By Tom Whipple
1. Oil and the Global Economy
Despite growing oil production, and record inventories, prices were little changed last week, with NY oil hovering around $95 and London around $104. Although demand for oil remains weak across much of the world, a stronger dollar and hopes that the US economy is starting to grow supported prices. The economic news from Europe was almost universally bad, mixed from China and the US, and better from Japan. US crude inventories, which are now at their highest level since 1931, fell slightly last week as refining increased. US oil product exports, mostly to Latin America, have been increasing in recent months despite weak domestic consumption.
US natural gas prices have been quiet recently as the country is in the “shoulder period” between the heating and cooling seasons. The Obama administration approved construction of a second LNG export terminal last week. This move came over the objections of many who fear that large exports of natural gas will increase prices and eliminate the competitive advantage that the US petrochemical industry is banking on. Twenty six companies have applied for LNG export permits, but so far only two have been granted.
US gasoline prices have increased rapidly in the last week due to troubles at several refineries. In the upper mid-west, prices have climbed some 40 cents a gallon and are expected to go higher. The national average price for regular is now back up to $3.65 a gallon ($4.27 in Minnesota), after peeking at $3.78 in February, but is expected to increase by another 20 cents or so before prices begin to fall. There are already concerns as to the effects of the high gasoline prices on US economic growth in the current quarter.
The announcement of a new oil price-fixing probe by European antitrust regulators involving at a minimum Shell, BP, Statoil, and Platts is raising concerns. The issue focuses on how Platts settles on a daily price fix that determines oil costs in the $3.4 trillion global crude industry. In the past, Platts has resisted attempts to regulate its oil price setting business.
The British government is taking the probe seriously and has been issuing threats as to the harsh financial penalties in store for price fixers. Even the US Congress is weighing in with a request to the Justice Department to investigate the possible impact of any European oil price-fixing on US gasoline prices.
The International Energy Agency caused quite a stir with the new issue of its medium-term oil market report last week. In the report, the Agency forecasts that non-OPEC oil production, mostly from US tight oil fields and Canada’s tar sands, will increase by nearly 1 million b/d annually for the next five years. This “supply shock” could disrupt the world oil market which is not expected to grow as fast as the supply. OPEC sales are to remain stagnant during the period and its spare capacity is to increase.
Conventional wisdom in the peak oil community has held that the rapid depletion of tight oil wells and the high costs of production will slow the growth of tight oil production in the next 3-4 years. The IEA believes that new and more efficient drilling techniques will not only reduce costs of production, but will increase the yields from tight oil fields.
2. Middle East
Syria: The uprising against the Assad government remains the focus of events in the region. Last week Turkish Prime Minister Erdogan visited Washington in hopes of increasing US involvement in the conflict. The US and Russia seem determined to organize a peace conference that would bring all sides together for political discussions despite protests from Damascus and the various rebel groups that such a conference is a non-starter. The Syrian government has taken the offensive to enhance their military position around Damascus and the corridors to Jordan, Lebanon, and the Alawite enclaves along the NW coast. Hezbollah militia units from Lebanon are now directly involved in the fighting against Sunni insurgents.
Moscow is signaling its continued support for Assad by increasing its naval presence off the coast and possibly delivering more advanced air defense and anti-ship weapons to the beleaguered government in hopes of deterring intervention by Western or Israeli forces.
In the meantime, the fighting continues to become more violent; the refugee population swells; Syrian cities are being blown to pieces; there is little left of Syria’s economy; and hatreds deepen. Currently it seems that increased Russian, Iranian, and Hezbollah support to the Assad government will allow the conflict to continue with no end in sight. The aftermath of the uprising seems likely to be chaos lasting for many years or even decades, increasing the possibility that troubles will eventually spread to oil-exporting states.
Iraq: The spiral into civil war continues with daily bombings killing dozens occurring across the country. While the monthly death toll, 700 in April, has not reached the highs of 3,000 or so reached in 2006-2007, there is little to suggest it will not continue to climb. The attacks and counter attacks between Sunnis and Shiites is becoming reminiscent of what took place six years ago, but this time there are no US forces to intervene.
While most Iraqi oil production is in southern Iraq and has been relatively isolated from the Sunni-Shiite-Kurd turmoil in the north, bombs have started in the southern oil capitol of Basra. The Iraq-Turkey oil pipeline was blown up yet again on Friday, effectively shutting down exports from northern Iraq. Although these pipeline bombings are usually repaired quickly, the increasing turmoil and the setting of multiple bombs could easily close the pipeline for an indefinite period.
The agreement announced last week between Turkey and Iraq’s semiautonomous Kurds to develop oil projects sets off a new and dangerous round of uncertainties. Baghdad is obvious outraged that the Kurds with the help of Turkey and major international oil companies are “stealing” their oil. Washington is caught between a desire to help its longtime ally, Turkey, and the desire not to further undercut the tottering Iraqi central government.
Israel: With the nuclear confrontation relatively quiet during the run-up to Iran’s presidential election, attention has turned to Israel’s relationship to the fighting in Syria. So far Tel Aviv’s has confined its actions to three air strikes against advanced weapons it believed were being transferred through Syria to Israel’s arch-enemy, the Hezbollah militias in Lebanon. The prospect of Hezbollah obtaining advanced missiles and chemical munitions that could destroy targets in Israel has Tel Aviv very upset. The level of rhetoric between Israel on one side and the Syria, Tehran, Moscow, Hezbollah axis on the other has been increasing with Damascus now threatening missile strikes in Israel in retaliation for another Israeli air strike on Syrian territory.
Direct large-scale involvement of Hezbollah fighters in the fighting raises the possibility of Israeli air strikes on Hezbollah forces in Syria, and Syrian retaliation against Israel. Should this happen, the Middle Eastern situation would quickly become a much wider war with unknown but likely serious consequence for many countries in the region, the US, EU, and consumers of Middle Eastern oil.
3. China at a turning point?
For the last 30 years China’s economic growth has been the envy of the world with annual increases in GDP output frequently exceeding 10 percent. Such economic growth has required prodigious increases in energy consumption which in turn has resulted in unprecedented levels of air, water, and soil pollution. It is becoming clear the increases in energy consumption can no longer continue at the pace we have seen in recent decades.
Newly released data shows that Beijing’s economic growth is slowing due to falling exports, problems involved in growing an economy the size of China at high rates, and the first steps at controlling pollution. Most economists are revising downwards their estimates of how fast China will be growing in the immediate future. Some are even more pessimistic about China’s prospects, noting the relatively slow growth of electric power production so far this year, and huge debts the country has built up in the last ten years.
China’s new President Xi Jinping is in charge of drawing up a plan for economic reforms that will be presented at a Party Congress in the fall. Moreover, the government has pledged to control air pollution which occasionally approaches lethal levels. There are reports that China has already reduced the pace of new thermal power plant construction from two a week to one and is making an effort to cap coal consumptions just above 4 billion tons a year – quadruple US consumption.
All this will pose a major challenge for China’s government in the next few years. Keeping economic growth above 7 percent without large increases in coal and oil consumption will be difficult. Although Beijing is making major efforts in increase hydro and other forms of renewable power, well over 70 percent of its current power production comes from coal.
Nearly all forecasts of future global oil consumption assume that China will continue to increase it annual demand for oil at a rate of 500,000 additional b/d every year or better. It is still too early to tell where all this is going, but we may be seeing the first signs that the Chinese economic juggernaut is slowing and that the annual demand increases we have seen for the last 30 may become much smaller.
4. Quote of the Week
- “It would be deeply worrying if prices had been driven up for households, especially given all the work government had been undertaking to deal with the cost of living. The European Commission investigation should run its course as it is critical it get to the bottom of the issue.”
–Spokesman for British Prime Minister Cameron
5. The Briefs
- The International Energy Agency is forecasting the use of natural gas as motor fuel will increase from the current 1.4 percent of share of the market for transportation fuel in 2010 to 2.5 percent in 2018. (5/14, #11)
- A new study concludes that loss of tropical rain forests is likely to reduce the output of hydropower projects as fewer trees will reduce evaporation and the subsequent rainfall. (5/14, #13)
- Angola is becoming increasingly dependent on China as a market for its oil as US demand for imported light, sweet crude is replaced by tight oil from North Dakota and Texas. (5/14, #18)
- The IEA is forecasting that the demand for oil from Africa will increase quickly during the next five years due to rapidly rising transportation and power generation needs. (5/14, #19)
- China will build additional storage sites for its strategic petroleum reserve this year. The IEA now forecasts that Beijing will add 245 million barrels to its reserves, up from 169 million in last year’s forecast. (5/14, #21)
- Widespread corruption and criminal gang involvement in India’s coal industry is having a significant impact on the country’s ability to mine sufficient coal to support its economic growth. (4/14, #21)
- New polling shows that British Columbia’s provincial elections may stymie federal government plans to build pipelines to Canada’s west coast in order to export tar sands oil to Asia. (5/14, #30)
- A Financial Times story reports that increases in drilling efficiency have lowered the cost of extracting tight oil from North Dakota to $35-60 per barrel which is considerably lower than outside estimates. (5/15, #12)
- The Arctic Council, which now includes China as an observer, has reached agreement on procedures to deal with oil spills in Arctic waters. (5/15, #12)
- Foreign oil companies are preparing to explore for oil in war-torn Somalia. The effort could trigger more conflict as the companies encounter the numerous Islamist extremist groups active in the country. (5/15, #21)
- Brazil’s state-controlled Petrobras sold $11 billion worth of bonds at auction last week as part of the $237 billion it expects to spend in the next four years to exploit deep water fields off its coasts. Petrobras hopes to double its production from the current 2.2 million b/d to 5.7 million by the end of the decade. (5/15, #23)
- Venezuela is completing an agreement to borrow $4 billion from China to finance an increase of Orinoco heavy oil production from the current 140,000 b/d to 330,000 b/d. China is already importing 626,000 b/d from Venezuela to pay off $30 billion worth of loans currently outstanding (5/16, #24)
- Venezuela’s economy continues to deteriorate due to strict currency controls. There are serious shortages of almost all imported products including toilet paper. (5/16, #25)
- New research shows that one of Japan’s shut-in nuclear reactors is resting on a seismic fault. This will likely lead to the permanent decommissioning of the reactor and slow government plans to bring more nuclear power back online. (5/16, #28)
- The decline in the share of US natural gas production coming from Gulf waters from 24 to 6 percent in the last decade lessens the chance of gas production being damaged by hurricanes. (5/16, #32)
- The operators of Israel’s two offshore natural gas fields say that a third field is showing promise and could contain 2 trillion cubic feet of gas. These discoveries increase the possibility that Israel will be energy independent in the near future. (5/17, #9)
- Nobel Energy of Houston is pressing Tel Aviv to make a decision about exporting some of the newly discovered natural gas as the company is anxious to get on with the design of the pipeline infrastructure that will be required to transport the gas. (5/18,#13)
- Shell has declared force majeure to gas supplies coming to its LNG facility in Nigeria. The company announced that the pipeline has suffered a “leak” which is the usual euphemism for pipeline sabotage. The government does not permit oil companies to announce the effects of insurgent and criminal attacks on its oil infrastructure. (5/17, #17)
- Mexico’s Pemex announced the discovery of its third ultra-deep (10,000+ ft.) field. Last year Pemex made its first two ultra-deep commercial discoveries 200 miles east of the Texas-Mexico border in the Gulf after 23 attempts. (5/17, #19)
- North Dakota reports that oil production hit an all-time high of 782,000 barrels of oil per day during March for 8,634 producing wells. The state says there still is adequate rail capacity to move the oil to coastal refineries. (5/17, #23)
- BP Is asking for British government support in an effort to pressure the US into lowering the fines that have been levied for its 2010 Gulf oil spill. The spill has now cost the company $42.4 billion. (5/17, #24)
- Britain has issued more than 300 licenses for onshore oil and gas exploration since the ban on hydraulic fracking was lifted in December. (5/18, #28)
- Kuwait has suspended several senior executives of its oil company after the government learned the company had authorized the payment of a $2.2 billion penalty to Dow Chemical after Kuwait unilaterally withdrew from a $17.4 billion petrochemicals project. (5/18, #14)
- Hopes that Ohio’s Utica shale will be a major oil producer are fading. New data shows that Ohio produced only 1,742 b/d of oil last year as compared to 780,000 b/d from North Dakota. (5/18, #25)
- Last week the US approved a new $10 billion LNG facility in Texas that could begin exporting LNG by 2015. There is still concern that large LNG exports will drive up natural gas prices in the US hurting thereby the economy. The 5.2 billion expansion of the Panama Canal will allow the economical transport of US LNG to Asia. (5/18, #27)
- The US drilling rig count remained unchanged last week at 1,769 rigs. Rigs targeting gas increased by four while those targeting oil decreased by four. (5/18, #30)