It was another volatile week during which oil prices moved between $121 and $128 in response to various news reports. The perception that slowing US and OECD economies will stem the demand for oil still dominates the markets. This sentiment is punctuated by occasional threats to the oil supply. Last week the Iranian nuclear enrichment situation heated up again accompanied by renewed threats to attack Iran and to close the Straits of Hormouz. In Nigeria a pair of successful insurgent attacks on pipelines shut-in still more oil production.
Accompanying reports of record high international oil company profits came the news that their production is slipping. Exxon reported a 10 percent drop in oil and a three percent decline in natural gas production. Shell reported a 1.6 percent decline in output and Repsol’s production fell by nearly 20 percent.
Taken together the decline of production of all the major international oil companies may now exceed 600,000 b/d. This decline reflects the difficulties they are having in gaining access to new oil fields amidst a myriad of political difficulties around the would as production declines in their mature fields.
A new study funded by the natural gas companies claims that the US has 50 percent more natural gas than once thought because of higher-than-expected yields from 22 shale formations in 20 states. The report concludes that the US now has a 118 year supply of natural gas.
Although new drilling techniques have allowed access to small pockets of natural gas imbedded in shale, we, and some of the people that contributed to the study, are skeptical that the data permits the industry’s conclusion that US natural gas reserves have jumped by 50 percent.
Oil prices jumped by nearly $5 a barrel on Friday when Israel’s Deputy Prime Minister and candidate for Prime Minister Mofaz told a Washington audience that Iran is driving toward a “major breakthrough” in its nuclear development efforts and poses an “unacceptable” danger. Last month Mofaz told the Jerusalem Post that ``all options are on the table. If there won't be a choice other than a nuclear Iran or a military option, it's clear what our decision has to be.''
The statement brought the usual rejoinder from Tehran about closing the Straits of Hormuz should they be attacked. The Iranians are also sticking to their position in the face of yet another threat of harsher sanctions from the Western powers over their uranium enrichment program. Thus far the US and its European allies have been successful in persuading European oil companies to largely withdraw from Iranian projects. To an extent the western companies have been replaced by the Chinese who are eager to gain access to new supplies of oil and gas.
This situation is likely to hover over the oil markets for many years as the possibility that the oil flow through the Straits could be halted or slowed is about the most serious threat to the global economy imaginable.
In the meantime, Iran has been hit by a serious drought which has cut hydro-electric production and forced daily blackouts. Tehran now has halted the export of heavy fuel oil to Asia as it is required for power generation and stockpiles for next winter.
Step by step the situation in Nigeria continues to deteriorate. The government has imposed a blackout on news about militant attacks so that it is now taking a week before there are official figures as to how much production has been shut-in. Last week’s attacks, which the government now admits damaged two major pipelines, are slowing exports by 150,000 to 230,000 b/d for the next two months unless there are more attacks. The most recent attack was spurred by reports that the government had bribed the militants to go easy on oil facilities, suggesting that the attacks are mainly a criminal enterprise that can be cured with money.
The most effective militant group, the Movement for the Emancipation of the Niger Delta, took umbrage at the charge they could be bribed. Within days they blew up two important pipelines as proof that theirs was a selfless political cause of helping the people of the Niger Delta.
Lawlessness is also on the rise as rival gangs fought hours-long gun battles in the streets of Port Harcourt over the weekend. Power shortages are widespread and most refined oil products have to be imported.
Over the weekend China’s State Council announced a major national energy saving campaign by ordering government agencies and local governments to cut the use of energy consuming equipment. The order requires less use of cars, air conditioners, elevators, street lights and lamps, plastic bags and disposable goods, and the development of equipment that uses electricity and oil efficiently.
This decree is probably in response to the coal shortage which is threatening China’s power supply. A state agency reported last week that coal supplies are only sufficient for 11 days of operation and that aging equipment threatens wide scale blackouts.
China’s immediate energy situation is precarious. For the next two months efforts to clear the air around the Beijing Olympics will result in large savings of oil and coal as driving has been seriously restricted and many industrial enterprises have been temporarily shut down.
By the end of September, the Olympics will be over and Beijing’s overriding priority will once again be 10 percent economic growth. How this will mesh with orders to save electricity and oil has yet to be seen. Some outside analysts are already predicting that coal shortages will require increased oil imports if goals for economic growth are to be maintained.
After two months of nearly continuous debate over how to deal with the soaring price of gasoline, Congress adjourned Friday without doing anything about energy. Many in the Congress recognize that energy is a top issue for the voters this fall and favored staying in session until something was passed. The final vote for adjournment in the house passed 213 to 212. The Senate vote to adjourn was 48 to 40 on what is normally a unanimous vote. After the vote a group of Republicans remained on the floor demanding that the Democrats return to vote on energy legislation.
In general the Republicans are calling for lifting restrictions on off-shore drilling while the Democrats favor more incentives for renewables, restrictions on speculation and, as a short-term fix, releasing oil from the Strategic Petroleum Reserve. Both sides cite polls showing that the voters favor their position. Last week various compromises emerged with something from both side’s positions but failed in floor votes.
Some widely favored measures such as renewing tax credits for renewable energy have been to the floors of both houses many times without passing. Some of these measures are caught up in Republican efforts to renew President Bush’s tax cuts before he leaves office. The fear is that increased expenditures for energy without offsetting cuts will weaken the argument for continuing the cuts. The requirement for 60 votes to pass any significant legislation in the Senate is not helping the situation.
Congress will return in September, but seems unlikely to do anything significant about energy until after the voters have their say in November.
(clips from recent Peak Oil News dailies are indicated by date and item #)