Vol. 4 No. 1
January 5, 2009
Tom Whipple, Editor
Steve Andrews, Publisher

1. Last Week

It was yet another wild ride for oil prices last week as the markets continued to balance unsettling economic news, Israel’s attack on Hamas in Gaza, and the pace of OPEC’s production cuts. Prices were up 8 percent on Monday as the Israeli attacks began, down on Tuesday on economic concerns, and took a 14 percent jump on Wednesday due to lower US refinery utilization, higher US demand, a massing of Israeli ground forces, and Moscow’s threats to cut the gas flow to Ukraine. Further gains after the markets reopened on Friday resulted in oil closing the week at $46.43, up 23 percent for the biggest one week gain since 1986.

Shortages in Europe from Russia’s reduction in the amount of gas supplied to Ukraine seem to be increasing. Several East European countries are complaining that their supply is running 5 to 10 percent short of contract. On Sunday a major German gas distributor said that it supply from Russia was running short, but could be made up using Norwegian gas.

There is no clear end to the Israeli incursion into Gaza which is likely to go on for some time, further inflaming passions across the Middle East. So far there is no immediate threat to oil supplies, but if the fighting is prolonged, pressure will increase on Middle Eastern governments to do something. At least one Iranian official has called for reduced oil sales to Israel’s backers as the only effective weapon the Arab world has. In the meantime, the fighting will exert upward pressure on oil prices in conjunction with OPEC’s production cuts.

The OPEC price cuts from mid-December seem to be taking hold. Tanker tracker Petrologistics reports that OPEC production was down by 400,000 b/d in December and most OPEC members have now announced how they will implement the 2.2 million b/d cut that was to begin on January 1st. Numerous OPEC customers say they expect lower shipments in coming months. Even Iran joined in with the announcement of a 545,000 b/d cut.

New numbers and analysis of EIA data suggests that US oil demand, and particularly gasoline, may be rebounding slowly due to lower prices. The IEA says worldwide demand is no longer growing and may be slipping, but the IEA is not, as yet, talking about the 4 million b/d drop in demand that OPEC is attempting to offset. Although worldwide industrial production is clearly dropping rapidly due to the recession, there is as yet no clear picture as to how this drop translates into the demand for oil.

2. Briefs

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

• Russia’s oil production fell by around one percent in 2008, the country's first annual decline in a decade and possibly a sign of things to come. The decline is expected to continue because of aging reserves and plunging oil prices, which combine with heavy taxation to leave producers with limited cash to invest in maintaining production and opening new fields. (1/4, #13)
• Russian crude oil exports increased 10 percent in December after the government lowered duties. (1/2, #12)
• Faced with falling oil prices and a weakening economy, Iran’s President Ahmadinejad presented a plan to Parliament that would scrap energy subsidies, a major change in a country where gasoline is sold for 36 cents/gal. (1/1, #7)
• The Chinese National Petroleum Company started work on a $3 billion oil project in Iraq, the first foreign firm to undertake such work since Saddam Hussein nationalized the industry decades ago. (1/3, #8)
• Iraq has opened nearly 90 percent of its reserves to international oil companies for development in two major bidding rounds this year. The government plans to add 4 to 4.5 million barrels a day to its current 2.4 million b/d of production over the next four to six years. (1/2, #3) (Editor’s note: consider us highly skeptical, for a host of reasons.)
• The number of drilling rigs actively exploring for oil and natural gas in the US dropped by 98 this week to 1,623. A year ago, the rig count stood at 1,774. (1/3, #13)
• More Gulf oil and gas projects may go the way of Kuwait's aborted $17.4 billion deal with Dow Chemical or be renegotiated as states take a hard look at spending amid the global financial crisis and an oil price slump. (1/1, #6)
• Crude oil output in China's Daqing oilfield, China's largest, fell 3.6 percent during 2008 to 804,000 barrels per day. Annual oil output at Daqing has been on the decline for several years after decades of production. Its crude output in 2007 was down 3.7 percent, down 3 percent in 2006. (12/31, #10)
• Vietnam's crude output dropped 5.7 percent --the fourth straight year of declines—because of aging fields, technical problems and bad weather, and 2009 is forecast to be a "very difficult" year. Crude exports account for 20 percent of the country's GDP. (12/30, #11)
• Preliminary figures from Venezuela's Energy Ministry suggest their December oil prices will average $32.66/barrel — nearly half the $60 average used in Venezuela's 2009 budget plan. (1/2, #9)
• The world’s most inexpensive gasoline — around 15 cents a gallon —is sold in Venezuela, through a longstanding subsidy program that subsidizes car owners $3,000 each while depriving the oil industry of a large source of funds for reinvesting. (12/30, #9)
• A 50 percent increase in US gasoline and diesel fuel taxes is being urged by a federal commission to finance highway construction and repair until the government devises another way for motorists to pay for using public roads. (1/2, #11)
• The Bush administration resumed buying oil for the US Strategic Petroleum Reserve seeking to fill the reserve to the maximum by year's end. (1/3, #10)
• Early in 2008, Mexico locked in contracts to sell its oil for $70 per barrel. By the end of 2009, its fixed-rate contracts to sell oil at $70 will have expired. (1/1, #10)
• A new rule from the US Securities and Exchange Commission will let oil and natural-gas producers declare probable and possible reserves, a break with a decades-old rule that allowed them only to identify proven reserves. (12/31, #12; 12/30, #13)
• China Datang Corp., the nation's second-biggest power producer, received state permission to build a $659 million wind farm as the government expedites project approvals to spur economic growth. (12/31, #19)
• US oil demand in October was 598,000 barrels per day more than previously estimated and down 833,000 bpd from a year earlier, the Energy Information Administration said on Monday. US oil demand in October was revised up by 3.14 percent from the EIA's early estimate. (12/30, #12)
• A year ago, Gazprom, the Russian natural gas monopoly, aspired to be the largest corporation in the world. Today, Gazprom is deep in debt and negotiating a government bailout. The total value of all the company's shares fell 76 percent during 2008. Instead of becoming the world's largest company, it has tumbled to 35th place. (12/30, #16)
• The outlook for the 2009 hurricane season is not a good one for the Gulf coast from Louisiana to Alabama, according to Weather Research Center in Houston. (1/1, #12)

Quote of the Week

“Just as the world does not work too well at $147 oil, the energy industry does not work well with oil at $37. If $147 oil was a problem, then $37 oil is actually NOT the solution. Cheap oil might even be worse for the world over the long term.”
-- Byron King, energy analyst/author