1. Oil and the Global Economy
Last week’s oil trading was again dominated by Washington’s debt ceiling debate, with NY futures falling by 4.2 percent to $95.70 a barrel. Individuals, corporations, and governments around the world pondered the uncertainties of a possible US government debt default and, at a minimum, major cuts in US government spending. The decline was aided by an unexpected increase of 2.3 million barrels in US crude stocks and recalculation of US economic growth, showing that the country had been growing at a much slower rate in recent years than previously announced.
The week’s news left many observers concerned about the future of US demand for oil which, of late, has been running about 3.4 percent lower than last year. With incessant talk out of Washington of multi-trillion dollar budget cuts, it is difficult to be optimistic about the immediate future. Many are talking of US oil futures prices falling into the $80’s. Various technical indicators are suggesting further weakness. A contrary opinion, however, is indicated by the increase in open interest in December oil contracts which are selling for $120 a barrel, suggesting that an increasing number of traders see the possibility of the spike in prices despite the likely weakness in US and EU demand.
London oil prices, which are more in tune with global supply and demand than developments in Washington, fell by 1.6 percent last week to settle at $116.74 a barrel and gained 3.8 percent in July.
OPEC production is thought to have increased by 245,000 b/d in July, but there is much uncertainty about how much of this increase in available for export. The energy situation in China seems to be improving as heavy rains are increasing hydro-power production and the nation seems to be on track for another 10 percent increase in coal output this year. Despite much belt-tightening, the country still seems to be headed for a GDP increase in excess of 9 percent with oil imports in excess of 5 percent this year.
The future of Ottawa’s oil industry is coming under increasing scrutiny on several fronts. In the last decade Canada’s oil production has grown from 2.7 million b/d to 3.4 million and many are looking to increase this to 5 million b/d during the coming decade. Alberta is thought to have the second largest oil reserves in the world after Saudi Arabia. With investment in the Alberta oil sands steadily increasing and high oil prices now supporting the costly-to-extract heavy oil, the issues have become the environmental damage and an export route from Alberta.
Currently the only way to export oil in large quantities from Alberta is through pipelines to the US, one of which terminates at the Cushing, Okla. oil terminal and is contributing to the glut there which is pushing down US oil prices. When the Cushing terminal fills up, the system backs up into Alberta where it forces a reduction in oil sands production.
The major issue at the moment is the permitting of the $7 billion, 700,000 b/d Keystone pipeline that would bring increased quantities of Alberta oil to refineries along the US Gulf Coast where it could be processed or exported to markets around the world. The Keystone pipeline is highly controversial, with environmentalists in the US and Canada saying the increased release of carbon from stepping up oil sands extraction could send the global climate over the tipping point. Republicans in Congress disagree and passed a bill last week requiring the administration to decide on the permit before 1 November.
The US State Department announced that it will release the final environmental impact study on the Keystone pipeline in August and will make a decision on issuing the permit before the end of the year.
Canadian politicians do not like the notion that the future of their oil production is held captive by American environmentalists and markets so are already talking about building a 525,000 b/d “Northern Gateway” pipeline from Edmonton to British Columbia. Such a pipeline would open the Asian markets to Canadian oil and reduce reliance on US markets. The Northern Gateway line would cost some $5.5 billion but also faces so many environmental obstacles that many doubt it will ever be built.
With more than two-thirds of Japanese supporting the Prime Minister’s call to do away with nuclear power, the future of Japans energy resources is at a crossroads. Prior to the 1973 price run-up, Japan generated 73 percent of its electricity by burning imported oil. In the intervening years, this percentage has shrunk to 12 percent and nuclear power grew to 30 percent of production. With 54 operational reactors and 14 new ones planned, Japan was on course to produce 50 percent of its power with nuclear energy by 2030. Now the Fukushima meltdown and radiation leaks have brought an abrupt change in the prospects for Japan’s future.
For an island with almost no fossil fuel resources, renewable energy from wind, waves, tides, and solar would seem a natural solution, but the drive for a nuclear future has left the Japan’s renewables industry with little in the way of policy or financial support. This attitude is changing with the Prime Minister proposing a goal of 20 percent of Japan’s energy consumption coming from renewables by the early 2020’s.
In the meantime, the movement to close Japans remaining nuclear reactors by next spring seems to be picking up steam, while the government is already estimating a 9 percent power deficit by next summer if all 54 nuclear reactors are closed down. Even if their production is replaced by increased use of thermal power plants burning imported coal, oil, and natural gas, there will still be a substantial power deficit for many years.
The most interesting development in Japan in recent weeks has been the story of how Tokyo is coping in the middle of a heat wave with less power available due to the closure of 19 nuclear reactors since the tsunami struck on March 10th. By embracing conservation practices, the economic disruptions that would be expected from such a large drop in energy production have not taken place. To quote the Wall Street Journal, “saving electricity has become a national religion” in Japan. With air conditioning set above 82o, business men in short sleeves, lighting reduced to a minimum, and car makers working on weekends to save power for the weekdays, electricity consumption is down 23 percent from last year, rolling blackouts have stopped, the economy is returning to normal, and economic damage appears small.
Old and inefficient thermal plants have been brought online increasing emissions and the bill for imported fossil fuels will increase, but the bottom line is that due to conservation, the available supply easily outweighs demand. A debate in raging over the long term, and so far proponents of nuclear power seem to be on the defensive. Some argue that in the near term, the country should step up its imports of LNG and plans to build new LNG facilities in Japan and abroad are underway. Over the longer term the emphasis is to increasing renewables.
The major lesson for now, however, seems to be what can be accomplished through widespread adoption of conservation practices.
4. Sabotaging pipelines
In recent years blowing up oil and natural gas pipelines has become a favorite tactic for insurgent groups around the world. Pipelines are difficult to protect and are largely above ground so that a small effort involved in staging an attack can result in much economic damage and political damage to one’s opponents. As unrest rises in the Middle East, damage to pipelines, most of which can be repaired quickly, is on the upswing.
Last week saboteurs bombed a major oil pipeline that carries crude to Syria’s 132,000 b/d refinery at Banyias. The government says that the flow was transferred to another pipeline so that refining was not interrupted. Earlier in the month a natural gas pipeline exploded, but the government claims in was an accident. As violence in Syria increases, more such attacks can be expected on an oil industry which produces 350,000 b/d and exports about 200,000 b/d -- a key source of government revenue.
Iran has resumed pumping natural gas to Turkey after a one-day halt following an explosion likely caused by Kurdish separatists. The blast came among ongoing discussions about pumping large quantities of Iranian gas to the EU via Turkey. Last week Iran, Iraq and Syria signed an agreement to build a 900 mile pipeline from Iranian oil fields across Iraq to Damascus at the cost of $10 billion.
A fifth attack on the pipeline carrying Egyptian gas to Israel took place over the weekend when masked men attacked a terminal with a RPG. The pipeline has been out of service since an attack on July 12th. Senior Israeli officials believe it will be some time before operations are resumed.
As the fighting continues in Libya, an unknown number of pipelines bringing oil from the interior deserts to the coast have been sabotaged, suggesting that restoration of production may be difficult after the fighting ends.
As the Arab Awakening continues, sabotage of pipelines across the region will likely become the tool of choice for dissidents with few other means of hurting entrenched governments. As oil supplies shrink in coming years and with plans for new pipelines underway to deliver large quantities of natural gas from the Middle East to Europe and South Asia, the vulnerability of these lines will become increasing important to global energy supplies.
Quote of the week
"This agreement on fuel standards represents the single most important step we've ever taken to reduce our dependence on foreign oil.”
-- President Barack Obama
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)