Production and Prices

Forces coalesced this week to bring about another $10 a barrel drop in oil prices. General concern about the prospects for the US and other OECD economies topped the list, but a strengthening dollar resulting in a flight from commodities helped. The markets simply ignored factors such a storm in the gulf, closure of a major pipeline in Turkey, an unexpected drop in US gasoline stocks, more trouble in Nigeria, and new sanctions in the Iranian nuclear dispute that would normally send prices higher. Oil closed the week at $115 a barrel.

There has been very little change in the fundamentals of supply and demand during the last few weeks. OPEC production for July was up a bit, but this was more than offset by declines in non-OPEC production. US demand for oil products remains about 2-3 percent lower than last year. Chinese imports which are more volatile than those of other countries were significantly lower in July than in the spring and this may be a factor in the price drop.

Retail prices in the US have declined rapidly in the last three weeks with averages now down by 28 cents. Most OPEC oil ministers have been quiet during the last few weeks, but if prices continue to fall, talk of production cuts are sure to resume.

With the end of the summer driving season and all that easy-to-forego discretionary travel coming to an end in a few weeks, perceptions may again change.

The BTC pipeline

Pipelines, even buried ones, are easy to sabotage as anyone who has followed the situations in Nigeria and Iraq knows. For many months now Kurdish separatists have threatened harm to the 1100 mile Baku-Tbilisi-Ceyhan pipeline that can transport as much as 1 million barrels/day from the Caspian Sea to tankers in the Mediterranean. Last week a fire began in Eastern Turkey closing the BTC pipeline which at the time was pumping about 800,000 b/d.

At first the Turks denied that the line was sabotaged, but after several press releases from the Kurdistan Workers Party (PKK) claiming responsibility for the fire, they now appear to be waiting the results of an investigation.

The fire caused BP to declare force majeure on shipments of Caspian crude from Ceyhan. News of the fire briefly caused a rise in oil prices late last week, but this was soon overshadowed by the rising US dollar.

The BTC pipeline is still on fire with estimates for repairs running anywhere from two to five weeks. The situation was further complicated last week by the fighting in South Ossetia which resulted in Russian air attacks on the BTC pipeline and an oil shipping port inside Georgia.

BP had been redirecting part of its Caspian oil production to the Georgian Black Sea ports of Batumi and Kulevi, but by Saturday these exports were halted due the fighting.

Exports from Ceyhan are of increasing importance to the US and European oil supply. If the pipeline has been sabotaged by the PKK as they claim, it sets an important precedent and once again shows how vulnerable are the world’s oil and gas pipelines. The pipeline from Kirkuk in Northern Iraq has recently reopened after many years of continuous attacks partly because of increased security and partly because it is advantageous to would-be attackers to keep the pipeline open. These situations, however, are constantly in flux and renewed disagreements over the status of Kirkuk could easily lead to more pipeline closures.

Oil and the US elections

The political gridlock over America’s energy policy continues as the Congress went into recess without passing any new initiatives. The Republicans continue to favor more domestic drilling, oppose excess profit taxes on the oil industry, and do not want to tap the strategic petroleum reserve to provide short term price relief.

The Democrats want increased spending on renewables, paid for by cutting tax breaks for the oil companies, have seen little short-term benefits, if any, from lifting off-shore and Alaskan drilling bans, and are willing to withdraw oil from the SPR to cut prices prior to the election.

In recent months, $4 gasoline has clearly shifted public sentiment towards more drilling on the theory that the situation is so bad that anything is worth a try. For several weeks, Senator McCain has favored lifting off-shore drilling bans and last week he was joined by Senator Obama, who bowed to the inevitable and now favors off-shore drilling as part of a more comprehensive compromise package including more renewables and releasing 70 million barrels from the strategic reserve, tax credits for plug in cars and help for the automakers.

It is unlikely that anything will happen before the Congress returns in September, but the sentiment seems to be moving towards some form of compromise prior to the election.

More emphasis on renewables, efficiency, and electrification of transportation are all likely to have sustained effects on America’s energy situation; most of the other proposals will likely be more transitory. But the short-term issue, however, is one of convincing an increasingly stressed electorate that their Congress and Presidential candidates feels their pain and is doing its best to help the situation.

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

• During the first seven months of the year, Russian oil production was 9.76 million b/d, down by 1 percent versus the same period of last year. (8/5, #17)
• The eight investor-owned international oil majors reported combined production of 10.47 million b/d, down from 11.18 million a year ago. Most blamed sliding scales in production sharing agreements with foreign countries for at least half of this decline, with field maturation responsible for most of the rest. (8/9, #3)
• The European Central Bank reported that high energy costs and sluggish global growth are taking a toll on the 15-nation eurozone, an economy that had seemed remarkably resistant to the turmoil around it for most of this year. (8/9, #4)
• The September natural gas contract dropped 20.2¢ to $8.53/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., gained 5¢ to $8.74/MMbtu. (8/9, #7)
• The failure of Iraqi politicians to resolve competing ethnic claims for the oil-rich northern city of Kirkuk is storing up explosive problems for the country's future. (8/9, #8)
• Platt’s latest estimate is that Nigerian oil output now stands at 2.16 million b/d , having slipped to below 1.5 million b/d in April but that a total of 1.533 million b/d remains shut due to militant attacks (8/9, #9)
• US Senator Feinstein is pressing the US Trade Representative to support her effort to cut the 54 cents/gal tariff on imported ethanol, in a bid to ward off a potential complaint by Brazil to the World Trade Organization. The US farm bill enacted in June maintains the 54-cent import tariff while dropping the US tax credit for blending gasoline with ethanol to 45 cents/gal of ethanol. (8/9, #15)
• Iraq said on Friday it was resuming exploration of its immense oil reserves after a break of nearly 20 years because of UN sanctions and several wars. (8/8, #6)
• Major ASEAN coal producers have taken measures to restrain coal exports, leading to a nearly 20% decrease in Guangdong’s coal import from ASEAN countries since the beginning of the year. Due to the tight power coal supply, China has decided to restrain coal exports, while maintaining small exports to Korea and Japan. (8/8, #13)
• The US Environmental Protection Agency denied a request by Texas to cut, temporarily, federal ethanol requirements for the nation's fuel supply, saying the state had not proved that the recent rise in corn prices is severely hurting its economy. (8/8, #15)
• The U.S. Defense Department accounts for 1.5 percent of U.S. energy consumption. The military has set a goal that 25 percent of its energy should come from renewable sources by 2025. (8/8, #16)
• Although compressed natural gas (CNG) has been around for more than 20 years, it's still a small market. Only 0.1 percent of the 23 trillion cubic feet of natural gas the US consumed last year was used to fuel vehicles. CNG which sells for $2.50 to $3.00 in California is a lot cheaper than gasoline. (8/8, #17)
• In London, a Chatham House report says the world faces a serious oil supply crunch within five to 10 years that may drive prices up over $200 a barrel because of inadequate investment by oil companies in raising output -- not because of a lack of oil underground. (8/8, #18)
• Six world powers agreed to consider new sanctions after Tehran gave an ambiguous answer to their latest demand to freeze key nuclear work. (8/7, #6)
• China will cut diesel imports during August and September as the domestic supply situation has improved, according to traders with knowledge of the purchases. (8/7, #10)
• The US Secretary of Transportation said new data showing further steep declines in the number of miles Americans are driving is proof that the country needs new means, other than the gas tax, to finance the nation's highways. (8/7, #13)
• The cost of the Horizon oil sands project has jumped another 6 percent to nearly C$9.3 billion and start-up has been pushed back several months due to problems starting processing units. The project -- Canada's fourth oil sands mining operation -- is now 36 percent over the original C$6.8 billion budget set in 2004. (8/7, #15)
• Norway's oil production peaked in 2001 and exports are likely to end by 2030, according to a study by Professor Kjell Aleklett at Uppsala University in Sweden. (8/7, #16)
• So far this year 25 airlines, three to four times the usual number, have gone out of business due to high fuel costs. (8/7, #17)
• The price of fuel has risen sharply in Afghanistan after major foreign suppliers—Russia, Kazakhstan and Uzbekistan—stopped exports to the landlocked nation, reportedly in order to maintain their own domestic supplies. The rise has pushed up prices of food and other commodities. (8/6, #5)
• Latin American states from energy-starved Chile to oil-rich Venezuela are growing dependent on expensive fuel subsidies that could lead to future economic shocks when those countries are forced to raise prices. (8/6, #8)
• Despite recent price declines, natural gas and heating oil remain so high that heating bills this winter will far exceed those of last year. The price of natural gas is still 11 percent above where it was last winter and heating oil is 36 percent higher, with the government projecting that the costs of both fuels will stay high. (8/6, #15)
• Many have been expecting a post-Olympics Chinese economic slowdown, but it has already started and the Games have not even begun. Chinese factories reported a plunge in new orders last month. Exports are barely growing. (8/5, #8)
• Deregulation of the airline industry 30 years ago made air travel affordable to most Americans. Rising airfares threaten to again make flying a service for the affluent. Airfares have risen this summer more than any year in the past quarter century. (8/5, #14)
• While companies launch high-profile plans to shift toward battery power, hydrogen and ethanol, little has been said about natural gas. General Motors may add natural gas to the arsenal of energy alternatives it hopes will one day make gasoline a scarcity on U.S. roads. (8/5, #16)
• Sales of class-A recreational vehicles fell by 31.3 per cent in the first five months of 2008 compared with a year earlier. This included a 43 per cent plunge in May. (8/4, #15)
• Fresh data from the US Department of Energy show the amount of petroleum products shipped by the world's top oil exporters fell 2.5 percent in 2007, despite a 57 percent increase in prices and the rise in global consumption. (8/10, #6)
• General Motors marketing chief Mark LaNeve says that GM assumes $4 gas is here to stay. Strategic planners at Toyota, where conservative assumptions have paid off handsomely, think gas prices could rise to $5 or even $6 by 2010. Both automakers are locking in long-term plans based on those assumptions. (8/10, #11)

Quote of the Week

• “It is endlessly reported that the demand for oil in Asian countries has soared since the turn of the century, and that China's thirst has been especially prodigious. What is less realised is that global oil production has been essentially stagnant, at around 86 million barrels a day, since early 2005.”
  -- David Strahan, The Telegraph (UK)