1. Oil and the Global Economy
London and New York oil prices went their separate ways for a day last week as it was announced that the pipeline that had been sending oil from the Texas coast to the Cushing, Oklahoma oil terminal would be reversed. Traders saw this reversal as having the potential of draining the glut of crude that has been accumulating at Cushing for the past year, keeping NY crude prices well below those of London. NY oil closed at $102.59 on Wednesday at the height of the enthusiasm following the news of the pipeline reversal, but then fell away to close at $97.67 on Friday as traders concluded that it was going to take some time, possibly years, and a second Cushing to Gulf pipeline to drain the glut at Cushing down to normal levels.
In the meantime, London's Brent crude, which had traded at $115 a barrel earlier this month generally trended downward to close at $107.56 on Friday as Europe's financial problems continued to grow. An interesting feature of the week's trading was the continuing drop in the size of the spread between London and NY oil futures which has reached a record $28 a barrel in mid-October. On Wednesday, the spread got as low as $7.88 for a while. This spread is expected to narrow further next year as the Seaway pipeline begins to take pressure off the stocks at Cushing, more Libyan oil comes in production, and bad economic times in the EU lower the demand for oil.
Bloomberg reminded us this week that Exxon, Shell, and their partners have spent $39 billion over the last 11 years trying to develop the Kashagan oil field in the Caspian. First oil from the project, which is eight years behind schedule, is expected soon, but analysts are wondering whether the partnership will ever see a profit from the project which in theory will produce enough oil to keep the world supplied for six months. In the meantime, Kashagan is symbolic of the problems oil companies will be facing as they attempt to extract oil from increasing hostile environments.
2. The Middle East in transition
In contemplating the many facets of the growing disorder in the oil-producing Middle East, it is hard to know where to begin. The situation is Syria continues to dominate the news with continuing government attacks on popular demonstrations now being overtaken by the "Free Syrian Army", made up of military deserters, staging attacks on the government's security forces and facilities. Even more ominous are reports of increasing brutalities between Sunnis and Alawites. The government still enjoys some support among Alawites and other non-Sunni Muslims. The situation is starting to look more like the beginnings of a lengthy civil war along confessional lines, with unforeseeable but potentially serious consequences for the region.
While the West searches for meaningful sanctions to impose on the Assad government, the Arab League continues its efforts to broker a settlement, and Moscow and Beijing continue to support the regime. Relations between Damascus and the Arab League are breaking down as Damascus, which has been kicked out of the organization, refuses to accept League observers. In the meantime the Russians continue to reject efforts to craft a UN significant resolution which Moscow fears could eventually lead to NATO aircraft pounding Assad's armed forces to the point where they can no longer resist the insurgency.
Egypt saw the largest and most violent demonstrations in many months over the weekend as protestors, demanding a transition to more democratic civilian rule, and an end to police brutality, took to the streets in several cities. The Sinai natural gas pipeline was blown up last week for the seventh time since the Egyptian revolution, halting deliveries to Jordan and Israel.
The war of words over the alleged Iranian efforts to develop nuclear weapons continued last week. The Israelis insist that the Iranians are closer to completing a nuclear weapon than is generally thought, and the Iranians continue to prevaricate and issue the occasional veiled threat to bring the world to its knees by closing the Straits of Hormuz. China and Russia continue to resist meaningful sanctions against Iran and the US continues to say it will use sanctions rather than bombs to pressure Tehran.
The most interesting event last week was an explosion at an Iranian military base killing the Revolutionary Guard general in charge of Iran's ballistic missile program. Tehran says it was an accident, but many are saying it was sabotage. In any case there is no end in sight for the Iranian nuclear weapons story which likely will drag on until there is some fundamental change in the Middle Eastern political situation. There are, however, still no developments pointing to major reductions in oil exports from the region in the near future but given the ever widening unrest sparked by Arab Spring it is only a matter of time.
3. Turmoil in Europe
The situation worsened last week with debt troubles spreading to heretofore untouched Austria, Netherlands, Finland, and France. Bond yields across the continent continue to rise as investors lose confidence that the crisis will be contained. Spanish bond yields got to 7 percent last week, the unsustainable level that brought down the governments in Greece and Italy. For now the focus is on whether or not the necessary changes can or will be made to allow the European Central Bank to intervene more forcefully to keep down interest rates. While some European leaders are in favor of the Central Bank becoming the lender of last resort, others are strongly opposed, fearing the bank does not have the resources and that turning on the printing presses would only lead to uncontrollable hyper-inflation.
Many dire predictions are starting to surface, including the end of the Eurozone, the end of the EU, and the likelihood that the many US banks will be seriously hurt by defaults in Europe. It appears that much of the European economy is facing a period of contraction which implies that the demand for oil in the region will be weaker in the coming years. European demand for oil currently is forecast by the IEA as flat to falling by a few hundred b/d in the next few years. The concern of course is that some sort of collapse in the EU's financial system will lower the demand for oil by a lot more than currently forecast and that the effects of the collapse will spread across the other OECD nations lowering demand still further.
4. The IEA's World Energy Outlook 2011
The IEA's release of its annual magnum opus, The World Energy Outlook, is usually an occasion for considerable commentary and analysis by the financial press. This year seems different, however, as the report was broader ranging -- delving into climate change, and the outlooks for Russia and the global coal market. There was little in the report for Wall Street to cheer about nor for the environmental movement either. Aside from the obligatory and dubious forecast that world oil must increase to 99 million b/d 25 years from now in order to satisfy demand, the report pulls few punches.
The Agency sees few signs that governments are as yet serious about changing the direction of global energy policy away from increasing consumption of fossil fuels but notes that trillions of investment dollars that will be needed to offset depletion do not seem to be forthcoming.
Interestingly, the Agency is advocating increased use of nuclear power at a time when several governments are backing away in the wake of the Japanese disaster. The argument seems to be that while there are risks to widespread proliferation of nuclear power, they are outweighed by the near certainty that increasing use of fossil fuels will lead to disaster.
The Agency remains concerned about the possibility of supply disruptions from the Middle East and North Africa in the next few years. It notes that if investment in the region should run one third lower than the $100 billion a year required, shortages will develop and prices will move higher than $150 a barrel.
While couched in cautious language, and the need not to sound too alarmist, the new World Outlook essentially supports much of what most students of peak oil and environmental activists have been saying for many years.
Quote of the week
You can't talk about our economy or foreign policy without talking about energy. With a growing global population and a finite supply of fossil fuels, the need to diversify our supply is urgent."
-- US Secretary of State, Hillary Clinton
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)