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1. Oil and the Global Economy

As has been the case for several months, last week’s trading in oil futures was dominated by the twists and turns of the EU’s debt crisis. Hopes for a solution sent NY oil prices from the high $80’s to the low $90’s last week – closing on Friday at $93.32. NY crude futures are up by almost 18 percent in October after touching a low of $74.89 a barrel early in the month. London futures traded in a range between $109 and $112 all week before closing at $109.91.

The most notable feature of the oil markets in October was the narrowing of the spread between NY and London crude which hit a record of $27.88 a barrel early in the month and then narrowed to close to $16.59 on Friday. Reductions in the amount of oil being stored at Cushing, Okla., the delivery point for NY futures contracts, is likely the reason for the move. Some analysts believe that NY oil has been under-priced due to the Cushing glut and believe it is due to move higher as the inventory situation eases.

A 4.7 million barrel increase in US crude stocks the week before last was due to an unusually large number of tankers bringing in foreign oil during the week. An unusual October snowstorm struck the northeastern US to send natural gas prices up 4.2 percent on Friday to close at $3.92 per million BTUs.

The global oil markets remain tight. Despite many optimistic announcements, not much oil is coming out of Libya as yet, the Chinese seem to be having growing shortages and Japan is still importing increased quantities of fossil fuels to make up for lost nuclear power. Last week the NY futures market joined London by going into backwardation that typically signals a near-term supply crunch.

US gasoline futures have had a volatile month. After climbing by nearly 40 cents a gallon in the first two weeks of October, prices then reversed in the last two weeks, closing out the week nearly 20 cents a gallon lower at $2.68 a gallon.

2. The EU debt crisis

Despite the euphoria in the equity markets over the supposed “settlement” of the EU’s debt crisis, most observers believe that there are still years of troubles ahead. While the basics of a plan were agreed to last week, little has been done on the details of implementing the plan. The euro surged two percent to $1.41, its highest point in two months, after the plan was announced Thursday morning and the Dow Jones surged in relief that the crisis was “over.”

Greece is to undergo a “controlled default” under which its bond holders are supposed to accept a 50 percent reduction in the value of their securities. Such a default is seen as a way to avoid the triggering of credit default swaps on the Greek debt which it is feared would cause untold havoc. A day after the agreement, Italy’s borrowing costs surged to a euro-era high amidst a civil service strike protesting layoffs. Many observers believe the course of Italy is the key as to whether the Eurozone holds together.

The Europeans are turning to China as the lender of last resort in an effort to raise the cash to keep the banks solvent. If Beijing agrees to help, it is likely to drive a hard bargain and extract concessions affecting global trade.

The situation still remains unstable and is likely to remain so for the foreseeable future. The major fear is that the collapse of the Eurozone could trigger off a series of events leading to global economic troubles and a arge reduction in the demand for oil.

3. Shortages in China

Despite fears that China is in a real estate bubble and over extended, Beijing continues to release figures showing that economic growth is continuing apace. China’s value-added industrial growth is reported as increasing by 14.2 percent in the first three quarters and is on track to meet the goal of 11 percent growth in 2011 and 2012. All this activity requires energy and there are already reports of growing diesel shortages.

Some of this shortage the Chinese brought upon themselves by cutting retail prices for gasoline and diesel as part of the battle against inflation. Given the recent increase in global oil prices refiners are hard pressed to make a profit and there are charges that the shortage is intended to force Beijing to raise prices. Statistics from the two major Chinese oil companies say that demand for diesel last month was up by 8-9 percent over last year. Both companies say they are stepping up production to ease the shortages.

Platts reports that PetroChina’s refineries have been running at full capacity this month with crude runs averaging 5.7 percent higher than last year. For the nine-month period ending in September, PetroChina’s refineries processed 10.3 percent more crude than in the same period last year. Sinopec says it will boost production to 4.47 million b/d in November. Chinese diesel imports since July are running 122 percent more than in the same period last year. All this suggests that despite worries about a slowing economy, China’s industrial production and oil consumption continue to grow smartly adding pressure to oil prices.

4. Cold fusion test

Media interest in the Andrea Rossi “energy catalyzer” (e-cat) is growing after an apparently “successful” test of a new and larger version his “cold fusion” device in Bologna, Italy last week. As many aspects of the program and details of the device have not been made public, many observers remain skeptical and believe that these demonstrations of energy reactor are nothing more than an elaborate fraud. While the device and the scientific concepts behind its apparent production of energy have not been verified by independent researchers, numerous physicists from European universities have been observing the demonstrations of the device which have been taking place since last January.

Building on the work of Pons and Fleischmann 20 years ago, Andrea Rossi says he has developed a process whereby nickel and hydrogen are fused with the help of an undisclosed catalyst to produce large quantities of heat. As such a nuclear reaction is not thought to be possible under the known laws of physics; mainstream scientific journals have refused to publish on the topic.

Should the device prove viable, however, the energy industry would be changed forever. Nickel and hydrogen are abundant and cheap, and as is well known vast amounts of energy are contained in the bonds of atomic nuclei. The device that has been demonstrated is simple to build and the nuclear reaction is said to produce no emissions, hazardous radiation, or toxic/radioactive wastes.

As Kjell Aleklett, professor of physics at Uppsala University in Sweden and President of ASPO International said about the project, “What shall we do as scientists? Shall we say madness as many do today, or should we try to understand what is happening? I myself have nothing against revealing a scam, or joining in and verifying something that no one could imagine. Both extremes belong to that which makes life as a researcher incredibly interesting.”

After the test last Friday, the device’s inventor said it has been sold to an unknown organization in the United States and that research contracts with the Universities of Bologna and Uppsala to clarify the scientific principles behind the device are in the works.

Quote of the week

“The heart of our request is the formation of a national oil emergency response plan. We are not demanding that the Department of Energy enact any specific policy change at this time, but rather set up a properly funded and sufficiently empowered commission to study the full range of potential consequences to the United States if we were to experience a near-term imbalance between global supply and demand of liquid fuels.

Lt. Col. Daniel Davis

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

  • OPEC’s reference crude oil basket price rose to $109.09 a barrel on Thursday. (10/28, #11)
  • Tension over disputed natural gas fields in the eastern Mediterranean has sharpened in recent days with Turkey sending a second exploration ship to Cyprus while Israel, feuding with Turkey, held air force exercises. (10/28, #15)
  • European Union regulators proposed stricter safety standards for offshore oil and natural-gas exploration to curb the risk of a major accident after BP’s spill in the Gulf of Mexico. (10/28, #22)
  • Oil and gas production from the Nigerian joint venture led by Royal Dutch Shell has shown a year-on-year decline for the first time in two years. (10/27, #8)
  • Eni, Italy’s biggest energy company, increased significantly the natural gas it discovered offshore Mozambique, only a week after announcing the giant discovery. Eni said the discovery of gas in the Mamba South area is about 50% more than announced Oct. 20, as the exploratory well revealed a separate pool with a potential of up to 7.5 trillion cubic feet of gas. (10/27, #9)
  • A new study posted for peer-review suggests that the nuclear reactors at Fukushima Daiichi released far more radiation than the Japanese government initially estimated. (10/27, #12)
  • Three US senators and 10 members of the US House of Representatives asked the State Department’s inspector general to hold off on making a decision on TransCanada’s Keystone XL project and to investigate whether TransCanada “improperly” influenced State’s review of the project. (10/27, #16)
  • Turkey and Azerbaijan signed a long-awaited agreement to allow the transit of some 10 billion cubic meters of Azeri natural gas to Europe, resolving one of the final obstacles to the opening of a southern corridor to allow gas to flow from the Caspian to the EU. (10/27, #18)
  • Nebraska’s governor announced he was calling legislators in for a special session to review options for the controversial Keystone XL oil pipeline. (10/26, #12)
  • Talks with Moscow over the European Union’s newly enacted energy market reform package have reached a stalemate. Russian Energy Minister Sergei Shmatko said that efforts to work out a compromise over the EU Third Energy Package’s push to “unbundle” natural gas production, transportation, and pricing haven’t been realized. (10/26. #13)
  • Ukraine’s recent progress toward a natural gas price agreement with Russia means security for European supplies, Ukrainian Prime Minister Mykola Azarov says. (10/24, #15)
  • Analysis of drilling and test data from 14 wells drilled since the 1950s has indicated the presence of a world class shale gas play in the Basque Country of northern Spain. Of 14 wells that penetrated the Cretaceous shale, 10 tested for gas. (10/26, #14)
  • The amount of global carbon dioxide emissions declined because of the economic meltdown but don’t expect a trend, the IEA said from Paris. (10/25, #3)
  • Gulf Keystone Petroleum announced it was ready to start shipping oil from assets in northern Iraq during the first half of 2012. Last month, the London-listed energy company said it might need another pipeline to get oil from its Shaikan field in northern Iraq. (10/25. #5)
  • Iraq’s crude oil production from the northern Kurdistan region is expected to be more than double next year due to oil fields development plans. (10/24, #6)
  • Kuwait, the fifth-largest producer in OPEC, pumped 2.9 million barrels a day of crude in September and sees current prices as reasonable for exporters and importers, Oil Minister Mohammad al-Busairy said. (10/24, #9)
  • The pumping of crude oil through Yemen’s Marib pipeline, which carries oil to the Ras Issa terminal on the Red Sea, remains halted following repeated attacks. (10/24, #11)
  • Iran aims to gain a stronger foothold in the Asian energy market by exploring options for liquefied natural gas. Mohsen Qamsari, director of international affairs at the National Iranian Oil Co., said “We must try to gain control of Indian and Chinese LNG markets, which are close to our country and account for 45 percent of LNG consumption in the world.” (10/25, #7)
  • The biggest problem companies in India and neighboring countries face today is electricity. In every South Asian country, except Bhutan and the Maldives, medium-size urban companies consider it one of the top two constraints. (10/25, #14)
  • Alaska Native and environmental groups hoping to block oil drilling off Alaska’s northern coasts next summer filed an appeal challenging a federal air permit granted to Shell. (10/25, #16)
  • BP shares rose after the U.K. energy giant reported solid earnings and announced plans to expand its asset-sale program and boost distributions to shareholders. The London-based energy company said net profit for the three months to Sept. 30 was $4.91 billion, compared with $1.79 billion a year earlier. The sharp increase was owing to the $7.66 billion pre-tax charge that BP booked for the Gulf spill in the third quarter of 2010. (10/25, #20)
  • The United Nations will warn this week that the world’s population could more than double to 15 billion by the end of this century, putting a catastrophic strain on the planet’s resources unless urgent action is taken to curb growth rates. (10/24, #3)
  • The Canadian government warned it will defend its interests if the European Union implements a proposed law that identifies the oil sands as dirtier than conventional oil. The European Commission, the EU’s executive body, is proposing to single out crude from Canada’s oil sands as more harmful to the environment than other fuel types for its Fuel Quality Directive. (10/24, #14)