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1. Oil and the Global Economy

Oil prices moved slowly upward last week as a tropical storm threatened gulf oil production. NY crude touched a high just below $90 a barrel on Thursday and London’s Brent briefly topped $115. Prices fell sharply on Friday, however, after a Labor Department report showed no growth in US employment during August. This coupled with reports of slowing industrial production in Europe and Asia sent NY futures down 2.8 percent on Friday to close at $85.42. London crude followed suit falling on Friday to close at $112.33.

The Labor Department’s marquis 9.1 percent unemployment figure remained unchanged. Many observers noted that the broader U6 unemployment number rose a bit to 16.2 percent. Some observers of US employment now say that 22 percent may be a more realistic unemployment number when all categories of workers such graduates and the underemployed are considered.

Tropical Storm Lee which hit Louisiana over the weekend did not cause much wind or storm surge damage, but is slow moving and is causing extensive flooding. This in turn could cause problems for some of the 19 refineries in its path.

US crude stocks increased by 5.3 million barrels the week before last, but this increase is likely due to changes in import schedules caused by hurricane Irene and the sale of crude from the US strategic reserve to commercial users.

US gasoline prices over the Labor Day weekend will average $3.66 a gallon, only 3 cents below the record high of $3.69 which was set in 2008 as prices were falling from a major price spike. Gasoline is now nearly a dollar a gallon higher than at this time last year and is a major reason why US gasoline consumption over the last four weeks is off by 2.1 percent from last year.

For the immediate future analysts are awaiting President Obama’s speech on job creation Thursday night and the Federal Reserve meeting on September 20th which is widely expected to revive quantitative easing. In the meantime oil prices are expected to drift lower, absent more weather disasters or more violence in the Middle East. For now, the gradual tightening of the global supply/demand balance as portrayed by the IEA and several investment banks does not seem to concern the markets.

2. The Exxon Deal

Much fanfare was attached to the agreement that ExxonMobil signed with Moscow last week for the rights to explore for oil in Russia’s Arctic. In return for the concession Exxon agreed to give the Russian government-owned oil company Rosneft partial ownership of assets Exxon owns elsewhere in the world including six fields in the Gulf of Mexico and in the Texas shale.

In announcing the agreement, Russian Prime Minister Putin said the deal could eventually grow to $500 billion although initially it world run to only $3.2 billion. By linking up with Exxon, the Russians gain access to deepwater and fracking technology that will help them expand and diversify their oil industry as their older fields go into decline, threatening their position as the world’s largest oil producer.

Exxon, of course gains immediate access to what could turn out to be large amounts of Arctic oil at considerable risk. Moscow’s policies towards foreign oil companies operating in their country are mercurial at best. Five years ago, Moscow forced Shell out of the Sakhalin project after Shell had spent $20 billion.

Other risks to the agreement could come from Congressional objections to allowing the Russian government into Texas oil and from the difficulties of drilling in Arctic waters. The bottom line to the deal is that the Russian’s gain access to Exxon’s technology and money to exploit oil that they would find difficult to do on their own and Exxon gets access to Arctic oil without the regulations and environmentalist lawsuits they would face in US or Canadian waters.

3. The Marcellus gas estimates

Last week the US Geologic survey announced that it was increasing its estimate of the amount of natural gas in the Marcellus shale to 84 trillion cubic feet from the 2 trillion it had estimated in 2002. This announcement resulted in headlines touting the massive increase in US shale gas resources until someone remembered that a month ago the EIA had estimated that the Marcellus shale contained 410 trillion cubic feet of gas. The EIA promptly announced that it will revise its estimate after it understands the discrepancies between the two estimates. This led to new headlines that the US had slashed its estimate of the Marcellus shale gas potential by 80 percent.

The size of US shale gas resources has become highly politicized in recent years not only because of the environmentalists’ concerns about fracking, but because of the hype that shale gas is so plentiful it can replace oil as the major source of domestically produced energy. Investigations of what are said to be overly optimistic industry estimates as a way of inflating stock prices are going on.

The US currently consumes about 25 trillion cubic feet of natural gas a year mostly for heating and power generation.

4. Dangers in the Middle East

The hunt for Gadhafi continues as his supporters cut off most of the water supply for Tripoli and rebel forces close in on the remaining Gadhafi strongholds. A meeting in Paris last week of 60 national delegations supporting the Libyan National Transition Council confirmed the legitimacy of the new government. Even Moscow has recognized the Council. Interest in rapidly reviving Libyan oil and gas exports have brought all sorts of offers of support for the new government which has yet to prove it can establish effective control of the country. The Italians who are most interested in restarting the Greenstream pipeline that brings gas under the Mediterranean have already signed agreements with the new government. The Transition Council wants to get control of the billions of dollars in Libyan government assets that were frozen by foreign governments when the fighting started.

Resumption of oil exports, however, remains the number one topic. For now the political and security situation is far from stable amid fears fighting between the tribes that are thought to be either pro or anti Gadhafi could arise. It is doubtful if large numbers of foreign oil workers will return to the country until political and security conditions improve.

Perhaps the major fallout of Gadhafi’s overthrow will prove to be the encouragement it provides to the demonstrators in Syria and elsewhere who are still taking to the streets where some are being gunned down by security forces. The Assad government has very few friends left in the wake of the continued shooting of peaceful demonstrators. Economic activity in Syria is grinding to a halt in the wake of economic sanctions. Last week the EU adopted a ban on crude imports from Syria. EU states currently take 95 percent of Syria’s oil exports and provide 25 percent of the government’s income.

The continuing unrest in Syria coupled with foreign sanctions is increasing concerns that the Assad government could become the next to fall. Damascus is in the center of many long-standing confrontations in the region so that the accession to power of new and unknown entities could set off clashes with serious consequences. The Iranians are getting nervous the West and Israelis may win out as a result of the upheavals.

Iran’s efforts to obtain nuclear weapons came back in the news last week with the publication of an IAEA report saying that Tehran has begun operating a new generation of centrifuges that will allow it to enrich uranium to weapons grade much faster. As tensions increase in the region, we are likely to hear more about this program

Quote of the week

“When considering the consequences of peak oil, no everyday experiences and only few historical parallels are at hand. It is therefore difficult to imagine how significant the effects of being gradually deprived of one of our civilization’s most important energy sources will be. Psychological barriers cause indisputable facts to be blanked out and lead to almost instinctively refusing to look into this difficult subject in detail. Peak oil, however, is unavoidable.”

— from the recently translated Peak Oil analysis by the German Military

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

  • Russia has expressed an interest in participating in the long delayed Turkmenistan-Afghanistan-Pakistan-India natural gas pipeline. (9/3, #10)
  • The operators of Mauritania’s southern Atlantic offshore Chinguetti oil field expect to double production by the end of the year. Production is predicted to increase from 4,000 b/d to 8,000 b/d by the end of the year. (9/3, #11)
  • China’s coastal waters regulator ordered ConocoPhillips to suspend production in the country’s largest off-shore oil field, citing “negligence” by the US energy company in handling underwater leaks. (9/3, #13)
  • A critical shortage of gasoline and diesel fuel in North Dakota is showing no signs of improving. Industry representatives are working with the governor’s office trying to find ways to get more fuel from refineries in other parts of the country. Minnesota, South Dakota and Iowa are also experiencing fuel supply shortages. (9/3, #18)
  • South Carolina State Sen. Elliott is not only pushing forward with a goal of capping wholesale gasoline prices, he’s confident that if South Carolina takes such a step, other states will follow. “The fact is, the oil companies will own us if we don’t do something.” (9/3, #19)
  • China is slowing its oil and gas investments in Iran. Industry executives said this action reflected Beijing’s efforts to appease Washington and avoid US sanctions on its big energy firms. (9/2, #7)
  • Foreign oil company officials are frustrated by a new rule, implemented last week at Iraq’s Basra Airport, that forces even the highest-level oil company executives to abandon their customary armored convoys when traveling to the airport and take a taxi. This raises concerns of everything from traffic accidents to attacks and kidnappings. (9/2, #12)
  • Surveys done in Panama have established that the country is sitting on oil worth at least $15 billion. Panama is dependent on imported oil and rising demand puts added pressure on the country’s cash resources. (9/2, #13)
  • The Federal Trade Commission weighed into the debate in Washington about oil-market speculation, saying supply-and-demand forces drive gasoline prices, not oil traders. The FTC didn’t investigate speculation independently, but reviewed the available research and found it inconclusive. (8/31, #4) (9/2, #17)
  • Nuclear regulators said they want the operators of all 104 US commercial reactors to conduct new assessments of their facilities’ vulnerability to earthquake damage. (9/2, #18)
  • NRG Solar announced its 20-megawatt Roadrunner facility near the New Mexico border with Texas is now operating at full capacity. (9/2, #21)
  • The bankruptcies of three American solar power companies in the last month, including Solyndra of California, have left China’s industry with a dominant sales position – almost three-fifths of the world’s production capacity – and rapidly falling costs. (9/2, #23)
  • ENI’s CEO says the Italian energy company has set an “ambitious” target of Oct. 15 for the resumption of natural gas flow from Libya to Italy via the Greenstream pipeline. (9/1, #7)
  • Chevron said it won a $96 million judgment against Ecuador in an international arbitration case stemming from a 1990s oil-export dispute with the Latin American nation. (9/1, #17)
  • US natural gas production in the lower 48 states increased 0.1 percent in June to the highest level since at least 2005. Production rose to 69.47 billion cubic feet a day from a revised 69.39 billion in May. (8/31, #5)
  • The 60 watt has long been the bulb of choice for the modestly-sized rooms in the typical British home. But this bulb will be put on the endangered list on Thursday 1 September, when an EU-wide ban on the manufacturing and importing of 60W incandescent clear light bulbs comes into force. (8/31, #6)
  • Bangladesh is making a strong play to lure Pakistani textile businesses in the wake of the long-running energy crisis. (8/31, #8)
  • The US Bureau of Offshore Energy Management, Regulation, and Enforcement has developed and implemented tools to help offshore oil and gas operators improve their exploration and development plan and permit applications. (8/31, #10)
  • Global production of biofuels increased 17 percent in 2010 to reach an all-time high of 28 billion gallons, up from 24 billion gallons in 2009. (8/31, #20)
  • Many of the world’s biggest energy companies may have to surrender most of the gas from Iraq’s southern oilfields to a processing and export project led by Shell, according to a draft contract between Baghdad and Shell. (8/30, #3)
  • The head of Iran’s national oil company has announced that the Tehran government plans to privatize seven of the country’s nine refineries by March 2012. (8/30, #4)
  • Jordan Energy Minister Toukan announced that his country will sign a new agreement with Cairo for a small part of the natural gas it receives from Egypt. Toukan said his country will pay more for the gas than agreed to in one of its existing contracts. Jordan looked for other sources following a series of attacks in the Sinai that have disrupted supplies (8/30, #5)
  • Japan imported 4.07 million b/d of crude over August 1-10, jumping 15.9 percent from the same period last year. (8/30, #10)
  • South Korea’s exports of oil products surged 94.6 percent in July from a year earlier due to strong demand from Asia and Europe and higher oil product prices. (8/30, #11)
  • France, which depends on nuclear reactors for about three-quarters of its power needs, won’t build new atomic plants just to compensate for closures in Germany, Prime Minister Fillon said. (8/30, #14)
  • Solar generators may produce the majority of the world’s power within 50 years, slashing the emissions of greenhouse gases, according to a projection by the International Energy Agency. (8/30, #17)
  • Food price inflation looks set to continue into 2012 as expectations for the US corn harvest are being lowered by the week. Analysts and trading executives are cutting estimates of how many bushels each acre will grow as the effects of punishing heat last month result in smaller ears of corn. (8/29, #4)
  • A suicide bomber mounted a devastating attack in one of the largest Sunni mosques in Baghdad on Sunday, killing at least 28 people, including a member of Parliament, and wounding dozens more. (8/29, #6)
  • A renewed diesel fuel shortage, which has hit Egypt’s governorates over the past few days, has left many truck drivers fuming. A similar shortage has also been reported from the coastal city of Alexandria, a major oil consumer that lies 220km north of Cairo, to Delta Governorates of Qalubia, Menufia, Kafr el- Sheikh and Damietta. (8/29, #7)