1. Oil and the Global Economy
It was a volatile week with oil prices falling some $3.50 a barrel on Tuesday, recovering on Wednesday, and falling again on Friday. At week's end NY oil ended down a couple of dollars for the week at $89.88 and London ended largely unchanged at $112.02. These moves widened the spread between NY and London oil to $22.14, the widest in almost a year largely due to increasing US production. Declining production from the North Sea suggests that the Brent benchmark may become less relevant as a gauge of global oil's value in the future. Except for the refining situation in California, oil supplies in the US are adequate, with domestic production the highest in 16 years at 6.5 million b/d, weak demand of 18.3 million b/d, and crude stockpiles up 8.4 percent from last year.
The global economic situation remains largely unchanged with the US limping along with little real growth; the EU's economies continuing to slow and facing several major sovereign debt issues; and China suffering from falling exports and a lower-than-usual growth rate. Large speculators are pulling out of oil contracts on the theory that the various new economic stimulus programs will not be enough and that the global economy will be demanding less oil in the months ahead.
US natural gas futures climbed to a new 2012 high of $3.55 per million BTUs last week on forecasts of colder weather across the northern US. By week's end, however, these forecasts were moderated pushing prices back to close at $3.39. It is still too early for winter demand forecasts.
For now the global demand for oil seems to be in a rough balance. Increased production by the Saudis and its Gulf allies has offset the roughly one million b/d drop in Iranian exports occasioned by the sanctions. Increased US production and lower demand is slowly cutting US imports. While the fears of Middle Eastern disruptions continue, they are fading in importance as an Israeli strike on Iran does not appear as imminent as it did a few months ago. The longer term outlook, however, is not good as the Sunni-Shiite animosity stemming from the Syrian uprising continues to worsen and the ripples from Arab Spring make their way in to hereditary kingdoms of the Gulf States.
2. Middle East
Iran's currency, the rial, collapsed last week as Iranians rushed to sell rials for dollars. The sudden decline set off a wave of unrest in Tehran not seen is several years as police tried to shut down black market money changers and force merchants to stay open in the face of uncertain currency values. The general assessment is that a combination of Western sanctions and government economic mismanagement was behind the collapse. The development heartened those that believe the sanctions program will eventually bring a change in Tehran's nuclear policy. At one point even Iran's President Ahmadinejad admitted that the West's "hidden war" against Iran was having an effect.
By Friday prayers however, Iran's clerics were expounding a message of defiance, assuring the faithful that the country would stand resolute and that things would get better soon. In the meantime, the average Iranian is beginning to suffer serious hardships as some foods are becoming too expensive for many families. In the midst of all this Tehran unveiled a new plan that would have the West lift all economic sanctions after which Iran might do some reassuring things with their stocks of uranium. Washington dismissed the plan as a non-starter.
Fighting in Syria continues unabated. Last week hostilities spread to the Turkish border where Syrian shelling of insurgent forces along the border struck a Turkish village killing five Turkish civilians. Ankara retaliated by shelling Syrian military bases and moving tanks to the border. Intermittent exchanges of mortar and artillery fire seem to be continuing, adding a new dimension to the uprising. In the meantime, Moscow remains steadfast in its support of the Assad government, warning other countries that whatever comes after Assad is likely to be far worse for regional stability.
The Eurozone's troubles continued last week with manufacturing falling to the lowest levels in three years. A new business survey points to renewed recession with troubles now spreading from the peripheral European states to the core countries of the zone.
The sovereign debt troubles continue to deepen. Spain's corporate tax collections have fallen to one-third of pre-crisis levels as small businesses fail and large companies flee the country. Pre-bailout maneuvering is now going on. Madrid, for now, remains reluctant to ask for a loan fearing the harsh conditions that central bankers will demand. Greece's Prime Minister says that his country will collapse in two months unless more aid is received.
There are two sides to the growing EU economic problems from the perspective of oil consumption. The EU is already a very efficient consumer of oil and its economies have survived for years with motor fuel prices in the range of $6-10 a gallon. Europe's oil consumption per capita is roughly half that of North America. The EU's oil consumption has fallen by couple of million b/d in the last five years, so it is a good question as to whether additional economic slowdown will cut the EU's oil demand much further. The second side is what a major recession in EU economic activity will do to the global economy and the demand for oil. We are already seeing a fall in China's exports which these days is a fair indicator of the economic health of the world. Beijing is now looking at growth in the 6-7 percent range rather than the circa 10 percent it has registered in recent years. As exports slow, China's demand for oil is also slowing although with one of the fastest economic growth rates in the world, its oil consumption will continue to grow.
4. US Gasoline Prices
Retail gasoline prices in California hit an all-time high on Sunday of $4.65 a gallon of regular, exceeding the 2008 high. Several factors contributed in the sudden increase in prices but the proximate cause was troubles at a southern California refinery that was out of production for most of the week, coupled with problems at other refineries that reduced output. California, of course, is isolated from the rest of the country and requires special gasoline blends in order to meet air quality requirements. Many major retailers such as COSTCO were forced to close their gasoline pumps as they could not acquire sufficient supplies. The problem is expected to be over this week as other large refineries have delayed maintenance and outages are expected to be repaired.
The California problems contributed to a 3 cent a gallon increase in the average retail price of regular in the US to $3.81 a gallon. This is nearly 40 cents a gallon higher than at this time last year. While the West Coast, Alaska, and Hawaii are over $4 a gallon so are New York and Connecticut in the east.
Analysts are starting to say that US gasoline consumers, like Europeans, are becoming used to high prices, have made whatever adjustments are necessary and are not expecting much in the way of repercussions in next month's elections.
Quote of the week
"The assumptions we have been fed over the past few decades are up for reexamination. And it's really important that we understand why this is happening, because if we don't, I think scapegoats will be paraded in front of us. As economies fail to grow, we'll be encouraged to think that this group over here or that country over there is keeping us from achieving our destiny."
- Richard Heinberg, in a lecture to the University of South Australia
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)