1. Production and Prices
2. Shortages in China
3. The Canadian Report
4. The Media
5. Energy Briefs
The struggle between fears of recession-driven lower demand vs. the falling dollar and shrinking inventories continued for another volatile week. Despite reports of increased OPEC production, oil reached an all-time high of $99.29 on Wednesday and closed at a record $98.18 on Friday.
Tanker trackers are reporting that OPEC oil shipments possibly increased by a much as 720,000 b/d during November. Much of this increase is because Iraq’s northern export pipeline to Ceyhan, Turkey remains open, allowing the country to export an additional 300,000 b/d. Preliminary reports indicate that Saudi production will increase by 360,000 b/d in November.
The falling dollar, which hit a new low of 1.4966, and a two-week forecast of cold weather in the northern US were enough to overcome reports of increased production.
The week ahead promises more of the same with suggestions that more bad economic news will be revealed during the week. A new factor in the world situation is the oil shortage that has developed in China. Beijing is planning to increase imports of diesel and other products during December. Shipping rates for moving oil from the Middle East to Asia are soaring.
The government’s efforts to control inflation by mandating price controls in the face of increasing demand has resulted in retail fuel shortages nationwide. China’s oil industry is comprised of two large state-owned oil companies and scores of small privately or locally-owned refiners known as “teapots” which may supply as much as 15-20 percent of domestic oil products.
As the price of imported crude soared over the last few months many of the “teapots”, which do not have the benefit of massive state subsidies, reduced output, switched to more profitable products, or shut down. The resulting shortages in many parts of the country led to rationing, stoppages of public transport, and in a few cases violence at the gas pumps.
On November 1st the government decided that inflation was the lesser of two evils, raised retail fuel prices by 10 percent, and directed the state-owned oil companies to eliminate the shortages. The companies responded by delaying maintenance, stepping up production, and increasing product imports to record highs.
The underlying problem is that for the first 10 months of 2007, China’s demand for oil went up 5.2 percent while domestic production increased by only 1.4 percent. Demand for diesel rose 5.8 percent during the first ten months and gasoline by 4.7 percent.
Beijing realizes it has a problem. Unwilling to take steps to slow growth, the government has undertaken a program to reduce the amount of energy per unit of GDP. This is extremely difficult to do quickly and thus far there has been little progress, so the demand for energy continues to grow apace. Chinese efforts to increase petroleum product imports this winter will obviously push up world prices.
While OPEC may be able to produce more crude on a sustainable basis in coming months, China apparently stands ready to take it all, and then some.
Nearly everyone who talks about the future of US energy supplies assumes that Canada will be a reliable, un-politicized source of oil and natural gas for the foreseeable future. A new report from Canada’s National Energy Board, however, casts doubt on those assumptions.
As expected, the report says Canada’s domestic demand for energy will continue to grow for the next 30 years and that there will be sufficient supplies to cover domestic consumption.
The bad news for the US is that the report says the US should expect that natural gas exports will fall by approximately 30 percent during the next 7 years. There are almost 30 percent fewer drillings rigs operating in western Canada now than a year ago because of higher costs and the decline of the dollar against other major currencies. The US currently imports about 17 percent of its annual consumption from Canada.
Of even greater significance is the Board’s forecast for production from the Alberta tar sands, currently running about 1.3 million b/d, is starting to slip. Despite talk of billions of politically-unencumbered barrels buried in the sands, the Board now believes that we should expect a daily production of 2.8 million b/d by 2015, down from the 3.0 million b/d that had been forecast.
Citing higher production costs as the reason why it was reducing its forecast, the Energy Board clearly left open the possibility of further cost-related reductions in the years ahead. According to the report, “a number of companies are reassessing the economics of their projects.”
It was a banner week for peak oil in the US media, with the Wall Street Journal, Time magazine, the Houston Chronicle, and several other publications addressing the issue. As the price of crude nears $100 a barrel, editors are starting to realize that it is not enough to simply blame high gas prices on speculators, the falling dollar, and national oil companies. The realization is setting in slowly that if prices do not fall shortly, serious economic damage may ensue.
Fully embracing the concepts of peak oil was clearly too much of a leap for some publications, so they found a middle ground. Rejecting the notion that geologic limits on oil production were imminent, the Journal and Time cited CEO’s of major oil companies as saying it is doubtful that global oil production will ever get beyond 100 million b/d.
To emphasize that they are not talking about “peak oil”, the Journal and Time said some rather unflattering things about people who believe geologic limits on oil production are imminent. Their stories then go on to explain how the oil companies now believe we might reach a plateau in the next few years. World oil production won’t decline right away, but will continue to be flat for an indefinite, perhaps prolonged, period.
To give these publications some credit, they state directly that alternatives to conventional oil such as shale, tar sands, heavy oil, and bio-fuels can only provide a small fraction what is coming from conventional oil and natural gas liquids.
After much soul searching, the editors of the Journal and those that follow its lead have come up with a formula that gives intellectual support for $100+ oil without raising undue alarm. They leave their readers with the idea that serious economic difficulties, occasioned by global oil depletion, are likely to come gradually and are still some ways off.
"The growing demand for bio-fuels and the high prices of fossil fuel are having a dramatic impact on millions of people [in Africa].
—Stephanie Savariaud, UN World Food Program