1. Oil and the Global Economy
Oil prices moved up steadily last week on the strength of optimism over the state of the US economy, the prospects for a Greek bailout, and the Iran confrontation. NY oil hit $104 a barrel in post-settlement trading Friday, up nearly $8 a barrel from early February. In London oil hit a high of $120.70 on Friday before settling at $119.58, the highest close since last June.
While US gasoline futures traded in a range just over $3 a gallon last week, retail prices continued to steadily creep higher. While the national average is currently $3.52 a gallon, an unusually large spread in retail prices between the mountain and coastal states has opened up with cities in California and the Northeast pushing or above $4 a gallon while some cities in the mountain states are selling for less than $3. If this spring's price run-up looks anything like 2008, the arithmetic says we could see a national average of $4.70 a gallon by the 4th of July with some cities along the coasts 40 or 50 cents a gallon higher. This seems unlikely to happen as high prices will curtail driving. Gasoline consumption in the US so far this year is down by 5 percent (MasterCard) to 7 percent (EIA) over last winter. The big unknown is just how the closure of so many refineries that supply the East Coast will affect prices this year.
The 50 cent a gallon price increase since mid-December is starting to show up in US inflation figures. This is turn is raising concerns as to whether the on-going "economic recovery" will be jeopardized. Should the high prices continue beyond the spring, the Federal Reserve may be forced to decide between stimulating the economy and fighting inflation.
Natural gas prices climbed a bit last week as news that Encana, another major producer, was curtailing production rather than continue to sell gas below cost and a larger than expected drawdown of inventories. The weekly drilling rig count shows rigs drilling for natural gas fell by 25 the week before last while those drilling for oil increased by 18. Analysts are suggesting that some utilities may be switching from coal to natural gas in order to take advantage of the unusually low prices.
2. The Iranian Confrontation
There were numerous twists and turns in the nuclear standoff that kept oil traders nervous all week and contributed to the steadily increasing price of crude. The week started with Tehran announcing that it was imposing an embargo on oil shipments to six European countries. Upon further inquiry it turned out that the decision to start the embargo was on hold, once again demonstrating the disorganization that has overtaken Iranian policymaking. On Wednesday the Iranians announced with much fanfare that their nuclear program was making great strides as they now had many more centrifuges in operation and could make their own nuclear fuel rods. This was dismissed as nothing new by Western governments and was intended for domestic consumption in the face of rising economic hardships.
This news was followed by unsuccessful attempts, apparently by Iranian agents, to assassinate Israeli diplomats in India, Georgia, and Thailand in retaliation for the purported Israeli involvement in the assassination of several Iranian nuclear scientists. The attack in New Delhi, which seriously wounded the wife of an Israeli diplomat, did little to endear Tehran to the Indians who are one of the few countries that still wants to buy Iranian oil. Adding in the deteriorating situation in Syria, in which Tehran seems to be deeply involved, and you can see it was not a good week for the Iranians.
Despite the widespread skepticism that sanctions could ever bring about a change in Iranian behavior, the skeptics apparently did not fully appreciate the economic pressure that the US, EU, and the rest of the OECD could bring upon a country if they really tried. Despite the reluctance of China and India to support the more extreme sanctions, a stream of reports suggests that the Iranian economy is suffering far more than is generally realized. Many major shipping companies will no longer visit Iranian ports for fear of running afoul of sanction rules that would prevent their ships from visiting US or EU ports.
Another development in the offing is a plan to ban Iranian banks from using the international system for electronic banking known as SWIFT. Should this sanction go into effect, Iranian financial institutions would no longer be able to transfer funds electronically and would in essence be blocked from much of their foreign trade.
Given the mounting economic and political problems, it came as no surprise when Tehran announced late last week that it was ready to resume negotiations over its nuclear program. While Western diplomats were skeptical that the announcement was a diplomatic breakthrough, the Iranians did drop previously unacceptable conditions for talks and declare they were ready to start at the "earliest possibility." Many noted that this could be another effort to stall for time or to delay even harsher restrictions; others noted that in reality the Iranians had little choice but to negotiate or face such economic hardships that the regime would be in jeopardy.
The week's events were topped by Tehran's announcement on Sunday that it would no longer sell oil to France or Britain. This move is largely meaningless as the UK stopped importing Iranian oil in September and France, which had been importing 75,000 b/d of Iranian crude in the third quarter of 2011, halted nearly all imports in December.
Tehran has clearly backed itself into a corner. If present trends continue, the country seems on course to have serious economic problems by summer. The Iranian military undoubtedly will have great troubles opening the doors to its secret nuclear programs to international inspectors so there is likely to be prolonged debate in Tehran over what concessions the country can make to ease the sanctions. It seems too early to call last week a turning point in the confrontation, but movement, for good or bad, is clearly taking place.
3. The Greek Bailout
From a peak oil perspective, the EU's lumbering sovereign debt crisis seems rather tame in comparison to the Middle East where mobs rule the streets, assassins stalk, and governments threaten Armageddon. The problem here is the fear that a cascade of defaults by countries and financial institutions will trigger a global depression that in turn will lead to a substantial reduction in the demand for oil.
A week ago, Greece's parliament agreed to the austerity program that should trigger a $170 billion bailout from the EU. The problem is that the parliamentary vote was accompanied by much turmoil in the streets, leading most to believe there is little chance that the Greeks can or will live up to their pledge of austerity. Recent polls show that 60 percent of the Greeks believe they will go bankrupt anyway so why agree to the EU's austerity demands. On the eve of the crucial Eurozone meeting to decide on the bailout, crowds were still demonstrating against the agreement in front of the Greek parliament.
All week, market sentiment swung back and forth between hopes that a bailout will be successful and concerns that it will not take place. Currently the balance of sentiment seems to favor the idea that a bailout, perhaps a partial one, will be agreed to on Monday and the problem will be pushed further down the road.
The good news of the week was that China seems to be coming around to the idea that a global depression would be bad for exports so that Beijng might be willing to spend some of their massive financial reserves helping Europe out of its problems. On the downside, the EU's economy continues to slow and Moody's announced that it is planning to cut the credit ratings of 114 European financial institutions. Increasing world oil prices and the up-coming sanction of Iranian oil imports are certainly not helping the problem. It seems likely, however, that some sort of bailout will take place during the Eurozone finance ministers meeting on Monday to forestall a Greek default on March 20th. The twists and turns of this situation are likely to have a continuing impact on oil prices for the foreseeable future.
Quote of the week
"...there is good reason to be skeptical that the world's oil production can be forever buoyed by new technology... oil production from existing areas like the North Sea or Alaska declines steadily, meaning the industry must run just to stand still."
-- James Harren, Wall Street Journal
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)