1. Oil and the Global Economy
Oil prices moved slowly upward last week as a tropical storm threatened gulf oil production. NY crude touched a high just below $90 a barrel on Thursday and London’s Brent briefly topped $115. Prices fell sharply on Friday, however, after a Labor Department report showed no growth in US employment during August. This coupled with reports of slowing industrial production in Europe and Asia sent NY futures down 2.8 percent on Friday to close at $85.42. London crude followed suit falling on Friday to close at $112.33.
The Labor Department’s marquis 9.1 percent unemployment figure remained unchanged. Many observers noted that the broader U6 unemployment number rose a bit to 16.2 percent. Some observers of US employment now say that 22 percent may be a more realistic unemployment number when all categories of workers such graduates and the underemployed are considered.
Tropical Storm Lee which hit Louisiana over the weekend did not cause much wind or storm surge damage, but is slow moving and is causing extensive flooding. This in turn could cause problems for some of the 19 refineries in its path.
US crude stocks increased by 5.3 million barrels the week before last, but this increase is likely due to changes in import schedules caused by hurricane Irene and the sale of crude from the US strategic reserve to commercial users.
US gasoline prices over the Labor Day weekend will average $3.66 a gallon, only 3 cents below the record high of $3.69 which was set in 2008 as prices were falling from a major price spike. Gasoline is now nearly a dollar a gallon higher than at this time last year and is a major reason why US gasoline consumption over the last four weeks is off by 2.1 percent from last year.
For the immediate future analysts are awaiting President Obama’s speech on job creation Thursday night and the Federal Reserve meeting on September 20th which is widely expected to revive quantitative easing. In the meantime oil prices are expected to drift lower, absent more weather disasters or more violence in the Middle East. For now, the gradual tightening of the global supply/demand balance as portrayed by the IEA and several investment banks does not seem to concern the markets.
2. The Exxon Deal
Much fanfare was attached to the agreement that ExxonMobil signed with Moscow last week for the rights to explore for oil in Russia’s Arctic. In return for the concession Exxon agreed to give the Russian government-owned oil company Rosneft partial ownership of assets Exxon owns elsewhere in the world including six fields in the Gulf of Mexico and in the Texas shale.
In announcing the agreement, Russian Prime Minister Putin said the deal could eventually grow to $500 billion although initially it world run to only $3.2 billion. By linking up with Exxon, the Russians gain access to deepwater and fracking technology that will help them expand and diversify their oil industry as their older fields go into decline, threatening their position as the world’s largest oil producer.
Exxon, of course gains immediate access to what could turn out to be large amounts of Arctic oil at considerable risk. Moscow’s policies towards foreign oil companies operating in their country are mercurial at best. Five years ago, Moscow forced Shell out of the Sakhalin project after Shell had spent $20 billion.
Other risks to the agreement could come from Congressional objections to allowing the Russian government into Texas oil and from the difficulties of drilling in Arctic waters. The bottom line to the deal is that the Russian’s gain access to Exxon’s technology and money to exploit oil that they would find difficult to do on their own and Exxon gets access to Arctic oil without the regulations and environmentalist lawsuits they would face in US or Canadian waters.
3. The Marcellus gas estimates
Last week the US Geologic survey announced that it was increasing its estimate of the amount of natural gas in the Marcellus shale to 84 trillion cubic feet from the 2 trillion it had estimated in 2002. This announcement resulted in headlines touting the massive increase in US shale gas resources until someone remembered that a month ago the EIA had estimated that the Marcellus shale contained 410 trillion cubic feet of gas. The EIA promptly announced that it will revise its estimate after it understands the discrepancies between the two estimates. This led to new headlines that the US had slashed its estimate of the Marcellus shale gas potential by 80 percent.
The size of US shale gas resources has become highly politicized in recent years not only because of the environmentalists’ concerns about fracking, but because of the hype that shale gas is so plentiful it can replace oil as the major source of domestically produced energy. Investigations of what are said to be overly optimistic industry estimates as a way of inflating stock prices are going on.
The US currently consumes about 25 trillion cubic feet of natural gas a year mostly for heating and power generation.
4. Dangers in the Middle East
The hunt for Gadhafi continues as his supporters cut off most of the water supply for Tripoli and rebel forces close in on the remaining Gadhafi strongholds. A meeting in Paris last week of 60 national delegations supporting the Libyan National Transition Council confirmed the legitimacy of the new government. Even Moscow has recognized the Council. Interest in rapidly reviving Libyan oil and gas exports have brought all sorts of offers of support for the new government which has yet to prove it can establish effective control of the country. The Italians who are most interested in restarting the Greenstream pipeline that brings gas under the Mediterranean have already signed agreements with the new government. The Transition Council wants to get control of the billions of dollars in Libyan government assets that were frozen by foreign governments when the fighting started.
Resumption of oil exports, however, remains the number one topic. For now the political and security situation is far from stable amid fears fighting between the tribes that are thought to be either pro or anti Gadhafi could arise. It is doubtful if large numbers of foreign oil workers will return to the country until political and security conditions improve.
Perhaps the major fallout of Gadhafi’s overthrow will prove to be the encouragement it provides to the demonstrators in Syria and elsewhere who are still taking to the streets where some are being gunned down by security forces. The Assad government has very few friends left in the wake of the continued shooting of peaceful demonstrators. Economic activity in Syria is grinding to a halt in the wake of economic sanctions. Last week the EU adopted a ban on crude imports from Syria. EU states currently take 95 percent of Syria’s oil exports and provide 25 percent of the government’s income.
The continuing unrest in Syria coupled with foreign sanctions is increasing concerns that the Assad government could become the next to fall. Damascus is in the center of many long-standing confrontations in the region so that the accession to power of new and unknown entities could set off clashes with serious consequences. The Iranians are getting nervous the West and Israelis may win out as a result of the upheavals.
Iran’s efforts to obtain nuclear weapons came back in the news last week with the publication of an IAEA report saying that Tehran has begun operating a new generation of centrifuges that will allow it to enrich uranium to weapons grade much faster. As tensions increase in the region, we are likely to hear more about this program.
Quote of the week
“When considering the consequences of peak oil, no everyday experiences and only few historical parallels are at hand. It is therefore difficult to imagine how significant the effects of being gradually deprived of one of our civilization’s most important energy sources will be. Psychological barriers cause indisputable facts to be blanked out and lead to almost instinctively refusing to look into this difficult subject in detail. Peak oil, however, is unavoidable.”
-- from the recently translated Peak Oil analysis by the German Military
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)