Truth in Energy: ASPO-USA 2011 Peak Oil & Energy Conference
Washington, DC, November 3-5 2011;
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1. Oil and the Global Economy
Oil prices climbed to a six-week high after the EU reached yet another agreement on the terms of a Greek bailout. Trading below $95 a barrel on Monday, oil climbed steadily to top $100 on Thursday and Friday, closing out the week at $99.87. In London, Brent crude followed a similar pattern closing on Friday at $118.67. Both crudes are still trading about $15 a barrel below the recent highs touched in early May. NY gasoline futures traded in a narrow range between $3.10 and $3.15 a gallon, closing out the week at $3.13.
Next week the focus will shift from the EU's debt problems to the possibility that the US government could begin defaulting on obligations next week with unknown consequences for the oil markets. US demand for gasoline is running about 400,000 b/d lower than last year as prices again approach $1 a gallon more than they were last summer. US gasoline prices are now 15 cents a gallon higher than they were over the 4th of July weekend.
The government is scheduled to deliver some 10 million barrels of crude from the US strategic reserve to refiners by the end of this week. Another 20 million barrels will be delivered in August. Unless crude imports are slowed, there is likely to be six weeks or so of increasing US commercial petroleum inventories as the stockpile release works through the system. The IEA announced that no new releases of crude from strategic reserve stocks are currently planned.
Oil prices remained balanced between fears that demand in US and Europe will slacken and increasing Asian demand combined with concerns about unrest in Middle Eastern oil states. Concerns over another oil price spike in the next six months continue amid conflicting projections from the EIA, IEA and OPEC. The OECD's IEA now foresees average global consumption in 2011 at 89.5 million b/d which is 1.34 million above Washington's EIA projections and 1.32 million above OPEC's projection. For 2012, the IEA sees demand increasing to 91 million b/d while OPEC sees demand at a more sedate 89.5 million.
Although global crude stockpiles are about 67 million barrels larger than during the May 2008 price spike, most of this higher inventory is in North America and OECD Pacific. Europe's inventories are 26 million barrels below 2008 levels largely due to the loss of Libyan oil production. Given the global stock situation, Platts Oil Information Service sees a $20 a barrel increase in NY and London oil prices as a possibility before the end of the year.
NATO aircraft struck targets in central Tripoli over the weekend as insurgent forces continue to advance slowly towards Tripoli from the east and the south. Recognition of the Benghazi Transitional Council as the legitimate government of Libya by the US and most other countries was a significant step toward ending the uprising.
Sources within the alliance say that after 3 months of bombing, NATO is running out of military targets that can be struck from the air. The NATO air strikes, of course, did turn the momentum of the insurgency around and Gadhafi's forces have long since abandoned heavy military vehicles as untenable in an era of smart bombs. This leaves the two sides more evenly matched with the government having the advantage in weapons and the insurgents the advantage in morale and will to fight.
The Libyan economy has ground to a halt, but after 40 years in power there are thousands or perhaps hundreds of thousands of Libyans with a vested interest in the regime who fear retribution should the insurgent forces take over. This suggests that we may be many months from a settlement should Gadhafi and his closest supporters be unable to negotiate their way out of their current predicament.
The insurgents appear to have driven government forces out of the key eastern oil town of Brega, although there are reports that many oil facilities have been wired for demolition with explosives. Whenever the end comes, it is unlikely that oil exports can be resumed quickly at anything approaching last winter's 1.3 million b/d. The political and security situation in the country is likely to be unstable for an extended period after the fighting ends. Foreign oil contractors have left the country and their camps have been looted by both sides. In some instances the oil production infrastructure has been destroyed.
The waxy nature of Libya's crudes is another problem. If oil stops flowing to the north from fields in the southern desert, the pipeline turns into a "giant candle". The waxy crudes were already a transportation problem before the uprising but after months of disuse, it will take many months to bring the pipeline back into operation. In a recent assessment of the situation, the IEA says that full Libyan production cannot be resumed until 2013, at best.
Beijing's manufacturing sector may have declined for the first time in a year as new orders drop. The decline in the Purchasing Managers Index suggests that the long series of regulatory and policy changes over the last six months are having an effect so the economy which has been growing at 9.6 percent in the first half of the year may be slowing. Chinese officials remain optimistic that industrial growth will resume in the second half but admit there are many uncertainties. China¡'s tax revenue did increase by 29.6 percent in the first half year on year, but some of this increase is due to inflation which hit 6.4 percent in June.
The government announced that apparent fuel consumption rose by 7.2 percent year on year in the first half which is about in line with the pace of GDP growth. Beijing also announced that coal production rose by 12.7 percent in the first half to 1.77 billion tons. If this pace continues the country is on course to produce 3.54 billion tons this year. The rate that China's coal production continues to grow is showing no signs of slacking despite hints last year that this breakneck rate of increases that has been going on for 20 years cannot continue much longer.
China's coal imports dropped 12 percent in the first half of the year, but so did coal exports resulting in a net import of 62 million tons, down 11 percent from last year. The torrential rains which have hit China during the last two months have increased hydro-power production thereby easing the power shortages that were widespread in April and May.
Rapidly increasing coal and electricity production suggest that China's demand for oil imports may not surge in the second half as much as some have feared. Still the Chinese economy continues to forge ahead with GDP growth rates in excess of 9 percent and fuel consumption increasing by 7 percent or more. Given that China is now the world's biggest energy consumer these are not inconsequential numbers.
4. Iran – India
The question of just how India can pay Iran for its imported oil came to the fore last week after Tehran threatened to suspend oil shipments to India starting August 1st for failure to pay a bill now said to be $5 billion. The problem started 7 months ago after Washington and some EU members cracked down on the funding mechanism Indian refiners were using to pay for their oil. Iran is India's second biggest supplier of oil exporting some 400,000 b/d or 12 percent of India's consumption of 3.5 million b/d to Indian refiners.
There is some confusion over the change of policy after a senior Iranian official said that the exports would continue so that Tehran would not lose the Indian business to the Saudis. A US official said efforts are underway to find a solution to the payments problem.
In the meantime, the Indians are scrambling to replace the lost Iranian oil imports should a halt occur. Indian officials remain optimistic than additional oil can be supplied, most likely by the Saudis and Iraqis. Tehran has announced that it will decide in the next few days whether to actually implement the cutoff to India.
Quote of the week
"The U.S. military is the world¡'s single-largest industrial consumer of oil¡K Every $10 increase in the price per barrel of oil costs the Pentagon $1.3 billion."
-- Sen. Mark Udall (D-CO)
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)