1. Oil and the Global Economy
NY oil began the week around $107 a barrel and closed Friday just below $103. Most of the drop came on Tuesday and Wednesday in response to the weekly stocks report which showed US crude inventories climbing by 7.1 million barrels. In London, where traders are less concerned about American inventories these days, oil fell from $125 a barrel on Monday to close at $122.88 on Friday. Reports that the US and the major EU countries were considering a release from their strategic reserves also contributed to the decline. For the 1st quarter, however, NY crude prices were up about 4.2 percent and London about 14 percent.
With talks between the Big Six and Iran over Tehran’s nuclear program due to start in about two weeks, the rhetoric and threats that have been a staple of the confrontation for the past year have been muted. Some are saying that all the talk of a release of strategic reserves (SPR) is simply an effort by the Obama administration to “jawbone” prices lower. Most observers, however, think that any release from the SPR will only affect oil prices briefly. In the Congress, the Republicans are attempting to tie any release from the SPR to promises of more drilling.
Wire service surveys shows that OPEC oil production in March reached its highest level since October 2008 with higher output from Libya and Iraq offsetting a drop of about 65,000 b/d in Iranian production.
While US economic data for the week was mixed, a positive spin increased optimism that demand could increase in the future and the equity markets rose. This news was offset by signs that China’s economy continues to slow. Prospects for the EU’s economic stability were improved with the announcement of a $1.2 trillion firewall.
In Washington, the EPA finally announced the rules that will limit CO2 emissions from power plants. If the rules, which face serious opposition by the Republicans in Congress and challenges in the courts, ever come into effect they are likely to trigger a significant switch from coal to natural gas as the fuel for generating electricity. The proposed rules would prevent the construction of new coal-fired plants unless they are built with very expensive equipment to contain carbon emissions.
As pressure mounts on the Obama Administration to do something about high gasoline costs, the government approved Shell’s plans to drill in shallow waters off Alaska as well as allowing seismic surveys off the US’s East Coast starting next year.
The major national gas leak that developed last week off the coast of Scotland once again reiterates the dangers involved in exploiting high pressure and temperature oil and gas deposits from deep beneath the sea. The North Sea leak will likely take six months and billions of dollars to contain. A series of leaks from deep-water Brazilian wells also emphasizes the troubles that are likely to become endemic as more and more of the world’s conventional oil production shifts to deepwater fields.
2. The Iranian confrontation
While awaiting the resumption of talks in about two weeks on Iran’s nuclear program, both sides are maneuvering for leverage. On Friday, President Obama released a statement saying that he was satisfied that the US could proceed with increased sanctions on Iran without raising oil prices by an unacceptable amount. A combination of increased production coupled with releases of SPR stocks is said to be sufficient to replace the 900,000 b/d or so of Iranian exports that the IEA estimates will be shut in by the sanctions.
Even Moscow joined the pressure on Tehran last week by announcing that Tehran was breaching UN resolutions by increasing the size of its nuclear program. Most observers interpret the Russian statement as a clear warning to Tehran that it is walking a tightrope and that continued intransigence could easily lead to a war with devastating consequences for the world’s economy.
The US and EU sanctions program continues to make slow progress with Turkey announcing that it will reduce imports of Iranian oil by 10 percent in an effort to dodge tightening sanctions on Iran’s oil customers. South Korea also announced that it was working to reduce Iranian imports.
On the other side of the ledger, China rejected President Obama’s decision to move ahead with sanctions against countries buying Iranian oil saying that the US had no right to unilaterally punish other nations. While ostensibly on Iran’s side in the conflict, Beijing has already reduced its imports of Iranian oil. With the Saudis and the other Gulf producers clearly lined up against Tehran, Beijing must tread a very narrow path in this confrontation.
Also to Iran’s favor was the announcement that India and, to an unknown extent, Beijing will pay for Iranian oil through a combination of barter and local currencies. India is to pay for some 45 percent of its imports in rupees and the rest with food and manufactured goods. While this may solve an immediate problem, in the long run it will weaken Tehran’s ability to fund its military programs and further weaken Iran’s currency.
Despite the dip in crude prices last week, US gasoline prices continue to increase another 3 cents a gallon to a national average of $3.92, with many regions already well above $4. In Europe, gasoline prices have risen to new highs on supply worries going into the summer driving season. Austerity measures in Italy have boosted gasoline prices there to $9.17 a gallon -- the highest in Europe. Gasoline and diesel consumption in Italy is down 9.6 percent in the first two months of 2012 and new car sales fell 18 percent. Despite the drop in consumption, Italian gas tax revenues are up 11 percent due to higher prices.
MasterCard reported on Tuesday that US gasoline demand was down 1.5 percent the previous week from the week before and was down 7 percent from the same week in 2011. The firm’s four-week moving average shows that US demand for gasoline has fallen for 53 straight weeks.
While surveys show that more than two-thirds of Americans disapprove of the way the President is handling gasoline prices, most do not blame him. US mainstream media seem to grasp that oil is a globally traded commodity in short supply and that the President can do little to reduce prices in the short term. The only holdouts to the idea that there is little the President can do seem to be Republican candidates for federal office who continue to insist that more domestic drilling will help the situation – all without saying just how long this will take to happen.
Americans under 40 are driving significantly less than 10 years ago. Among the unemployed in this age range, driving is down by 19 to 24 percent according to a recent survey, raising the question as to whether the American car culture is on the wane as younger Americans become more environmentally aware.
The loss of refining capacity in the Northeastern US continues to pressure prices. The EIA says the operating refinery capacity in the region is down to 1.2 million b/d from 1.6 last summer. There is still no word on the sale of the Philadelphia area Sunoco refinery which may be closed in July sending the region’s gasoline situation into crisis. The Oil Price Information Service is still forecasting that gasoline prices will peak somewhere between $4.05 and $4.25 a gallon in the next three months – unless, of course, there is some sort of supply disruption.
4. US pipelines
Last week two energy companies announced plans to build new pipelines that would move 850,000 barrels of crude per day from Canada to refineries along the US Gulf Coast by 2014. As the plan would use existing pipelines across the US border, the projects would not have the same State-Department-approval problems as the Keystone pipeline. It would, however, require approval from the Federal Energy Regulatory Commission and the Corps of Engineers and if built be a competitor to the Keystone pipeline which is still awaiting the results of environmental reviews.
The plan involves building a new pipeline from the Flanagan, Ill. oil depot to the one in Cushing, Okla. The Seaway pipeline which is to be reversed in June, thereby moving 150,000 b/d of crude to the Gulf coast and 400,000 b/d next year after a pump upgrade, would be joined by a new 450,000 b/d pipeline to be built in the same right-of-way. The Obama administration already supports this plan which should meet minimal objections.
The three-stage plan should drain the current oil surpluses from the Cushing depot, which has seen its storage capacity climb from 26 to 65 million barrels in the last seven years. The proposal would eventually allow a larger flow of Alberta tar sands oil and tight oil from North Dakota to the coast where it would fetch higher prices. The downside of this plan is that it would allow increased production of oil from Alberta and likely lead to higher oil prices in the Midwest as it would compete with imported oil from abroad. With the US already importing millions of barrels of oil each day, it is unlikely that any of the oil brought from Canada would ever be re-exported, as it would be considerably cheaper just to refine the oil along the coast and cut other imports.
Production from the Alberta sands and the Bakken Shale is expected to increase by some 2 million b/d by 2020 so there would eventually be a need for the proposed pipeline and the Keystone to move crude to coastal refineries if they are ever built.
Last week the Nebraska legislature approved a measure that would allow a study of how best to route the Keystone XL pipeline through the state. The Keystone proposal still has a ways to go and it is unlikely that there will be any major developments until after the November elections. In the meantime the new proposal should take some of the pressure off the Obama administration.
Quote of the week
“The decline of major conventional oil fields—coupled with the rapidly rising demand from countries like China and India—means the spare production capacity that once cushioned prices is melting away, ushering in an era of volatile market swings.”
- Bryan Walsh, Time Magazine
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)