ASPO-USA 2011 Conference – Peak Oil, Energy & the Economy
November 2-5, Capitol Hill Hyatt, Washington DC
Get the latest research, analysis, and insights on Peak Oil, the ripple effects that a new energy reality will have on the economy and modern life, and response strategies for businesses, government, and communities.
More information: aspousa.org/conferences/2011
Oil prices rebounded for a day or two mid-week on hopes for a successful Greek bailout, but then collapsed on Friday under the combined weight of unfavorable economic reports from Europe, the US, and even China. For the week prices were only down a dollar or two a barrel, but at the close on Friday NY oil was down to the lowest close in more than a year. For the quarter, oil prices were the weakest since the 2008 crisis with NY crude settling at $79.20 a barrel and at $102.76 in London. The spread between NY and London crude has narrowed a bit in recent days closing at $23.56 after trading as low as $21.81 on Thursday.
Talk of renewed recession in the US and a Greek debt default are pervasive in the financial press. The prevailing belief is that overall demand for oil will fall in coming months despite some growth in the Asian markets. It also is becoming clearer that a Greek default would likely engulf the European and US banking systems, possibly leading to a global financial crisis similar to or worse than that of 2008. An increasing number of respected commentators believe that a major crisis is inevitable in the near future.
A report from China on Friday shows its manufacturing sector contracting for the third consecutive month. A sinking euro, the weakest global equity markets in three years, and the likelihood that some Libyan oil will be returning to the markets soon contributed to the weak oil prices.
The Middle East was relatively quiet last week, except in Syria where anti-government protestors continue to be gunned down by security forces. Turkey along with the EU has halted imports of Syrian oil, and contrary to government assertions, Damascus seems to be having trouble finding a market for its oil exports. Syria’s traditional friends in Moscow and Tehran are starting to pull back from supporting the Assad government as the confrontation and killing of protestors drags on. Having learned the lesson in Libya that support for a despotic government can have wider implications, even the Chinese may not be willing to risk their credibility in the region by taking Syrian oil. The Syrian uprising remains serious and has the potential of morphing into a wider Middle Eastern conflict which could eventually have an impact on oil exports.
The confrontation between Israel/Cyprus and Turkey over drilling for natural gas off the coast of Cyprus continued last week. Ankara is concerned that the Turkish-occupied northern portion of Cyprus will be left out of any Israel-Greek Cypriot natural gas deal – which the Israelis desperately need to offset the recent loss of Egyptian gas. The Turks have sent a seismic ship to do their own exploring for natural gas off Cyprus which last week was buzzed by Israeli fighter planes.
Preliminary wire service surveys suggest that OPEC oil production increased modestly by 75,000 b/d to 30.05 million b/d in September. If these numbers are confirmed, this would be the highest level of OPEC production since November 2008.
The pace at which Libyan oil exports will return to the markets remains an issue. Last week Italy’s ENI and France’s Total announced that it had restarted some oil production in Libya. ENI, which had previously announced that natural gas exports to Italy through the Green Stream pipeline would resume in mid-October, is now saying the start date has been pushed back to mid-November. ENI is having trouble getting personnel and equipment to the Wafa oil field which supplies natural gas to the pipeline.
ENI spokesmen said they are already producing 30,000 b/d and soon will be producing enough oil to fill the pipeline to a coastal export terminal. The offshore Libya oil facilities were not involved in the fighting and are expected to resume about 40,000 b/d of production in the next few weeks.
Before the uprising, Libya was consuming about 300,000 b/d of the country’s 1.6 million b/d of oil production, but economic activity in the country has slumped to a fraction of pre-war levels. Hundreds of thousands of foreign workers have fled and are unlikely to return for a while, suggesting that domestic demand for oil will be well below 300,000 b/d for some time to come.
Scattered fighting continues in several cities as the remnants of the Gadhafi government, many of whom are facing prosecution for war and humanitarian crimes, continue to fight on. In recent days the insurgents have gotten into the massive arms dumps that Gadhafi had built up. The massive quantities of arms and munitions that are being hauled off by anyone with a pickup raise the issue of how quickly a stable a post-Gadhafi Libya can be formed.
Large scale Libyan oil production requires the assistance of thousands of foreign oil workers, who are unlikely to return until the security situation is satisfactory. With the political situation still up in the air and thousands of heavily armed tribesmen with diverse political aspirations and loyalties running around, the estimate that oil production will be resumed to pre-uprising levels in 12 to 18 months may be optimistic.
Although gasoline prices in the US have fallen by 20 cents a gallon in the last month, they are still 72 cents a gallon higher than this time last year. A number of newspapers have noted that while NY oil futures have fallen by nearly a third since last April, the retail price of gasoline is only down by 13 percent. After some research, a number of reporters have concluded that NY futures prices no longer reflect the prices that most US refiners are paying for their crude. While NY futures are down 30 percent, London’s Brent is only down 18 percent. Most of east and gulf coast imports are priced off the Brent Benchmark. Oil prices in Europe have been higher of late due to falling North Sea production and the loss of Libyan oil exports to European markets.
When oil prices are rising, refiners are quick to raise their prices to wholesalers and the higher prices are reflected at the gas pump in a matter of hours. As prices fall however, refiners who are contending with relatively small profit margins keep prices high until competitive pressures force them down.
All this does not bode well for the US economy which is teetering on the verge of renewed recession. As the economy slows, US gasoline consumption has been falling. Revised numbers for July show that oil demand in the US fell by 4 percent from 2010. This was the lowest level for July since 1996. This year saw the largest decline in year over year demand for the first four months of the summer driving season since 1980 when the Iranian revolution pushed crude prices up by 58 percent.
In recent years, net US oil product exports have been increasing. In July they were 2.84 million b/d which is the second highest monthly export number on record. In July 2007 net oil product exports were only 1.5 million b/d. Net US crude and product imports for July were down to 8.7 million b/d – as recently as early 2009, US net imports were regularly in excess of 10 million b/d.
The API reported last week that US gasoline demand in September fell 2 percent year on year to a 10-year low for the month. The institute also reported that US imports of oil products were down 11 percent in August to a 14 year low.
"Unless and until adaptive responses are large and fast enough to constrain the upward trend of oil prices, the primary adaptive response will be periodic economic crashes of a magnitude that depresses oil consumption and oil prices. These have the effect of shifting consumption from incumbent consumers—the advanced economies—to the new consumers in the developing economies."
-- Chris Skrebowski