1. Oil and the Global Economy
NY oil climbed a couple of dollars a barrel on Monday, then continued to trade around $85 for the rest of the week. The driving factors last week were how fast Libya would resume significant oil exports and whether the US Federal Reserve would resume quantitative easing in the near future. In London, futures which traded as low as $105 barrel on Monday amidst the euphoria surrounding the insurgent takeover to Libya, climbed steadily all week to close at $111.36. As the week wore on, the complications surrounding Tripol¡'s resumption of oil production became apparent, dampening the enthusiasm.
Federal Reserve Chairman's Bernanke's announcement that it would be September before any decision on further economic stimulus would be made sent equity and oil prices down at first. They rebounded after the Chairman said growth will resume and the Fed has the tools to make this happen. For now NY oil is stuck in a trading range around $85 a barrel as the markets try to sort out various conflicting forces.
US commercial crude inventories fell by 2.2 million barrels last week due to more refining and lower imports. Platts believes that the reduction would have been significantly larger were it not for the movement of oil from the US's strategic to commercial reserves. IEA is still saying that global oil consumption is outrunning production.
Gasoline futures climbed nearly 9 cents a gallon on Thursday in reaction to hurricane Irene's threat to east coast refineries, settling on Friday at $2.93 a gallon -- about 15 cents below where it traded during much of July. Hurricane Irene appears to have done little damage to east coast refineries and transportation so that the reduction in demand from reduced driving during the storm may turn out to be the most important effect of the hurricane. MasterCard reports that US gasoline consumption the week before last was down by nearly 5 percent from last year. The combination of a weak economy, increasing unemployment, and high gas prices is taking its toll on gasoline consumption.
After much refinery maintenance in June, Chinese oil consumption seems to be rising again with apparent demand in July up 7 percent over last year. Analysts expect Beijing's oil consumption to keep rising for the rest of the year in accordance with seasonal patterns. As China does not release official oil demand statistics, they must be calculated by outside analysts from other data such as imports and refinery throughput.
Iran's oil industry may be in trouble with the natural decline rate of its crude production falling by 8-11 percent a year. A recent report points out that a combination of the international sanctions that prevent western investment and oil fields some of which are 50 to 60 years old means that the country no longer has the resources to maintain production. With domestic demand rising, Iran may not be OPEC¡¦s number 2 exporter five years from now.
2. Restarting Libyan exports
Last week an inordinate amount of attention was devoted to the question of just how fast the new Libyan government can revive oil exports to something approaching the pre-uprising level of 1.3 million b/d. There seems to be little disagreement that little serious damage was done to Libya's oil fields and other facilities during six months of fighting and that 300-600,000 b/d of production could be started up in a few weeks. To get production much beyond this level in going to require the assistance of the tens of thousands of foreign oil workers that left the country when the fighting began. Therein lies the problem.
The foreigners were all in the country working with Libya's national oil company under a maze of contracts and agreements signed by the Gadhafi government. Some of these agreements were corrupt with oil going to foreigners at bargain prices and profits going to the Gadhafi family and associates. Last March when Gadhafi's security forces were threatening to overrun Benghazi and slaughter his opponents, several countries, most notably Russia, China, and Italy, were less than enthusiastic about giving up the lucrative contracts. Some are already saying that there is no way oil companies from these nations will be allowed back in Libya.
The overriding problems however are the lack of security and any political or legal infrastructure in the country. At the minute, the remnants of Gadhafi's forces and Gadhafi himself are still on the loose. It is uncertain just how much authority the National Transition Council from Benghazi will have when it settles into Tripoli and even if things go well, how long it will take to negotiate new oil agreements.
At the minute there are serious shortages of almost everything in Libya and the facilities left by the departing foreign oil companies have been thoroughly looted. Given the record of other countries that have tried to revive oil production following political upheavals – Russia, Venezuela, Iraq, Iran – some astute observers are saying that while in may be technically possible to revive production in a matter of months, the politics of the situation say it is more likely to take years.
3. The Keystone pipeline
The announcement by the US State Department last week that it can see no show-stopping environmental impacts from the construction of a new 1,700 mile pipeline to bring oil from the Canadian tar sands to the Texas gulf has set off a storm of controversy. While the pipeline itself may be relatively harmless, it has become a proxy in the fight over global warming and the release of greenhouse gas.
The Canadian tar sands contain one of the largest reserves of petroleum-like hydrocarbons in the world, and for many offers one of the best hopes of maintaining adequate oil production for many years. Given the sands' proximity to US markets and the lack in political entanglements endemic to most oil exporters, many see the expansion of pipelines from Alberta to US markets as a no-brainer. They argue that if the pipeline is not approved, the Canadians will just build one to their Pacific coast and sell the oil to the Chinese. There is little doubt that Beijing would be delighted to build the Canadians their own pipeline to Asian markets in return for substantial access to Canadian oil production.
For environmentalists the expansion of production from the Alberta sands is madness as it will result in massive increases in greenhouse gases into the atmosphere. Proponents of the plan say they are working to lower or eliminate the release of CO2 as a byproduct of exploiting the hydrocarbons.
The remaining step in the permitting process is for the State Department to rule on whether the pipeline is in the "national interest." Some believe that the new pipeline would simply give the Canadians the opportunity to sell their oil to other countries through gulf ports, while other believe the pipeline would be a guarantee of adequate oil supplies to the US in future decades.
The Keystone decision is coming to be seen as a definitive test of the Obama administration's commitment to controlling greenhouse gases. Protests have been taking place in front of the White House for the last two weeks. NASA climatologist James Hansen says that if the pipeline is approved, the increase in tar sands production will mean "game over" for the planet.
4. Gas in the Marcellus shale
The publication by federal geologists of a new estimate that the Marcellus shale contains some 84 trillion cubic feet of undiscovered, technically recoverable natural gas has evoked some interesting reactions. The New York Times notes that the new estimate is drastically lower than the 410 trillion cubic feet publisher earlier this year by the Department of Energy and the 262 trillion reported by the National Energy Technology Laboratory. The EIA says that as a result of the new assessment, the Administration will cut its official estimate by 80 percent, raising all sorts of questions as to how it develops its estimates and the role played by industry-tied consultants.
In reporting the development, the Oil & Gas Journal points out that the last assessment by the US Geologic assessment made in 2002 estimated that the Marcellus shale contained only 2 trillion cubic feet of recoverable natural gas. The Journal also points out, optimistically, that the new study also says there is a 5 percent chance that the shale contains as much as 144 trillion cubic feet.
The new estimate of 84 trillion cubic feet is less than four years of US consumption and would take many decades to exploit with unknown, but possibly serious environmental consequences. As with all estimates of undiscovered resources, the new 84 trillion number has a probability of 50 percent of being the minimum amount that can be exploited. The 95 percent probability number is only 43 trillion cubic feet – a real reduction from the official EIA number of 410 trillion. There may not be as much natural gas in our future as some claim.
Quote of the week
"If the country is going to embrace natural gas as the fuel of the future, there needs to be a lot more transparency in how these estimates are calculated and a more skeptical and informed discussion about the economics of shale gas."
-- Bill Powers, editor of the Powers Energy Investor
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)