11/4, #7)
  • The Persian Gulf lacks sufficient supertankers to take the fuel for the first time in almost a year. There are 1 percent fewer very large crude carriers for hire over the next 30 days than there are cargoes; there was a 20 percent surplus a week ago. (11/4, #6)
  • Saudi insiders say development of shale will be more challenging than for similar unconventional resources in the US and Europe. (11/1, #6)
  • To diversify its economy Kuwait plans to boost non-oil income fourfold by the end of a four year development plan that would expand the role of the private sector. (11/2, #8)
  • Anticipating a fivefold increase in oil production by foreign companies, Iraq is fast-tracking plans bring back modern training to the sector. (11/3, #7)
  • The Arab world will tip into severe water scarcity as early as 2015, when a report predicts that Arabs will have to survive on less than 18,000 cu. ft. of water per person per year. The world average is above 200,000 cu. ft. per person-year. (11/5, #13)
  • Russia’s Rosneft increased its crude output target for 2010 to 872 million barrels. (11/4, #19)
  • Pakistan’s energy crisis, likely to deepen as winter approaches, threatens to further undermine the credibility of a government struggling with a Taliban insurgency and an economy in tatters. (11/5, #12)
  • ExxonMobil’s Nigerian subsidiary discovered 165 net feet of rich gas condensate off the southeast coastline. Nigeria may pass a Petroleum Industry Bill before the end of December, paving the way for a new exploration licensing round, says Presidential Energy Advisor Egbogah. Nigeria is producing 2.6-2.7 million b/d oil and capacity is 3.6 million b/d, Egbogah says, adding talks with China on a reserve sale have not progressed. (11/1, #9; 11/2, #11)
  • Angola, producing 1.8 million b/d oil, wants its OPEC quota raised. (11/1, #10)
  • OPEC boosted its global demand forecast by 800,000 b/d for 2014, to 89.9 million b/d total. Unused capacity is unlikely to shrink from current levels of 6-7 million b/d. (11/5#8,9; 11/6#4)
  • Amid rising oil prices, Venezuela is once again setting aside a portion of its oil income for the off-budget Fonden development fund, favored by President Chavez. (11/4, #9)
  • Brazil’s Petrobras connected the first well in the Tupi pilot project to a floating production, storage and offloading vessel. In September Petrobras produced 2.53 million boe/d, down 1.6 percent from a year earlier and 2.6 percent below August. Anadarko says it is excited about its pre-salt discoveries offshore Brazil, and views its Brazilian interests as a springboard into other Latin American countries. (11/1, #11; 11/4, #11; 11/6, #7)
  • In Norway, Statoil fell the most since May after cutting its full-year production target to 1.9 million boe/d, from 1.925-1.975 million boe/d. Output fell to 1.52 million boe/d from 1.87 million boe/d one year earlier because of maintenance at fields, while analysts had estimated an average of 1.65 million boe/d. (11/3, #23)
  • In the UK, offshore wind-farm builders risk having leases terminated without compensation if oil and gas companies need the seabed. The energy secretary said he was surprised to hear about site conflicts. (11/2, #24; 11/3, #28)
  • In a memorandum, President Obama’s top advisers had recommended cutting off funds for a federal loan-guarantee program meant to spur construction of wind and solar farms and other projects, but also warned that that might antagonize allies in Congress. (11/5, #16, 17)
  • An oil-free way of surfacing roads could be on the way: a surface built by bacteria just using sand. The idea submitted by two Americans won Korea’s green-design Incheon International Design Award (iida). This bioengineered road of “sandstone” would take less energy to light at night and could reduce the urban-heat-island effect by up to 6¾ degrees. (11/1, #26)
  • Weeden’s Charles Maxwell makes the following points in an interview: Peak oil is nearly upon us: I think between 2015-2017. Based on consumption in 2000-2008, we would have peaked around 2013-2014, but for the recession. We believe a natural-gas peak is coming, maybe in 60 years. Today, we probably get an average of 40 percent of the oil out of a field; we’ll be at 41-42 in ten years. Peak oil will unleash a wave of technological innovation, most importantly in energy efficiency. That and conservation can solve the problem. (11/4, #21)