Last week in Cork, Ireland, some 300 attendees at ASPO-6 heard former U.S. Energy Secretary James Schlesinger say, “Conceptually the battle is over—the peakists have won.” Shell’s former Chairman Lord Ron Oxburgh stated unambiguously, “today the era of cheap energy is over; a move away from fossil fuels is urgently needed.” CIBC’s Jeff Rubin’s highlighted the coming problem with declining oil exports, pointing out a key example: “in 10 years, Mexico could become an Indonesia—a former oil exporter that is now a oil importer."
ASPO-Houston, with over 325 already registered and the peak sign-up period here how, will hear speakers echo the above points during Oct 17-20th at the Hilton-Americas. One speaker will point to a European petroleum institute that now expects world oil production to plateau by 2010. Another will highlight the reality of shrinking exports. Now that oil has reached $80/barrel well before T. Boone Pickens 80th birthday, he’ll share his updated views on oil prices. A conference’s highlight will be Thursday evening, when six panelists will explore common ground plus share differing perspectives from groups such as the National Petroleum Council, the Congressional GAO, the American Association of Petroleum Geologists, ASPO-USA, ASPO-Ireland, and more. This may be the first such effort since a 2005 National Academy of Sciences workshop on peak oil. For ASPO-Houston conference details, go to www.aspousa.org.
The US Federal Reserve’s half percent cut in its benchmark interest rate on Tuesday had widespread repercussions in the energy markets. In the wake of the cut, stock markets surged on hopes that the subprime liquidity crisis would soon be under control. Oil prices too surged on the idea that the demand for oil would stay high. By Thursday, oil touched at a new all-time high of $83.90. The surge in oil prices was aided by the Wednesday stocks report showing US crude inventories falling by another 3.8 million barrels and by the approach of a tropical storm in the Gulf which led to the shutdown of 360,000 b/d of oil production for a short time.
Oil prices ended the week $2.52 higher, but the October contract rose $4.22 before expiring on Thursday. Gasoline prices have so far held steady or even fallen despite the oil rally that set new records for eight straight trading sessions on the New York Mercantile Exchange. Relatively low gas prices should be ending soon, however. Retail gasoline in the US currently is selling at an average of $2.79 a gallon – down from $3.22 in May. Last week gasoline futures climbed by 7.8 cents.
Most analysts are expecting further increases in oil prices over the next month or so. The world oil market remains tight and US imports continue to run behind the level needed to maintain inventories.
After several quiescent months, the Iranian nuclear situation seems to be heating up again. The week began with the French Foreign Minister saying that the world should prepare for war over Iran’s nuclear program. Iranian President Ahmadinejad replied that he does not take the threat seriously. He suggested that Washington would not dare to strike Iran while the fighting in Iraq and Afghanistan continues. Russian Foreign Minister Sergei Lavrov warned that any attempt to wage war on Iran could disrupt the flow of oil to Western countries and prompt a flow of refugees from Iran into Russia.
“Serious and constructive” talks about new sanctions on Iran were held at the UN last week and France has begun talks with the UK and Germany about EU-wide sanctions against Iran if the UN Security Council resolutions do not prove effective.
Over the weekend, Tehran staged a military parade complete with a new missile; threats to the US and Israel; and bombastic statements from Ayatollah Ali Khamenei. However, in an interview with 60 Minutes taped on Tuesday Ahmadinejad sounded more conciliatory insisting that Iran did not need nuclear weapons and that a war with the US was not imminent.
The decline of the US dollar to a 15-year low in the wake of the US interest rate cut is raising concerns about its stability. After the US interest rate cut, the Saudis announced that they will not follow suit. This action could break the dollar currency peg and risks setting off a stampede out of the dollar across the Middle East.
The danger is that the yield gap between the US and the rest of the world will leave America starved of foreign capital flows needed to cover its current account deficit - expected to reach $850 billion this year. Inflation in Saudi Arabia has increased to 4 percent and in the United Arab Emirates to 9.3 percent, a 20-year high. In Qatar it has reached 13 percent. Some see the biggest danger is that falling US rates will at some point trigger a reversal of the yen "carry trade," causing massive capital flows from the US back to Japan.
The flight from US bonds could push up the long-term yields thus driving the mortgage market into even deeper crisis. All this suggests that hard economic times are just ahead and that there will be more upward pressure on oil prices.
“The present PDVSa is a company seriously wounded that lacks capacity. You could take some 15-18 years to take output back up to 3.5 million bpd."
— Luis Giusti, former CEO of PDVSA