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1. Prices and Production

After starting the week quietly, oil prices fell to a seven-week low on Friday to close at $75.47 following the US November jobs report which showed a drop in unemployment. As usual, some analysts are skeptical, saying the drop is a statistical aberration that is not backed up by other employment indicators.

The fall in oil prices was led by a surge in the dollar as speculators believed that an improving economy will lead to higher interest rates. The dollar gained the most in one day since June and gold futures fell nearly $49 ounce after reaching a new high above $1200 during the week.

US demand for oil products remains weak. Last week’s stocks report showed crude stockpiles increasing by 2 million barrels and gasoline by 4 million — a much greater increase than analysts had expected. The EIA revised US oil demand for September down by more than 500,000 b/d to 18.3 million. Meanwhile global oil production is increasing once again. OPEC’s production is at its highest level in almost a year and Russian production set a new post-Soviet record of 10.07 million b/d last month. US oil production is up for the year thanks to new production from deep-water platforms in the Gulf and relatively low production due to hurricanes in 2008.

Iranian belligerence continued last week with the announcement of plans to build more enrichment facilities, threats to reduce oil exports, and much bombast over the possibility of a Western embargo. Meanwhile the Chinese, who are fast becoming Tehran’s only friend among the major powers, quietly restated their hopes that the Iranians would work with the IAEA to resolve the nuclear enrichment issue.

As yet oil prices are showing no sign of a major drop in the face of increased production and weak demand in the US. Although inventories are growing, demand from China and India still seems to be absorbing much of the increased production. Beijing has announced another stimulus package which could increase demand by another 4-5 percent next year. Even though optimism over a near-term US economic recovery seems to be receding, many analysts are still forecasting higher, recovery-damaging oil prices in 2010.

2. The Natural Gas Bubble

With the recession reducing world-wide demand for natural gas by some 5 percent this year, production increasing in some regions, and storage facilities brimming, natural gas prices have fallen markedly in the past 18 months. Reaching a high of $13 in the summer of 2008, spot prices fell as low as $2.41 this fall.

Unlike for oil, there has not yet been a significant price rebound for spot natural gas. The Paris-based natural gas association, Cedigaz, forecasts that increasing supplies and the construction of 57 billion cubic meters of liquefaction capacity will outpace demand over the next five or six years, keeping prices low.

Last week natural gas in US storage facilities increased by 2 billion cubic feet at a time when inventories normally drop by 43 bcf due to colder weather. Natural gas storage in the US is now 15 percent above the five-year average. This report sent prices as low as $4.43 per million BTUs.

The Gas Exporting Countries Forum will meet this week to discuss ways of “stabilizing” (read increasing) natural gas prices. This may be more difficult to achieve as most gas is still delivered by pipeline or under long-term contracts. The European utilities take most of their gas under contracts that are tied to oil prices, and include a minimum annual purchase. The problem comes with the rapidly growing LNG market that is more closely tied to the unusually low spot prices. The gas exporters argue that they sell a clean fuel that should sell at a premium.

The major tool for balancing supply and demand is to increase underground storage which now amounts to 10.7 percent of annual world consumption at 683 sites. Storage capacity for natural gas will grow slowly, however. An additional 200 storage projects are under construction which will increase world-wide capacity by 25 percent over the next five years.

3. Climate Change

As President Obama prepares for Copenhagen, the US Senate continues to argue whether global warming is really caused in part by man-made emissions or whether the administration is selling out to foreigners; and the Chinese ponder how to save themselves from extinction without abandoning their preoccupation with 10 percent annual economic growth. Top climate scientists are stridently warning that disaster for mankind is becoming inevitable.

Last week James Hansen, the world’s pre-eminent climate scientist, told the Guardian that he would rather see the Copenhagen conference fail and start from scratch than leave people with the impression that the woefully inadequate measures and compromises being proposed would actually do any good. Although Hansen is seen as a radical for his refusal to accept normal political compromises on emissions reductions, he resolutely maintains that nature and the laws of physics are not changed by political compromise.

Hansen says that ten years ago he believed that by keeping the atmospheric CO2 content below 450 parts per million (up from 280 ppm in 1750 to 387 today) would stem disaster. The rate of melting during the past 10 years has been enough to convince him that at 387 ppm we are already in the danger zone and need major reductions in CO2 emissions immediately.

He foresees global chaos when extremely violent storms combined with rising sea levels begin to flood and destroy coastal cities. Although these events may be 50 or more years away, continued emissions will make them impossible to control.

On the other side of the world China’s chief meteorologist, Zheng Guoguang, a member of the small group charged with developing Beijing’s climate change policy, is concerned that global warming could destabilize China’s agricultural production. In a newly published article Zheng pointed out that floods, droughts, and pests could lead to reductions of 30 to 50 percent in China’s grain production without specifying a date for such a disaster.

Despite the scientists’ concerns, President Obama’s attendance during the closing days of the Copenhagen conference likely insures that some form of “political declaration” will be reached at the meeting. Given the ambivalence on the issue in many major capitols and strength of the political forces fighting for the status quo, it is likely to be years or perhaps decades before this is sorted out. In the meantime, the ice continues to melt at what the scientists say is an unexpectedly fast pace.

Given that the effects of global warming are already starting to cause troubles worldwide, it is unlikely that significant declines in fossil fuel production will occur soon enough without major political intervention.

Quote of the Week

• “I have never said that we are running out of oil. I do not believe that. But we are running out of production capacities. It is not a question of reserves as “peak oil” theorists would have us believe but rather a question of available production capacities. So why is it we are reaching a production peak? First of all, there are few ‘easy’ oil and gas fields left out there. Second, oil nationalism as well as the economic crisis are making matters worse. This is leading to less investment. Producing countries at present are quite simply asking “why invest now?” when they have a shortage of cash and have other priorities. There is a reduction in investment for there is a shortage of financing.”

– Christophe de Margerie, CEO of Total SA

[Editor’s note: we have never said that we are running out of oil—period. That’s a red herring. Peak oil is about flows--the same issue that worries Mr. de Margerie.]

The Briefs

• Saudi Arabia expects to complete its Manifa heavy oil field in 2015, according to a statement on the Web site of Saudi Aramco. The project, which involves building a man-made causeway to 27 shallow-water drilling islands, will eventually produce 900,000 barrels a day of heavy crude oil. (12/4. #11)
• Saudi Arabia, OPEC’s biggest oil producer, said crude oil prices are satisfactory, close to their current level of $75 a barrel. Asked whether OPEC should raise production at its Dec. 22 meeting, Saudi Oil Minister Ali al-Naimi gave a vaguely supportive answer. (12/4, #9)
• ConocoPhillips will cut capital expenditures by an estimated 10 percent to $11.2 billion next year, as the hard-hit super major continues to grapple with volatile energy markets and tight credit. It will also sell $10 billion of its current assets over the next two years. (12/3, #19)
• Total, Europe’s third-largest oil producer, plans to keep investment stable at about $18 billion next year as it seeks to work more closely with Chinese, Russian and Brazilian competitors to raise output. (12/2, #16)
• Venezuela’s currency fell sharply against the dollar in black market trading Thursday, reaching a two-month low as worries over bank nationalizations prompted Venezuelans to trade in their bolivars for greenbacks. (12/4, #13)
• Recession has hit Venezuela after declining oil output and low prices for crude, plus a collapse in manufacturing and imports, brought an end to five years of economic good times. (12/2, #11)
• A senior Chinese official has publicly slammed western investment banks for “maliciously” peddling complicated derivative products that caused huge losses for Chinese companies over the last year. Some of the biggest losses came from the airlines and shipping companies’ purchases of options to hedge against rising oil prices between June and August last year, when oil hit a historic peak of more than $140 a barrel. (12/4, #14)
• The Greek-owned supertanker Maran Centaurus was seized by pirates off Somalia while sailing to the US, raising concerns that attackers are ranging farther from shore to hijack merchant ships. (11/30, #4)
• Orders for floating oil production systems have resumed after a 1-year hiatus, according to the latest International Maritime Associates assessment. (12/4, #7)
• Colonial Pipeline, which operates the largest pipeline linking US Gulf Coast refiners and East Coast markets, will limit shipments of gasoline because orders exceed the company’s ability to deliver fuel on time. (12/4, #20)
• US investment bank Goldman Sachs maintained on Thursday its previous $90-a-barrel 2010 price forecast for West Texas Intermediate crude futures, but predicted the NYMEX crude futures would rise to $110 a barrel in 2011. (12/4, #6)
• The IEA, in their 2009 annual report, is forecasting for 2030 per capita oil consumption efficiency improvements of over 20% in the US and OECD Europe. Amazingly the IEA is forecasting a per capita efficiency improvement of around 40% for Japan. (12/4, #22)
• According to a new survey, most oil and gas companies don’t expect demand for energy to rebound until 2011 or later (18% think it won’t happen until after 2012). They also don’t expect access to credit to improve until at least the second half of next year. They don’t expect industry spending to rebound to 2007 levels until 2011 or beyond. (12/4, #23)
• Demand for oil after 2010 could increase significantly and this may pose a risk to global recovery, International Energy Agency chief economist Fatih Birol said Monday.(12/1,#4)
• In World Energy Outlook 2009, the IEA forecasts that OECD demand has already peaked - it never recovers the levels seen before the oil price spikes and financial crisis unfolded. OECD demand is in permanent decline. (11/30, #14)
• China National Offshore Oil Corp. will triple the receiving capacity of its Ningbo LNG terminal in Zhejiang province to meet the country’s increased demand for natural gas. Chinese oil companies are building or planning more than 10 LNG import terminals as the country targets doubling the use of the fuel by 2010. (12/3, #14)
• More than a year after Republicans rallied around the now-famous call “Drill baby drill,” a growing number of Americans are saying not-in-my-backyard when it comes to more oil and natural gas drilling. Opposition is growing, especially when that drilling nears more populated urban areas. (12/3, #20)
• US gas production was actually up in September from a year ago despite a big drop in the number of rigs drilling for gas. Output did fall from the previous month, but demand fell almost twice as much. (12/1, #19)
• Congressional Republicans called on the Obama administration to suspend its efforts to combat climate change, given recently disclosed e-mails that, they suggested, raise questions about the scientific underpinnings of the issue. (12/3, #16)
• David Jones, the head of the British research unit at the center of a controversy over the disclosure of thousands of e-mail messages among climate-change scientists has stepped down pending the outcome of an investigation. (12/2, #15)
• The Texas Department of Transportation is starting to explore a driver mileage tax as an alternative to the state gasoline tax in the face of dwindling highway funds that will become depleted in 2012. (12/5, #12)