1. Oil and the global economy
After the brief euphoria following Beijing’s un-pegging of the Yuan on Monday, oil prices slipped lower for most of the week. On Friday, however, concerns about the effects the first gulf hurricane of the season might have on oil production sent prices sharply higher to close at $78.86, the highest since early May. As of Monday morning, it appears that Hurricane Alex will remain in the Western Caribbean where it will not be a threat to work on the leaking oil well or US oil production.
US crude inventories continued to increase during the week before last. American driving over the holiday weekend is forecast to increase by 18 percent over last year. This forecast sent gasoline futures up 7 cents on the NYMEX to close at $2.17 a gallon.
The general outlook for future economic growth in the US and EU does not look good, leaving the dynamic between stagnant OECD oil demand and more robust Asian demand in place. If the Yuan moves higher, dollar-denominated oil will be cheaper for China to import and should in the longer-run bolster demand, but the austerity measures being implemented across the EU could well reduce oil demand, thereby moderating any overall increase.
In a revised estimate, the IEA now forecasts annual demand growth for oil at just 1 percent per year through 2015, or 940,000 barrels a day this year, down from their earlier forecast growth of 1.9 percent, or 1.62 million barrels a day, in 2010. The Agency projects that global consumption will be 91.9 million b/d in 2015 as compared to 86.3 million b/d this year.
Car bombs continue in Baghdad as unusually high summer temperatures have led to serious electricity and water shortages, which in turn have led to some domestic unrest. With the Iraqi election from last March still not settled and no oil law in place, major increases in Iraqi oil production may be difficult to achieve in coming years.
2. The Deepwater Horizon
Developments last week
BP continued to collect about 24,000 of the 35,000-60,000 barrels that are currently estimated to be leaking from the well each day. For a brief time last week the cap that is collecting much of the leaking oil had to be removed for repairs after it was bumped by a remotely operated vehicle.
Most of the news last week centered on a Louisiana Federal Judge’s order that the administration’s temporary ban on deepwater drilling be lifted. The administration is appealing the ruling and none of the companies drilling in the Gulf are expected to resume operations until the litigation is settled. As US unemployment continues to grow, many feel that the risks of renewed drilling, especially in an era of super-caution on the part of the oil companies, are minimal in comparison to even the temporary loss of thousands of highly-paid offshore jobs.
After the judge’s order to lift the ban, Interior Secretary Salazar said he would issue a new order banning drilling that made clear the magnitude of the risks that were being taken and the federal government’s authority to issue the ban.
The furor surrounding the ban will increase the pressure on the administration to complete the investigation of the Deepwater Horizon explosion as quickly as possible and to lift at least parts of the drilling ban.
The near term
Provided Hurricane Alex does not interfere with BP’s oil capturing operations this week, new equipment being moved to the site could increase the daily oil collection rate to as much as 53,000 b/d by the end of this week. Plans are being prepared for a new collection system that could boost the amount captured to 80,000 b/d if that much oil is actually coming from the well.
In the meantime, progress is being made on the pair of relief wells that are being drilled to intercept and plug the leaking Macondo well. As the relief wells draw closer to their target depth, however, drilling must stop while the drill string is pulled to the surface and is replaced by electro-magnetic sensors that can detect electrical pulses sent down the casing of the blown well. While the relief wells are currently close to the depth required to block the original well, casing these wells and then locating the pipe to be blocked is expected to take another 4-6 weeks.
Although this week’s hurricane may not turn out to be much of a threat, we are just at the beginning of what is forecast to be an active hurricane season with new storms forming regularly for the next few months.
The economic impact
In the two months since the Deepwater Horizon explosion, the economic costs of the disaster continue to spread outward like ripples in a pond. The drilling moratorium has cost thousands of jobs. The collapse of BP’s stock value has endangered pension funds around the world. The seafood and hotel industries have been badly damaged. Last week British Prime Minister Cameron warned President Obama that BP could be destroyed which is not in anybody’s interest if the pressure is kept up. The Prime Minister is probably concerned that the US will seek to impose billions of dollars in fines on BP in addition to the billions it will cost the company to stem the leak and pay for the damages.
The one point that is emerging from the furor surrounding the disaster is that the cost of deepsea well drilling is bound to go much higher as governments and the companies themselves introduce tougher drilling rules and emergency preparations. Insurance costs for offshore drilling are increasing rapidly.
With oil continuing to flood the Gulf, the cost to marine life continues to expand at deeply impactful proportions. The Fish and Wildlife service reports a growing toll of birds and marine mammals being found along the coast and oil is starting to reach the beaches of northern Florida. People are increasingly worried about what will happen if a large hurricane passes across the spill this summer.
The future of BP
As BP’s liabilities grow, not only Britain’s Prime Minister but many others are worried about the company’s future with earnings likely to be tied up for many years paying off claims and government fines. Capital for new drilling projects will become increasingly scarce and there is much talk of BP’s selling off major assets to remain solvent.
In recent weeks, BP has upped its cash and lines of credit from $15 to $20 billion dollars as the credit-default swap market continues to believe that the risk of a BP default within the next year is growing. Many analysts point out that a bankrupt or significantly weakened BP would be a major threat to US energy security.
3. Venezuela continues nationalizations
Last week, Caracas nationalized 11 drilling rigs belonging to the US firm Helmerich & Payne. The nationalization came after the company halted drilling in a dispute over $49 million that PDVSA owed it. In 2007, President Chavez nationalized billions of dollars worth of heavy crude facilities and last year took over dozens of small oil service companies.
Venezuela’s Oil Minister said the government would pay for the nationalized rigs, but would not allow equipment to stand idle while payments to private firms were being disputed. The minister noted that five additional rigs being operated by a subsidiary of Chevron were also in danger of being nationalized. Since oil prices collapsed in 2008 PDVSA has become notoriously slow in paying its bills to foreign oil service providers. Last week the company announced that it had reached settlements with 32 companies that were owed money.
In the long run this frequent resort to nationalizations will only weaken Venezuela’s oil industry --reducing production and driving away private foreign investors and service providers.
Quote of the Week
“The data resoundingly rejects ... peak oil. In all aspects, I find the peak oil model an inadequate empirical representation of historical patterns. This is not to say that oil production may eventually peak. It does say that the peak oil model will have little, if anything, to say about it.”
-- John R. Boyce, University of Calgary economist
Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)