1. Production and prices

Since the beginning of August oil has hovered around $70 a barrel as the markets tried to decide whether the prospects for an imminent economic rebound trumped weak global demand. On Friday the pattern was broken when new reports showed weaker-than-expected US retail sales and a drop in consumer confidence. The equity markets and oil prices fell with oil closing the week at $67.51– the lowest since July 30th. As we move towards the fall, pessimism about the immediate future of oil prices seems to be gaining the upper hand.

With OPEC continuing to produce well above quota, and the summer driving season drawing to a close, many analysts expect a further decline in prices. The IEA reported that OECD stockpiles rose by a counter-seasonal 8.5 million barrels in June which is 5.5 percent above last year. The Agency also reports that global crude supply rose in July by 570,000 b/d to 85.1 million b/d – with two-thirds coming from non-OPEC production.
US crude stockpiles increased by 2.5 million barrels last week. Demand for distillates and jet fuel remains 10 and 13 percent below last year, respectively; and even gasoline consumption, which has remained relatively strong this summer, has begun to shrink a bit.

Reports of 10 percent Chinese industrial growth have led the IEA to increase its demand forecasts for 2009 and 2010 by 190,000 b/d and 70,000 b/d, respectively.

2. Is China really Recovering?

All week there was a steady stream of new reports from China: — oil imports jumped 18 percent year on year; iron ore purchases rose 5 percent month over month; industrial output up by 10.8 percent in July; imports and exports continue falling; and Beijing to triple use of renewable energy by 2010.

Most of the news seems good and conventional wisdom is settling around the notion that China may lead the world out of recession. Many, however, remain skeptical. China’s stimulus boom, paid for with $586 billion of state reserves and a loosening of credit, certainly has started a lot of infrastructure projects and sparked a 60 percent jump in property sales. But is this a real recovery? Exports, the mainstay of China’s economic miracle, are still down by nearly 25 percent and much of the recent boom is fostered by what may be “excessive liquidity.”

With a population of 1.33 billion, Beijing believes it must continue rapid economic growth to absorb millions of new graduates into the modern sector of its economy and to maintain political stability. This need to grow vs. the realities of the global economy, resource depletion and climate change will be at the heart of China’s policy debates for many years to come.

One of the more interesting stories out of China last week was the statement by its top climate change policymaker that its carbon emissions will only start falling by 2050. This 40 year away goal could easily be a bargaining chip for the next round of emissions negotiations this December. Beijing has numerous programs underway to reduce emissions, but they pale in comparison with the 10 percent GDP and industrial growth rates China has seen in recent years. Moreover, continued rapid growth in the consumption of oil, coal and natural gas is almost certain to encounter shortages due to global depletion — despite China’s best efforts to gain a bigger share of world mineral production.

For now the issue is whether China can maintain anything like its current growth rate without major improvements in the world economy and a jump in its exports. Over the longer run China faces very severe problems brought about by rapid industrialization and climate change – air and water quality, droughts, falling water tables, shrinking rivers, and in the longer term coastal flooding. At some point China will have to come to terms with these issues at the expense of growth.

3. Mexico

The rapid drop in Mexican oil production is starting to have effects across the country. With the possibility that production from Cantarell could fall as low as 400,000 b/d by the end of the year, from a high of over 2 million b/d five years ago, the government is facing serious fiscal problems. Finance Minister Carstens told the Mexican Congress last week that oil production may fall by 4.9 percent next year and the government is preparing to raise taxes to cover a $23 billion hole in the budget from lost oil revenues. Oil revenue funds 38 percent of the government’s budget.

Mexico is planning to spend on the order of $20 billion annually for the next three years to find and develop new oil fields. Last week it was learned that the Chicontepec unconventional crude project, that has already cost $3.4 billion, is still only producing 30,000 b/d. PEMEX management is already questioning whether the remaining $8 billion planned for the project will be worth it.

Energy Minister Kassel said last week that any large increases in Mexican production will have to come from deep water wells which require that oil prices remain above $70-75 a barrel to be economically viable.

[Note: Mexican energy expert David Shields will be updating the story from Mexico at this year’s ASPO-USA conference in Denver, October 11-13.]

Briefs

  • From an ongoing study by the UK’s Industry Peak Oil Task Force, early indications are that the recession has moved the peak a little further into the next decade, but steepened the descent in production thereafter. (8/10, #16)
  • In Venezuela, the bidding to explore seven oil fields — called the Carabobo auction — was just delayed for the second time, a reflection of investor nervousness over the financial terms, doubts about the socialist Chavez government and concerns about the global economy. As inhospitable as Chavez may seem to foreign investors, the relatively few opportunities for oil development elsewhere can be seen as even riskier. (8/15, #4)
  • Iraq’s oil exports have hit a post-war high, but its failure to attract the huge investment it needs to overhaul crumbling infrastructure will prevent it from becoming one of the world’s top oil powers for some time. (8/12, #7)
  • Oman, the largest Persian Gulf oil producer outside OPEC, pumped 6.6 percent more crude in the first six months compared with a year earlier, according to the Ministry of National Economy. (8/12, #8) [Editors’ note: production is still 20% below 2001 peak.]
  • The US government is prepared to provide up to $10 billion in loans to finance the development of massive hydrocarbon reserves off Brazil’s coast, a Brazilian official said Wednesday. (8/11, #10)
  • In Brazil, the future got cloudier this week for oil companies with word the government was quietly debating increasing state control over the most promising reservoirs, which are in deep water buried under a rugged blanket of salt more than a mile thick. (8/10, #9)
  • There are some estimates out there that show US oil production is declining by an annual rate of nearly four per cent. This means that the US –absent any major finds–will be able to supply less than 25 per cent of its needs by 2012 given current consumption levels. Factor in the likelihood that less oil — if any — will be coming from Mexico by that time and it all suggests that the US dependency on outside sources of oil is set to rise in the coming years. (8/15, #15) [Editor’s note: US production has increased 3% year-to-date this year over last.]
  • Secretary of State Clinton pledged U.S. support for Nigeria’s efforts to combat militants who have slashed oil production in the Niger Delta, while the country’s foreign minister predicted peace would be restored to the region by year’s end. (8/13, #12)
  • Movement for the Emancipation of the Niger Delta (MEND), an amalgamation of armed militant groups in the Niger Delta, has expressed doubt about the possibility of the U.S. offering military assistance to Nigeria to fight militancy in the Niger Delta. (6/13, #13)
  • Oil should fall to between $4 and $10 a barrel based on a technical analysis called Elliott Wave principle. The forecast rests on a “supercycle” theory, which through a series of five waves from last century suggests a decline from last year’s peak. “The Elliott-Wave picture pretty much assures us that there will be no additional waves of advance to extend the ‘peak oil’ mania,” Robert Prechter said in the report. (8/13, #8) [Editors’ note: the drop from $147 to $33/barrel was shocking and humbling to many analysts last year, but this is delusional]
  • US oil demand has fallen 8.1 percent from its December 2007 peak to March 2009, and is currently running about 19 million b/d. The global oil supply peaked at 86.9 million b/d in July 2008 — just as prices peaked — and has since fallen to 82.3 million b/d, down 4.5 mbpd or just over 5 percent. (8/11, #24)
  • Oil and natural gas rigs operating in the US rose by two to 968, according to Baker Hughes. That is still down 52% from the 2008 peak of 2031 rigs drilling at peak. (8/15, #12)
  • The Horn River in Northeast British Columbia could become another Barnett Shale in terms of headline-making gas production…while a well in the Barnett Shale well might yield 3 to 4 billion cubic feet of gas during its producing lifetime, some Horn River wells could recover 10 billion cubic feet. (8/11, #21) [Editors’ note: see last week’s article analyzing Barnett shale gas production, by Art Berman; his numbers differ from these.]
  • In the remote Peace River country of British Columbia, six bomb attacks since last October have been made on natural-gas pipelines near Dawson Creek by someone demanding that their operator, EnCana, dismantle them. (8/14, #17)
  • Chesapeake Energy Corp. wells drilled through the Barnett Shale, the biggest Texas natural-gas field, may have caused earthquakes in the Dallas-Fort Worth area according to company and university scientists. (8/15, #9)
  • A Halliburton Energy Services representative defended hydraulic fracturing as a practice needing no more regulation, while a researcher said analysis of health concerns is hampered by a lack of disclosure of some chemicals used in the drilling process. (8/10, #14)
  • To make one Haynesville Shale well produce its natural gas, drillers need 4 million to 5 million gallons of water. Where the latter precious resource comes from is a big concern for gas companies, rural industries, government officials and rural populations. (8/11, #17)
  • In Australia, senators voted 42 to 30 against a law which included plans for a carbon trading system similar to one used in Europe. Australia, the world’s biggest coal exporter, was proposing to reduce greenhouse gases by between 5 percent and 15 percent of 2000 levels in the next decade. (8/14, #11)
  • The US Senate should abandon efforts to pass legislation curbing greenhouse-gas emissions this year and concentrate on a narrower bill to require use of renewable energy, four Democratic lawmakers say. (8/14, #12)
  • US Energy Secretary Chu said the US could “offload our total dependence on foreign oil” by using cars that rely on next-generation biofuels and turning to electric vehicles. (8/12, #19)
  • The average mileage for new US vehicles rose from 21.4 miles per gallon in June to 22.1 mpg in July. That may not sound like much, but it’s the highest mileage that researchers at the University of Michigan have seen since the EPA reconfigured mileage estimates in October 2007. It’s also the biggest one-month jump. (8/14, #14)
  • The popular US cash-for-clunkers program may be drawing money from other consumer purchases and could also undermine future car sales, US economists warned. (8/14, #15)
  • General Motors has cast doubt over the long-term future of the Chevrolet Volt by claiming it may not be commercially viable and other rivals may overtake it with superior and more advanced technology. (8/13, #18)
  • A growing number of US utilities, rather than depend on independent power producers to build large solar projects, have launched multi-million dollar initiatives to own and operate their own solar assets. These utilities have announced plans to build more than 800 MW of solar installations that they would own and operate. But this amount is still a small fraction of the country’s planned power generation. (8/15, #11)
  • In Ontario, lower economic activity, a relatively cool and wet summer, and conservation programs have combined to lower demand for electricity by 19 percent. Roughly 60 per cent of the fall in power demand is the result of reduced economic activity (8/15, #13)
  • Slack demand for electricity across the US is leading to some of the sharpest reductions in power prices in recent years, offering a break for consumers and businesses who just a year ago were getting crunched by massive electricity bills. (8/12, #19)
  • India’s first fast breeder nuclear reactor, being built at Kalpakkam to produce 500 MW of power, is facing a cost overrun of over 40 percent and a one-year delay. (8/15, #8)
  • The big hurdle for Calvert Cliffs III and 21 other US nuclear power reactors now in the development pipeline is all about money – finding the billions in loans to build them. And the key to getting those loans is winning federal guarantees to back them… Cost estimates to build a new nuclear power plant have more than tripled in the past five years, according to industry-funded reports. (8/15, #18)

Quote of the Week

    “So while the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. The recent market rallies in stocks, commodities, and credit may have gotten ahead of the improvement in the real economy. If so, a correction cannot be too far behind.” (8/15, #6)
    — Nouriel Roubini, economics professor, Stern School of Business, NYU