1. Oil and the Global Economy
Oil prices hovered just below $100 a barrel last week as a weaker euro, falling US demand for gasoline, and weaker prospects for US economic growth, balanced off long term concerns about the adequacy of global oil supplies. NY crude has fallen from $115 a barrel in early May, closing out the week at $99.49 a barrel while in London Brent closed at $112.39.
Much of the pressure on oil prices last week came from the falling euro as the debt crisis which is now affecting Greece and several others European countries continues to fester. The arrest in NY of the IMF’s CEO only added to the uncertainties. Until the overextended countries in the EU agree to put their fiscal house in order, this situation will continue and the euro is unlikely to rebound against the dollar.
Analysts were expecting that the US stocks report would show crude and gasoline supplies were continuing to rise, so it came as a surprise when Wednesday’s report showed a slight drop in US inventories on increased refinery operating rates. Flooding along the Mississippi is also causing some disruptions to oil supplies, but the threat to the 10 refineries along the lower Mississippi appears to be abating as a large share of the flood water is being diverted down the Atchafalaya.
US retail gasoline prices continue to fall slowly as gasoline futures in NY hovered below $2.95 a gallon, down 45 cents from the high of $3.40 reached three weeks ago. Despite the 45 cent a gallon drop in wholesale prices, retail prices are down only 12 cents a gallon, leading to charges of price gouging by the oil industry.
At week’s end, the API issued a report pointing out that the demand for distillates in April was up by 5.2 percent over last year. However, the EIA reported on Wednesday that total demand for oil products over the last four weeks was 18.7 million b/d, down 2.9 percent from a similar period last year.
After Baker-Hughes reported that the number of rigs drilling for natural gas fell for the second time last week to the lowest level in 16 months, natural gas prices rose 3.3 percent to close at $4.32 per million BTUs.
2. Energy shortages spreading
Pakistan and China continue to top the list of countries with the most serious power shortages. Last week brought in reports of energy shortages developing or worsening in Egypt, Guyana, the Dominican Republic, India, Japan, El Salvador, Bangladesh, Libya, Mozambique, Nepal, Venezuela, Argentina, Zimbabwe, Kenya, and Tanzania. Most of the reported shortages are of electric power caused by inadequate water levels at hydro dams or insufficient coal, but some of these shortages stem from unaffordable oil prices or the inability to import sufficient quantities of liquid fuels.
In most countries, electricity shortages quickly translate into increased demand for gasoline and diesel as organizations strive to keep important activities such as computers, elevators, hospitals, refrigeration and even factory production functioning with back-up generators. Pakistan probably is suffering the worst from electricity shortages, the country simply does not have enough foreign exchange to import large quantities of expensive fuels. China however is a different situation. Beijing is committed to maintaining its economic growth which it can’t do without increasing supplies of electricity. The Chinese only report their oil imports and electricity consumption monthly so the complete picture of their energy situation will not be known for a while, but if past shortages are any indication we can expect imports to increase, perhaps significantly, in coming months. Beijing is being unusually open concerning the seriousness of its growing electricity shortages which are said to be the worst since 2004. Rationing of power has started and reports of production shortfalls are starting to appear. In the past year the price of coal has increased by 20 percent while electricity rates have increased by only 2 percent leading to substantial losses for many Chinese electricity producers.
Summer is nearing, and temperatures across parts of South Asia are already running above 40 degrees C. so the use of air conditioning is putting further strains on power grids. Wide spread blackouts and lost industrial production can be expected this summer if current trends continue. The liquid fuel shortages being reported in a number of the world’s poorer countries suggests that demand may indeed be outstripping available supplies with the poorer countries losing out in bidding for available supplies.
3. The IEA speaks out
In an unusual development, last week the IEA’s governing board called on oil producers to increase their output to "help avoid the negative global economic consequences which a further sharp market tightening could cause." The Agency’s position is in stark contrast to that of OPEC, and in particular the Saudis, who maintain that the oil markets are adequately supplied and that there is no need for a production increase at this time. The statement released by the IEA cited a “clear, urgent need for additional supplies."
This time around the IEA seems to be taking the lead in warning that ever since the Saudis pulled back from replacing the lost Libyan exports last month, global demand for oil has been exceeding supply with the difference coming out of stocks. If, as seems likely, OPEC does not raise production at its meeting next month, the IEA is threatening to drive down prices by releasing oil from its members strategic stockpiles as it did during the 1991 Kuwaiti war and again during hurricane Katrina in 2005. Both of these events had deprived the markets of large amounts of oil.
As the IEA can only release reserves in response to supply stoppages, the Agency would likely use the loss of Libyan and Yemeni exports as the excuse for dipping into the stockpiles. The June OPEC meeting is likely to be an interesting one. Iranian President Ahmadinejad appointed himself Iran’s acting Oil Minister over the objections of the Iran’s Guardian Council and plans to chair the OPEC meeting where he may attempt to drive up oil prices by challenging any Saudi effort to increase production officially.
The political struggles currently underway in the nation’s capital are likely to play an increasing role in the future of the nation’s energy supply. With the Presidential and Congressional elections less than 18 months away, both political parties are posturing and exchanging accusations about who is to blame for high gasoline prices and who has the best solution.
Last week the Senate rejected the package of House-passed bills designed to speed up drilling for oil by requiring the administration to issue permits without delay and banning litigation by environmentalists seeking to block drilling. Despite the furor over deficit reduction and record oil company profits, Republicans rejected Democratic efforts to reduce tax breaks for the major oil companies calling them a tax increase that would not lower gas prices and would only cost jobs.
Polling indicates that thus far most of the public blames the oil companies, exporting nations, or the business cycle for the high gasoline prices and only 9-12 percent currently holds the Obama administration responsible. The President’s recent announcement that he will support more offshore drilling seems to some as flip flopping, but is also seen as an effort to appear flexible and thread a course between those who want more drilling and those who are concerned by the dangers.
Quote of the week
“We must realize that prosperity and well-being do not depend on consuming ever-greater quantities of resources. Decoupling is not about stopping growth. It's about doing more with less.”
-- Ernst U. von Weizsacker, co-chair, UNEP Resource Panel
Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)