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1. Oil and the Global Economy

Oil prices started the week just below $84 a barrel; plunged to touch $79.25 on Tuesday in reaction to an unexpected interest rate increase in China; and then bounced back to close at $81.69 on Friday as traders decided the rate increase would not slow Chinese economic growth. As usual the value of the dollar, and expectations for same, were behind many of the price movements. The general weakening of the dollar and anticipation that the US will soon begin “quantitative easing” again continues to lend support to prices.

The weekly US stocks report showed total commercial stocks down by 2 million barrels. Gasoline stocks continue to build due to weak consumer demand, while middle distillate stocks continue to fall due to limited economic growth, more air travel, and larger US distillate exports.

The strike over pension modification in France has introduced another note of uncertainty into the oil markets. The gasoline shortage situation in France improved over the weekend after police forced open access to many of France’s refineries and storage depots. France’s senate passed the controversial pension bill last week and final approval of the measure is expected on Wednesday. French imports of gasoline from other parts of Europe have increased 5-fold to 100,000 tons a day which along with large national gasoline stockpiles is mitigating the closure of France’s 12 refineries.

The unions are calling for more strikes and demonstrations this week. If some settlement is not reached soon, more dislocations of the European and possibly global oil markets seem likely.

The first request for a Gulf of Mexico drilling permit since the moratorium was lifted was received in Washington last week. The permit is being reviewed amidst lawsuits and lobbying from the oil industry and environmentalists. Government officials have said there will be no new permits until systems are in place to quickly trap and contain any future blowout. Industry spokesman say this requirement could translate in many more months of delay before drilling is resumed.

JPMorgan has joined Goldman Sachs in forecasting an increase in oil prices during the next year. Morgan’s analysts expect the dollar to fall by another 4-5 percent over the next six months and demand for oil from emerging nations to remain strong.

2. China

Major moves in the oil markets last week came after Beijing announced it was raising interest rates and again when Beijing announced GDP growth figures for the 3rd quarter. When first announced however, these developments were interpreted as bad for oil consumption and prices dropped. Higher interest rates can slow economic growth and China’s GDP, which posted an 11.9 percent increase in the first quarter and 10.3 percent in the 2nd, had fallen to “only” 9.6 percent in the 3rd. By the end of the week, reality set in and it was appreciated that China’s government was accomplishing exactly what it set out to do — cool the economy down to a more sustainable 8-9 percent annual rate of growth. The consensus of economists is that Beijing has for now succeeded in steering its economy between overheating and an economic slump.

Although inflation in China is still above desirable levels, much of this is connected to food prices which have suffered from adverse weather during the past year. The main economic issue for China

is to shift its economy away from reliance on exports to the US and EU towards domestic consumption and exports to those parts of the world that are still growing.

Reports from China say the domestic auto industry is surging. A GM executive forecast that auto sales could reach 17 million vehicles this year and 19 million next – up from 13.7 million in 2009. This assessment is backed by other foreign companies selling cars in China who report robust sales as more and more Chinese incomes cross the threshold that makes car ownership feasible. The government has also been offering incentives to boost car sales.

All this suggests that China’s demand for oil will continue to increase for the foreseeable future as auto ownership grows at an unprecedented pace and the GDP continues to increase in the 8-9 percent per annum range. China’s apparent oil demand in September rose 5.1% year on year to 35.53 million tons or an average of 8.68 million b/d. Demand in the first nine months of the year totaled 317.7 million tons or an average of 8.52 million b/d, up 10.25% from the same period of 2009. Chinese refiners processed 310 million tons of crude from January to September, 13.4 percent higher from a year ago. Crude imports in September hit a new historic high of 23.29 million tons, or around 5.7 million b/d. So far there seems to be little to suggest that the demand for oil will not outpace the world’s ability to increase production in the next few years.

In the meantime, Beijing’s efforts to lock up overseas sources of oil and natural gas continue unabated. Last week it was announced that the Chinese may be offering $5 billion for Kosmos Energy’s assets in Ghana. The all-cash bid for the estimated 1.8 billion barrels of oil tops an earlier $4 billion bid from Exxon that was rejected.

The shipyard which builds China’s LNG tankers reports that Beijing’s imports of LNG may increase four-fold in the next five years as China continues to seek more and more liquefied gas from abroad.

3. Sanctions on Iran

Despite widespread skepticism that Iran’s nuclear ambitions could ever be reined in by sanctions, reports over the last few weeks suggest that the UN sanctions coupled with additional measures implemented by the US and its partners are making troubles for the Iranian government. Iran Air is having difficulty refueling its planes in Europe and most of the major European oil companies are withdrawing from doing business with Tehran.

Iran is preparing to cut the country’s cherished fuel subsidies to slow the consumption of the now embargoed gasoline imports. This time the government is paying cash subsidies directly to poorer motorists in an effort to stem a repeat of the riots that occurred the last time gasoline prices were increased.

Despite the shift in US policy which now permits measures that will harm the Iranian people rather than just government organizations, sanctions are a slow and cumbersome method of pressuring Tehran. Somewhere along the line both Moscow and Beijing came to appreciate that Iran’s acquisition of a nuclear weapon, or even the perception that they have done so, would set off a chain of events that could easily shut down the 17 million b/d of crude that transits the straits of Hormouz and in short order do incalculable damage to every economy in the world.

While in theory sanctions could impose such economic hardships on Tehran that its government would change and nuclear policies be modified, there are so many variables in this situation that it is impossible to foresee if this outcome is at all likely. The future of Tehran’s relationship with Baghdad and Kabul are among the many unknowns that could set off unforeseen consequences. Iran’s backing of opposition to Israel in Lebanon or meddling in Iraqi politics could lead to many different outcomes.

In the meantime, the many possible outcomes brought on by Iran’s efforts to enrich uranium remain the most obvious threat to global energy supplies and barring open hostilities is likely to remain so for the foreseeable future.

Quote of the week

“China’s demand for oil remains strong and the rate hike is not of a magnitude that would change that.”

— Hannes Loacker, analyst at Raiffeisen Zentralbank Oesterreich AG

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

  • A multibillion-dollar oil pipeline network between Canada and the US is on hold pending US government approval of its last leg. TransCanada hoped to be laying pipe by year’s end for the latest leg of the system. (10/19, #11)
  • Alberta oil sands may soon make up one-third of total US oil imports, but can the rest of Canada’s economy afford its dollar having become petro-currency? (10/21, #23)
  • Chevron has approved a $7.5 billion project to develop two deepwater fields in the Gulf of Mexico. It plans to build a massive floating city 280 miles southwest of New Orleans that is expected to produce its first barrels of crude in 2014. (10/21, #20; 10/22, #14; 10/23, #18, 22)
  • At Tupi offshore Brazil, confirmation of estimated recoverable volumes of 5 to 8 billion barrels of light oil and gas led Petrobras to say it was on target to declare “commerciality” this year. (10/23, #10, 11)
  • The failures of Mexico’s Pemex, in contrast to the successes of Brazil’s Petrobras, have reignited discussion of Pemex’s future. (10/20, #19; 10/23, #9)
  • US offshore drilling chief Bromwich called for adding more in-house expertise and an approach in which regulators have access to real-time data. (10/19, #11)
  • The US has announced a record arms sale to Saudi Arabia, after weeks of consultations with Congress and with Israel. (10/20, #13)
  • Russian oil output will exceed 3.6 billion barrels this year, and it expects a similar production rate through 2012. The Kremlin is close to approving a $59 billion privatization program aiming to sell minority stakes of banks, railroads and oil producers. (10/22, #17)
  • Russia’s agreement to build a nuclear power station and a research reactor in Venezuela has handed the Obama administration and the IAEA a headache. Russia says it will soon deliver 35 sophisticated tanks to Venezuela, which has since 2005 spent $4 billion on Russian arms. (10/18, #10; 10/20, #20)
  • ExxonMobil reduced its arbitration claim against PDVSA to $7 billion from $12 billion plus interest as it seeks compensation for the nationalization of oil assets by President Chavez. PDVSA launched a $3 billion bond issue due in 2017, which will supply dollars to meet pent-up domestic demand for US currency and finance President Chavez’s social spending. The results of the sale are to be published today, Monday, Oct. 25. (10/19, #8; 10/21, #12)
  • Venezuela agreed to supply Belarus with 30 million tons of oil over three years from 2011 in a deal worth as much as $19.4 billion. Since Moscow imposed duties the price of Russian exports to Belarus has risen 36 percent. (10/18, #9, 10)
  • Iranian and Venezuelan officials signed 11 agreements promoting cooperation in oil, natural gas, textiles, trade and public housing and also agreed to set up an oil shipping company and construct petrochemical plants. PDVSA will participate in the exploitation of Iran’s South Pars gas field. The US State Department says it will monitor energy agreements to ensure that they do not violate international sanctions. (10/21, #11; 10/23, #8)
  • Participants in a natural-gas-vehicle conference in Tehran last month discussed over-regulation on the infrastructure side. Iran has 2 million NGVs on its roads and 1474 compressed-natural-gas stations. Additional capacity to produce gasoline locally, expected next year, will reduce pressure to continue the CNG program apace. (10/21, #10)
  • Kuwait has added 12 billion barrels of crude oil to its reserves, estimated at over 100 billion barrels, following a comprehensive study, a newspaper reported. (10/21, #9; 10/22, #11)
  • Southern pipelines which export three-quarters of Iraq’s oil are at risk of failing any time, according to a US study. Shutting them, while the best environmental option, would cause a financial heart attack in a war-torn country that needs oil revenue to fund even the most basic of services, not to mention reconstruction. (10/18, #5)
  • Three Iraqi gas fields with proved reserves of 11.2 trillion cu. ft. have been auctioned to international companies. But Anbar province said, “We refuse and reject the foreign companies that won the contract to develop Akkas gas field.” For exports Iraq is considering linking up to a pipeline running from Egypt through other Arab states. (10/21 #4, 7; 10/23 #6)
  • In the eastern Mediterranean off Israel, oil companies led by Noble have begun drilling at the Leviathan gas prospect. Leviathan may hold 16 trillion cu. ft., enough to supply all of Israel’s gas needs for 100 years, and could give Israel the option to export. (10/18, #7; 10/20, #16)
  • Angolan crude exports will drop from 1.72 million b/d scheduled in November to 1.47 million b/d in December due to a disruption at the Plutonio terminal. With partner Sonangol, Eni says it has made an oil discovery 75 miles from shore at the Mpungi-1 well. (10/20, #17, 18)
  • As sub-Saharan African governments tighten control of the oil industry, producers expected profits are at risk. (10/22, #12)
  • BP agreed to sell assets in Venezuela and Vietnam to TNK-BP for $1.8 billion. Completion of the deal is expected in the first half of 2011. (10/18, #14)
  • China will triple the length of its natural gas pipelines in the next five years. Over the following 30 years the China-Central Asia pipeline will import annually into China 30 percent of the total amount now transported annually throughout the country. (10/21, #16; 10/23, #14)
  • Beijing denied a China Daily report that said the government planned a further reduction of up to 30 percent next year in its quotas for rare-earth exports. The report came four days after US officials announced an investigation into whether China was violating international rules with a range of policies to help its clean-energy industries. (10/19, #10; 10/20, #21)
  • The cold snap in China may strain the energy supply and transportation and disrupt agriculture. CNPC says it will ensure stable fuel supplies. Natural gas demand in Beijing may increase by 20 percent in 2010. (10/21, #17; 10/23, #15)
  • Japan’s government says that the economy is at a standstill. It downgraded its assessment for the first time since February 2009; a senior official says further pressure on the economy, which is mired in stubborn deflation, could tip it into recession. (10/19, #9)
  • US House member Henry Waxman urged the US Chamber of Commerce to work constructively on developing an energy and climate bill that the next Congress would approve. (10/21, #19)
  • In West Virginia, a Google-funded project has discovered enough geothermal potential to more than double the state’s electricity generation capacity. (10/22, #22)
  • Lake Mead’s water level hit a record low. Levels remain eight feet above which a shortage is official and limited rationing could go into effect for Nevada and Arizona, and well above when hydroelectric output might be seriously jeopardized. (10/20, #24)
  • In the next few years the world can expect to see huge advances in our ability to harness the ocean’s wave and tide power, IHS predicts. Over 45 wave and tidal prototypes are expected to be ocean-tested in 2010 and 2011, compared to nine in 2009. (10/21, #29)
  • The extent of Arctic sea ice dropped to one of the lowest levels on record. In the first half of 2010 Arctic warming has had monthly readings over 7ºF above normal in northern Canada. Warmer air, less sea ice and melting glaciers probably mean this weather-making region will not return to its former, colder state, scientists say. In Russia, public opinion is shifting on climate change in the wake of last summer’s fires. (10/22, #5, 6; 10/23, #27)