1. Supply and demand

After six days of decline, oil prices rose 50 cents on Friday to close at $49.93, down $7.67 or 13 percent for the week. Oil prices now have fallen 66 percent since July 11th.

As more production and consumption numbers are released, it is becoming obvious that excess supply is behind the continuing drop in prices. Although subject to later revision, the IEA reports that total world liquids production increased by 1.81 million b/d in October to 86.4 million b/d at a time when consumption is declining. Average OECD consumption in 2008 from January through September is reported to be 1.11 million b/d less than in 2008. Most of this is from a 950,000 b/d drop in US consumption. Chinese consumption during the first 9 months of 2008 was up by only 50,000 b/d while Indian consumption was up by 200,000 b/d.

Beijing reports that demand for fuel has contracted sharply since September due to the credit crisis, and that stockpiles of crude and products have risen “significantly.” Chinese imports of diesel and gasoline have dropped to the lowest level in 14 months.

Supplies for November delivery, however, appear to be contracting. Tanker tracker Petrologistics reports that crude shipments from OPEC will be down by nearly 1.2 million b/d this month. Although still above targets, the cartel is making progress towards implementing the 1.5 million b/d cut agreed on in October.

The export pipeline from northern Iraq to Ceyhan, Turkey was bombed by Kurdish insurgents last week. It may be back in operation after a 3 day outage. PEMEX reports that crude output fell 7.9 percent in October as the Cantarell field continued its 5-year decline. Cantarell’s production is now down to 900,000 b/d from a high of 2.2 million b/d in December 2003. Yet another pipeline was blown up in Nigeria last week, shutting in about 90,000 b/d of production.

2. OPEC

As oil prices continue to fall, the average price received by OPEC is now approaching $40 a barrel. A recent analysis by PFC Energy suggests that this price is well below what most of the members need to balance their budgets. Venezuela is said to need oil at $102; Iran at $83, the Saudis at $54; Kuwait at $52; and the UAE at $45.

In deciding on the next round of production cuts, OPEC’s first problem is non-OPEC production which would be under no obligation to make cuts. The fear is that as OPEC mandates production cuts, their market share would be taken over by relatively stable non-OPEC production. OPEC therefore seems to be making a major effort to involve non-OPEC exporters, particularly Moscow, in a decision to reduce production.

OPEC will meet November 29th in Cairo and then again in Oran on December 17th. Statements from various OPEC oil ministers suggest that a major cut (1.5 million b/d+) will be made at the Oran meeting, although a token cut may be made at the earlier Cairo meeting.

Although 2008 has been a good year for OPEC with estimated revenues of nearly $1 trillion dollars, 46 percent above 2007 earnings, this is down from the $1.2 trillion they were expecting. The larger OPEC countries have found ways to spend their windfalls as fast as they are earned and are nearly totally dependent on their oil revenues to support large and restless populations. If worldwide demand continues to fall faster than OPEC can make real production cuts, then several OPEC members may soon be having as much or perhaps more trouble than the rest of the world.

3. Price forecasts

As oil prices spiraled upwards last spring, the press was full of stories about how high prices could go. Many thought $200 a barrel or more before the end of the year sounded reasonable. Now the tables have turned and the game has become picking a bottom for 2009. The IEA’s chief economist set the tone by expecting oil to remain under downward pressure next year as a weakening global economy reduces demand.

Various financial institutions are starting to throw around numbers like $40 a barrel either soon or next spring. The Deutsche bank is even talking about $30 a barrel as their “worst case” scenario. Goldman Sachs is saying $50 a barrel for most of 2009 although much of the decline is behind us. Nobody seems to have much faith in OPEC production cuts.

At an average US price of $1.92 a gallon, when adjusted for inflation, gasoline is already well below what it was selling for during the 1930’s depression. US gasoline consumption is down about 2 percent and American consumers are receiving a major economic stimulus through prices that have now dropped more than 50 percent.

The serious problem, of course, is what $30 or $40 oil will do to investment. There are now daily reports of oil production and refining projects being cancelled due to low prices and lack of capital. The situation can only get worse. While worldwide oil consumption is dropping, it is not dropping as fast as investment in new production seems to be dropping. All this will come to a head in a few short years when serious oil shortages are bound to develop.

4. Detroit

The US automobile industry had one of the worst weeks in its history. After two days of appealing to the Congress for a $25 billion bailout loan, US automobile executives were told to come back with a workable plan that would restructure the industry and convince lawmakers that any loan would do more than keep the industry on life support for a few more months.

By week’s end, GM’s board was reported to be weighing bankruptcy options. This in turn has started a debate over whether a corporation as large and complex as GM can actually operate under bankruptcy laws or whether it simply will have to shut down as quickly as possible, throwing millions out of work at GM—parts suppliers, dealers and other automobile companies that would be caught up in the turmoil. Some doubt that GM, despite heroic efforts to shut down plants and trim costs, has enough cash to survive more than a month or two.

5. More on the IEA Report

Two weeks after the IEA’s 2008 World Energy Outlook was published, lengthy commentary and analysis of the report’s findings continue to pour in. All compliment the 190 staff analysts and statisticians that worked on the report along with many outside consultants that were brought in for the project. The general acknowledgement that current trends are unsustainable and the effort to work out depletion rates for major oil fields has broken new ground.

The effort to show how world oil production can continue to grow over the next 20 years is highly contrived. Broken down into pieces, the projection that world production can grow by another 20 million b/d includes many unlikely assumptions such as the Saudis coming up with 60 million b/d of new production in order to grow total output to 15 million b/d and offset depletion. The assumption that large amounts of new oil will be discovered and put into production is highly dubious.

More and more internal contradictions are turning up in the report. The most egregious is the statement that worldwide oil production from existing fields is declining at an average rate of 6.7 percent a year whereas the chart of future production sources shows a decline closer to 4 percent. The distinction is important since the future of the world’s economy could hang on the difference.

The world’s ability to produce or not produce 20 million b/d more oil 20 years from now could literally be a matter of life and death. Many of these anomalies have already been brought to the IEA’s attention. Hopefully at least some of these problems will be worked out prior to next year’s edition.

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

• U.S. fuel demand fell 5.2 percent in the first 10 months of this year, the biggest drop since 1981, the American Petroleum Institute said. Deliveries of petroleum products, a measure of consumption, averaged 19.6 million barrels a day in the period, down from 20.7 million barrels a day a year earlier. Gasoline demand averaged 9.06 million barrels a day from January through October, down 2.6 percent from a year earlier. (11/20, #17)
• The drop in crude prices is threatening investment needed to boost global oil production, Total CEO Christophe de Margerie said. In the long term, de Margerie said crude prices will rise, making investment worthwhile in projects such as the Shtokman field in Russia and Canadian oil sands. (11/22, #4)
• After the tanker Sirus Star was seized by pirates on Nov. 15, Saudi Arabia said it will join a fleet of NATO warships on an anti-piracy mission, as hijackers bolstered defenses around a Saudi tanker captured off the East African coast. Since January, at least 91 vessels have been attacked in the Gulf of Aden, (11/22, #7; 11/21, #7)
• Shippers controlling almost a fifth of the global fleet of crude-oil supertankers may avoid Egypt's Suez Canal after an escalation in piracy off east Africa, potentially increasing the cost of delivery and reducing supply. (11/20, #7)
• Pemex is preparing 68 new drilling sites at a geologically challenging oil basin—Chicontepec — that the company hopes will offset declining production in other oil fields. (11/19, #11)
• Brazil’s Petrobras said on Friday that they found light oil in two new offshore wells, expanding its “pre- salt” discoveries. There may be 1.5 billion to 2 billion barrels of recoverable oil equivalent in the new find. (11/22, #10)
• Petrobras has postponed construction tenders for 28 deep-sea drilling rigs to the coming year. (11/19, #10)
• The global financial crisis has put the brakes on Brazil’s biofuels boom, drying up foreign investment and domestic credit, stalling new projects and prompting cash-strapped ethanol producers to indefinitely postpone $30 to $40 billion of expansions. (11/21, #21)
• Russia's Gazprom would like to avoid supply cuts to Ukraine in 2009 but will not continue deliveries without a new contract for 2009. (11/22, #19)
• In Russia, the collapse in the value of oil is likely to have several catastrophic consequences for the economy, including a possible devaluation of the ruble and a severe drop in living standards next year. (11/21, #15)
• Russian oil companies may cut production and exports should they become unprofitable, Energy Minister Sergei Shmatko said on Tuesday. (11/18, #13)
• According to Lukoil, a ``significant'' reduction in OPEC's oil production may drive the average price of crude back above $80 a barrel next year, aiding the Russian economy. (11/20, #5)
• In the current economic climate, 66 out of 262 approved wind farms in the US have either been outright canceled or postponed. (11/22, #21)
• Yemen is facing an economic and political crisis as the country's oil resources near exhaustion. The World Bank predicts that Yemen's oil and gas revenues will plummet over the next two years and fall to zero by 2017 as supplies run out. (11/21, #10)
• China, the world's second-largest energy user after the U.S., is accelerating plans to cut fuel prices for the first time in two years as the nation's economy slows and oil costs fall. The government will separately introduce a tax on retail gasoline and diesel sales to replace road tolls and maintenance charges. (11/20, #13)
• In Alaska, falling oil prices will take a bite out of the state budget and put a damper on oil-field investment, Governor Palin told a conference of major North Slope oil operators on Wednesday. (11/20, #18)
• Canada's oil-rich province of Alberta is rolling back a large portion of the royalty hikes that were to take effect in January in order to encourage drilling in the province's sagging energy industry. (11/20, #20)
• The biggest oil companies including Saudi Aramco, Royal Dutch Shell Plc and Petroleo Brasileiro SA are accelerating spending cuts and delaying projects as the world enters a recession, said Morgan Stanley & Co. As many as 44 projects have been delayed and faced cuts in investments as of Nov. 18, compared with 19 in a Nov. 5 report. (11/19, #4)
• While the idea of running US vehicles on natural gas has lately received a great deal of attention, powering our cars with electricity is a more sensible option on all fronts--national security, efficiency, climate stabilization, and economics. (11/20, #23)
• vBanks in Europe and Britain, and their borrowers, face another blow as plunging oil prices tighten the spigot of petrodollar deposits. With oil prices having fallen, dollar flows into European banks will likely drop dramatically. Moreover, a global recession and financial crises mean that oil producers such as Russia and the Middle East states will have to spend money at home, further diminishing the money available to international banking. (11/20, #24)
• In West Virginia, Synthesis Energy Systems and Consol Energy shelved an $800 million coal-to-liquid fuels plant, with Synthesis chief executive Tim Veil citing "the current state of U.S. credit markets." (11/19, #17)
• Dubai, the second largest of the seven sheikhdoms in the United Arab Emirates, is the most vulnerable place in the Gulf to lower oil prices as real estate prices and debt refinancing pose ``real risks.” (11/18, #5)
• Petro-Canada said it delayed to next year a decision whether to mine oil sands at the proposed C$25.3 billion ($20.6 billion) Fort Hills project in northeastern Alberta because of rising costs and falling oil prices. (11/18, #11)
• Tokyo Electric Power Co. received less liquefied natural gas and heavy fuel in October on expectations that the slowing economy will further reduce power demand. (11/17, #10)
• Officials in California have unveiled ambitious plans to turn the San Francisco Bay Area into one of the leading centers of electric vehicles in the world. If it succeeds, the strategy announced yesterday will see billions of dollars poured into a new power infrastructure that will turn the region away from fossil fuel and to renewable energy – and convince millions of people to switch to green technology. (11/23, #20)

Quote of the Week

• “Climate change says we should change, whereas peak oil says we will be forced to change.”
  -- Rob Hopkins, author of The Transition Town Handbook