1. Production and Prices
2. Trouble in China
4. Prospects for Iraqi Production
5. Energy Briefs
For yet another week oil prices rose and fell with the perturbations of the world stock markets. Starting the week in the low $90s, oil prices fell to nearly $86 as traders assessed and reassessed the prospects for a demand-killing recession. By week’s end, hopes that the US “stimulus package” would forestall a recession drove oil prices up to close at $90.71.
The weekly stocks report showed that US refineries are starting to shut down for maintenance in preparation for the summer driving season. As refinery activity fell, crude stocks jumped as did gasoline stocks, aided by an increase in gasoline imports. Distillate stocks fell by 1.3 million barrels, however, due to cold weather in the northern US and reduced imports. The US currently imports about 5-8 percent of its requirements for distillates. Last winter the US was importing 350-400,000 barrels of distillates per day. Last week we imported 242,000 and so far this winter imports appear to be running 100-150,000 b/d lower than last year. US stockpiles are close to the bottom of the normal range and unless this situation stabilizes soon, there will be higher prices and shortages ahead.
OPEC is expected to keep its crude oil production unchanged when the group's 13 members meet in Vienna on Feb. 1.
Calamity after calamity struck China last week as the coldest, snowiest winter in decades left millions without heat and running water. On Sunday 100,000 passengers were stranded on trains and in stations when power cuts halted 136 electric passenger trains. The storms and cold weather have cut deliveries of coal which powers 78 percent of China’s electric production. On Friday, the government halted coal exports and ordered that all available coal be delivered to domestic power plants. Storms felled transmission towers along a major power line from the Three Gorges Dam, disrupting supplies to central China.
As happened with diesel supplies last fall, Beijing’s imposition of coal price controls, coupled with the closing of thousands of mines not in compliance with safety regulations, has exacerbated the problem. The power generation shortfall has reached 70 gigawatts, equal to the production of all of Great Britain. The five biggest electricity producers have shut 90 power stations in northern and central China. Rationing of electricity is reported in one-third of China’s provinces. Shortages are expected to continue, with forecasts of continued cold weather and more snowfall for many regions of central and southern China.
The recalcitrance by power plant managers unwilling to generate at a loss is similar to the nationwide diesel supply crisis last autumn, when refiners under pressure quietly curbed output and forced the government to make an unplanned and unwanted increase in fuel prices. Beijing is battling high inflation and has promised not to raise energy prices in the short-term. The government has a major problem: domestic prices of coal and crude oil rose 14.2 percent and 35 percent on year respectively in December while priced-capped electricity rose by only 2.1 percent. Overall Chinese inflation in 2007 was 7.6 percent.
In the midst of all this turmoil, Beijing announced that economic growth reached a 13 year high of 11.4 percent last year. Oil consumption in December grew to 7.2 million b/d, the highest growth rate for seven months and is expected to remain high in 2008. The current power shortages could easily lead to a sudden increase in fuel imports as managers attempt to compensate for the problems with the national electric grid. If the weather problems persist, China is likely to lose considerable production this winter. Over the remainder of the year oil imports are likely to be determined by how closely China is tied to global economic problems.
Shell’s CEO, Jeroen van der Veer, made headlines last week when in an email to company staff he stated that “Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand.”
In face of the declining availability of oil, Shell envisions one of two scenarios. The first is a “Scramble” in which the world’s oil importers engage in a mad dash to secure oil supplies and an increasing use of coal and biofuels. The alternative scenario, “Blue-prints”, envisages a world of political cooperation between governments on efficiency standards and taxes, a convergence of policies on emissions trading, and local initiatives to improve environmental performance of buildings.
Van der Veer joins an increasing list of organizations, newspapers, government officials who are willing to publicly acknowledge the reality of imminent peak oil…without using that wording. With a few notable exceptions, such as ExxonMobil and BP, most major oil companies and the International Energy Agency have at least hinted that serious problems are just ahead.
While visiting the Davos World Economic Forum last week, Iraqi Oil Minister al-Shahristani proudly announced that Baghdad had increased oil production by 400,000 b/d over the last three months, going from 1.9 million b/d to 3.3 million b/d. The minister said all of the increase had been exported and that Iraq would increase production and exports by another 400,000 b/d during 2008. This increase, most of which can be attributed to the opening of the northern export pipeline to Ceyhan, Turkey, has contributed significantly to the recent increase in OPEC production.
This euphoria, however, contrasts with fragmentary press reports on serious troubles in Iraq’s electric and refining industries. The troubles started two weeks ago with reports of fires at two Iraqi refineries. Although the government reported that the damage would be repaired quickly, it appears that supplies of fuel for the Iraqi power plants are way less than necessary and that electricity generation is much worse than normal. Some reports say that power is on for only two hours a day in much of the country.
The power shortages in turn are hurting the oil industry which needs the electricity to run pumps. Much finger pointing between the ministries is taking place. Although the Iraqi government is understandably reticent to announce the true state of affairs, it appears that the northern export pipeline to Turkey has been out of service for much of the last two weeks due either to power shortages or another insurgent attack. Given the history of Iraqi exports over this last five years, the reopening of exports to Turkey will be an anomaly and the prospects for an additional 800,000 b/d of exports during the coming year are not that good.
(clips from recent Peak Oil News dailies are indicated by date and item #)
“When you’re schlepping around two tons of sand for a barrel of crude, it shows that conventional oil is already well into depletion. Price will ultimately ration demand. People won’t be able to afford to drive.”
— Jeffrey Rubin, chief economist CIBC World Markets