Oil prices had another volatile week in the midst of the US elections, threats from OPEC, and more bad economic news. Starting in the mid-$60s, prices made it up to $71 a barrel on Tuesday only to slide steadily for the rest of the week to close out at $61.04.
Bad economic news dominated the week. With payrolls dropping, house values sinking, retail sales dropping, and car sales plunging, the oil market naturally is taken by the notion that the demand for oil is going to drop markedly.
This week the EIA reported that overall US oil consumption is down by about 500,000 b/d or 6.7 percent compared to the same four week period last year. The decline, however, is not uniform across the range of oil products. While jet fuel consumption is down by nearly 16 percent, reflecting cuts in airline schedules, gasoline and distillate consumption now are down by 2.3 and 4.8 percent respectively. For the last few weeks, the gap between US gasoline consumption this year and last has been narrowing as average US gasoline prices have plunged by $1.85 a gallon to $2.26. Should this trend continue much longer, US gasoline consumption will soon be close to last year’s, although consumption of other petroleum products is likely to remain lower due to lessening economic activity.
From all indications, OPEC appears to be making a serious effort to reduce production and exports in the face of falling prices. The Saudis are reported to have cut exports by 900,000 b/d from their August peak; the Kuwaitis say they have cut exports by 100,000 b/d; Venezuela says it has notified customers of cuts totaling 129,000 b/d; Shell says it is cutting its exports from Nigeria by an unspecified amount despite the country’s spotty record of meeting its quota; and the Indians say that Iran, Kuwait, and the UAE have reduced shipments by 5 percent.
As world crude prices are now hovering around $60 a barrel, the average prices received by OPEC members could soon be in the low $50’s, suggesting that the production cuts at the last two OPEC meetings are not as yet having the desired effect.
OPEC’s Secretariat in Vienna is currently holding talks with its members on the state of the oil markets. There is a possibility of a second emergency meeting being held before the next regular meeting on December 19th. OPEC’s President is already suggesting that there will be a third production cut at the next meeting if prices remain under $70 a barrel.
In the meantime, Russia seems to be backing away from reports that Moscow will cut production in concert with OPEC. Finance Minister Kudrin said over the weekend that ``the government isn't planning any restrictions of oil production in the near future. Oil businesses should estimate their own risks.'' At the same time, the CEO of pipeline company Transneft said that exports in November are only three quarters of planned. The company blamed high export duties on the reduction in shipments and said lower exports will only be temporary.
The worldwide financial liquidity crisis continues to affect future oil projects. Major companies say that projects with financing already in place are expected to continue as planned, but that those programmed for completion after 2012 are likely to be placed on hold until the global economic situation improves.
Outside of the major oil companies, most of which have healthy cash balances, there is more talk of cutbacks. Most national oil companies do not have the freedom to invest as their profits fund much of their governments’ budgets, a higher priority than funding future production. Even the Saudis have announced an indefinite delay in a $12 billion joint refinery project with Total.
Deepwater and Alberta sands projects which are very costly seem to be in the most trouble. Unfortunately, these are exactly the projects that are being counted on to supply an increasing share of world oil production in coming years.
Last week the International Energy Agency released the 12 page executive summary of the World Energy Report 2008 that is due to be released November 12th.
Judging from the summary, the report is a curious mixture of unreality and an unprecedented warning of an energy crisis to come. The Agency still maintains there is enough oil to maintain current rates of production for the next 40 years. At one point it even mentions possible world reserves of 9 trillion barrels by lumping in oil shales, tar sands, and much undiscovered oil with much smaller proven reserves.
The report, however, breaks new ground by warning up front that current trends in global energy supply and consumption are unsustainable. New analysis shows that rates of depletion from existing fields are high and will go higher as world production shifts to smaller and offshore fields. They admit that much further growth in conventional oil production is unlikely and the bulk of future growth will have to come from natural gas liquids and unconventional sources.
The Agency now estimates that over $26 trillion dollars will have to be invested in maintaining current or slightly higher rates of production over the next 22 years. A key judgment discernable from the summary is that 30 million b/d of new production capacity will be needed by 2015 and that there is “real risk” that underinvestment will cause an oil-supply crunch in that timeframe.
The IEA must serve many masters, most of whom are not yet willing to confront the reality of the world’s energy and climate situations. It appears that the new report will contain a wealth of new data and judgments, leaving it to the reader to read between the lines and draw conclusions about the likelihood of imminent peak oil.
The future of the American automobile industry is hanging in the balance and is likely to be decided shortly. New reports of plunging sales and large losses make it likely that the big three automakers will be insolvent in a matter of months if not weeks. Early last week the Bush administration refused to come to the industry’s aid with multi-billion dollar loans. Over the weekend, however, Congressional Democrats, fearful of massive job losses should the industry fail, asked the Administration to reconsider its decision.
President-elect Obama appears to favor the industry request for loans, but is powerless to do anything the next two-three months. Some analysts are warning that unless the Bush administration authorizes the loans in the next few weeks it may be too late.
The situation is further complicated by reports that the Obama administration will quickly reverse President’s Bush’s decision and permit the California emissions regulations to go into effect. This California standard would mandate that cars achieve an economy standard of 36 miles per gallon within 8 years