1. Oil and the Global Economy
After climbing a dollar or so a barrel by mid-week, oil prices slipped on Friday to close largely unchanged, with NY crude at $96 a barrel and London at $113. The number of factors now impacting oil prices seems to be increasing. Tending to pushing prices higher we have the Iranian sanctions and the threat of an Israeli strike on Iranian nuclear facilities prior to the US election; falling petroleum stockpiles in the US and other OECD countries; hopes that the Eurozone crisis, particularly the Greek situation will be settled soon; and hopes that slowing economies in the US, EU, and China will lead to more central bank bond-buying and other stimulus packages that will push oil prices higher. There are also several short-term factors such as the hurricane currently headed for the Gulf oil fields and a 17 percent drop in production from the North Sea oil fields next month due to maintenance.
Keeping a lid on prices is the stream of economic data showing slowing economies in the US, EU, China and several other nations which eventually should lead to a decline in the demand for oil. The interaction of these factors from day to day is resulting in very choppy oil markets and little net movement in the past week.
The meetings last week aimed at heading off a breakup of the Eurozone seem to have been indecisive. The Germans and French, while continuing to profess support for Greece continuing in the zone, are refusing to give Athens more time or money to settle its affairs. Athens' debts continue to pile up so that it is difficult to see this situation going on much longer.
Gasoline prices in the US continue to rise even as US oil consumption continues to slip. US petroleum deliveries for July were at their lowest level since 1995. Last week US gasoline prices reached their highest level ever for the third week in August with regular now averaging $3.75 a gallon. Regular gasoline in California is now at $4.13, and Connecticut, Hawaii, Oregon, and Washington are over $4 a gallon. MasterCard reports that year-to-date gasoline demand is 4.4 percent below last year. Interestingly, a new Reuters' poll shows that voters are not unduly concerned about high gas prices, placing them 10th in a list of economic concerns.
Oil entered the Presidential race last week as Republican candidate Romney proposed ending federal control over drilling on federal lands and in coastal waters. This would primarily affect New Mexico, Nevada, Utah, Colorado, and Alaska where there is still much land under federal control. Romney claims that such a move would increase domestic oil production so much that the US would be "energy independent" in eight years and that 3 million new jobs would be created. We welcome your comments on how ASPO-USA's publications and other work can best meet your needs and interests.
2. The Middle East
The civil war in Syria continues unabated with government forces driving back rebels from parts of Damascus amid bombing and shelling of residential areas. The number of refugees fleeing to foreign countries is now over 200,000 and climbing. The rebels are saying that government forces are now rounding up all young men in areas they overrun and are summarily executing them. Hundreds were said to have been executed over the weekend. The fighting is now spreading to parts of Lebanon where heavy fighting is reported between Assad government and rebel supporters.
Rising concerns over the security of Syria's large and dispersed chemical weapons stockpiles led President Obama's threat to intervene militarily in the fighting to secure the weapons should there be any sign of their use by government forces or even movement out of storage sites. The threat brought a sharp retort from Moscow and Beijing who accused the US of using the issue as a pretext to invade and destroy the Assad government. Russia assured the world that it has received assurances from the Syrians that the weapons are secure and will not be used. The Free Syrian Army, however, is saying that gas has already been used by government forces in the fighting, but these reports cannot be confirmed. Most observers are saying that to situation is so confused that direct foreign intervention in Syria would only make matters worse.
Security of chemical weapons is only one aspect of the Syrian uprising that makes it extremely dangerous and, over the longer run, a threat to Middle Eastern oil exports. The increasing animosity between Sunnis and Shiites and the atrocities that are taking place bodes ill for the stability of the Middle East. The fighting has already spread to parts of Lebanon and occasionally to Iraq which has long been a center of Sunni-Shiite animosity. Bombs, mostly against Shiite targets, continue to explode in Iraq, and are likely one of the factors driving foreign oil companies into Kurdistan where the security situation is much better.
The Iranian nuclear situation is clearly deteriorating with new reports from UN inspectors that Iran has expanded its underground capacity to enrich uranium. Israeli media is reporting that Prime Minister Netanyahu is "determined to attack Iran before the US elections," unless he receives iron-clad guarantees from President Obama that the US will attack Iran in the spring if the Iranians do not come to a satisfactory agreement by then.
An Israeli attack on Iran is still the most serious threat to Gulf oil exports, affordable oil prices, and the welfare of the global economy on the horizon. The Iranian response to such an attack is almost certain to drive oil prices much higher and very likely would reduce Middle Eastern oil flows for an indeterminate length of time.
As the drought in the central US drives corn prices ever higher, both political parties are starting to question the policy of mandating corn-based ethanol in gasoline which has been in effect since 2005. Long a favorite of corn-state congressmen, the mandate was seen as a perfect answer to the rise in corn yields from 20 bu/ac prior to 1940 to160 bu/ac in recent years. About a third of the US corn crop goes to produce ethanol. While the drought has not yet seriously impacted food supplies, it has affected livestock producers who can no longer afford to feed their animals. Seven governors have already asked the EPA to waive the mandate, which it can only do if there is evidence of "severe" damage to the economy.
The real problem, however, is that while the government can mandate that ethanol be put in gasoline to replace imported oil, it has also mandated under the 1990 Clean Air Act that gasoline be cleaner. This is now largely achieved by adding ethanol to gasoline. As ethanol is currently cheaper than gasoline to produce, some 96 percent of the "gasoline" sold in the US now contains ethanol.
Corn prices would have to rise to circa $10 a gallon or oil fall to less than $70 before there would be an economic incentive for gasoline companies to stop using ethanol.
All this says that any decision by the Obama administration to waive the mandate is likely to be meaningless. Unless corn or oil prices change rapidly, the only way to prevent food from being changed into fuel is for Congress to reverse itself and pass legislation preventing the use of corn as a fuel.
Quote of the week
Many analysts predict that the world's production of oil will peak in the next ten to twenty years, but oil expert Matt Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, presents a compelling case that Middle Eastern oil production may have already reached its peak... But whether the peak is already past or will be reached within a few years, world oil supply will decline at some point, and no one predicts a corresponding decline in demand."
- Mitt Romney in his 2010 book: No Apology; The Case for American Greatness
"With no 'Peak-Oil' in Sight."
- Romney Campaign 8/23/12 Energy Policy Whitepaper, quoting Leonardo Maugeri
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)