1. Oil and the Global Economy
Oil prices remained stable for most of last week with NY oil climbing a dollar or so and London oil falling about the same. On Friday however a number of factors came together to send NY oil down $2.23 a barrel to close at $84.86. London also fell, closing at $105.64, down $2.53. These were the lowest settlement prices in both markets since last July. The downward pressure came in the aftermath of Superstorm Sandy when it was announced that two refineries with a combined capacity of 308,000 b/d, which were shut down for the storm, could not resume operations immediately. On the world scene, the stronger than expected US jobs report sent the euro down taking oil prices with it as did a weaker equities market.
While last week’s US stocks report showed a 2 million barrel decline in crude inventories, most analysts believe the widespread refinery outages caused by the storm soon will push the inventories to a 30-year high for this time of year.
Natural gas futures fell steadily last week on the theory that with so much of the electric grid out in the New York area, the demand for gas, which is used to generate 35 percent of the electricity in New York and New Jersey, would shrink. The week’s natural gas inventory report showed that 65 billion cubic feet were added, sending the inventory to 3.9 trillion cubic feet – the highest level ever.
Gasoline futures gyrated during the week as concerns about refinery outages and distribution problems played against the large number of powerless gasoline stations. On Friday futures fell as supplies coming into the NY area increased, but little progress was made on getting power to the regions gas stations. State restrictions on gasoline sellers which keep prices from rising excessively – a 10 percent cap in New Jersey – helped keep the situation under control.
The global diesel and heating oil situation is tightening again. Colder weather is settling in on Europe and Northern Asia, while the stocks situation in the northeastern US where most of heating oil is consumed is becoming very tight. Forecasts of a colder winter in the US has caused the EIA to project that heating oil consumption will be up 16 to 18 percent over last year when temperatures were mild.
2. Sandy’s Aftermath
The supply of gasoline, diesel, and jet fuel coming into the NY area came to nearly a complete halt on Monday as the worst storm on record shutdown power to more than 8 million people. By week’s end more that 2.5 million utility customers were still without power although the lights were back on in southern Manhattan and much of the subway system was running again. The power outages served to emphasize just how much the oil product distribution system is dependent on the power grid to pump oil products.
At one point some 70 percent of the gas stations in the most affected areas were not open leading to miles-long backups and flared tempers. Many gas stations required a police presence to keep order. In New Jersey the situation became so bad that, in some counties, the governor decreed a police-enforced odd/even license plate system that has not been seen since the Arab oil embargo 40 years ago. In Manhattan, Mayor Bloomberg decreed that only cars carrying three or more passengers would be allowed into the city in a attempt to ameliorate the chaos caused by the lack of traffic lights.
By week’s end NY’s most oil terminals had been restored to operation and tankers of fuel were coming in. Recovery from the storm, however, remains spotty with hundreds of thousands still trapped in powerless, storm damaged homes along the shoreline and facing colder temperatures without any source of heat. Finding fuel for fuel oil delivery trucks is currently a major problem. Some distributors are rationing customers to 100 gallons per building until the situation improves. The US Department of Energy released two million gallons of heating oil from a reserve in Connecticut to help with the shortage. There is another 42 million gallons still in reserve, but as somebody pointed out, 2 million gallons could be used up in about 8 hours on a cold day in New York.
To help the situation, the Obama administration waived the Jones Act so that foreign flagged tankers can be used to move oil products from the ample stocks along the Gulf coast to the NY area.
The silver lining to the week was the growing recognition that something has to done to cope with rising sea levels and stronger storms. A public discussion, led by NY’s governor Cuomo and the city’s Mayor Bloomberg, has begun as to the best way to prepare for future storms. Proposals range from massive storm barriers – difficult to implement given the NY region’s geography – to flood proofing buildings, to what is called “managed retreat” that would cede low lying areas to the sea.
3. Middle East
On Tuesday, Israeli Defense Minister Barak told a British interviewer that in August Tehran had pulled back from its push to build nuclear weapons and was thereby delaying the “moment of truth” by eight to ten months. The Minister seems to be referring to an announcement by Tehran, that has not received much attention, in which the Iranians announced that they were going to turn 30 percent of their enriched uranium into fuel rods for a nuclear reactor. This development moves the confrontation and the possibility of an attack on Tehran’s enrichment facilities off until next year. Last week an Iranian military commander said that closing the straits of Hormuz would not be done simply as a response to the sanctions, further lowering tensions.
In the meantime the pressures on Tehran resulted in a rare public clash between Iran’s President Ahmadinejad and his rivals in the government. The situation became so bad that supreme leader Ayatollah Ali Khamenei issued a warning that public disputes within his government would be treated as treason as they provided ammunition to “foreign media and enemies.” The President then apologized to the Ayatollah and said he would concentrate on overcoming the Western sanctions.
With the situation in Syria deteriorating rapidly, the sanctions pressures continuing, and domestic discontent on the rise, the Iranian government has a lot on its plate already without provoking war. The Turks managed to cut their imports of Iranian crude by 50 percent between August and September by finding other suppliers. Stories of critical shortages of medicines that must be imported from abroad are starting to make their way out of Iran. Although medicines were not specifically targeted by the sanctions, foreign currency shortages and restrictions on banking are making it difficult for the Iranians to import almost anything these days.
The ring around the Assad government in Syria continues to tighten with government aircraft launching attacks on rebel forces in and around Damascus on a daily basis. The rebel are attempting to overrun the government’s main attack helicopter base south of Aleppo and bombs continue to go off in downtown Damascus.
A conference is currently underway in Doha in an attempt to form an alliance among the disparate groups fighting the Assad regime. This move is in anticipation that the Assad regime may not be able to hold on much longer and is an effort to avoid the dangerous anarchy that could ensue in its wake. Iraqi Sunnis are already looking forward to the day when a Sunni-dominated government in Damascus will act as a counterweight to the Shiite-dominated Baghdad.
There were several developments in the EU last week that are worth noting. In Germany Chancellor Merkel had talks with the governors of the 16 states on developing a nationwide renewable energy strategy. Although Germany has made considerable progress in developing renewable resources, thus far there has been no coordination among the states which are often going in conflicting directions. With elections coming up next year, the Merkel government is under increasing pressure from Social Democrats to get its act together. The eventual shutdown of all its nuclear power plants and its goal of reducing carbon emissions makes this a critical issue for the country.
In Athens, the three-party coalition will submit bills to parliament on Monday which should meet the EU’s demand for austerity reforms. If passed, the bills would clear the way for Greece to receive the €13.5 billion loan it needs to avoid bankruptcy later this month. The austerity measures are far from popular. Last week a 24-hour subway and commuter rail strike took place to protest austerity. A general strike has ben called for Tuesday this week.
As the EU’s economic crisis deepens, wealthier regions are questioning why their money should go to support poorer countries or provinces. The sentiment has now spread to Spain where the Catalonians are calling for independence from the poor provinces currently surviving on Catalonian taxpayers.
There are numerous places in Europe where provinces or regions have linguistic and cultural differences from the rest of the country and which have latent nationalistic sentiments. Should any of these movements be successful, the problems of keeping the Eurozone together would become more difficult and threaten the continent’s economic stability.
Quote of the week
"I want our president to place scientific evidence and risk management above electoral politics.” - New York City Mayor Michael R. Bloomberg
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)