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1. Oil and the Global Economy

Oil prices, which had been falling for a week on concerns about the Irish debt crisis and Chinese inflation, stabilized around $82 a barrel on Thursday and Friday. For the week, prices were down 4 percent, the biggest weekly loss in three months. The Chinese government raised its reserve requirements for banks by 0.5 percent on Friday which is a less drastic inflation taming measure than the markets had feared.

Natural gas futures rose above $4 per million BTUs on Friday on forecasts that temperatures will be well below normal for the next week or so.

US crude production averaged 5.5 million b/d for October, 0.1 percent higher than last year. Production in the lower 48 states grew to 4.86 million b/d, a 0.2 percent gain over last year while Alaskan production fell 0.6 percent to 654,000 b/d.

The API reports that US diesel consumption increased by 8.4 percent year over year, attributing the growth to a rebound in the economy. As other indicators are not showing an economic rebound of this magnitude, it seems possible that some of this increase in diesel consumption is being exported. China is currently suffering from a major diesel shortage and has stepped up its imports significantly.

2. Peak coal in China?

Beijing‘s announcement that it was considering “capping” domestic coal output at 3.6 to 3.8 billion tons in the next five-year plan set off a flurry of commentary as to just what was happening to the industry which provides 70 percent of China‘s energy. Coal production in China has been growing at about 10 percent a year recently and now constitutes nearly one half of global production – clearly an unsustainable situation.

China produced 3.05 billion tons of coal in 2009. As monthly production figures are no longer released, 10 percent growth suggests that 2010 production will be on the order of 3.3 billion tons. If the Chinese are able to continue growing production at anywhere near 10 percent, then their “cap” could be reached next year. Some believe that the term “cap” is Beijing-speak for saying that they could produce at higher levels if they wanted to without admitting that they can‘t grow production much more for geologic reasons. Interestingly some outside observers had predicted that the country would reach peak coal in 2011 as the best deposits had already been exploited and all that was left were thinner, deeper seams of lower quality coal.

Should the growth in China‘s coal production falter over the next few years, the repercussions will be felt in energy markets across the world. As Beijing scrambles to maintain economic growth without its primary source of energy, demand for imported coal, oil and natural gas is bound to rise. We are already seeing increased efforts to buy up foreign coal reserves and increase imports. As the growth of electricity production slows or in some areas actually falls, some Chinese factories are forced to use their diesel-powered emergency generators to keep functioning thereby exacerbating the demand for diesel.

If Chinese coal production actually starts to fall in the next few years, then a new and largely unforeseen factor will have become part of the peak-oil story.

3. China

In recent years, watching developments in China has become nearly synonymous with watching developments in the peak-oil story. With the OECD economies virtually stagnant, economic developments in China frequently make the headlines. Last week was no exception: oil prices plunged as the world waited to see what Beijing would do about a 4.4 percent increase in the consumer inflation rate that was widely thought to be unacceptable. At the same time the country was in the throes of a massive diesel shortage and was scrambling to increase imports.

Much of the increase in China‘s inflation rate was due to major increases in the cost of food which constitutes about a third of China‘s consumer price index. To counter the inflation problem, on Wednesday the government announced price controls on food and releases from state stockpiles. On Friday it increased banks‘ mandatory reserve requirements by 0.5 percent to an all-time high of 18.5 percent. Whether these measures will be effective remains to be seen. The oil markets were expecting much more dramatic measures such as increased interest rates that could potentially dampen growth.

In the judgment of the markets, the inflation situation outweighed the diesel shortage, which clearly got worse during the past week. Thousands of trucks were immobilized due to diesel shortages. Some of the problem seems to be price controls which force private retailers to take a loss on every liter sold and resulted in 2000 stations closing.

Imports of diesel are being increased and exports reduced. The IEA is saying that diesel imports may be increasing by 70,000 b/d to cope with the shortage which could continue into 2011. Last week Beijing‘s State Information Center announced that it expects GDP growth to fall to 8.7 percent in the 4th quarter vs. 10.6 percent growth during the first nine months. Industrial production is expected to be 11.6 percent year over year in this quarter.

The director of China‘s Energy Research Institute expects oil consumption to increase by 3-4 percent in 2011. Other senior Chinese economists say this number is too low and that demand will be higher.

4. Nigeria

A few years back the Movement for the Emancipation of the Niger Delta (MEND) nearly brought Nigerian oil production to its knees through a series of attacks on oil pipelines and pumping stations. Two years ago a government amnesty program bought off most of the senior militant leaders, the attacks largely ceased, and oil production grew. In the last two weeks, a new surge of violence has resumed including the boarding of an offshore oil platform and the taking of hostages.

Although the Nigerian government tries to ban the international oil companies from discussing the effectiveness of the militant attacks, Exxon announced that 45,000 b/d has been shut down in the area of the attack. Shell declared force majeure on exports of Bonny Light crude after an attack on its pipelines.

This time there seems to be a new wrinkle in the insurgent story. A few days after the attacks the Nigerian government announced that coordinated attack by its armed forces had freed 19 hostages and arrested 50 kidnappers. As successful government attacks in the past were few and far between, it has been suggested that senior members of the militancy who were bought off in the amnesty are helping government forces. These observers say that the insurgency is now in the hands of mid-level insurgents who may not be as effective as in the old days.

Anyway, legendary MEND spokesman Jomo Gbomo is back and predicting widespread assaults on Nigeria‘s oil infrastructure in the coming weeks. If the new MEND is as effective as the old, we could see Nigeria‘s exports drop by hundreds of thousands of b/d, further tightening global supplies.

5. Another warning in the UK

Britain‘s Industry Taskforce on Peak Oil & Energy Security says “we are running out of time” to protect the UK economy and make the necessary switch to sustainable energy sources. The task force made up of some of Britain‘s most influential industrial leaders had previously warned that peak-oil production could come as early as 2015. The new warning was prompted by BP‘s Macondo well explosion. While the incident itself had minimal impact on global oil production, the resulting moratorium, new regulations, and delays procuring new blowout preventers will likely set back new deepwater oil production in the next few years.

By 2015 deepwater oil production is expected to supply 29 percent of global crude, up from 5 percent today. The task force says that an average delay of six months in bringing deepwater oil into production would result in a reduction of spare world productive capacity from 3 to 2 million b/d.

Quote of the week

“With price increases largely reflecting scarcity in export supply, global competition for securing foodstuffs is set to intensify.”

–UN Food and Agriculture Organization

Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

  • Republican victories in Pennsylvania and on Capitol Hill will help drilling companies rushing to exploit the Marcellus Shale. The GOP takeover of the House will probably doom efforts to impose federal regulation over gas drilling. In Pittsburgh, the city council voted to ban natural gas drilling; no wells currently exist but the industry has 1,500 acres of city land under lease. (11/18, #20; 11/19, #18, 19)
  • Perla Field is the largest natural gas field ever in Venezuela, says Eni, which just boosted estimates above 2.5 billion barrels of oil equivalent. Venezuela is in talks with China for 3,000 MW of new electric power projects as it seeks to boost capacity by 18,700 MW; it will miss President Chavez’s goal of building and restoring 4,000-6,000 MW of generating capacity this year. (11/15, #12; 11/17, #9; 11/18, #9)
  • Norway-based STX, the biggest maker of oil-rig support vessels, plans to double its ship building capacity in Brazil as Petrobras works through the world’s largest oil-exploration investment plan. Petrobras expects crude oil exports to rise to 800,000 b/d by 2020 – not accounting for its subsalt partners’ production – with imports slated to halt by 2014. So far this year net exports averaged 185,000 b/d. (11/15, #13; 11/16, #17; 11/17, #10; 11/18, #8)
  • The Arab world faces a water crisis by 2015, when it will have 18,000 cu. ft. / person-year, 50 percent below severe scarcity. In eastern Syria, a drought that began in 2007, aggravated by over-cultivation of subsidized cash crops, has displaced hundreds of thousands of people. In Yemen, water scarcity is prompting many farmers to abandon their land and head for the cities. While wealthier oil-producing Persian Gulf nations rely on desalinization plants for drinking water, that’s harder for other nations. (11/15, #5; 11/16, #10, 12)
  • Climate change could lead to colder winters in northern regions, according to a study: “Recent severe winters (in Europe and northern Asia) like last year’s or the one of 2005/06 do not conflict with the global warming picture but rather supplement it.” (11/18, #4)
  • India is not yet ready to consider freeing diesel prices. While gasoline prices were decontrolled in June, diesel decontrol will be done in stages. (11/17, #17)
  • Russia’s Gazprom has joined a growing list of foreign companies searching for oil off Cuba’s coast. In the wake of the BP spill, some in Florida are worried about Cuba drilling as close as 50 miles off the coast of Key West. (11/17, #11)
  • Paladin, the mining company producing uranium in Africa, expects prices to keep rising. China has “piled up” contracts to import, the Paladin CEO told analysts: “[T]hey are nowhere near their target of acquiring in the vicinity of 45 to 50 million pounds per annum by 2020.” Paladin aims to double uranium oxide output to 14 million pounds by 2016 from a projected 7 million in the year ending June 30, 2011. (11/17, #29)
  • The world will run out of oil 100 years before replacement energy sources are available if oil use and development of new fuels continue apace, say researchers at University of California, Davis. The researchers used the current share prices of oil companies and alternative energy companies to predict when replacement fuels could fill the gap left when oil runs dry. (11/16, #5)
  • The US Interior Department may not finish its environmental review of Sale 216 by auction time, making it likely to cancel the March 2011 lease-sale in which energy companies would bid for the right to explore for oil and natural gas in the Gulf of Mexico. (11/16, #20)
  • Analyses suggest peak phosphorus in 2040, with known reserves, mostly controlled by China, the US and Morocco, potentially exhausted within 50-100 years. The world depends on a continuous supply of phosphorus to make fertilizers. Demand is being pushed higher by greater consumption of meat in China and India. (11/15, #23)
  • The UN warns that the world should “be prepared” for higher food prices next year if cereal production fails to increase significantly. It forecasts the global bill for food imports will rise 15 percent this year from 2009 to top $1 trillion for just the second time. (11/17, #6)
  • Used-car prices in the US hit a record high while new-car sales are at 2/3 of pre-recession levels. Through October the average used vehicle sold for $18,570 compared to $17,968 a year earlier. (11/17, #20)
  • US natural gas has dropped to its lowest level in 11 months relative to Canadian supplies as production will rise in 2010 to the highest level in 37 years. US imports through pipelines, 99 percent of which come from Canada, will fall 11 percent to a net 7.33 billion cu. ft. a day this year compared with 2008, the lowest amount since 1994. Boone Pickens says a bill to help convert US trucking fleets to natural gas may pass Congress by year-end with bipartisan support. (11/18, #19, 23)
  • In Alaska, a federal officer has asked a judge to revoke BP’s criminal probation stemming from a Prudhoe Bay oil spill in 2006. This could lay BP open to new penalties in addition to the conviction it received after the incident. (11/20, #18)
  • Republican Congressman Doc Hastings has asked lawmakers to consolidate energy oversight in the House of Representatives. The expected incoming head of the House Natural Resources Committee has called for expanding its jurisdiction to cover all energy policy. Republicans on the Energy and Commerce committee have pushed back against this proposal. (11/20, #13)
  • OPEC, excluding Ecuador and Angola, will increase crude loadings by 1.2 percent this month on rising exports to Asia. OPEC’s export earnings from crude are already up by $161 billion year-on-year and on track to be $177 billion higher this year than last. IEA has forecast OPEC will become increasingly dominant as non-OPEC producers fail to increase output over the next few decades. (11/16, #8; 11/19, #4)
  • China and Russia remain divided on the price of natural gas that Moscow wants to sell to Beijing. Meanwhile Russia plans to harmonize its oil and gas reserves classification with international standards by 2012. For example, reserves of Gazprom under current Russian standards are 25 percent higher than international standards. (11/18, #25; 11/19, #25)
  • Experts say the computer worm suspected of being aimed at Iran’s nuclear program was precisely calibrated to send nuclear centrifuges out of control. Meanwhile banks are shying from oil trade with Iran following tougher sanctions, although the EU says it didn’t intend to restrict oil dealings. The US is investigating whether Schlumberger broke the law by shipping spare parts to Iran from the US and Europe through the UAE. Schlumberger has promised to leave Iran when existing contracts expire. (11/16, #9; 11/19, #6, 7)
  • Although Iraq has failed to arm its growing navy to protect the oil sector, the source of 95 percent of revenue, the British navy is leaving Iraq. Meanwhile Iraq’s farming sector – one of the biggest employers but which contributes only 3 percent of revenue – faces frequent dust storms and scarce rains. Production has suffered from severe drought in the past two years due partly to rising temperatures and a dearth of river water. (11/16, #11; 11/19, #8)
  • The outlook for a new wave of US nuclear reactors remains mixed. Although prominent Republicans say the US should embark on a building campaign, the party dislikes global warming rules. Exelon, the largest nuclear reactor operator, says it won’t break ground on any new reactors until the price of natural gas exceeds double today’s level and carbon emissions cost $25 a ton. (11/18, #29)
  • A $15 million DOE grant in the next year will provide 4,600 electric car charging stations in Austin, southern Michigan, Los Angeles, New York, Orlando, Sacramento, the Bay Area, Washington state and DC, which just unveiled its first public, curbside station. NRG says it will create a network of stations in Houston and hopes to expand. (11/17, #21,28; 11/20, #21)