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ASPO-USA 2011 Conference – Peak Oil, Energy & the Economy
November 2-5, Capitol Hill Hyatt Washington DC

Get the latest research, analysis, and insights on Peak Oil, the ripple effects that a new energy reality will have on the economy and modern life, and response strategies for businesses, government, and communities.

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1. Oil and the Global Economy

Oil prices rebounded for a day or two mid-week on hopes for a successful Greek bailout, but then collapsed on Friday under the combined weight of unfavorable economic reports from Europe, the US, and even China. For the week prices were only down a dollar or two a barrel, but at the close on Friday NY oil was down to the lowest close in more than a year. For the quarter, oil prices were the weakest since the 2008 crisis with NY crude settling at $79.20 a barrel and at $102.76 in London. The spread between NY and London crude has narrowed a bit in recent days closing at $23.56 after trading as low as $21.81 on Thursday.

Talk of renewed recession in the US and a Greek debt default are pervasive in the financial press. The prevailing belief is that overall demand for oil will fall in coming months despite some growth in the Asian markets. It also is becoming clearer that a Greek default would likely engulf the European and US banking systems, possibly leading to a global financial crisis similar to or worse than that of 2008. An increasing number of respected commentators believe that a major crisis is inevitable in the near future.

A report from China on Friday shows its manufacturing sector contracting for the third consecutive month. A sinking euro, the weakest global equity markets in three years, and the likelihood that some Libyan oil will be returning to the markets soon contributed to the weak oil prices.

The Middle East was relatively quiet last week, except in Syria where anti-government protestors continue to be gunned down by security forces. Turkey along with the EU has halted imports of Syrian oil, and contrary to government assertions, Damascus seems to be having trouble finding a market for its oil exports. Syria’s traditional friends in Moscow and Tehran are starting to pull back from supporting the Assad government as the confrontation and killing of protestors drags on. Having learned the lesson in Libya that support for a despotic government can have wider implications, even the Chinese may not be willing to risk their credibility in the region by taking Syrian oil. The Syrian uprising remains serious and has the potential of morphing into a wider Middle Eastern conflict which could eventually have an impact on oil exports.

The confrontation between Israel/Cyprus and Turkey over drilling for natural gas off the coast of Cyprus continued last week. Ankara is concerned that the Turkish-occupied northern portion of Cyprus will be left out of any Israel-Greek Cypriot natural gas deal – which the Israelis desperately need to offset the recent loss of Egyptian gas. The Turks have sent a seismic ship to do their own exploring for natural gas off Cyprus which last week was buzzed by Israeli fighter planes.

Preliminary wire service surveys suggest that OPEC oil production increased modestly by 75,000 b/d to 30.05 million b/d in September. If these numbers are confirmed, this would be the highest level of OPEC production since November 2008.

2. Libya

The pace at which Libyan oil exports will return to the markets remains an issue. Last week Italy’s ENI and France’s Total announced that it had restarted some oil production in Libya. ENI, which had previously announced that natural gas exports to Italy through the Green Stream pipeline would resume in mid-October, is now saying the start date has been pushed back to mid-November. ENI is having trouble getting personnel and equipment to the Wafa oil field which supplies natural gas to the pipeline.

ENI spokesmen said they are already producing 30,000 b/d and soon will be producing enough oil to fill the pipeline to a coastal export terminal. The offshore Libya oil facilities were not involved in the fighting and are expected to resume about 40,000 b/d of production in the next few weeks.

Before the uprising, Libya was consuming about 300,000 b/d of the country’s 1.6 million b/d of oil production, but economic activity in the country has slumped to a fraction of pre-war levels. Hundreds of thousands of foreign workers have fled and are unlikely to return for a while, suggesting that domestic demand for oil will be well below 300,000 b/d for some time to come.

Scattered fighting continues in several cities as the remnants of the Gadhafi government, many of whom are facing prosecution for war and humanitarian crimes, continue to fight on. In recent days the insurgents have gotten into the massive arms dumps that Gadhafi had built up. The massive quantities of arms and munitions that are being hauled off by anyone with a pickup raise the issue of how quickly a stable a post-Gadhafi Libya can be formed.

Large scale Libyan oil production requires the assistance of thousands of foreign oil workers, who are unlikely to return until the security situation is satisfactory. With the political situation still up in the air and thousands of heavily armed tribesmen with diverse political aspirations and loyalties running around, the estimate that oil production will be resumed to pre-uprising levels in 12 to 18 months may be optimistic.

3. Gasoline prices

Although gasoline prices in the US have fallen by 20 cents a gallon in the last month, they are still 72 cents a gallon higher than this time last year. A number of newspapers have noted that while NY oil futures have fallen by nearly a third since last April, the retail price of gasoline is only down by 13 percent. After some research, a number of reporters have concluded that NY futures prices no longer reflect the prices that most US refiners are paying for their crude. While NY futures are down 30 percent, London’s Brent is only down 18 percent. Most of east and gulf coast imports are priced off the Brent Benchmark. Oil prices in Europe have been higher of late due to falling North Sea production and the loss of Libyan oil exports to European markets.

When oil prices are rising, refiners are quick to raise their prices to wholesalers and the higher prices are reflected at the gas pump in a matter of hours. As prices fall however, refiners who are contending with relatively small profit margins keep prices high until competitive pressures force them down.

All this does not bode well for the US economy which is teetering on the verge of renewed recession. As the economy slows, US gasoline consumption has been falling. Revised numbers for July show that oil demand in the US fell by 4 percent from 2010. This was the lowest level for July since 1996. This year saw the largest decline in year over year demand for the first four months of the summer driving season since 1980 when the Iranian revolution pushed crude prices up by 58 percent.

In recent years, net US oil product exports have been increasing. In July they were 2.84 million b/d which is the second highest monthly export number on record. In July 2007 net oil product exports were only 1.5 million b/d. Net US crude and product imports for July were down to 8.7 million b/d – as recently as early 2009, US net imports were regularly in excess of 10 million b/d.

The API reported last week that US gasoline demand in September fell 2 percent year on year to a 10-year low for the month. The institute also reported that US imports of oil products were down 11 percent in August to a 14 year low.

Quote of the week

“Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers-the advanced economies-to the new consumers in the developing economies.”

Chris Skrebowski

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

  • Ecuador is on track to launch the largest smart grid project in Latin America in a multimillion-dollar collaboration with GE Energy that sets a benchmark for electricity management in the region. (10/1, #10)
  • Trace amounts of plutonium were found as far as 28 miles from the damaged Fukushima nuclear-power plant, the first time that the dangerous element released from the accident was found outside of the immediate area of the plant. (10/1, #11)
  • Environmental and Alaskan native groups have filed a lawsuit challenging the Obama administration’s decision to allow offshore oil drilling by Shell Oil in the Beaufort Sea near Alaska. (10/1, #13)
  • Exxon announced plans to build two new oil tankers at a Philadelphia shipyard to carry oil from the north slope of Alaska to the US West Coast in anticipation of the Prudhoe oil production falling too low to keep the pipeline operating. (10/1, #14)
  • Two pipeline companies announced plans to build a 500-mile oil pipeline to get supplies from a hub in Cushing, Okla. to refineries in Texas. Enterprise Products Partners and Canadian company Enbridge Inc. announced plans for the so-called Wrangler pipeline that would move oil away from the Cushing hub. (10/1, #15)
  • North Sea natural gas production slumped by 25 percent in the second quarter, an alarming increase in the rate of decline that will cut tax revenues and could put more pressure on governments to agree to shale gas developments. (10/1, #21, #22)
  • A government plan to phase out nuclear power in Switzerland has moved a lot closer to becoming reality. Switzerland’s upper house, the Council of States, approved a measure to gradually shut down the country’s five nuclear reactors by 2034. (10/1, #23)
  • Paris will launch an ambitious electrically powered car-share service that it hopes will not only improve the quality of life in the City of Lights but also herald a revolution in sustainable urban transport. (10/1, #27)
  • Researchers led by MIT professor Daniel Nocera have produced an “artificial leaf” solar water-splitting cell producing hydrogen and oxygen. Although not yet ready for commercial development, some observers see this development as a major breakthrough in producing fuels from the energy in sunlight. (10/1, #29)
  • Iran’s crude production fell in August for a second consecutive month, underlining how its mature fields are steadily declining. This also gave added urgency to Tehran’s scramble to secure foreign investment to upgrade the fields and replenish shrinking reserves, an increasingly futile effort as UN sanctions, beefed up by U.S. and European measures, scare off international companies.(9/30, #4)
  • More than 30 US House lawmakers are urging Spanish energy company Repsol to abandon its plan to drill for oil in Cuban waters, saying such a move will bolster the financial strength of the Castro regime and could expose Repsol to criminal and civil liabilities in US courts. (9/30, #7)
  • Ukraine’s state-run energy firm Naftogaz and Exxon have signed a preliminary agreement on exploring and developing shale gas deposits in Ukraine. According to EIA, Ukraine has Europe’s fourth-largest shale gas reserves at 42 trillion cubic feet (1.2 trillion cubic meters), trailing Poland, France and Norway. (9/30, #17)
  • Poland will veto any attempt by the European Commission to institute EU-wide rules regulating shale gas production, a government adviser said this week. (9/30, #18)
  • Chevron expects to begin work on its project in Venezuela’s Orinoco heavy-oil fields by the end of this year, with production as soon as early 2012. (9/29, #8)
  • China’s state-owned assets watchdog announced the completion of restructuring of its bloated electricity industry, breaking up the design and construction businesses from power grids and firms by establishing two new companies. (9/29, #10)
  • India’s plans to build additional nuclear power capacity remain unchanged despite protests over the risks of nuclear power. (9/29, #11)
  • For 80 years the US has relied on motor-fuel taxes to pay for road repairs, transit systems and highway construction. This system needs an overhaul because soaring fuel efficiency and a poor economy jeopardize the current tax’s fundraising power. (9/29, #13)
  • Appalachia’s easy-to-reach seams of coal are running out, forcing many operators to shift to more destructive mining. Coal in this area is getting harder and costlier to dig – and the region, which includes southern West Virginia, Virginia and Tennessee, is headed for a huge collapse in coal production. The DOE projects that in a little more than three years, the amount of coal mined here will be just half of what it was in 2008. (9/29, #14)
  • Arch Coal slashed its full-year adjusted earnings outlook for the second time this year, attributing the lower view mostly on lost metallurgical coal production at the Mountain Laurel mine complex in West Virginia. (10/1, #18)
  • Natural gas from Russia could start flowing to Germany through the Nord Stream pipeline through the Baltic Sea as early as October. (9/29, #17)
  • Extracting natural resources and the use of nitrogen fertilizers is making the air, soil and water more acidic, said a U.S. Geological Survey study. (9/27, #4)
  • Slowly and almost imperceptibly the seas are rising, swollen by melting ice and the expansion of seawater as it warms. But there’s another source of water adding to the rise: humanity’s habit of pumping water from underground aquifers to the surface. (9/27, #5)
  • Helmerich & Payne Inc. has filed a lawsuit against Venezuela over the 2010 government takeover of 11 drilling rigs belonging to the Oklahoma-based oil-services company. (9/27, #11)
  • An expected increase in gas production from the Sakhalin projects in Russia’s Far East will make it expedient to build a second liquefied gas production plant on the Island by 2020, apart from the planned expansion of the existing LNG capacities. (9/27, #22)
  • A massive power blackout paralyzed crucial copper mines in Chile and the capital Santiago before energy was largely restored. The outage acutely exposed the fragility of the energy grid in the world’s top copper producer, which was devastated by a powerful earthquake in 2010. (9/26, #5)
  • Chevron says it will go ahead with a $29 billion liquefied natural gas project in Western Australia. (9/26, #10)