1. Oil and the Global Economy
Oil prices rebounded last week from the sell-off triggered the previous week by the sale of 60 million barrels from IEA stocks. By mid-week, prices in NY were back to where they were before the sell-off and London prices, which sustained a circa $10 drop during the sell-off, were back to nearly the levels of the week before last. Trading in the early part of last week was dominated by expectations that the Greek parliament would pass the austerity measures thereby delaying further EU economic problems for a while.
At mid-week, the news that US crude and gasoline stocks took an unexpectedly large drop the week before last gave oil prices a boost. The end of the week was dominated by worse-than-expected manufacturing data from China and the EU, leaving NY oil at $94.94 and London oil to close out the week at $111.77. A better than expected report on manufacturing in the US tempered the report from China.
The weekly gain, however, was the biggest in almost three months suggesting that there may be some truth in IEA fears that widespread power shortages and hot weather will lead to tighter oil markets in the 2nd half of the year. For the next few months, the course of oil prices could be determined by the balance between slowing economic growth in China and the increased demand for oil occasioned by droughts, unusually hot weather, and power shortages in many countries. China’s manufacturing growth in May was the slowest in 28 months and the Beijing Times reports that the Bank of China is likely to raise interest rate one or two times this quarter.
The IEA’s Oil Market Report for June says that OPEC will have to produce 1.5 million b/d more during the 3rd quarter to keep up with demand than the 29.2 million b/d the Agency believes the cartel produced in May.
US gasoline futures which were trading below $2.70 a gallon on Monday rose sharply on the news that US gasoline stocks had declined by 1.4 million barrels the previous week and closed out on Friday at $2.97 a gallon. This move retraced nearly half of the decline from early May when gasoline futures were trading at $3.30 a gallon.
2. Middle East – North Africa
Although there is as yet no clear end to the Libyan insurrection and the shut-in 1.3 million b/d of light sweet crude exports, insurgent forces seem to be making progress in moving towards Tripoli. Stepped up NATO air strikes which now include the use of attack helicopters have eliminated much of the large stock of heavy weapons held by the Gadhafi government. France has admitted parachuting weapons and ammunition to rebel forces in the mountains south of Tripoli. Economic activity in the capital has nearly halted.
Despite the shift in momentum, Gadhafi and his supporters who are now facing criminal charges have no place to go and are betting their futures that the NATO governments will tire of the attacks and seek a settlement. Given the rules of engagement for NATO and the difficulty the rebels will have overcoming Gadhafi’s security forces that may be literally fighting for their lives, the struggle may be a long one.
If the situation stabilizes the rebel government may be able to resume some oil shipments before the year is out. Last week rebel chief Jabril told reporters that they were reviewing the oil contracts with foreign companies for signs of what is thought to be widespread corruption.
As the US winds down its forces in Iraq, there are signs that sectarian troubles and the accompanying violence are increasing, suggesting that major increases in Iraqi oil exports may not be as easily achieved as many had hoped. More Americans were killed in June than in the last two years, and troubles are increasing in Sunni areas of the country as forces from the Shiite-led government tighten their grip. In recent weeks, attacks on oil facilities have seen an upswing.
Last week Hama, Syria saw the largest demonstrations since the uprising against the al-Assad government began three months ago. Hama is the city where Assad’s father killed some 30,000 people while putting down an uprising in 1982. This development has increased concerns in the West that the Syrian situation could get out of hand. Ankara has already warned al-Assad against repeating another Hama. So far there is nothing that would seem to be an immediate threat to oil exports from the region, but Syria is a pivotal state. Continuing instability there could have major consequences for the region.
Gasoline shortages developed across the UAE last week as Emirates National Oil Company, a Dubai-based refiner, shut down gas stations in Sharjah after running short of supplies. Much of the problem is due to government policies that require gasoline to be retailed at well below market prices across the region. Demand for oil products by Middle Eastern oil exporters has been increasing by 5 percent a year, outrunning local refining capacity and forcing governments to import large amounts of oil products at world prices. While national oil companies may be able to extract oil at a marginal cost of a few dollars a barrel, imported gasoline and diesel is going to run closer to $100. Building more refining capacity will be very expensive – last week Kuwait approved a new refinery that will cost $14 billion.
3. Energy Shortages
The last few weeks have seen what appears to be a substantial increase in electricity and liquid fuels shortages across many parts of the world. The common theme behind these shortages is higher prices for liquid fuels and hot, dry weather which is reducing hydro generated power and increasing the demand for air conditioning. Brent oil prices that have now been above $100 a barrel for the last six months are placing a strain on many poorer nations that can no longer afford to import enough oil to run power stations. Theft of electrical power is endemic in much of the underdeveloped world leaving many power companies without the revenue to pay for increasingly expensive fuel.
In many countries, a paradox is developing in which widespread, lengthy blackouts are in some cases saving fuel for power stations, but at the same time increasing the demand for diesel fuel to keep essential utilities, factories and computerized offices running.
Last week several new or worsening situations were reported. In Mongolia, which until recently had only a diesel crisis due to the ban on exports by its only neighbors, Russia and China, is now facing a gasoline crisis. Power cuts in Tanzania, where 70 percent of the power comes from hydro, are up to 12 hours a day for an indefinite period. Japan has now issued an official order that large power users in the service areas of the Tokyo and Tohoku power companies must cut their usage by 15 percent. Japanese car manufactures are stopping production on Thursday and Friday. Nissan says it will shift production to the weekend when more power is available.
Jordan’s electric company which was dependent on cheap natural gas from Egypt ran into troubles when the pipeline was blown up for the third time and the company was forced to turn to expensive imported oil. Botswana and Argentina in the southern hemisphere are facing shortages of electricity and natural gas respectively as temperatures fall. Nigeria is dealing with growing kerosene shortages and longer blackouts. In Nigeria the electric company is increasing prices to cope with revenue shortfalls from lower production.
Energy shortages in Pakistan continue without end. There are near-daily protests against the blackouts, and a CNG shortage has cut bus service in many regions. Gasoline is in short supply. Last week, Tehran, in an effort to supplant US influence in Pakistan, offered to sell the country electricity. The offer came at the same time Iran’s electric company reported that it was about to close 15 thermal power plants because of a fuel shortage.
While some of these shortages will be short-lived, others are systemic stemming from the rising energy consumption by a growing world running into the limits to growth.
4. The NY Times on shale gas
For several years now, many in the peak oil community have been voicing concerns that shale gas will not turn out to be the energy bonanza that proponents claim. Last week the NY Times published a story raising many of the same concerns. The Times based its story on a collection of private e-mails written by industry executives, geologists and market analysts which express skepticism about the bullish statements being issued by industry spokesmen.
The problems of the shale gas industry are well known to anyone following the situation closely. Only in very limited areas of what appear to be large shale gas fields can profitable wells be drilled. Currently producing shale gas wells are running out so quickly that many will never recoup the high horizontal drilling and fracking costs. Contamination from fracking and diminishing water resources – it can require more than a million gallons of water per well – pose environmental issues.
Last week’s Times story is news in that what is arguably the country’s leading newspaper quotes many knowledgeable insiders as saying the whole shale phenomenon may turn out to be a giant Ponzi scheme that will ultimately provide far less affordable energy than is commonly believed. While industry believers are also quoted, the thrust of the story leaves the reader with the impression that the shale gas “boom” does not have much of a future.
Quote of the week
“This kind of data is making it harder and harder to deny that the shale gas revolution is being oversold."
-- Art Berman, ASPO-USA board member
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)