1. Production and Prices
2. Mortgages and Inflation
5. Energy Briefs
Oil prices remained volatile as fears of oil shortages alternated with fears of an impending recession depending on the news of the day. Starting at $88 on Monday, oil climbed to $95 at midweek only to close at $91.58 on Friday as bad economic reports accumulated.
The IEA calculates that world oil production increased by 55,000 b/d to 86.5 million because of increased production in Mexico, China, and Brazil. The Agency says OPEC production dropped by 180,000 b/d in November while Platts says there was a small increase. Higher production from Saudi Arabia and Iraq helped offset a temporary maintenance-related drop of 400,000 b/d in the UAE’s output. Iran and Kuwait boosted output by 50,000 b/d while Algeria, Libya, Nigeria and Qatar increased output by about 10,000. With the UAE back to full production in December, production could be still higher.
The IEA reports that commercial OECD stockpiles dropped by 22.4 million barrels in October. (The EIA says 16 million.) A sharp drop in European stockpiles led the decline. Preliminary indications suggest that a similar decline will take place in November. The EIA says it appears that US domestic oil consumption will increase by 0.4 percent in 2007 with gasoline increasing by 0.6 percent.
The EIA and a number of independent analysts are forecasting a slight drop in oil prices over the next few months. While the fundamental supply/demand balance remains tight and stockpiles continue to shrink, they cite increased OPEC production of 400,000 b/d in the 1st quarter, forecasts of warmer weather, and the increasing likelihood of a recession as reasons for this judgment.
It now seems likely that the housing/mortgage/credit situation will play a central role in the peak oil story for years to come. Already a veritable avalanche of bad economic news competes daily with routine oil-related stories in determining the course of oil prices. Until recently, the OECD world seemed relatively immune to the inflationary pressures of $90 oil and $3 gasoline and, thanks to droughts and biofuels, soaring food prices -- but that is changing.
The Federal Reserve’s actions to improve liquidity and stave off a recession have played a large part in the decline of the dollar and the consequent $25 surge in oil prices this fall. Record oil prices turned up in the inflation numbers last week with a vengeance as producer prices showed their steepest gain in 34 years. Inflation in Europe took a similar bounce. If oil-price-induced inflation continues much longer, the Fed is going to have to think long and hard about further interest rate cuts for the feedback loop of lower dollar, higher oil, more inflation will only make the situation worse.
In recent days, however, more ominous insights into the credit situation have emerged. As government efforts to restore liquidity seem to be making little progress, observers are suggesting that many of our financial institutions have taken on so many loans that have or soon will go bad that they are insolvent. To remedy a problem of this magnitude, housing prices will have to decrease by 30 percent to restore their normal relationship to incomes, and financial institutions will have to come clean as to the real extent of their potential losses.
This suggests it will take many years to stabilize the current credit situation and it will be very painful. It is clear that the peak oil is already inextricably involved with the credit situation just as peak oil is involved with global warming. It is a two-way street; rising oil prices from inadequate supplies will affect the credit-induced economic situation and serious economic problems will affect the demand for oil.
The improving security situation in Iraq has led to a surprising increase of nearly 400,000 b/d in Iraq’s oil production, which Baghdad claims is now 2.5 million b/d. Exports are now approaching 2 million b/d which is above the pre-2003 levels. Nearly all of this increase is due to the opening of the Kirkuk-Ceyhan, Turkey pipeline that until recently had been closed by sabotage.
How long this situation remains is difficult to predict. Although extraordinary efforts are being made to protect the northern pipeline, there has been little letup in insurgent activities in northern Iraq. Last week three pylons on a power line sending electricity south to Baghdad were blown up. The Kurds vs.Turkey situation continues to fester with Turkish air strikes on Kurdish villages in Iraq last week. With a national oil law stalled in parliament, the Kurds are continuing to sign agreements with foreign oil companies, much to Baghdad’s displeasure.
In the south, British forces pulled out of Basra yesterday, turning the city over to 30,000 Iraqi troops and security personnel. Maintaining security and oil exports in the factionalized city will be the biggest test yet for the Baghdad government. Given the current world supply situation, the loss of even part of Iraq’s 2 million b/d of exports to insurgent attacks is bound to have a more significant impact on oil prices than in previous years.
The possibility that serious economic difficulties are in the offing has made projections of oil demand through 2008 more controversial than usual. During the last week, three major prognosticators – the IEA, the EIA, and OPEC – and several major financial institutions came out with their estimates of what demand will look like next year.
First out was the OECD’s IEA which now foresees world oil demand growing by 2.1 million b/d next year. The upward revision is based on an expected increase in demand for ethane and other petrochemical feedstocks in the Middle East, notably Saudi Arabia. This forecast assumes that there will be economic problems in the US and other OECD countries, but continuing robust oil demand growth in non-OECD countries, where subsidies protect people from the impact of high oil prices.
In contrast to the IEA, OPEC economists foresee a growth of only 1.3 million b/d because of increasing world economic problems. The US’s EIA foresees a “mild slowdown in global economic growth” and comes up with demand growing by 1.38 million b/d. Observers have pointed out that these are all “politically correct” forecasts reflecting the goals and biases of the organizations’ sponsors.
Goldman-Sachs remains bullish, believing that oil demand remains robust in the US and Japan, and is accelerating in China and Korea. "The softening of the balance in 2008 will likely be modest and short-lived," while the second half of the year could see "demand recover more quickly than OPEC supplies increase." Goldman-Sachs foresees oil going to $105 a barrel next year. Other prominent commentators see economic problems forcing oil prices lower in 2008 and believe they certainly will not break 2007’s highs.
Judging from the scale of the pressures that are building up in the financial markets, the answer to all this will probably depend on how fast and far the impending economic troubles spread.