1. Oil and the Global Economy
A week that began with the markets’ attention focused on the Greek bailout, concerns about the global economy and the US’s fiscal cliff, ended with a major upswing in Middle Eastern violence which some fear could result in constraints on oil exports. For much of the week fears for the economy kept prices edging down, but on Friday as the exchanges of rocket fire and air strikes between Gaza and Israel increased, the markets moved higher with NY oil closing at $86.67 and London at $108.96. Oil prices that have trended down since September are now about $14 a barrel lower as demand for oil slackened and crude supplies remained adequate despite the sanctions on Iran.
US natural gas futures surged to a one-year high on Friday as forecasters are now predicting colder weather across much of the US. The EIA reported an 18 billion cubic foot drawdown of natural gas from storage caverns last week, the first withdrawal of the year. At this time last year, the inventory was still increasing, suggesting that this winter will not be a repeat of the mild 2011-12 heating season.
The European fiscal crisis is on hold for a while. The Greeks managed to borrow €4 billion on the open market to tide themselves over after the EU and IMF delayed the bailout payment that was due last week and continue to bicker over the parameters of the loans. For its part, the Greek government seems to be passing whatever austerity measures it takes to secure the EU loans despite a steady stream of demonstrations outside the parliament building. Last week, the ever-present Greek protestors were joined by a wave of anti-austerity strikes across much of Europe. The euro-zone economy contracted in the third quarter as increasing unemployment and fiscal austerity cut into the demand for oil.
Last week the IEA released its monthly Oil Market Report for November. The report cuts the IEA’s estimate for global oil demand for the fourth quarter by 290,000 b/d due to the US hurricane and persistently weaker demand in Europe. The forecast for global growth in oil consumption has been lowered to 670,000 b/d for 2012 and 830,000 b/d for 2013. Hurricane Sandy is thought to have cut US demand by 230,000 b/d during October.
Non-OPEC oil production in October rebounded by 840,000 b/d as the maintenance season came to a close and weather disruptions ended. OPEC production in October was down by 30,000 b/d to the lowest level in nine months, largely due to disruptions in Nigeria. The Iranians managed to increase production during the month by 70,000 b/d to 2.7 million and to increase exports by 300,000 b/d to 1.3 million. China, South Korea, and Singapore took the increased Iranian shipments.
2. The Middle East
Violence and turmoil in the Middle East increased markedly last week raising concerns about the stability of oil supplies over the longer term. In addition to the on-going Syrian uprising, the week saw a series of riots in Jordan calling for the end of the regime, and a heavy exchange of rockets and air strikes between Israel and Gaza. The new factor this time is better organization and longer range rockets on the part of Hamas in Gaza, and the Arab Spring which has changed the political landscape in the region most notably in the case of Egypt and its attitude towards Gaza.
Whenever Israel in directly involved in hostilities emotion in the area increases several fold. Given Tel Aviv’s overwhelming military superiority in the region, including a large nuclear arsenal, the usually reliable backing of Washington and the major European powers; precarious domestic security situations in Syria, Lebanon, Jordan, and Iraq; and an Iran weakened by sanctions and the imminent demise of the Assad government; it is little wonder that Palestinian frustrations reached the point of futilely firing unguided rockets into Israel. Israel’s assassination of Hamas’ military chief lifted the violence to unusual heights. The Palestinians’ best hope is that the Israeli retaliation will be seen as being so one-sided that Hamas will gain enough sympathy in the outside to bring pressure to force a settlement.
The threat of an oil embargo is one of the few weapons the Arab states have to bring pressure on the Israelis; however, the situation is far more complicated than 40 years ago when the Organization of Arab Petroleum Exporting Countries were able to mount a reasonably successful embargo against Israel and its allies. The political landscape in the region has changed so much in recent years that it is doubtful the Saudis and their Gulf State allies would be able to embargo exports at a time when they need the major importing countries to support them in regional conflicts.
Another possibility is an Egyptian ban on oil shipments through the Suez Canal and the Sumed pipeline. While this currently seems unlikely, prolonged fighting in Gaza could eventually force Cairo to consider stronger measures; however, the peace treaty with Israel is still more important to Cairo than support of Hamas.
The major development in the Syrian uprising last week was the formation of a new anti-Assad coalition that the western powers hope will form the nucleus of a post-Assad government. The coalition has already been recognized by France and other countries are considering offering it various kinds of support. In the meantime the situation inside Syria grows more desperate as winter approaches. Very little economic activity is taking place, and the food and fuel situation is becoming critical for the survival of thousands. The refugee population continues to grow rapidly. Fears that the governments stocks of chemical weapons could fall into jihadist hands are increasing the likelihood that foreign military intervention will eventually become necessary, further complicating the regional situation.
3. The IEA’S Forecast
The International Energy Agency in Paris dropped a bombshell last week when its 2012 World Energy Outlook forecast that US tight (shale) oil production would continue to grow more rapidly than expected for the rest of the decade. This would lead to the US becoming the world’s largest oil producer by 2012 and largely energy independent (though not for oil) by 2035. Given the reduction in demand because of all those fuel efficient cars and natural gas trucks that will be running around 20 years from now, North America (includes Canada) may even be net exporting oil in the 2030s.
The world’s press immediately jumped on this “good news,” with nearly every major publication trumpeting the story that the energy crisis was now way off in the future and that all would be well for the next 20 years. Those few writers that did consult people in the peak oil community buried their skeptical comments at the bottom of their stories. The issue, of course, is just how much longer tight oil production will continue to grow at the spectacular rates we have seen in recent years before it too peaks and starts an inevitable decline. Oil production from the Bakken Shale in North Dakota is currently about 660,000 b/d and production from Eagle Ford fields in Texas is about 600,000 and growing.
There is talk that the two fields will produce 2 million b/d in the next year or so. The IEA seems to be saying that tight oil production in the US will continue to grow and peak at about 5 million b/d circa 2020.
Most people in the peak oil community who have looked into the issue have major problems with these forecasts, believing that a peak in tight oil production somewhere around 3 million b/d is more realistic. Remember that demand is currently increasing at about 750,000 b/d each year so that eight years from now an additional 6 million b/d of new production will be required worldwide plus the 3 or 4 million b/d that will be needed each year to replace the depletion from existing fields.
The first problem with the IEA’s estimate is the rapid depletion of fracked oil wells. Despite limited experience with this relatively new technology, some are calculating that production from many of these wells is dropping by over 40 percent or more a year. We do know that the average daily production from North Dakota’s 4630 producing wells is currently 143 b/d. If we assume that the Bakken oil fields are to produce 2.5 million b/d by the end of the decade then it will need some 18,000 wells each producing the average of 140 b/d. While this is a not an inconceivable number, when one takes into account that most if not all of these wells will have be redrilled twice in the next 8 years the number becomes improbable. We shall have to drill more and more wells just to maintain the same level of production.
Another caveat to the optimism over tight oil is the very high cost of the horizontal drilling and fracking of these wells which may run three or four times that of a conventional well. Some people put the cost of producing a barrel of oil from the Bakken at $80-90, which is just about where oil is currently selling in the region. Should the global economy continue to contract, the selling price of fracked oil could well fall below the cost of production, bringing a marked slowdown to further drilling.
There are so many variables in all this, such as the course of the Middle East, that making estimates of production levels 10 or 15 years from now is fraught with so much uncertainty as to not be of much value.
Quote of the week
"We'd all like to believe in the promise of energy abundance, but the global patterns of consumption and production are a reminder that the Hummers need to stay on history's junk heap.” - Loren Steffy, Houston Chronicle Business Columnist
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)