Forces coalesced this week to bring about another $10 a barrel drop in oil prices. General concern about the prospects for the US and other OECD economies topped the list, but a strengthening dollar resulting in a flight from commodities helped. The markets simply ignored factors such a storm in the gulf, closure of a major pipeline in Turkey, an unexpected drop in US gasoline stocks, more trouble in Nigeria, and new sanctions in the Iranian nuclear dispute that would normally send prices higher. Oil closed the week at $115 a barrel.
There has been very little change in the fundamentals of supply and demand during the last few weeks. OPEC production for July was up a bit, but this was more than offset by declines in non-OPEC production. US demand for oil products remains about 2-3 percent lower than last year. Chinese imports which are more volatile than those of other countries were significantly lower in July than in the spring and this may be a factor in the price drop.
Retail prices in the US have declined rapidly in the last three weeks with averages now down by 28 cents. Most OPEC oil ministers have been quiet during the last few weeks, but if prices continue to fall, talk of production cuts are sure to resume.
With the end of the summer driving season and all that easy-to-forego discretionary travel coming to an end in a few weeks, perceptions may again change.
Pipelines, even buried ones, are easy to sabotage as anyone who has followed the situations in Nigeria and Iraq knows. For many months now Kurdish separatists have threatened harm to the 1100 mile Baku-Tbilisi-Ceyhan pipeline that can transport as much as 1 million barrels/day from the Caspian Sea to tankers in the Mediterranean. Last week a fire began in Eastern Turkey closing the BTC pipeline which at the time was pumping about 800,000 b/d.
At first the Turks denied that the line was sabotaged, but after several press releases from the Kurdistan Workers Party (PKK) claiming responsibility for the fire, they now appear to be waiting the results of an investigation.
The fire caused BP to declare force majeure on shipments of Caspian crude from Ceyhan. News of the fire briefly caused a rise in oil prices late last week, but this was soon overshadowed by the rising US dollar.
The BTC pipeline is still on fire with estimates for repairs running anywhere from two to five weeks. The situation was further complicated last week by the fighting in South Ossetia which resulted in Russian air attacks on the BTC pipeline and an oil shipping port inside Georgia.
BP had been redirecting part of its Caspian oil production to the Georgian Black Sea ports of Batumi and Kulevi, but by Saturday these exports were halted due the fighting.
Exports from Ceyhan are of increasing importance to the US and European oil supply. If the pipeline has been sabotaged by the PKK as they claim, it sets an important precedent and once again shows how vulnerable are the world’s oil and gas pipelines. The pipeline from Kirkuk in Northern Iraq has recently reopened after many years of continuous attacks partly because of increased security and partly because it is advantageous to would-be attackers to keep the pipeline open. These situations, however, are constantly in flux and renewed disagreements over the status of Kirkuk could easily lead to more pipeline closures.
The political gridlock over America’s energy policy continues as the Congress went into recess without passing any new initiatives. The Republicans continue to favor more domestic drilling, oppose excess profit taxes on the oil industry, and do not want to tap the strategic petroleum reserve to provide short term price relief.
The Democrats want increased spending on renewables, paid for by cutting tax breaks for the oil companies, have seen little short-term benefits, if any, from lifting off-shore and Alaskan drilling bans, and are willing to withdraw oil from the SPR to cut prices prior to the election.
In recent months, $4 gasoline has clearly shifted public sentiment towards more drilling on the theory that the situation is so bad that anything is worth a try. For several weeks, Senator McCain has favored lifting off-shore drilling bans and last week he was joined by Senator Obama, who bowed to the inevitable and now favors off-shore drilling as part of a more comprehensive compromise package including more renewables and releasing 70 million barrels from the strategic reserve, tax credits for plug in cars and help for the automakers.
It is unlikely that anything will happen before the Congress returns in September, but the sentiment seems to be moving towards some form of compromise prior to the election.
More emphasis on renewables, efficiency, and electrification of transportation are all likely to have sustained effects on America’s energy situation; most of the other proposals will likely be more transitory. But the short-term issue, however, is one of convincing an increasingly stressed electorate that their Congress and Presidential candidates feels their pain and is doing its best to help the situation.