1. Oil and the Global Economy
Oil prices moved up sharply last Thursday and Friday with NY crude closing just below $108 a barrel and London crude at $118.70 — the highest settlement since August 2008. There were several reasons for the move. In Libya, the fighting seems to have reached at least a temporary stalemate thereby decreasing the chances that any of Libya’s 1.3 million b/d of crude exports will be reaching the market anytime soon. There is growing concern that the recent increases in Saudi and other Gulf State oil production is not enough to cover the loss of Libyan crude. So far the shortage has been mitigated by winter maintenance which has temporarily shut many refineries around the Atlantic basin. In April, however, these refineries will resume normal operations and will be seeking replacement supplies for the lost Libyan crude. Some analysts are optimistic that we will see a surge in OPEC oil production in April. Bloomberg is saying that the Saudis still have the ability to increase production by another 2 million+ b/d within 30 days.
Weakness of the dollar and hopes that a slightly improved employment situation in the US will eventually lead to an increase in demand contributed to the rally. The EIA issued revised figures showing the US demand for oil in January was up by 593,000 b/d to 19.12 million b/d from a year earlier. In the meantime, US gasoline prices, which now average $3.65 a gallon for regular and are well above $4 a gallon in California, are starting to reduce demand. Market technicians say NY crude has broken through key resistance levels and can easily move to $110 and higher in coming days.
Japan’s nuclear power situation continues to grow worse. Some analysts estimate that it will take the equivalent of 400,000 b/d of oil, coal, and LNG to replace the energy that was coming from the shut-in plants. Coal prices hit an all-time high of $130 a ton last week for shipments to Japan. The price reflects the increasing demand for coal from China and India as well as the damage done by the floods in Australia.
Going into the year, conventional wisdom, and the IEA, held that the increase in China’s demand for oil would be about half of what it was during the boom year of 2010. The idea was that increasing inflation in China would force so much economic tightening that the increasing demand for oil would slow markedly. While we do not yet have official data, preliminary indications are that the economy is moderating rather than slowing with the manufacturing sector continuing to expand. Foreign observers are still talking about China’s economy growing by 9 percent this year. In the meantime China’s largest oil trader has halted diesel exports in order to build inventories.
US corn futures surged last week closing at $7.36 a bushel after the USDA announced that US stocks were down by an unexpected 15 percent. Corn prices are now only 30 cents a bushel below the all-time high hit in the summer of 2008. There have been reports recently that the Chinese may be buying large quantities of US corn. The UN-world-food-price index is now at a record high. It appears that corn prices will have to go still higher to slow demand. Goldman Sachs now is forecasting corn reaching $8.60 in coming months and some analysts are talking about the possibility of running out of corn stocks prior to the next harvest.
This of course raises the issue of the of corn-based ethanol production in the US and whether the Congress will move to slow or halt production should food prices move much higher. The damage to the US and global economy from high oil prices is a topic of growing concern. Oil and gasoline prices are clearly at a level where in the past they have led to recessions. Unlike in 2008 where there was a relatively quick surge in prices to $140 a barrel followed by an equally rapid retreat, this time we are seeing numerous factors come together to slowly pressure prices higher. Other than a major drop in demand, forces that would lead to lower prices are not apparent.
2. Conflict in the Middle East
By recent standards, it was a relatively quiet week in the Middle East. Other than the ongoing fighting in Libya and continuing demonstrations in Yemen and Syria, there was little new that seemed to threaten oil exports from the region. Concerns about the stability of Saudi Arabia are on hold as the situation in Bahrain was relatively quiet.
Over the longer term, the situation is still serious. In Syria, President Assad is dissembling over demands to reform oppressive measures and his security forces continue to fire on and kill unarmed demonstrators. The key to Middle Eastern oil exports remains Saudi Arabia with its 9 million b/d of production. So far the Saudis have remained firm in their opposition to reform, choosing instead to stifle dissent with a combination of massive grants of money to the least well-off and stepped up security. Whether this formula continues to work as protests grow across the region remains to be seen.
Problems resulting from the earthquake and tsunami-damaged nuclear reactors continue to multiply. Although the reactors themselves are stable, highly radioactive water from the cooling operations continues to leak into the sea. Efforts to contain the leaks have been unsuccessful and the government is saying it may be many months before the situation is under control. With the cost of the disaster now estimated at $300 billion and Japanese industrial production now at a two year low due to facility damage and power outages, it is difficult to predict just where Japanese demand for oil will go.
Assuming that the leakage of radioactive material does not get much worse and that evacuations and "stay-indoors" do not expand much beyond the 200,000 people currently affected, Japan could be on the road to recovery in a few weeks. The electricity shortage, however, is likely to drag on for many months or possibly years and coping with it has become a top priority for the Japanese government. Beside the six units at the Fukushima nuclear facility, three other nuclear plants, six coal-fired plants and 11 oil-fired plants were initially shut down. Roughly 11 percent of Japan’s total generating capacity of 20 percent in the Tokyo region is shut down. As Japan is one of the world’s most energy-efficient countries, the room for conservation is small. Besides turning out lights, and rearranging retail and working hours, major reductions in the use of air conditioning next summer seem in store in order to keep industrial facilities working. All of this will require increased consumption of fossil fuels.
The wider implications of Japan’s nuclear reactor disaster have yet to be fully appreciated. There are currently some 440 nuclear power plants operating in 30 countries and an additional 65 are under construction. Many countries now have frozen construction of new nuclear facilities while their safety is being reevaluated. Some countries are planning to close existing nuclear facilities and questions are being raised about many others built in seismically active regions. While many countries are likely to continue with their nuclear power programs as the most cost effective way to keep the lights burning, many others seem destined to slow their nuclear programs and even close vulnerable facilities. This is will almost certainly increase the demand for coal, oil, and natural gas for use in generating power over the coming decades.
4. Obama’s Energy Plan
Since the failure of the US energy bill last year, the US has been without any coherent national policy to deal with the increasing costs of imported energy and the highly controversial issue of controlling carbon emissions. Last week President Obama announced a new set of goals for reducing imports of foreign oil by one-third in the next 15 years through a combination of increased domestic production, conservation, and increased use of alternative fuel. The President promised to speed up the issuance of drilling permits and will adopt incentives to encourage federal lease holders to speed up efforts to produce oil from leases they already hold.
Where all this goes is an open question that will be fought out in Washington over the coming months and years. The new majority in the House of Representatives believes that increased domestic drilling coupled with more nuclear reactors will be all the country needs to reduce high energy costs. They also believe that efforts to control emissions at this time are premature and will only hamper badly needed economic growth. Much of the US Senate majority holds diametrically opposed views. This issue will likely take years, much higher oil prices, several elections, and further deterioration of the climate to work out.
Quote of the week
"If things go as planned we will be reaching around 2.5 million barrels a day from southern oil field alone by the end of this year."
-- Dhiaa Jaafar, director-general of Iraq’s South Oil Co.
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)