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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

It was generally a quiet week for the oil markets which continue to be dominated by the European debt crisis and to a lesser extent the deepening US economic problems. The conventional wisdom is that these problems will eventually lead to a lower demand for oil among the OECD members. Brent crude took a $3 a barrel jump on Thursday during one of the more optimistic twists in the EU crisis to close out the week at $112.22. NY crude traded a narrow range around $89 a barrel for most of the week. Movement in oil prices continue to be heavily influenced by the euro/dollar exchange rate which has been fluctuating daily in response to the latest developments in the debt crisis.

The weekly US stocks report showed a decline of 6.7 million barrels in crude stocks due to the tropical storms that partially shut-in Gulf production and delayed import shipments in the previous week.

Some Libyan oil appears to be making it to port facilities in Eastern Libya. Token shipments are supposed to resume in about a week.

China’s electric power consumption in August was up 9.1 percent over last year but was down from the 12.6 percent increase in July. Some of this drop in consumption was due to a severe drought in southwest China. The largest hydro station in Guizhou province is down to 10 percent of normal production leading to electricity outages along the Pearl River delta. Growth of China’s industrial production fell from 14 percent year over year in July to 13.5 percent in August. This has led some analysts to forecast a drop in China’s demand for oil during the remainder of the year. Apparent oil demand in August, however, was up by 8 percent over last year.

Beijing has closed or nationalized dozens of rare earth mines in the name of controlling these notoriously polluting operations. This move has caused major increases in the cost of making compact fluorescent bulbs at time when the US and EU are closing down incandescent bulb production.

Slumping OECD economies have many analysts predicting that oil prices will be falling soon as demand for oil falters. The IEA and OPEC have trimmed their forecasts for global oil demand during the next 15 months and with the possibility of a Greek debt default in the offing the prospects for Europe are unsettled. Goldman Sachs, however, continues to forecast that Brent crude will hit $130 a barrel within the next 12 months. Goldman’s believes that economic growth in the BRICS (Brazil, Russia, India, China, and South Africa) which is forecast to be 7.7 percent this year and 7.9 percent next year will overshadow lower demand from the US and EU. OECD demand for oil already has fallen significantly in the last four years so further declines may be slow in coming. The IEA currently estimates that North American oil demand for 2011 will actually be up by 30,000 b/d and will only fall by 120,000 b/d next year despite the gloomy economic output.

2. The Oil Market Report

Beyond the headline news in this month’s OMR that the IEA was cutting its forecast for global oil demand for the rest of this year and next, the Agency provided a number of new insights as to the status of global supply and demand. The Agency still maintains that there is a fundamental tightness in global oil supplies that is keeping prices high despite the economic situation. After two $10-a-barrel sell-offs in the last few months, oil prices recovered quickly. The Agency notes that the $26-a-barrel West Texas Intermediate discount to London prices is an anomaly that only benefits those few refiners that have pipeline access to the Cushing, Okla. storage depot. The rest of the world is paying Brent prices for much of their imports.

The IEA says that demand has been outpacing supply since the middle of last year when global stocks were being drawn down at a rate of 1.4 million barrels a day. This situation has eased somewhat in 2011 with demand outrunning supply by only 500,000 b/d in the first half. The situation may be even better in the second half, however, at the end of July, global stockpiles dipped below their five-year average for the first time since 2008. In August, the build in global crude stocks was only 600,000 barrels, well below the 14 million barrel increase which was normal for the month. For the next six months the IEA forecasts that supply and demand will be pretty much in balance with little oil being added to or taken from global stocks.

While the Agency is currently forecasting a 1 million b/d increase in demand this year and a 1.4 million increase in 2012, it admits that these are still based on a fairly robust global GDP growth of 4 percent next year. Should the more dire predictions of a major slump in global growth occur, the growth in global demand for oil could be less than 500,000 b/d for 2012.

For the next six months, supply will likely be very close to demand provided Libya’s production is restored gradually to 1.1 million b/d by the end of 2012.

By the last quarter of 2012, however, the supply situation could become tight again. Global production is currently about 89.1 million b/d, but demand by the end of 2012 is forecast to be 91.5 million b/d or 2.5 million b/d over current production. Even with the restoration of a million b/d from Libya next year, the global oil industry may be hard pressed to come up with an additional 1.5 million b/d of production over the next 15 months.

3. The Brent oil price formula

With some 70 percent of global crude transactions priced off London’s Brent crude as the benchmark, the formula used to calculate this price is highly important. In recent years the production of crude from the North Sea oil fields that is the basis of the Brent benchmark has dropped significantly thereby reducing liquidity and increasing the possibility of price manipulation as it becomes easier to squeeze the market by buying up all available cargoes. Moreover, the aging fields are now subject to recurring maintenance problems which have helped drive the price of Brent recently to a record premium of $27 a barrel over West Texas Intermediate, the US benchmark.

The price of Brent crude is established by Platts Oil Price Information service which tallies up the contracted price for all cargos from 10 to 21 days prior to loading for shipment. Platts plans to expand that 12-day window to 16 days thereby including an additional 30 percent of oil shipments to the formula and making the market more liquid.

The change which is due to become effective in January 2012 has already drawn objections from market participants who say it is being implemented too soon and could have all sorts of consequences for the relationships among the spot market, Brent futures markets, and the derivatives markets. On Friday, Shell issued a statement asking that the change be put off until 2013 which would give more time to adjust to the change.

Platts has responded that it is essential to implement the change prior to February in which there are fewer barrels of oil coming on the market. Platts points out that last year one trader was able to acquire one-third of the barrels offered for sale in February. There appears to be widespread agreement, however, that a change is necessary. The last change in the formula was in 2002 when three other North Sea oil fields, Forties, Ekofisk, and Oseberg, were made part of the “Brent” assessment.

Quote of the week

“Things don’t stand still in the energy industry. With the passage of time, unconventional sources of oil, in all their variety, become a familiar part of the world’s petroleum supply. They help to explain why the plateau continues to recede into the horizon-and why, on a global view, Hubbert’s Peak is still not in sight.”

— from Daniel Yergin’s essay “There Will Be Oil

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

  • Italy’s ENI has signed an accord with OAO Gazprom to sell 50 percent of its stake in a Libyan field, reaffirming plans initially agreed a few days before the rebellion against Gadhafi started. (9/16, #8) (9/17, #7)
  • A race to build nuclear plants in China is outweighing the backlash against atomic energy sparked by the crisis at Japan’s Fukushima Daiichi plant. New reactors in China – home to nearly half of all such projects under construction – will help to double the world’s nuclear capacity by 2030 according to the World Nuclear Association. (9/17, #12)
  • Federal regulators said they approved of a pipeline network that would carry natural gas from the Marcellus Shale to East Coast states. (9/17, #16)
  • Russian oil major Rosneft and Exxon will begin seismic surveying on Russia’s Arctic shelf in two years. (9/17, #19)
  • The International Energy Agency’s governing board formally closed to the collective action on Libya, which released 60 million barrels of oil from emergency stocks earlier in the summer. The IEA decided in July that a second release from oil stocks was not necessary, but said it would continue to monitor market conditions. (9/16, #3)
  • A new pipeline in Iraq might be needed if production goals there are to be realized, the chief executive of Gulf Keystone Petroleum said. The company said it might need another pipeline to get oil from its Shaikan field to Basra port. The company aims to produce 15,000 barrels per day by the end of the year, which is currently transported by road. (9/16, #9)
  • India’s state-run fuel retailers will raise gasoline prices by about 5 percent, the third hike since January, as global crude prices remain high and a weak rupee adds to refiners’ oil import bill. (9/16, #11)
  • Findings of the second investigation by the government into the 2010 Gulf of Mexico oil spill, may press BP into putting over $30 billion on the table to quickly settle its outstanding legal headaches.(9/16, #14)
  • Turkish Prime Minister Erdogan’s unprecedented threat to send the Turkish navy into the eastern Mediterranean to challenge Israel is primarily aimed at torpedoing efforts by Israel and Greek Cypriots to develop rich offshore natural gas fields. (9/15, #9)
  • Iraq and BP are having trouble reaching an agreement on reimbursement of costs to build a multi-billion-dollar water injection system for oil fields in southern Iraq, a senior Iraqi oil ministry’s official said. (9/15, #10)
  • The Gulf of Mexico has staged a comeback as a source of oil for big energy companies, little more than a year after the Obama administration largely shut down drilling in the wake of the largest offshore oil spill in U.S. history. (9/15, #14)
  • Even if the US approves the Keystone XL pipeline in the next few months, an expected lawsuit by environmental opponents could force TransCanada to miss its 2013 target for starting the system. (9/15, #18)
  • BP is getting very good results from the first of four test production wells drilled into the Ugnu heavy oil deposit on the Alaska North Slope. (9/14, #16)
  • Iran aims to export more than 800 million cubic feet of natural gas to Iraq for its power plants. (9/13, #13)
  • President Hugo Chávez of Venezuela has taken steps to pull out of the international organization most used to settle investor disputes. Caracas faces more than $40 billion in claims for nationalized properties. (9/13, #17)
  • India’s increasing energy needs are being hampered by regulatory delays for coal mining projects. India could import 250 million tons of coal annually by 2015, more than double import levels this year. (9/13, #19)
  • A Chinese contractor, the Great Wall Drilling Company, has secretly signed a memorandum of understanding with the Kenya government to drill 80 geothermal wells, with funding expected to come from the Chinese Exim Bank. (9/12, #9)
  • A report by the National Association of Insurance Commissioners and a nonprofit research group found that there’s a broad consensus that climate change will result in more severe weather and more insurance losses. Yet only 11 of the companies surveyed have implemented climate-change policies. (9/12, #12)
  • The floods in upstate New York are raising new concern about plans for natural gas drilling in the state. The areas most affected by the disaster sit on the Marcellus Shale. (9/12, #13)
  • The European Union has adopted a mandate to negotiate a treaty between its member states and the Caspian littoral states of Azerbaijan and Turkmenistan to build a trans-Caspian pipeline system. (9/12, #15)