1. Oil and the Global Economy
After falling for two days early last week, oil prices recovered with London crude closing just below $126 a barrel; NY crude settled at $107 after touching $108. As usual, a mixture of news concerning the Iran confrontation, the Greek debt crisis, and the US economy pulled the oil markets both up and down. The week started with concerns about the next step in the Greek debt crisis and the visit to Washington of the Israeli Prime Minister. Netanyahu's visit was accompanied by much beating of war drums as the Iranian confrontation became ensnared in the US Presidential election.
At week's end, things were looking much better. The Greeks pulled off their debt-reducing bond swap thereby qualifying for the next big Eurozone loan and pushing an uncontrolled default further down the road; and the US payrolls report came in above expectations, raising hopes that a "recovery" was underway.
On the downside, the Syrian civil war continues to get worse and shows signs of continuing indefinitely; Libya is starting to come unstuck with the Eastern part of the country threatening to secede — taking much of the oil with it; the Chinese economy is stabilizing which likely means continuing increases in oil consumption; and the price of gasoline continues to climb rapidly.
Beijing set a growth target for 2012 of 7.5 percent although the final number will only be a percent or so higher. Although oil prices fell on Monday due to this news, we are still likely to see a growth rate of 8 percent. Beijing realizes that some sort of global recession is in the offing and is turning to increased domestic consumption — with 1.3 billion people they have a pretty good market — to keep up growth. Beijing says inflation fell in February to a 20-month low of 3.2 percent. China's implied oil demand in January climbed 4.8 percent year-on-year to the second highest on record. There are reports that Beijing is starting to fill their strategic petroleum tanks in anticipation of troubles ahead. Last month, the IEA revised its estimate of the growth in China's oil demand for 2012 down to 371,000 b/d or about half the growth in global oil demand for this year.
OPEC's production climbed by 400,000 b/d in February to 31.27 million b/d, the highest since autumn of 2008. Production recovery of 250,000 b/d in Libya with smaller increases from Angola, Kuwait, Nigeria, the Saudis and Venezuela was responsible for the increase. There are indications that Iranian production is starting to fall as the sanctions tighten.
In the US, Republican efforts to force the administration to start building the Keystone pipeline failed in the Senate. The weekly stocks report shows crude inventories rising by 800,000 barrels but with Cushing inventories hitting the highest level in eight months and keeping pressure on US gasoline prices. The pipeline reversal which is due to drain some of the Cushing crude inventory away to Gulf Coast refineries is still a few months away. TransCanada is planning to go ahead with the section of the Keystone pipeline that runs from Cushing to the Gulf Coast. Within a couple of years there could be two pipelines draining Cushing of the oil glut which should increase oil prices in the Midwest.
2. The Iranian Confrontation
It was a busy week in the confrontation which could easily lead to the most serious reduction in global oil flows in many decades. The results of Iran's parliamentary elections which gave a big boost to the hard line pro-Khamenei faction were followed by a visit to Washington by Israeli Prime Minister Netanyahu. The Netanyahu visit mixed the US Presidential elections into the ever-growing pot as President Obama's opponents sought to differentiate themselves from the administration by adopting more pro-Israel stances. At the conclusion of the meetings in Washington there seems to have been a modus vivendi adopted that would allow the sanctions-negotiations track to continue for a while before Israel unilaterally attacks Iranian nuclear facilities.
Evidence continues to build that the sanctions are starting to have an effect on Iranian oil sales. Some analysts are saying that Tehran's oil shipments are already down by 300,000 to 400,000 b/d with the worst yet to come. A combination of political pressure on importers, reluctance to become dependent on Tehran and restrictions on tankers, insurance and money transfers appears to cutting into the Iranian economy. Iranian currency has already fallen by 75 percent and the situation will only get worse for the Iranians.
On Tuesday, the US, Russia, China, the UK, France, and Germany agreed to reopen stalled talks with Iran on the whole nuclear question. That Tehran asked for a resumption of these talks is another indication that the sanctions are taking a toll. While Paris expressed its belief that the agreement was little more than another Iranian ploy to buy time, diplomats on all sides expressed optimism that an agreement could be reached. Oil prices fell when the agreement was announced but rebounded later in the week. The IAEA's 35-member board met last week to prepare a list of demands that Tehran must fulfill to insure that they are complying with international inspections.
The situation surrounding the confrontation remains dynamic. Sanctions on Iran continue to tighten; the Syrian civil war continues to become more brutal leading to calls for foreign intervention; the US elections head toward November; and the Israelis become increasingly nervous as Tehran politics shift further to the hard line.
In sitting down with the world's six preeminent powers, the Iranians are going to have problems. It is likely that the six powers are convinced that Iranians are indeed attempting to build a nuclear bomb and are concerned about where the situation might lead. While the Russians and Chinese have been reluctant to join in with harsh sanctions on Tehran — partly a hangover from cold war politics, Moscow has refused Tehran access to its latest air defense systems, and Beijing has reined in its purchases of Iranian crude. With the situation deteriorating in Syria, Tehran is risking the loss of its best friend in the region and the cornerstone of its foreign policy.
The Iranians are an old and proud people who are unlikely to give in on the nuclear issue without a "face saving" compromise. If nothing else, a year of increasing harsh threats seems to be drawing to a close as the diplomats take over. Analysts continue to claim that the Iranian confrontation has already added anywhere from $10 to $30 to the price of oil. Whether some of this markup is worked out of the oil markets in coming months, provided nobody starts shooting, remains to be seen. The situation is by far the number one concern of the oil markets.
3. Gasoline prices
Another week and we are up another 3 cents a gallon as the great 2012 price spike continues to rumble inexorably higher. It is still only the beginning of March and the national average for regular is already at 3.79 a gallon despite the increasing size of the Midwest oil glut. Nine states have already crossed or are very close to averaging $4 a barrel for regular according to the Oil Price Information Service that tallies credit card receipts from 100,000 gas stations. The Department of Energy that uses different methodology comes up with an average 3 or 4 cents a gallon higher.
Last week saw a brief pause in the incessant price rise after 39 straight days of increases as refiners dumped their excess stocks of winter gasoline in preparation for the production of summer blends. The transition to "summer" gasoline which is more expensive to make usually adds some 25 to 50 cent a gallon to retail gasoline prices so that forecasters predict the national average will be at $4.25 by the end of April and in California, which is running 55 cents higher than the national average, gas could be pushing $5 a gallon later this spring.
Gasoline at $4 to $5 a gallon raises two major questions; the effect on the November elections and the damage to the economy. The President's opponents are already off and running with the high gasoline price issue saying it is all Obama's fault as he has imposed too many constraints on the oil industry. This time around, shouts of "drill baby, drill" are not making much headway with the press as the realization sets in that US oil production has been rising of late, drilling in the Gulf is back to pre-Macondo levels and is starting off Alaska this summer and the President is saying we need to do anything we can to increase production. Trying to tie the current price spike to the Keystone pipeline is not making much progress as it will take several years to build and is likely to raise prices in the Midwest as the glut at Cushing is eased.
Although the political rhetoric is long on blaming the President, it is short on specific solutions other than opening Alaska's ANWR and coastal waters for drilling — a remedy that is unlikely to bring forth much oil for 10 or 20 years.
The more interesting question is what high oil prices are doing or will do to the economy this year. As Wall Street is loath to talk about a gas spike price induced recession, there has been a spate of articles to the effect that "we are in much better shape this time." These usually start with an assertion such as "$110 oil is only taking half as big a bite out of American's pocketbooks as it did in 1981." The story then goes on to discuss how, after adjustments, oil was really $213 a barrel in 1981 and consumed twice as much of our incomes.
The stories then go on to talk about how the economy is going to grow this year so that disposable income could be up by $500 billion allowing us to buy more expensive gasoline. Throw in a little efficiency and there is no reason high gas prices should drive us into recession — just a little headwind for the recovery.
Realists, even connected with Wall Street, acknowledge that gasoline prices are "dampening growth prospects" — a modest conclusion.
4. China's coal
One of the most fascinating stories of the fossil fuel age is the growth of China's coal production during the last 50 years. Starting with an annual production of some 400 million tons in 1960, production has grown, slowly at first and then after 2000 more rapidly until it 3.88 billion tons in 2011 — nearly three times what the US consumes. For the last decade, consumption has been growing in the vicinity of 9 percent a year, which is in line with GDP growth, but is impressive considering the size of the increase in annual production which must be achieved to maintain this growth.
For many years, people have been asking when will this rate of growth come to an end. Coal seams are becoming narrower and deeper and the open-pit mines are further away in Mongolia requiring long hauls to bring the coal to regions where it can be used. In 2010, the government, perhaps worried about pollution, said that its aim was to keep coal consumption below 3.8 million tons per year. In 2011 China's production grew by 8.7 percent, but last week Beijing announced that coal output for 2012 is expected to rise by only 3.7 percent this year, a sharp drop from the circa 9 percent annual increase we have seen in the last decade.
If we are indeed seeing the peaking of Chinese coal production there are numerous implications for the global economy. With China's GDP growing at 10 percent in recent years, or even the 8 or so percent forecast from this year, China is going to have to keep increasing its electricity production at roughly the same levels. Although renewables are increasing and Beijing is starting to drill for shale gas, the mainstay of China's growth will continue to be coal, imported oil and LNG. Beijing forecasts that the annual increase in electric power which has been in the double digits in recent years will fall to 7.5 percent in 2012. Domestic oil production is forecast to remain flat at 204 million tons, suggesting that increased imports of coal and oil are in the offing if these spectacular rates of growth are to be maintained.
Quote of the week
"...the idea of a rigorous separation between supply, demand, and "speculation" is nonsense. Speculators are speculating on, among other things, the likely outlook for supply and demand… blaming speculators rather than the underlying geopolitics is a perverse form of shooting the messenger."
- Matthew Yglesias, Slate
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)