1. Oil and the Global Economy
Oil prices fell last week on bad economic news from the EU and US, the uncertainty in Washington over the “fiscal cliff” negotiations, slumping gasoline and heating oil prices, and a weaker euro. Brent crude, which on Monday was trading above $112 a barrel, closed Friday at $107.02. New York crude fell about $3 a barrel during the week to close at $85.93. The EIA has decided that West Texas Intermediate oil prices, which are being held down by a glut in the Midwest, are no longer indicative of the global price of oil and has begun using London’s Brent crude in its price forecasts. West Texas has been running about $22 a barrel lower than Brent in recent weeks giving a misleading impression of the prices US refiners are paying for imported crude.
Gasoline futures fell 13 cents a gallon last week on lower demand and increasing inventories. The EIA’s weekly stocks report showed the biggest one-week increase in gasoline inventories in the last 11 years. The US employment numbers release on Friday were messy, with unemployment rate dropping a bit, but large numbers giving up searching for work.
Natural gas futures had an up and down week reflecting changing forecasts for temperatures in the northeastern US. Prospects for large scale exports of US natural gas improved last week with the release of an Energy Department study concluding that exports of LNG would not significantly increase domestic natural gas prices and would generally be of benefit to the US economy. In addition to one LNG export terminal under construction, 15 more LNG terminals costing some $5 billion each have been proposed. The issue is controversial as many fear that the domestic price of natural gas will become linked to global prices which are several times higher than current US prices. The environmental community also is concerned about increased use of fossil fuels and many in the peak oil community are not so sure that there will be that much spare natural gas around 10 or 15 years from now especially if there is more use by electric plants and chemical manufacturers.
The European economy had yet another bad week. While the Greek debt crisis has been pushed down the road for a while, last week the Bundesbank made a substantial reduction in its forecast for German GDP growth in 2013 and the ECB did the same for the EU as a whole. Over the weekend, Italy’s Prime Minister Monti announced that he was going to resign and former Prime Minister Berlusconi announced that he would try for a comeback.
Venezuelan President Chavez has returned to Cuba for another cancer operation, this time designating Vice President Maduro, a former bus driver, union leader, and Chavez loyalist as his successor should he not be able to continue. An election will have to be held within 30 days should Chavez leave within the next four years. The US currently is importing about 1 million barrels of oil a day from Venezuela -- a country with a long history of export interruptions during times of political ferment. When the Orinoco heavy oil deposits are considered, Venezuela may have the largest oil reserves in the world, but Venezuelan oil production has been drifting lower due to under-investment, expropriations, and general mismanagement by the Chavez government. There are considerable doubts as to whether Chavez’s military-leftist coalition will last after he leaves office.
The Canadian government approved more than $20 billion of investments in its oil industry by Chinese and Malaysian government-controlled oil companies. At the same time Ottawa made it clear that it was the end of foreign government investment in its oil sands, except in very unusual circumstances. Further development of the sands, however, will require massive amount of capital – some $650 billion – over the next ten years which is beyond what the Canadians can finance themselves. Canada’s Prime Minister warned that the deal should not be seen as the beginning of a trend in which the Alberta oil sands are gradually sold to China.
2. The Middle East
Much of the news last week focused on the demonstrations in Egypt and the fighting in Syria, where the insurgent forces are slowly closing in on the capitol. The Syrian rebels have formed a unified military command to control the final push. Reports that the Assad government has begun to move chemical weapons from their storage bunkers, and might resort to using them to keep the insurgents at bay, resulted in a stern warning from Washington that such action would likely result in Western intervention in the fighting. A meeting between the US Secretary of State and Russia’s Foreign Minister produced no results.
Concern now is shifting as to what a post-Assad government might look like, who would control the chemical stockpiles, and just how much chaos would ensue after Assad falls. The people of Syria are sharply divided along numerous ethnic and tribal and religious lines so the prospects for stability are questionable. Support for the uprising was far from universal and many ethnic and religious groups, including Christians, Kurds and Shiites have concerns as to how they will be treated by a Sunni-majority takeover. The primary concern from the peak oil prospective is whether the Syrian uprising is another step in region-wide turbulence that will eventually spill over to affect oil exports.
Thousands of Kuwaitis demonstrated over the weekend demanding the dissolution of the newly elected Parliament which they claim is illegitimate. The election of the new Parliament was widely boycotted after the emir changed the election rules. The opposition said the new rules rigged the election so they could not win. So far there has been little political trouble in the Gulf oil states, with Bahrain being the main exception, but this could easily change as political ferment and activism sweeps the region putting unelected heredity rulers in danger. Kuwait is currently producing about 2.8 million b/d.
The confrontation between Iraq’s Kurds and the Shiite-controlled government in Baghdad continues. Baghdad has set up a new military command along the border with Kurdistan. The Kurds have their own armed forces and have moved tanks and artillery to the ill-defined border between Kurdistan and rest of the country. The issue, of course, is control of Kurdistan’s oil revenues which the Kurds would like to keep at home. The Kurds are roughly 15 percent of Iraq’s population and likely have more than 15 percent of its oil. With western oil companies moving in to exploit Kurdistan’s oil and talk of a new export pipeline to Turkey that would allow the Kurds to export their oil without any involvement from Baghdad, the situation is slowly becoming worse.
There seems to be no appetite on either side for open conflict between the two for no one can predict the outcome. For now Baghdad is withholding revenue for Kurdish oil being exported through the northern pipeline and Erbil periodically withholds oil from the pipeline. For now the situation is stalemated, but over the longer run the course of this confrontation could have a lot to do with how much oil gets exported from Iraq.
Iran appears to be having increasing trouble exporting its oil. With 95 percent of the world’s tanker fleet banned from carrying Iranian crude, Tehran is dependent on its own fleet of 42 ships which are having increasing difficulties making deliveries, ranging from insurance to the ability to enter foreign ports of the flag that they sail under. The transponders of 31 Iranian owned tankers are still signaling that they are registered in Tanzania even though the government say it has de-registered all Iranian ships.
The US has extended sanction waivers for all the major countries, including China and India, that import Iranian oil signifying that they are making good progress in cutting back imports. Tanker trackers report that Tehran is sending more cargoes to China than Beijing is willing to accept so some ships are being forced to wait weeks to unload. The sanctions are now costing Tehran about $100 million a day in lost revenue. The fall of the Assad government would be another setback for Iranian foreign policy further complicating relations in the region. There is no news of any progress on the nuclear issue.
3. The Doha Climate Summit
After 18 years of UN conferences on climate change, yet another one ended without meaningful progress - only a few face-saving compromises such as extending the Kyoto emission limits until a new agreement can be reached. The Kyoto agreement, of course, only covers about 15 percent of global emissions.
After an extra day of talks agreement was reached that the rich nations might compensate poor ones, such as the 43 small island and coastal nations that are close to going underwater, for their losses. This will only be decided after another conference in Poland next year. As has been the case from many years, the heart of the climate change argument is whether the rich nations, which have got that way by burning lots of carbon over the decades, should pay for the poorer ones to get rich without burning much carbon. This is obviously a non-starter which is why this argument will continue until either the climate becomes obviously life-threating to nearly everybody, or new sources of energy are discovered.
Although the next official UN report on climate change in not due until the end of 2013, other groups continue to crank out dire predictions. NOAA has a new report out talking about a sea-level increase of 6 feet or more by the end of the century and the World Bank has started to say that we could see a 40C hotter world by 2100. Theses temperature increases will not be distributed equally so that large parts of the world could see its agriculture output greatly reduced before then.
China, which is now the world biggest greenhouse gas emitter, is clearly conflicted about emissions and climate change. With the nation committed to rapid economic growth and little else, the idea of cutting energy consumption is beyond consideration. Beijing is concerned about the state of its air quality which it realizes is killing hundreds of thousands of its citizens, if not millions, each year. In its current five year plan it is making a small effort – 5 or 10 percent – to reduce sulfur and nitrogen dioxide and fine particulate matter but is reducing carbon burning only through increased efficiency. The new government will reverse a decision and increase dam building for electricity even if thousands have to be moved and wind and solar is getting much attention. Overall, however, the directly observable effects of global warming will have to get much worse before Beijing gets serious.
President Obama has asked Congress for $60.4 billion to cover the costs of Hurricane Sandy. How this proposal which is less than that states asked for fares in the midst of fiscal cliffs and debt limit negotiations remains to be seen. Some are adamant that this money will have to be offset by reductions in social services elsewhere in the budget.
Quote of the week
"… money may be the most uncertain factor in the IEA scenario. It has the price of a barrel of oil rising to $125 in real terms by 2035. Such an increase would fund the maintenance of crude oil production, drive up production of unconventional oil, and encourage transportation's shift toward NGLs. The catch: The Organization of the Petroleum Exporting Countries would have to restrain its production as non-OPEC production surges to allow prices to rise. The scenario is silent on the chances of that.”
- Richard A. Kerr, Science
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)