1. Oil and the Global Economy
It was one of the most volatile weeks in recent memory with oil prices fluctuating over a $6 range during three separate trading sessions as the markets digested the flood of economic news. There was little new affecting oil market fundamentals last week and most of the activity stemmed from concerns about the prospects for US and EU economic growth and the future of the dollar and euro.
The week started with the settlement of the US debt cap crisis and ended with S&P’s downgrade of US government debt. In between a major sell-off in the equity markets took oil prices down by some $7 a barrel in NY and $10 a barrel in London. During the week Brent crude traded over a range of $17 a barrel, closing at $109 a barrel or 6.3 percent loss for the week. New York crude touched an eight month low of $82.87, wiping out all the price gains seen during 2011, before rebounding to close at $86.88.
From here the oil markets are entering uncharted territory. The downgrade of the US debt could send the dollar lower and oil higher; however this could easily be overcome by lower demand as new austerity measures are implemented in the US and EU. Some analysts are saying that the US and EU have reached the limits of what can be done by fiscal stimulation and quantitative easing and that from here on there will be little but austerity.
A Dow-Jones survey reports that OPEC production in July rose by 607,000 b/d to 30.3 million b/d, the highest level since November of 2008 when production reached 31.1 million b/d. This is an increase of 1.7 million b/d since March, which in theory compensates for the loss of 1.6 million b/d from Libya. According to the survey, Saudi production rose by 350,000 b/d in July to 9.81 million. A considerable portion of Saudi Arabia’s production increase, however, is being used domestically to generate electricity and desalinate water during the summer. Some analysts are saying that despite the increased production, there is still not enough oil being exported to meet global demand and that as the 3rd quarter global stockpile numbers become available, they will show a drawdown for the period. Tehran, which is having a variety of production problems this summer, is unhappy with the rapid drop in revenues and is already talking about a special OPEC meeting to lower quotas.
High oil prices have boosted spending by oil companies for exploration and production. A recent survey shows that E&P spending will increase by 12 percent to $406 billion this year. While the 2010 increase of 19 percent was larger, the industry was coming out of a drop in spending during the period of low oil prices in 2008-2009.
An increase in US gasoline stockpiles led to a drop in gasoline futures even more spectacular than the drop in crude prices. NY futures which had touched $3.15 a gallon fell so rapidly during the week that at one point they touched $2.67 a gallon, a decline of 48 cents before settling at $2.82. So far retail gasoline prices have only fallen about 3 cents since last week, but analysts are expecting another 30 cent a gallon drop before Labor Day unless there is a turnaround in the oil markets.
If there is a major country in the world that seems to be on course to succumb as a viable state in the near future due to inadequate energy supply, it is Pakistan. This is a serious matter as the country has a population of 190 million people, of which nearly 60 million live in cities. Moreover the country is square in the middle of numerous ethnic, religious, cultural, and political disputes with global implications. It also has a stockpile of atomic weapons.
Shortages of electricity and natural gas are now widespread. Pakistan produces about 60,000 b/d of oil and consumes some 360,000. A large portion of the 300,000 b/d of imported oil comes from the Saudis at subsidized prices. Demonstrations, sometime violent, against power outages are almost a daily occurrence. Recently natural gas shortages have been added to the country’s woes. The current natural gas shortfall is about 500 million cu. ft. per day, but this is projected to increase to about 2 billion per day or about 50 percent of total demand by winter. The government recently began limiting the amount of gas available to filling stations in a country where there are 2 million cars powered by compressed natural gas.
In addition to the hardships imposed by load electricity outages which now seem to be averaging more than 12 hours a day is the damage being done to industrial production, mostly of textiles, with tens of thousands being thrown out of work. There is no immediate solution in sight for the troubles.
Last week a Pakistani delegation showed up in Beijing to attend the first meeting of the Pak-China Joint Energy working group. The group was to discuss at least 18 projects ranging from a pipeline to bring in Iranian natural gas to new dams, power stations, and distribution systems. Even if Beijing decides to make major investments in Pakistan’s energy industry, realization of these projects is still many years away and the shortages are growing worse.
Beijing is currently preoccupied with Typhoon Muifa which is headed for Shandong province, southeast of Beijing and has already forced the evacuation of 600,000 people from the coastline. Meanwhile a drought in Guanqxi province in southern China is causing the most severe power shortage in 20 years. The electricity shortfall, which is running about 30 percent of demand, has already forced the closure of more than 1,000 factories and businesses in the province.
Elsewhere in China things seem to be running reasonably well as heavy rains have restored hydro power production to normal levels and the summer power shortfalls that were feared a few months back do not seem to have materialized. China’s manufacturing slowed slightly last month according to the purchasing managers’ index which provides a snapshot of economic conditions. Analysis of the index suggests that manufacturing in China is stabilizing after four months of decline.
Incidents of dissidence are appearing across the country, but the government continues to move quickly with massive force to prevent any “popular awakening” from taking hold. There is even talk of closing down China’s version of twitter to prevent the sharing of dissident thoughts.
Meanwhile China’s economy seems to be growing apace despite too much inflation. The government reported that crude refining will rise 8.5 percent year over year in 2011 to an average 9.24 million b/d. This is higher than the 6-7 percent growth predicted by analysts and is one of the reasons many are looking for a global supply shortfall in the remaining months of this year. The government also noted that natural gas demand could rise by 16 percent this year and when coupled with the 10 percent increase in coal consumption suggests that the Chinese economy continues to grow rapidly.
In a rather bizarre development, the Russians are threatening to pay back the $10 billion 20-year loan they received from the Chinese to pay for the construction of the new crude pipeline that supplies oil to China. The Russians say the Chinese are not paying in full for the 300,000 b/d they are supposed to receive for the next 20 years. The matter may go to court.
Quote of the week
"If the inevitability of peak oil is ignored and the event overtakes us unprepared, the unintended consequences could easily spiral into a sequence of ever-worsening conditions that would create not just twilight in Saudi Arabia, but twilight also for the lifestyles we all now enjoy.”
-- Matthew Simmons (April 7, 1943 – August 8, 2010)
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)