1. Economies in Contraction
Despite endless repetition by government spokesmen, Wall Street economists, and the financial media of the mantra that the global recession has, or has nearly, ended, independent observers continue to say this has not been the case. During 2009, government revenues continued to fall precipitously, the federal deficit continued to soar, real estate foreclosures continued to increase as housing prices fell, commercial real estate lined up as the next domino, and unemployment continued to rise. There are no indications of any significant reversal of these trends.
In recent months increased attention has focused on financing the unprecedented deficits that the US and other OECD governments are running. Although the US administration continued to say that all was well, as the year ended more voices were expressing concern as to how long Washington can maintain extremely low interest rates, the value of US dollar, the market for government debt, and rising equity markets.
Lower economic activity resulted in a significant drop in oil consumption in the last two years. OECD consumption for the first nine months of 2009 was 43.8 million b/d, nearly 4 million b/d less that the 47.7 million b/d consumed in the first nine months of 2007. Chinese consumption, however, continued to rebound from a low of 6.9 million b/d in the first nine months of 2008 to 7.9 million b/d in the same period of 2009. Average global liquid fuels production in 2009 through November was 84.8, versus 86.6 and 85.3 million b/d in 2008 and 2007.
2. Prices Rebound
When oil prices closed above $79 a barrel last Thursday, it marked an increase of 78 percent in 2009, the biggest annual percentage gain since 1999 when production cuts by OPEC forced prices up from around $10 a barrel. From a close of $44.60 on December 31st 2008 and a low of $32.70 on January 20th, oil moved up steadily to a 2009-high of $82 on October 21st. The $79 close last Thursday was just over half the $147 high set in July 2008.
The major effect of oil falling by $100 a barrel in less than six months was on OPEC. Starting in the fall of 2008 the cartel reduced and for a time largely adhered to production cuts totaling some 4.2 million b/d to offset the declining demand for oil. A second important effect of the price collapse was the role that falling oil prices played in mitigating the effects of global recession in the second half of 2008 and the first half of 2009. With roughly 85 million b/d being consumed world wide, consumers were spending about $8.5 billion a day less on their oil requirements in February 2009 as opposed to during the previous July.
By March of 2009, the situation had changed. China’s stimulus package started to take hold and the demand for oil began increasing again. More importantly, the US government’s “quantitative easing” (creating money) began pushing up equity markets and consumer confidence. Although demand for oil from the US and other OECD countries did not rise much during 2009, Chinese demand rebounded significantly and, coupled with rising demand from India and increasing domestic consumption in the oil exporting countries, forced prices back up to a range of $70-80 a barrel where they have remained for the past six months.
3. Asia: Growth or Bubble?
In November 2008, the Chinese government, afflicted with a 20 percent plus drop in exports, factory closings, social unrest, and World Bank predictions that its growth would fall to 6.5 percent, announced a two-year stimulus plan to restore and maintain rapid economic growth. China’s GDP, which it claims to have grown at 13 percent in 2007 and 9 percent in 2008, was on track to fall to 6.1 percent in the first quarter of 2009.
Bank credit in China was eased markedly and $586 billion in stimulus spending on infrastructure and housing was initiated. This spending represented nearly 15 percent of China’s GDP, a much larger effort than that undertaken in other countries. Until the announcement, Beijing had maintained that it was unaffected by economic problems in the rest of the world. Around the globe, many were saying that China’s spending package would change the world by leading the global economy out of recession.
By the fall of 2009, Beijing was reporting remarkable success as a result of its stimulus efforts. GDP was reported to be increasing at 8.3 percent a year. Amidst the euphoria, however, were warnings by many outside observers who had their doubts about whether all this spending was creating real economic growth or merely a financial bubble. Without the exports which had been the mainstay of China’s economy for the past 30 years, there was little else than spending its vast foreign exchange holdings to stimulate the economy. Unlike other developed economies, in China only 30 percent of GDP goes for domestic consumption as compared to 60 or more percent in the OECD nations.
However, the past year has seen continuing increases in Chinese imports of all sorts of commodities including coal and oil. Chinese oil consumption ran at about 8.8 million b/d in 2009 as compared to 6.9 in 2008. Beijing is already talking about another 4 percent increase in oil consumption for 2010.
4. Changing Perceptions of Peak Oil
During 2009 the most significant story about peak oil was published by The Guardian (UK) on November 9th, when reporter Terry Macalister conveyed alarming statements by two whistleblowers from the International Energy Agency. Whistleblower #1, still with the IEA, said “The IEA in 2005 was predicting oil supplies could rise as high as 120 million barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year . The 120m figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this. Many inside the organization believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further.” Such honesty isn’t tolerated by IEA member state USA, which apparently leaned hard on the Agency to bury this hard truth for years. While Time, CNN, the Financial Times and other mainstream sources carried follow-up articles on the whistleblower leak, the story largely disappeared within two weeks. But long-term doubts about the “big number” in IEA forecasts are probably here to stay.
The year opened with a similarly strong warning from a heavy-weight within the oil industry. Christophe de Margerie, CEO of oil super-major Total SA, had previously issued warnings about world oil supply constraints. In 2007, he stated that “production of 100 million barrels a day will be difficult.” He upped the ante during 2008, claiming that “world oil production would peak at or below 95 million barrels per day.” On February 10th, 2009, the CEO’s statement could have been issued by ASPO-USA: “world oil production may plateau below 90 million barrels per day.” Other CEOs—Jim Mulva of ConocoPhillips and John Hess of Hess Corp—continue with their own realistic wake-up calls. Houston and Wall Street appear to internalize the peak oil issue.
Yet despite these and other blunt warnings from a growing number of industry insiders, for much of the year the perception of peak oil as a looming issue lost ground in the media. Oil optimists like Daniel Yergin and Michael Lynch pushed back against the peak oil story on op-ed pages of several major US newspapers. Reporters wrongfully continued to link peak oil to “running out of oil,” which they then rightfully asserted wasn’t a near-term problem. A fog of sorts still plagues the issue.
5. New oil supplies underwhelm, except for Khurais
Here’s a small surprise: according to EIA data, through the first nine months of 2009 the nation with the largest increase in daily oil production (crude and condensate) was the USA. The world’s third-largest producer increased daily output by roughly 310,000 barrels/day compared to 2008. Is this the first wave of a major trend to increase production, thanks to the deepwater Gulf of Mexico (GOM) and the ballyhooed Bakken formation in North Dakota and Montana? Not likely.
First, about half of the USA’s “increase” was the absence of any substantial hurricane shut-ins compared to 2008. Second, yes, having Thunderhorse’s production on-line for a full year, plus some smaller new Gulf fields start up production, substantially increased GOM production vs. 2008. Yet add it all up and total 2009 offshore production for the US is likely to just return to the previous offshore high of 2 million barrels/day back in 2003. Third, while North Dakota’s oil production nearly tripled over the last six years, that only bumps it from 81,000 b/d to about 230,000 b/d. During those same six years, California’s production declined by nearly that amount, and Alaska’s production fell nearly three times more than the Bakken increase. U.S. oil output could increase modestly during the next year or two, but that’s likely the limit. Last November, CERA’s Peter Jackson forecast that U.S. production could stay between 5 and 6 million b/d for a decade. Anything’s possible on paper, but in the real world consider us skeptical.
Elsewhere, Azerbaijan’s production increased 140,000 b/d, Brazil’s climbed 120,000 b/d and Kazakhstan bumped up 85,000 b/d, continuing long-term trends in all three countries. Increases in Russia (90,000), Columbia (65,000) and Oman (50,000) reversed recent trends of either flat or declining production. Saudi Arabia’s 1.2 million b/d expansion at the Khurais field, brought on-line last June, could exceed all of the above increases, though the reactivation of OPEC quotas sidelined that new capacity for 2009.
6. Oil production declines continue — Mexico hit hardest
Preliminary EIA data indicate that half of the annual production declines from non-OPEC nations during 2009 came from three countries: Mexico, Norway and the UK. Back in 2000 when their collective production peaked it roughly equaled that of Saudi Arabia—over 12% of the world’s total supply. Nine years later, production from these once-reliable exporters has dropped 29% in aggregate. Since their domestic consumption is considerable and has risen modestly, their aggregate oil exports are down roughly 50% during this decade.
Mexico’s situation is approaching a critical level. Oil revenues typically have funded up to 40% of social programs in the nation’s annual budget. During 2008, Mexico hedged their oil production at relatively high prices, temporarily buffering their budget from the impact of declining oil exports. With oil at somewhat lower prices in 2009 and exports continuing to decline, the oil situation will make life tougher for everyone going forward. On top of this, Mexico’s GDP fell 5% last year; Mexicans working in the US have significantly cut back on their monthly remittances to families back home; and Mexico is suffering the worst criminal violence in its history. Add it all up and 2010 looks to be a very challenging year for the US’s southern neighbor.
Elsewhere, production continued modest declines in many post-peak nations such as Argentina, Denmark, Egypt, Indonesia, Malaysia and Yemen. While China’s oil production isn’t yet in decline, its 27-year string of continuous increases appears to have ended, as preliminary data indicates that production was flat from 2008 to 2009. [Note that nearly all the data in #5 and #6 is preliminary]
Drops in supplies from Middle East OPEC nations can be largely attributed to the organizations’ efforts, starting in January 2009, to meet the reduced quotas set the previous fall. However, continuing production declines from renewed OPEC member Ecuador appear to have nothing to do with quotas. Additionally, Venezuelan supply, down a fourth year in a row in 2009, reflects on domestic policy decisions more than quotas. And volatile production from Nigeria is more tied to the state of violence in the Niger River delta than to the nation’s quota allotment.
7. Geopolitical constraints to production
Although 2009 was relatively quiet from a geopolitical point of view, the seeds for more trouble were clearly sown. The most important took place in Iran, where allegations of election fraud led to widespread demonstrations and six months later to calls for regime change in the midst of an increasingly ruthless government crackdown. The issue of nuclear enrichment and Iran’s possible quest for an atom bomb continued to deteriorate during the past year while the Chinese, who are willing to pay nearly any price for access to foreign oil, continue to support Tehran’s aspirations, although with less enthusiasm. Moscow, which has been involved in the Middle East longer than Beijing, seems to better appreciate the dangers involved in this dispute. With some 25 percent of the world’s oil supply either originating in Iran or sailing past its coast, fighting in the region could easily become a major disaster for the global economy.
Although Iraq, with the help of foreign oil companies, has the potential to become one of the world’s largest oil producers, the political disputes and grudges that have wracked the region for centuries remain far from settled. There is still no oil law, the dispute with the Kurds grows worse every day, US forces are on the verge of pulling out, and al Qaeda has resumed car bombings in hopes of disrupting the upcoming elections. All this suggests that increasing production to 12 million b/d as Baghdad hopes will turn out to be impossible.
The situation in Venezuela continued to deteriorate during 2009 with oil production slowing, nationalizations of key sectors of the economy increasing, and a major drought hampering electricity production. President Chavez continues to sign oil and other agreements with Russia and China with to aim of halting oil shipments to the US as soon as possible. In the meantime, the economic situation in Venezuela has deteriorated rapidly during the past year and domestic unrest may not be far away.
8. Natural gas: from good news to a mixed bag
For anyone in the U.S. paying a natural gas bill, 2009 was a very good year. Prices dropped to levels last seen in early 2002. For natural gas producers, it was, to be kind, a challenging year. Spot prices on the NYMEX started the year at $6/mcf, slowly slid to less than $3 for several weeks in August and September, then bounced back into the $5 range. The low prices hammered the drilling industry; from a high of 1600 rigs drilling for natural gas in the early fall of 2008, the gas rig count crashed by nearly 60% to a low of 665 in July 2009.
What happened? It was apparently classic supply and demand: as U.S. demand for natural gas softened (but just by two percent) during late 2008 and 2009, supply continued growing into early 2009, hitting a production level in March not seen for 35 years. By last fall, this meant seasonal underground storage reached all-time highs before the late-arriving heating season got started.
But it was the role of shale gas in the growth of U.S. supply that made the big headlines all year long, culminating in the news last month that ExxonMobil was buying shale gas producer XTO for $41 billion. The four main US shale gas plays–the Barnett, Haynesville, Fayetteville and Marcellus–garnered nearly rock-star status media headlines. Most reports from the newer plays continue to feature the high initial production flows from new wells, while acknowledging wickedly sharp decline rates. A comment in November by John Dizard (The Financial Times) sums up the late-year dialogue here: “whether [the optimists or critics] are closer to the truth about shale gas decline rates, it does seem clear to me that Wall Street has underestimated the real cost of shale gas, and overestimated how fast its production can be expanded.”
Indeed, there’s a growing barrier along the path towards vastly increased shale gas development. A little-noticed escape clause in the XTO purchase highlights this barrier: ExxonMobil can back out of the deal if Congress bans hydraulic fracturing (fracking) or passes laws to make the technique commercially impractical. Indeed, during the summer and fall, stories featured the growing support by the citizenry to eliminate fracking’s exemption from the Clean Water Act, granted through 2005 legislation. As an outgrowth of this, Chesapeake Energy bowed to enormous citizen pressure in
October by agreeing not to drill for natural gas within New York’s watershed. At year’s end, the momentum appeared to shift towards more regulation of shale gas drilling. [See “Briefs” on p. 7]
9. Falling investment will squeeze oil supply
As the International Energy Agency has been warning for years, a slump in upstream oil investment now means an oil supply squeeze later; the only question is when and how bad it will be. IEA Director Nobuo Tanaka warned in November that “Sustained investment is needed mainly to combat the decline in output at existing fields, which will drop by almost 2/3 by 2030.” Tanaka added that global upstream spending was budgeted to drop $90 billion, or 19%, during 2009 vs. 2008—the first decline in a decade. While some of those declines are offset by lower costs for exploration and production work, the remaining deferred investment means less oil five to ten years out.
The super-major investor-owned oil companies report that they will maintain the bulk of their planned capital expenditures going forward. Total SA plans to keeps its capital investment budget at $18 billion, Chevron will trim theirs 5% from 2009 to $21.6 billion in 2010, while ConocoPhillips will cut their capital budget by 10% to $11.2 billion. It is the smaller companies, those that are more reliant on credit to finance drilling and other field operations that are already in more of a bind. Additionally, a large number of OPEC projects have been delayed.
The investment slowdown has already impacted Canada. During 2009, the nation’s production declined slightly for a second year in a row, despite their enormous tar sands resource. But building tar sands facilities costs more than any other commercial liquid fuel operation, so those investments were the first to be delayed and cancelled. In fact, when oil dropped below $40 a barrel, some tar sands operators shut down their operations, since at that price their costs exceeded revenues.
What few analysts mention is that the impacts of this “above ground” investment slowdown will combine with the geologic limits that are impacting an increasing number of countries worldwide.
10. Restraining carbon emissions
It is difficult to tell if developments surrounding efforts to cap global emissions, and thereby put constraints on the use of oil, made progress during 2009. The failure of the Copenhagen conference in December to reach any significant agreement was among the low points of the year. However, the inauguration of a more climate-change-aware administration in Washington and the growing realization in Beijing that their growth-at-all-costs policy may not be in their best interest is forcing a reevaluation. With 1.3 billion people to feed, the Chinese are coming to realize that with wide-spread droughts, falling water tables, rising sea levels, and disappearing glacier-fed rivers in the offing, the time may be at hand for actual cooperation.
During the Copenhagen conference, efforts to level global economic disparities through climate change agreements were evident. These ranged from outright blackmail – “give us lots of money or we will destroy the earth with our emissions” – to appeals for fairness – “every human being is entitled to the same amount of carbon emissions.” These are obviously tough issues to sort out and it has become obvious that short meetings of 200 odd nations and tens of thousands of people are not going to settle the issue, even with the major world leaders in attendance.
Late in the year a new scientific study was released pointing out that while we may be able to keep global warming down to 2 degrees centigrade, an increase of this magnitude implies much higher temperatures at the poles and the likely melting of the major ice caps in Greenland and Antarctica. Should this occur, there will be an increase in the sea level anywhere from 20 to 40 feet, the destruction of the world’s coastal cities and simply enormous costs.
Prices and Production
Protracted cold weather across the northern Hemisphere, from the US to China, continued to boost oil prices last week. From a low of $71 in mid-December, oil briefly touched $80 a barrel on Thursday and closed at a seven-week high of $79.36. In New York, heating oil hit a 13-month high as inventories fell to their lowest since last June. The US crude inventory, which rose to the highest level in 20 years last May, dropped by 10 million barrels during December.
OPEC production continues to rise, hitting 28.9 million b/d in December, up about 65,000 b/d from November. The OPEC target remains at 24.8 million barrels with all members exceeding their individual targets.
China had a successful week in acquiring new overseas oil assets. Beijing signed five agreements with Venezuela to build a refinery and develop the Orinoco heavy oil fields. Another agreement anticipates that Caracas will be shipping 560,000 b/d to China this year. PetroChina won approval for a $1.8 billion purchase of a stake in two Alberta oil-sands projects. China also participated in $9.7 billion worth of gas field service contracts that were let in Turkmenistan last week.
The Iranian situation continued to fester. Government forces contended with the biggest opposition rallies in more than six months. As Tehran is blaming the West for its troubles and is refusing to talk about nuclear enrichment, the US is preparing another round of sanctions.