Download Full PDF

1. Oil and the Global Economy

Oil prices fell until Friday last week when they bounced up $1.31 a barrel to close at $76.49. As usual, the price surge had little to do with supply and demand but was tied to a climbing Euro and the usual bag of mixed economic news which inevitably sends the equity markets higher these days. The Department of Energy reports that US stockpiles continue to rise with distillate stocks now at the highest levels in the last 29 years. Oil prices remain stuck in a $70-$80 trading range. Most OPEC and other producers are pumping out as much oil as they can and US refiners are still importing enough each week to keep increasing stocks. Perhaps they see $75 oil as a bargain in comparison to what is to come. Demand from Asia and the oil exporting states continues to rise, but as yet not enough to force oil prices higher.

Average retail gasoline prices in the US are now about $2.70 a gallon – 17 cents higher than at this time last year. Prices have been falling in the last few weeks and are expected to continue falling unless interrupted by a Gulf hurricane.

2. Iran

The dispute over the effectiveness of the UN and EU/US sanctions continued last week with Tehran claiming that it no longer needs to import gasoline after modifying its refineries and chemical plants to produce more motor fuel. A spokesman for the US Treasury claims that the sanctions are “dramatically isolating Iran financially and commercially” and points to the growing list of major companies that have announced that they will no longer do business with Tehran.

Iran appears to be having difficulty selling off the crude it has in floating storage. Iran normally builds up a surplus of its heavy crude in the summer when the demand for lighter, “gasoline-friendly” crudes increases and then is sold off during the summer as feed stock for the winter heating season. This year the surplus reached a high of 40 million barrels in June and is now down to 20 million barrels. Shipping sources say Tehran is having trouble selling off its floating stocks as quickly as in previous years.

Last week Moscow reinforced the sanctions by announcing that it would not sell the Iranians an advanced air defense missile which Tehran seeks as a deterrent against air strikes on its nuclear facilities. The US praised Moscow’s decision and renewed efforts to bring Tehran back to the negotiating table. The announcement was a major blow to Iranian President Ahmadinejad’s prestige and came just prior to his UN speech which claimed that the US orchestrated the 9/11 attacks as a pretext for injecting its forces into the Middle East. Despite the inflammatory rhetoric, Ahmadinejad expressed the hope that talks could resume next month saying that Tehran might give up its enrichment program in return for a supply of 20 percent enriched uranium for its medical reactors.

Analysts point out that Ahmadinejad is facing increasing troubles at home due to internal power struggles within the government that have paralyzed decision making. Last week a bomb exploded at the army day parade in the predominantly Kurdish city of Mahabad killing or injuring 100, further adding to the president’s troubles.

Despite the continuing assertions of skeptical observers that sanctions could never deter Tehran from efforts to develop nuclear weapons, developments in the last weeks seem to show some hope.

With the Chinese signing deals for the acquisition of new sources of foreign oil and gas literally all over the world, Beijing may not be as wedded to the notion that its access to Iranian oil is its top foreign policy goal outweighing the dangers that would ensue from Tehran’s acquisition of nuclear weapons.

The possibility that the 17 million b/d of oil shipments through the Strait of Hormuz might be slowed or blocked by hostilities involving Iran still remains the top threat to global oil supplies. Developments of the last few weeks, however, suggest that sanctions plus increasing domestic problems may force Tehran to rethink its current policy of either acquiring nuclear weapons or enhancing its prestige by leaving its adversaries in doubt as to its intentions.

3. China

With economic growth stagnant for the foreseeable future in the US, the EU, and Japan, nearly every economic and political development in China these days plays a role in determining how quickly global oil depletion will be upon us. Last month China’s oil consumption was about 8.4 million b/d, down about 500,000 b/d from a high of 8.97 million b/d in June. August consumption was still up 7.6 percent over August of 2009. For the first eight months of 2010, China’s oil demand was up 10.9 percent over 2009. For the first four months of the year, its oil demand was increasing by 13 to 18 percent over last year when the Chinese economy was in what passes for a slump these days.

There seems little doubt that the rate of China’s economic growth and with it her demand for oil will be a key determinant in just how soon the next major oil spike comes. With global oil production likely to be flat for the next few years, the growth in demand from China, India, and the oil exporter nations that are rapidly increasing their domestic consumption will be the key to how fast the world eats through its spare production capacity estimated to be from 3 to 6 million b/d. As we saw three years ago, just getting within a million b/d or so of maximum possible production is enough to send prices soaring with all sorts of dire economic consequences.

Last week a dispute between Japan and China over natural gas drilling right in the China Sea flared over Japan’s detention of a Chinese fishing boat captain. The dispute, which had been the subject of ongoing negations between Beijing and Tokyo, turned nasty with Beijing apparently halting the export to Japan of vital rare earths and stopping Chinese tourists from visiting Japan. In the end, Tokyo was forced to back down. The real test will be whether or not Beijing can leverage its near monopoly of increasingly important rare earths to gain more favorable access to the gas reserves in dispute.

The incident illustrates China’s growing clout on the international scene as it moves into the position of the world’s #1 energy consumer.

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

  • US drilling activity fell this week, down 11 rotary rigs to 1650 still working but well ahead of the 1017 units running in the comparable week a year ago, Baker Hughes reported. Land operations suffered the largest loss, slightly worse than offshore drilling. (9/25, #18)
  • Robust overseas demand has led the U.S. to become a net exporter of petroleum products for the first time ever, Goldman Sachs said. (9/22, #17)
  • Oil traders say the combination of last week’s price gap and near-record supplies at a U.S. futures delivery point has made West Texas Intermediate an inaccurate indicator for global demand. The shutdown of a U.S. oil pipeline that caused prices to fluctuate twice as much as in Europe is adding to concern over the benchmark contract for crude. (9/24, #4)
  • TransCanada Corp. expects the Cushing Extension of the Keystone system to be in service in the first quarter next year. The second phase of the $12 billion project extends a 36-inch pipeline from Steele City, Nebraska, to Cushing, Oklahoma, and will increase capacity to 591,000 b/d. (9/25, #19)
  • Off the Kent coast of the UK the world’s biggest offshore wind farm has been officially opened. Sweden’s Vattenfall said 100 turbines are expected to power 240,000 homes. Up to 341 turbines will be installed over four years. (9/23, #21)
  • The world’s airlines are expected to make a net profit of $8.9 billion this year amid unexpectedly strong economic growth. Traffic is expected to grow by 11% this year, with capacity rising only 7%. (9/21, #6)
  • The four major Atlantic hurricanes that spun toward the Caribbean in the past month were fueled by record warm seas and formed in an unprecedented 20 days. (9/21, #5)
  • Noble has sanctioned the $3 billion development of Tamar gas field in the Levant basin in the eastern Mediterranean off Israel and expects gas delivery to begin around the end of 2012. Tamar has an estimated 8.4 trillion cu. ft. of recoverable gas. (9/25, #7)
  • In Poland, PGNiG warned of gas shortages for industry clients this autumn if Warsaw fails to sign a deal with Russia on increasing deliveries. Russian Gazprom and PGNiG have finalized a deal to extend a 1993 agreement until 2037 and enlarge gas deliveries from 7.5 to 10.3 billion cubic meters, but the agreement has not been signed. (9/21, #19)
  • Turkey is open to new partnerships for oil and gas exploration in the Black Sea, the head of state-run Turkiye Petrolleri AO said after announcing a $750 million deal with Chevron. “In three years we plan $4 billion in investments to drill some 500 wells”. (9/21, #12)
  • Turkey, the relay point for a quarter of Iraq’s oil exports, also aims to be the main hub for the country’s up-and-coming natural gas exports. Turkey is at the world’s energy crossroads -especially if the planned Nabucco pipeline comes through. (9/22, #6)
  • Iraqi and Turkish energy ministers signed a 15-20 year agreement to keep Iraq’s second-biggest export outlet open, a day after Baghdad announced an initial agreement with Syria. (9/21, #10)
  • Iraq’s oil exports dipped slightly in August, but still topped 55 million barrels and brought in nearly four billion dollars in revenues. But last August Iraq shipped 62.3 million barrels of crude and earned 4.24 billion dollars in revenues. (9/24, #10)
  • The Arab states of the Gulf have embarked on one of the largest re-armament exercises in peacetime history, ordering US weapons worth some $123 billion as they seek to counter Iran’s military power. The first phase of this agreement is estimated at about $30 billion. (9/21, #11)
  • Pak-Arab Refinery resumed production from its plant in Multan after Pakistan‘s deadliest floods receded. The plant was shut down six weeks ago because fuel tankers couldn’t pass flooded roads. (9/20, #7)
  • Pakistan will push hard for quick implementation of a long-delayed trans-regional gas pipeline from Turkmenistan. The TAPI project would pump natural gas to Pakistan and India through the southern Afghan province of Kandahar. (9/22, #10)
  • In India, state-run oil marketing companies are raising the price of petrol to market parity but on different days in order to avoid accusations that they have formed a cartel. (9/21, #15)
  • Despite India’s abundant coal resources, many power producers are investing in coal assets outside India. Availability of domestic coal is a challenge for many Indian companies due to capacity constraints at Coal India, delays in coal block allocation, tribal land acquisition and environmental and forest clearances. (9/23, #15)
  • Nissan plans to double its automobile production capacity in China to 1.2 million units by 2012. Nissan and 44-percent owner Renault are also steering clear of General Motors’s upcoming initial public offering. Nissan is in discussions with its China market partner Dongfeng about sharing cutting-edge electric car technology. (9/20, #13, 14)
  • The number of motor vehicles on Beijing roads is forecast to hit 5 million by the end of the year. During July Beijing had 4.4 million automobiles on its roads, with an average driving speed of 15 mph during weekday rush hours, 3.6 percent slower than last year’s average. (9/24, #21)
  • Interest by China’s SAIC in possibly buying a stake in GM raises the issue of foreign investment for the US government, which is eager to unload its 61% stake. (9/21, #14)
  • China denied that it had halted exports to Japan of rare earth minerals, but industry executives said that factories in China were still not shipping to Japan after Chinese customs agents blocked shipments earlier this week. The minerals are used in products like wind turbines and hybrid cars. (9/24, #20)
  • China and Russia agreed to invest around $5 billion in a joint oil refinery but may not complete talks on Russian natural gas for China until next year. A feasibility study for the refinery in Tianjin will be ready in six months and construction will take two years. (9/22, #19, 20)
  • TNK-BP is ready to buy fields BP is selling to cover costs for the Gulf of Mexico spill. Talks to buy assets in Venezuela and Vietnam are furthest along. The company is also looking at North Africa and is interested in investing in Iraq. (9/20, #20)
  • Venezuelan President Chavez said the first $4 billion of a $20 billion loan from China had been deposited. This agreement was reached in April and was announced again in August. While the money had already arrived according to Chavez, it was only this week that the Venezuelan National Assembly approved the deal. (9/20, #8)
  • Venezuela submitted to the SEC its 2009 annual report which recognized that PDVSA will continue being affected by declining production. It also reported the economic situation of Guyana’s basic industries, where output has tumbled due to the energy crisis. (9/24, #18)
  • Germany’s minister for Economic Cooperation and Development said the country won’t consider contributing to a fund for the Yasuni-ITT project that would compensate Ecuador for not extracting oil from an Amazon reserve. (9/22, #13)
  • Mexico’s oil regulator again criticized the Chicontepec project. The National Hydrocarbons Commission said Pemex’s huge bet still had “fundamental problems” and risked being unprofitable for decades. Pemex said it had reestablished oil production at 14 minor wells in the Gulf evacuated in the wake of Hurricane Karl. (9/22, #12)
  • Mexico’s Energy Ministry said that proven hydrocarbon reserves as of Jan. 1 were 13.99 billion barrels of crude oil equivalent, the same number given by Pemex, and it also confirmed Pemex’s 2009 reserve replacement rate of 77%. (9/24, #16)
  • Repairs to sabotaged oil facilities in the Niger Delta will help to push exports of Nigeria’s benchmark crude oil to the highest since early-2008. Bonny Light output will average 285,000 b/d in November, up from 245,000 b/d planned in October and recovering from below 130,000 b/d earlier this year. (9/25, #8)
  • Ghana and China have signed deals totaling $15 billion, signaling the west African country’s rising prominence as an investment destination and future oil producer. Ghana is set to begin oil production later this year and will soon pump 120,000 b/d. (9/24, #11)
  • “It is commonly believed that South Africa has abundant coal reserves which will last 200 years or more,” says Jeremy Wakeford of ASPO. “But recent research … suggests that usable reserves are much smaller than previously thought, and that annual production could reach a peak and begin to decline within a decade.” (9/24, #13)
  • Angola is still producing 1.9 million b/d of oil, according to state media quoting the country’s oil minister, well in excess of its quota with OPEC. Angola says its quota is 1.656 million b/d, but data from OPEC show Angola’s allocation is 1.517 million b/d. (9/25, #9)
  • Europe’s OSPAR Convention rejected a German proposal for a moratorium on deep-water drilling in the Northeast Atlantic. (9/24, #28, 29)
  • Cairn Energy said it found traces of oil and gas in a second well drilled off the coast of Greenland but failed to make a commercial-sized discovery from its first well. Cairn plans to continue exploring for oil for several years off Greenland’s west coast. (9/22, #18)
  • BP said payouts to people affected by its Gulf of Mexico oil spill had dramatically increased. The $20 billion fund it set up had paid out 19,000 claims totaling over $240 million. While BP plans to permanently abandon its stricken well in the Gulf of Mexico, experts say that there are no technical or commercial reasons why BP or another company could not eventually produce oil from the formation. (9/20, #16, 18)
  • In the first three months of 2010, the Interior Department green-lighted 32 new shallow water wells. Since the BP oil spill, the department has approved just six new wells, even though a six-month moratorium only affected wells in much deeper waters. (9/22, #16)
  • The EIA revised June US crude oil imports down 2.7 percent from the previous reported level – 9.872 million b/d, down 274,000 b/d – due to an error in data submissions by Marathon. (9/24, #25)
  • The California Air Resources Board adopted targets for reducing greenhouse gas emissions in 2020 and 2035 associated with passenger vehicle travel. The Board also established a 33 percent renewable standard for electricity sold in the state in 2020. (9/24, #23, 24)
  • Fuels made from Canadian oil sands have lower greenhouse gas emissions than many commonly cited estimates, according to IHS CERA. Imported products have “well-to-wheels” lifecycle emissions only 6 percent higher than average crude refined in the US when blended with lower carbon products. (9/24, #27)
  • A targeted review of the Pennsylvania program regulating the hydraulic fracturing of oil and gas wells has concluded that the program is, overall, well-managed, professional and meeting its program objectives. The program was singled out for its comprehensive water planning; baseline water sampling and water studies; Prevention, Preparedness and Contingency planning; waste identification, tracking and reporting; and increasing staffing levels. (9/25, #22)
  • An MIT study finds no shortage of uranium for nuclear energy, but recommends against recycling spent nuclear fuel. Instead, it calls for a sustained R&D program worth nearly $700 million a year. (9/24, #31)
  • In Forbes, Charles Maxwell has forecast peak oil: “… in the period 2015 to 2020. And if I had to pick a particular year, I might use 2017 or 2018. … By 2020, we should be headed in a downward direction for oil output in the world each year …” (9/21, #20)