1. Production and Prices
2. Storms Close Down Mexican Production and Exports
3. Sadad Al-Husseini Gives an Interview
4. China -- Shortages, a Price Hike and a New ASPO
5. Energy Briefs
When the Wednesday morning stocks report showed that contrary to expectations US crude inventories had actually fallen by 3.9 million barrels the previous week, oil prices rose by more than $5 to an all-time high of $96.24. After reaching the high, oil slumped a bit amidst the now familiar concerns about economic growth, the credit squeeze, the falling dollar, the Kurds, and Iranian nuclear sanctions.
While US crude oil stockpiles are still in the middle of the average range, they are currently at the lowest level since recovering from the October 2005 hurricanes. They have been dropping steadily since last July and we are now well into the time of year when they should be building, thus suggesting that something different is happening this year.
Gasoline inventories did increase by 1.3 million barrels last week thanks to surprisingly-large imports. The price of gasoline has risen 19 cents a gallon since mid-October so that the national average is now $2.94 a gallon. This is well below the national average of $3.22 reached last May during the conversion to summer gasoline blends.
A Reuter’s survey conducted last week suggests that OPEC increased production during October by 180,000 b/d over September with 100,000 b/d of the increase coming from Saudi Arabia. An OPEC source told Reuters that Saudi output in November is to increase by 200,000 b/d to about 9 million b/d.
Many in the West remain concerned that a few hundred thousand b/d production increase will not be sufficient to meet growing world demand during this winter’s heating season. France’s Finance Minister issued a call for OPEC to increase production and the head of the US’s Energy Information Administration told a meeting that “we are in a very tight situation.” Various OPEC spokesmen continue to reiterate that the markets are well supplied and that there is little they can do to slow price increases.
This week will likely bring more volatility. Industry analysts are now saying that US inventories probably dropped last week because of the storms affecting Mexican exports. Gold is at a 28-year high above $800 and the dollar reached a new low of $1.45 against the Euro. Many are expecting additional credit market troubles to be revealed shortly and the Federal Reserve is becoming more concerned about inflation than supporting economic growth. Most analysts are now saying that $100 oil is a virtual certainty in the very near future.
Pemex has had a very bad month. The week before last a Gulf storm with 80mph winds and 25’ waves drove a drilling rig into a production platform. Eighty-six PEMEX workers were forced to abandon the platform and 21 died in the stormy seas. The accident caused natural gas and oil to leak into the Gulf.
On Sunday Oct. 28 when another storm came along, PEMEX closed its three major export terminals and was forced to shut down about 1.2 million b/d of production because of lack of storage space. On Sunday Oct. 28, 200,000 b/d were shut-in, followed by 400,000 b/d on Oct. 29 and another 500,000 b/d on Oct. 30. Operations resumed around noon on Oct. 30 from two oil ports and by day’s end approximately 800,000 b/d of production had been reopened.
On Thursday PEMEX announced that 11 million barrels of production had been lost during the outages. Whether full production has been restored is unclear for severe flooding has occurred in the State of Tabasco, resulting in nearly 1 million people being driven from their homes. On Friday Mexico’s President said, “The storms have forced the closure of three of Mexico's main oil ports, preventing almost all exports and halting a fifth of the country's oil production."
As the US imports about 1.3 million b/d from Mexico, some drops should begin showing up in US imports and stockpile numbers in the next couple of weeks.
Prior to last week’s Oil and Money Conference in London, author David Strahan had the opportunity to interview Sadad al-Husseini, former head of exploration and production at Saudi Aramco. As one of the few senior Saudis to speak candidly on where world oil production might be going, the interview, available at www.lastoilshock.com, is of considerable interest.
Al-Husseini believes that world production has reached a “structural ceiling” determined by geology, but that it should be able to sustain current production levels on what he refers to as a “plateau” – he does not like the word “peak” – for the next 10 or 15 years. After that production will decline. He rejects the idea that world oil production can increase significantly. As world demand will continue to increase with GNP growth, the floor under oil prices will rise steadily at about $12 per barrel each year. Only a global recession would change this outlook. Rich countries will be able to afford these increasing prices; the others will not. He does not see there is sufficient investment underway in alternative forms of energy to make much of a difference.
As for the future of Saudi production Al-Husseini notes that the kingdom has an $80 billion program underway to increase productive capacity to 12 million b/d – “an achievable number.” The next few years will show if the Saudi oil reservoirs will respond to this investment. He warns that the world should not bank on the Saudis producing ever increasing amounts of oil beyond a possible 12 million b/d.
Also of interest was his remark that some 300 billion barrels of claimed oil reserves may not exist. This is likely a reference to the 300 billion barrel increase in reserves claimed by the Gulf states in the 1980’s to bolster their OPEC quotas.
China's worst diesel shortages in two years broke out last week as record oil prices combined with retail price caps slowed output from independent refineries while the major state-owned refiners did not increase imports quickly enough. By Wednesday the crisis spread to the capital and other inland areas. One man was killed in a brawl at a petrol station queue. Diesel shortages in China's political heart, which escaped previous supply crunches unscathed, highlighted tensions between the government and its increasingly independent oil firms about who should pay for the country's generous fuel subsidies. Diesel costs about 64 cents a liter at the pump in Beijing, versus around $1 in Singapore and $2 in Britain.
Beijing worries that more costly energy will push up already-high inflation or spark social unrest and therefore force refiners and retailers to subsidize state-set prices. After China's last major fuel crisis in the summer of 2005, queues stretched for hours. At that time, Beijing cracked down on a flow of exports firms were using to slow losses by rescinding tax breaks, among other things. Most plants only break even when crude is around $65 a barrel or lower, so $95 crude forces many independents out of the market.
As the crisis worsened, Beijing announced a 10 percent increase in fuel prices and a doubling of diesel imports. The price increase is a reversal of one announced in September and is expected to add half a percent to China’s 6.2 percent inflation rate. Outside observers expect it may take weeks to solve these shortages. In the meantime, truck transport across China has slowed.
In the meantime, a workshop was held in Beijing on peak oil. Attendees included representatives of three major Chinese oil companies, the Vice Director of China’s Energy Office, as well as various academics. ASPO-China was formed, and the chancellor of the China Petroleum University of Beijing was elected as its new president.
"The competition for grain between the world's 800-million motorists, who want to maintain their mobility, and its two billion poorest people, who are simply trying to survive, is emerging as an epic issue."
— Lester Brown, President of Earth Policy Institute