1. Oil and the Global Economy
In a short US trading week, the most notable developments were the increasing spread between NY and London futures contracts and the warnings of higher prices ahead by several financial institutions. While NY crude gained $1.26 a barrel last week, Brent was up by $6.76, increasing the spread between NY and London to $23.33 a barrel. In NY, gasoline futures climbed by over 10 cents a gallon on Thursday and closed out the week at $3.10 a gallon, after the week’s stocks report showed a drop in US inventories. MasterCard reports that US gasoline consumption was up 2.4 percent last week, probably related to the holiday, but the EIA’s four week moving average shows demand lower than at this time last year.
Goldman-Sachs, Morgan Stanley, and Barron’s issued reports last week forecasting that oil prices will be much higher next year because of a stagnant supply situation. Goldman is saying the Saudis do not have nearly as much reserve capacity as Riyadh and the IEA claim and forecast oil at $140 a barrel next year. Barron’s is talking about oil reaching $150 next spring with spikes to $160 and $170 a barrel. Gasoline will be in the vicinity of $4.50 a gallon.
The balance between worsening economic prospects in the US, EU, and China, and the possibility of tighter oil markets in the months ahead has introduced much volatility into the oil markets. As each new report on economic developments is released, the oil markets are jolted, sometimes violently one way or another. Last week started with concerns about China’s economy and Portuguese debt. At mid-week, several major financial institutions issued reports predicting that oil prices will rise substantially in the next 18 months based on increasing demand from Asia outrunning supplies.
These forecasts and a preliminary report of a better employment picture in the US sent prices up on Thursday. On Friday the markets reversed when the official jobs report showed US employment growing only slightly – some analysts say US employment is actually falling – raising the prospects of less demand for oil products in the months ahead. This report sent US oil down by 2 percent in NY on Friday giving up most of the gains from earlier in the week, settling at $96.20 a barrel.
Prices in London, which are not as sensitive to the US employment picture fell 26 cents on Friday. A Platts survey showed OPEC production climbing by 530,000 b/d in June, still well below the loss in exports from the uprisings in Libya and Yemen.
The toll that high gasoline prices are taking on the US economy is beginning to dawn on many commentators. While US retail gasoline prices are down about 40 cents since early May, they are still nearly 90 cents a gallon higher than at this time last year. When the increased cost of gasoline and diesel are added, US consumers are now spending an additional $500 million a day on fuel – money that is not going for other retail spending. This week’s jobs report came as a major shock to economists that had been forecasting an economic recovery based on lower gasoline costs and reviving Japanese industrial production.
The announcement that President Chavez had been treated for cancer during his stay in Cuba has raised all sorts of questions about the future of Venezuela’s petroleum industry which he has dominated for over a decade.
Although no details concerning the illness were released, knowledgeable observers say it is likely Chavez has colon cancer with widely varying prospects depending on how far the malignancy has advanced. If the cancer has been caught early, the prospects that Chavez will be around for the foreseeable future are excellent, but if it has spread very far, the prospects that he will be President much longer are greatly reduced.
Chavez’s policies of government control, expropriation, hostility towards private oil companies and siphoning off oil profits to pay for social programs have been the hallmark of Venezuela’s oil industry for the last 12 years. During this time oil production has fallen as foreign oil companies have been kicked out or become reluctant to invest because of government policies. The country’s Orinoco heavy oil deposits remain one of the world’s largest largely untapped resources of liquid fuels.
At this point, it is useless to speculate about all the possible outcomes of Chavez’s illness which range from his remaining in office for years, if not decades, to imminent political upheavals if he should be unable to govern. The US is currently importing about 900,000 b/d of Venezuelan crude, another 600,000 is going to China to repay debts and to various Latin American countries that Chavez has sought to influence.
Any successors to Chavez would likely do their utmost to keep the oil industry which is the country’s major source of income functioning. However, successions to one-man governments rarely go smoothly and the situation has the potential to get out of control restricting oil shipments.
Interpreting economic reports out of China in relation to future demand for oil is becoming increasingly murky. While headlines trumpet the “drop” in China’s import growth, the fine print says it is still growing at an annual rate of increase of nearly 20 percent. This is only weaker by Chinese standards. Oil imports for June were down by 12 percent over June 2010; however analysts attribute this drop to unusually extensive refinery maintenance outages which dropped demand for the month.
Beijing, however, still has a major inflation problem with retail prices for June up by 6.4 percent over last year. To cope with steadily increasing prices, China has raised interest rates five times along with nine increases in bank reserve requirements since October. Some observers believe that Beijing has gone about as far as it can go with these fiscal tools.
A combination of droughts and floods are having a major impact on the country’s food production. Last week Chinese buyers ordered an unexpectedly large 540,000 tons of US corn sending prices higher after a three-week slump. The USDA will update its expectations for Chinese purchase of US corn this week; some analysts are predicting that China will import some 5- 8 million tons this year. Last year China imported corn for the first time in 14 years, procuring 1.5 million tons from abroad.
Cumulative volume of China’s imports for the first half of 2009 is up 8.1 percent over last year, which is consistent with forecasts of an 8-9 percent increase in GDP for the year. The major question of whether this round of belt-tightening to control inflation will do more than shave a point or two off annual growth remains open.
The news out of Pakistan has been growing steadily worse for months now -- last week was no exception. The endemic electric power shortage has been joined by a shortage of compressed natural gas (CNG). Sales of CNG were suspended on Thursday, Friday, and Saturday. Pakistan has some 2.7 million natural gas vehicles and 3,200 refueling stations – the highest in the world and nearly half the registered vehicles.
Riots protesting the power shortages, usually resulting in deaths and injuries, are reported almost daily in some Pakistani city. The country’s textile industry which was one of the mainstays of the economy, accounting for 60 percent of export revenue, is in tatters due to the rolling blackouts which sometimes last for 12 hours a day leaving tens of thousands jobless. Senior Pakistani officials
estimated that 25,000 firms have been hit by the energy crisis with many going out of business and some 500,000 people are now unemployed.
The root cause of these problems is the failure of numerous past governments to anticipate the growth in demand while delaying new power plants and hydro dam projects. This has been compounded by drought conditions which have reduced hydro-electric power production and the high costs of imported oil, gas and coal. The government has acknowledged that the power cuts will continue for at least another seven years, but has no long term plan to increase energy availability. Pakistan has contracted to complete a gas pipeline to Iran, but completion is not scheduled until 2014. Such a pipeline would be a tempting target for the numerous dissident groups operating in the country.
Among the many problems that Pakistan faces is the theft of electricity by people connecting themselves to the power lines. In some areas it is estimated that 30 to 40 percent of the power is stolen – leaving the state-owned utilities unable to pay for their fuel. The government is considering increasing the penalties for power theft including high fines and prison terms. The retail tariff for electricity is still about 20 percent less than the cost of production adding to the problem.
With the economy spiraling downhill and energy shortages likely to increase, Pakistan seems sure to have further civil unrest with perhaps devastating consequences.
Quote of the week
"If you are a strong believer in the green economy and electric vehicles, then [lithium] demand is going to exceed supply by 2015-2016."
-- Peter Secker, CEO - Canada Lithium Corp.
(clips from recent Peak Oil News dailies are indicated by date and item #)
Commentary: Americans select dilithium crystals to power next generation
By Christine Patton
Posted separately at Energy Bulletin HERE. -BA (Energy Bulletin co-editor)