1. Prices and production

After the markets digested China’s $586 billion stimulus package on Monday, prices fell from a week’s high of over to $65 a barrel until at one point oil was trading below $55. All the bluster about future production cuts could not compete with an avalanche of bad news about the global economy. Oil closed out the week at $57.04 a barrel.

The weekly US oil stocks report shows US gasoline consumption continues to recover from last summer’s $4 - 5 a gallon prices. The average US retail gasoline price is now down to $2.10 and there have been reports of it selling for as little as $1.50.

The IEA and the EIA cut their forecasts for oil demand during the rest of this year and next year. Both now see oil consumption as basically flat through 2009 in contrast to the annual increase of 1 million b/d plus that we have seen in recent years. The EIA is now forecasting that for 2009, global demand growth will be significantly less than the growth in non-OPEC supply as projects that are nearly finished come into production.

The IEA reports that global oil supply increased by 1.8 million b/d during October to 86.9 million b/d, as production outages eased. Preliminary October data show a steep rise of 51.2 million barrels in OECD stockpiles. These increases are consistent with the rapid fall in prices from $105 a barrel in late September to $60 a barrel six weeks later. The 1.5 million b/d OPEC production cut was not scheduled to start until November 1st and will take at least two months to fully implement.

2. The Next OPEC Meeting

It is now confirmed that the meeting of Arab OPEC members in Cairo on November 29th will be expanded into a general OPEC meeting to discuss production levels. As the average price for OPEC produced oil is now somewhere in the $40s, most OPEC members are, or soon will be, running into major financial problems that were unforeseen 6 months ago.

Nearly every member is talking production cuts beyond the 2 million b/d already agreed on, but most would like somebody else to do the cutting while they continue to produce as much as they can. Nigeria and Venezuela are already producing well below quota and have plenty of room to fudge new cuts. Ecuador has asked to be exempted from another cut on the grounds that as a small producer, it needs the money.

OPEC is making a major effort to induce non-OPEC oil exporters to join the cartel in cutting exports so that the non-members do not enjoy the benefits of higher prices while avoiding the pain of lower sales. Noting that non-OPEC producers are currently pumping about 50 million b/d, considerably more than OPEC’s 32 million b/d, the cartel has asked at least Russia, Mexico, and Norway to join in further cuts. Thus far, only Moscow has expressed some interest.

Some members are said to be pushing for a further 1.5 million b/d cut bringing the total of the three cuts to 3.5 million b/d. Others, fearing an overreaction that could damage the world economy, are talking about a modest 500,000 b/d cut while waiting for the early cuts to take full effect. Meanwhile, many remain skeptical that OPEC will actually cut production and are expecting further price declines.

3. The IEA Report

The official release of the IEA’s World Energy Outlook 2008, has already brought forth a flood of new stories and commentary. Most of the immediate press stories focused on the need to find 64 million b/d of new production in the next 22 years to offset depletion and provide for some modest growth. This was cast in terms of finding four new Saudi Arabias, or a new Kuwait a year. The IEA’s appraisal that depletion rates will increase in coming years as production shifts from giant on-shore fields to smaller off-shore ones received considerable attention. Finally, the IEA’s assertion that a lack of adequate investment will cause a supply crunch by 2015 was widely reported.

OPEC released a scathing attack on the report, apparently disturbed by the implication that the cartel did not have everything under control and would face a huge challenge in keeping up with projected increases in global demand. The Saudis and their friends, however, were delighted with the IEA judgment that the Kingdom’s giant Ghawar oil field was on a plateau and was not in danger of going into imminent decline -- thereby “undercutting the claims of peak oil theorists.”

Beyond the immediate press reaction, numerous individuals and organizations have embarked on in-depth analyses, commentary and criticism of the report which clearly breaks new ground in examining the future of the world’s energy supply. The IEA continues to forecast that, given adequate investment, the world oil supply can increase over the next 20 years despite accelerating depletion. Many observers have already called this forecast into question.

4. Venezuela & the price drop

Of all the OPEC members, Venezuela may be the one suffering most from the precipitous drop in oil prices over the last five months. Although Caracas claims to be producing 3.1 million b/d, nearly all outside observers put the number at 2.3. Then there is increasing domestic consumption in a country where the number of cars has increased from 2.6 to 4 million in the last six years.

President Chavez is exporting 400,000 b/d at less than market rates to various friendly countries around Latin America and the world. After all the subtractions, it appears that Venezuela only exports somewhere around 1.4 million b/d that earns hard foreign currency. As Venezuelan oil is currently selling for $46 a barrel, the country’s oil exports earnings could be on the order of $25 billion a year – well below what is needed to run the government and support imports.

Caracas claims to have large reserves of foreign currency, but many observers believe that if oil prices do not start increasing soon, Chavez will have to make some major policy changes within the next year.

5. General Motors

The drama over the future of the US automobile industry --or lack thereof – continued last week. Representatives of GM are running around Washington saying that if the company is allowed to go bankrupt, the US economy would be irreparably harmed. President-elect Obama and some Congressional Democrats are pushing for allowing the industry access to the $700 billion Troubled Asset Relief Program, while the Bush administration favors giving the industry immediate access to loans from the $25 billion already voted to assist the industry retool for more efficient cars.

A showdown appears likely this week with some predicting there will be no action until the new administration and new Congress takes office in January. Some are starting to doubt that GM can last another two months without substantial government money. Last week European insurers said they would no longer insure Ford and GM parts suppliers against the automakers’ bankruptcy.

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

• A crude oil pipeline that feeds into the Chevron-operated Escravos export terminal in Nigeria’s Delta state was attacked late Friday. One security source said 100,000 b/d of oil output had been cut because of the attack.(11/16, #7)
• The weak US economy will reduce America's oil demand this year by 1.1 million b/d, or 5.4 percent, the first time annual oil consumption will fall by more than 1 million b/d since 1980, according to the EIA. The Agency reduced its forecast for oil prices next year by 43 percent as the economic slowdown cuts energy demand. (11/13; #12, #13)
• The Baku-Tblisi-Ceyhan pipeline that carries Azerbaijani crude oil to the Mediterranean coast of Turkey will increase shipments to 1 million b/d by the end of the year. (11/15, #10)
• Brazil’s state-run oil company Petrobras reported that October crude output was 1.87 million b/d, an 8.3 percent increase over the same month last year. (11/15, #11)

• Total US petroleum demand has steadily decreased, down 6.6% year-over-year on a four-week moving average, but gasoline demand improved, a sign that the sharp decline in prices at the pump may be affecting consumption patterns. Each 10-cent drop in US gasoline prices puts $12 billion/yr back in consumers’ pockets. (11/14, #14; 11/15, #15)
• China Petroleum & Chemical Corp., Asia's biggest oil refiner, will reduce crude processing by 10 percent in November from July's record as the economic slowdown cuts fuel demand. China's monthly power generation fell for the first time in four years, suggesting a significant drop in industrial demand. (11/14, #10-11)
• In a case that could set a precedent for US federal regulation of greenhouse gases, an appeals board at the Environmental Protection Agency ordered one of the agency's regional offices to consider imposing carbon dioxide emission limits on a proposed coal-fired power plant in Utah. (11/14, #13)
• The prospects of a government rescue for foundering American automakers dwindled Thursday as Democratic congressional leaders conceded that they would face enormous Republican opposition during a lame-duck session next week. (11/14, #15)
• Billionaire hedge-fund manager T. Boone Pickens said his plan to build a 4,000-megawatt wind farm in Texas is on hold because lower prices for natural gas would make it uneconomic. (11/14, #18)
• Russia has ordered oil firms to resume full exports in November after they cut loss-making deliveries because of high duties and falling oil prices. (11/14, #19)
• Underinvestment in liquefied natural gas production plants may boost gas prices from 2012, the International Energy Agency said. (11/13, #5)
• The Energy Information Administration has largely underestimated near-term US natural gas production in its Annual Energy Outlook, released early this year, according to a study by FACTS Global Energy in Singapore. (11/13, #16)
• The European Union moved closer to publishing weekly data on commercial oil stocks in a bid to match U.S. practices and enhance market transparency. The European Commission included the provision in a draft law that also seeks to improve the EU's ability to cope with any oil-supply disruption. (11/13, #17)
• Russia and China have suspended talks over $25 billion in loans to Russian oil companies due to disagreements over interest rates and state guarantees, two Russian sources close to the talks told Reuters on Wednesday. (11/13, #18)
• Four months ago, economists warned of “demand destruction” as record prices and a slumping economy slowed the growth of global crude consumption. But now, the IEA is worried about “supply destruction” as producers delay expensive projects, including some in Canada's oil sands, that would bring much-needed supplies to market. (11/12, #10)
• Federal scientists have concluded that Alaska's North Slope holds one of the nation's largest deposits of recoverable natural gas in the form of gas hydrates, a finding that could open a major new front in domestic energy exploration. (11/12, #22) [Editor’s note: we remind readers that production from gas hydrates is far from a proven technology.]
• A severe shortage in aircraft delivery financing is threatening to leave Airbus and Boeing stranded with perhaps 200 "white-tail" aircraft they can't place with customers. The aircraft financing crisis comes on top of fears by analysts that 20-30% of Airbus and Boeing backlogs may be at risk as airlines go bust. (11/11, #13)
• Americans are using the [cheaper gasoline] savings not to buy groceries or make home payments, but instead to drive more. That may, in turn, drive up demand and push prices right back up. So while gas prices are still well below $3 a gallon, is now the time to pass a gas tax in an effort to keep demand down? (11/11, #14)
• According to a newly published global supply report by the Energy Watch Group at the Foreign Press Association in London, world oil production peaked in 2006. (11/11, #19)
• Saudi Aramco, the world's biggest state oil company, will cut crude supplies to Asia in December for the first time in at least a year as demand slumps for naphtha and diesel fuel. (11/10, #5)
• Asphalt is becoming scarce as US refiners overhaul their equipment to maximize output of more profitable fuels such as diesel and gasoline. Refiners are also cutting back on production of a petrochemical often mixed into asphalt for road durability. (11/10, #14)
• More than four-out-of-five refinery construction projects face cancellation as the worldwide collapse in fuel demand wipes out all but those with strong government backing. (11/16, #3)

Quote of the Week

• The U.S. could soon find itself scrambling to make up 11 percent in lost oil imports. Mexico, the third-largest foreign supplier of U.S. oil, faces the real possibility of having to halt oil exports in four years, a former top Mexican energy official was reported as saying Tuesday in Mexico’s El Universal newspaper
  Houston Chronicle, November 11, 2008