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1. Production and prices

Oil prices started the week fairly strong with expectations that recent highs of $82 a barrel could be surpassed. By Wednesday, however, sentiment changed; with the dollar strengthening and the equity markets falling, oil fell to close out the week at $77 a barrel.

The stocks report last week contributed to the uncertainty. Platt’s survey of analysts said the EIA figures would show a 1.2 million barrel increase while the API’s survey released the night before the EIA report showed a 4.4 million barrel decrease. When the EIA report came out on Wednesday, it showed a 900,000 barrel increase in crude stocks and a 1.7 million barrel drop in gasoline supplies. US propane stocks dropped by nearly 3 million barrels as unusually wet weather across the mid-west increased the need to dry grain prior to storage. Local shortages of propane developed in Iowa and Illinois as demand outgrew the capacity of normal supply lines.

US demand for petroleum products remains down about 4 percent from last year with gasoline demand down less than half a percent.

Concern seems to be growing that $80 or above oil may harm the prospects for a rebound in the badly stressed US economy. Last week Fortune magazine joined the Wall Street Journal in exploring the issue. So far the consensus among the authorities consulted seems to be that we are safe at $80 a barrel but should gasoline prices push above $3 a gallon or 6 percent of average household budgets, fuel prices will become an increasing drag on he economy.

Last week US Treasury bills traded for a while at negative interest rates and gold hit a new all-time high near $1,150 an ounce.

2. Will China continue to grow?

Commentators inside and outside China are beginning to question the sustainability of the 8.9 percent GDP growth that Beijing’s statisticians reported last month. While there is little doubt that the massive surge in government spending coupled with extremely loose lending practices resulted in a swift and dramatic increase in activity, the number of observers questioning just where and how this money was spent is increasing.

As the Chinese government expresses satisfaction with the progress and many outside observers look at the Chinese economy as the new wonder of the world, others point out inconsistencies and imbalances which are growing within Beijing’s numbers. Much of the spending is going into new investment in new manufacturing capacity which is now well in excess of that required by domestic demand and weak exports.

Although the government claims retail sales are growing by 15 percent year over year, observers note that much of this increased production may be going into warehouses as the Chinese count factory shipments as consumption. China’s command economy can simply order factories, particularly the government owned ones, to keep producing and the banks to keep lending. An asset bubble in real estate is clearly growing and the reported year-over-year increases in automobile sales of 70, 80, and 90 percent are simply too much to be true. Reports that state enterprises are being forced to buy large numbers of cars for which they have no economic use continue to appear.

While China’s economy may have been growing for the past year at or near the claimed rate, given that the export situation is unlikely to improve, this situation is not sustainable much longer. Since projected increases in world oil consumption during the next year are largely predicated on increasing demand from China, any deterioration in Beijing’s rapid economic growth will call these forecasts into question.

3. Copenhagen

It was a rough week for prospects that a definitive agreement will be reached at the Copenhagen climate talks next month. US Senate leaders said they would put off debate over the climate change bill until next spring due to the increasingly difficult economic and employment situation. Recent polls show that popular sentiment has changed so that a majority of US and British citizens now doubt that global warming is man made or that it will require expensive restrictions on emissions. President Obama acknowledged that time had run out for a binding climate pact to be drafted in December and has begun work on a two-stage process.

While the US Congress dithers on emissions controls, the UN official in charge of the Copenhagen negotiations says that the industrialized nations are releasing plans to curb emissions – and that he now has at least tentative targets from all the industrialized nations except the United States. For now he would be content if the US could come up with a numerical mid-term target and a commitment of financial support.

While the US and China, the biggest emitters, are still out, last week the Russians said they will try to reduce emissions by 25 percent. The ground rules for the Copenhagen agreement call for binding numerical commitments from the countries that were industrialized in 1992 while those still “industrializing” such as China are allowed a more flexible position. Even without a firm commitment from the US Congress, some progress may still be made next month.

4. Uranium

Nuclear power has long been touted as the solution to peak oil, global warming, energy security, and a host of other ills. The underlying assumption has always been that there will be plenty of uranium to fuel a major increase in the number of nuclear reactors and most countries are contemplating building more of them despite their high costs, the dangers of radiation leakage and nuclear proliferation, and problems with nuclear waste.

Last week the last of part of major four-part study of the nuclear industry was published by the Swiss Federal Institute of Technology in Zurich. The study raises questions of whether there will soon be enough uranium to support the existing reactors, much less a massive increase in nuclear power generation.

The study reports that the existing nuclear power plants consume some 65,000 tons of uranium each year. Of this, new mining of uranium ore provides only about 40,000 tons each year. The remaining 25,000 tons comes from civilian and military stockpiles of reprocessed fuel and enriched uranium. The military stocks come from disassembling the portions of vast nuclear arsenals that the US and the USSR built up over the 45 years of the cold war. The surplus military uranium stocks are running out and without them the civilian stocks will last only until 2013.

If this report has it right, the prospects for increasing uranium ore production on the scale needed to support a major increase in nuclear power generation are not good. Neither are the immediate prospects for breeder reactors, thorium or fusion reactors. While these may be in our futures, they would seem to be decades away.

Quote of the Week

  • “[A world oil study of mine in 1990] attracted the interest of Petroconsultants, a company based in Geneva that was used by the international oil companies to assemble a valid database on oil activities around the world, including the size of discoveries and drilling statistics. They invited me to redo the study but this time using their comprehensive database of virtually all the world’s fields. I was joined in this project by Jean Laherrère, formerly Exploration Manager of the French oil company TOTAL, who had developed various analytical techniques. The resulting study was published at $50,000 a copy, but was later suppressed under pressure from a major US oil company.”
    — Colin Campbell, retired oil industry professional, founder of ASPO in 2002

The Briefs

  • In October 2009 world production of all liquid fuels increased by 630,000 barrels per day from September, according to the latest figures of the International Energy Agency, resulting in total world liquid fuels production of 85.61 million b/d. (11/19, #19; 11/16, #4)
  • Strong flow rates in a Petrobras oil well in Brazil’s offshore subsalt area (up to 50,000 b/d) suggest the region’s fields may have high productivity rates that could help control costs. The subsalt fields could be produced with fewer than expected total wells — which cost more than $100 million dollars each. (11/21, #6)
  • OPEC output capacity is expected to increase around one million b/d in 2010 as projects enter service in Angola, Iraq, Qatar and Saudi Arabia, according to Bill Farren-Price, energy director at Medley Global Advisors…David Kirsch, director of market intelligence at PFC Energy, thinks Iraq’s total capacity could top four million barrels a day by 2015 if political and security problems don’t get in the way. (11/18, #6)
  • Mexico produced an average 2.607 million barrels per day of crude oil over the first 10 months of 2009, down 7.1 percent from the same period last year. Exports averaged 1.22 million bpd over the same period, down 13 percent from a year ago. (11/21, #17) Pemex, the state-owned oil company, said proven reserves of crude-oil equivalent may drop for an 11th straight year as existing fields dry up and discoveries are smaller than expected. (11/18, #10)
  • Nigeria’s main militant faction said it was starting a serious dialogue with Nigeria’s government after its emissaries formally met the president Saturday, reviving hopes that improvement in the country’s oil production could be sustained. (11/16, #11)
  • OPEC reported that the world’s economic recovery will drive global oil demand to 85.07 million b/d in 2010, an increase of 0.9%. (11/19, #5)
  • Cambridge Energy Research Associates published a new report asserting that world oil production capacity will grow continuously through 2030 and reach 115 million barrels a day at that time, up from 92 million barrels today. (11/18, #4; #11/17, #4) [for more, see page 5]
  • U.S. crude oil production for October increased to average 5.36 million b/d, continuing at levels not seen since 2005, according to API’s Monthly Statistical Report. (11/20, #9)
  • The number of US natural gas drilling rigs fell for a second week, dropping two to 726, according to oil services firm Baker Hughes. That’s up from the low of 640 rigs last May but down 55% from the September peak above 1600 during September of 2008. Many producers have scaled back drilling due to tight credit and low gas prices. (11/21, #13)
  • ExxonMobil Corp sees winter heating demand having a limited effect in reducing a record-high global fuel inventory glut, adding there needs to be a pick-up in industrial and transport demand to bring stocks back to normal. (11/16, #17)
  • US gasoline demand, hit by recession, will never return to 2007’s peak as more biofuels and increased engine efficiency cut consumption, said BP CEO Tony Hayward. (11/20, #11) 
  • In Australia, last Thursday the Government and Opposition voted against a Green’s motion in the Senate calling on the Government to plan for peak oil. (11/20, #7) [Editor’s note: voting against peak oil planning is like voting against gravity…]
  • Venezuela’s economy fell into a recession in the third quarter as a collapse in oil revenue continues to limit government and consumer spending, the main drivers of the country’s economic output. (11/18, #10)
  • With more than 115,000 b/d of Venezuelan oil flowing to Cuba, the island gets more than enough crude to cover its electricity needs. But the government may not have enough cash to keep the lights on. The global recession and $10 billion in damage from three 2008 hurricanes have drained Cuba’s finances. (11/21, #7)
  • US electricity sales remained weak in the third quarter, prompting speculation that the sluggishness could persist even after the economy rebounds. Some utilities don’t expect power sales to recover to pre-recession levels until 2012 — if at all — because so many factories have closed. Sales held up well in the first half of 2008 but then declined and have continued falling this year. American Electric Power, which owns utilities in 11 states, saw industrial electricity sales plunge 17% for the third quarter versus the year-ago period. (11/21, #12)
  • Valero Energy said it will permanently close its Delaware City, Delaware, plant because of mounting losses after the recession eroded demand for gasoline and diesel. The shutdown will affect 550 employees. (11/21, #11)
  • According to farm scientists at Cornell University…the amazing productivity of modern farm labor has been purchased at the cost of a dependency on oil. Unless farmers can change the way it’s grown, a permanent oil shock would price food out of the mouths of many of the world’s people. (11/17, #19)
  • Germany’s new finance minister has echoed Chinese warnings about the growing threat of fresh global asset price bubbles, fuelled by low US interest rates and a weak dollar. Wolfgang Schäuble’s comments highlight official concern in Europe. (11/21, #3)
  • Federal Reserve officials on Thursday downplayed the consequences of the falling US dollar, underscoring that deflation is still a threat, especially with commercial real estate prices falling. (11/19, #4)
  • Britain may finally be emerging from recession, but analysts warn that it is a false dawn. In fact, they argue, the economy is so ravaged by growing debts and ruined banks that it could well be following in the steps of Japan’s lost decade of the 1990s. (11/21, #14)
  • French bank Société Générale has advised clients to be ready for a possible “global economic collapse” over the next two years, mapping a strategy of defensive investments to avoid wealth destruction. (11/20, #5)
  • A group of corporate chief executives has formed to promote cuts in US oil use through expansion of the electric-powered vehicle fleet. The Electrification Coalition has published a plan to reduce oil consumption in the light-duty vehicle fleet to 2 million b/d in 2040 from 8.6 million b/d currently. (11/20, #19)
  • Over the first year of operations of its pilot-scale cellulosic ethanol plant in South Dakota, POET has reduced its per gallon production cost from $4.13 to $2.35. Cost reduction came via reductions in energy usage, enzyme costs, raw material requirements and capital expenses. The plant uses corn cobs for feedstock. (11/19, #23)
  • Carbon capture technology is far from a done deal. Unproven on a commercial scale, the process is extremely expensive and there are a multitude of safety concerns. One senior scientist said, “Right now we have politicians making promises about the technology of carbon capture and sequestration that scientists don’t know that they can meet.”(11/19, #12)
  • Hundreds of private e-mail messages and documents hacked from a computer server at a British university of East Anglia are causing a stir among global warming skeptics, who say they show that climate scientists conspired to overstate the case for human influence on climate change. (11/21, #15)
  • Climate change models don’t take peaking of any fossil fuels into account. They all project — over a period of 30+ years — fairly simple growth curves for population and the global economy, assuming that enough fossil fuels will be available to satisfy demand at historically normal prices. Peak-adjusted fuel models would lower projected CO2 emissions, reducing the cost of mitigation and buying a bit more time for the transition to renewables.(11/21,#19)
  • A recent front-page report by the British newspaper, The Guardian, is the latest reason why Canada needs a top-level analysis of global hydrocarbon supplies…The Guardian report is only the most recent document to question the reliability of the IEA’s projections. (11/18, #18)
  • A UK industry organization that includes Virgin and Yahoo has called on the government to “urgently” reassess its dismissive view about the potential threat and impact of oil shortages. The call from the UK Industry Taskforce on Peak Oil and Energy Security comes after revelations in the Guardian that there is dissent inside the International Energy Agency about how soon the world may run out of supplies. (11/16, #8)
  • Four years after the “Oil Shockwave” US intelligence exercise, not one city, state, or federal government in North America has a plan to deal with the effects of an oil shortage. The official plan is to have no plan…Failing to plan is planning to fail. (11/18, #22)
  • International inspectors who gained access to Iran’s newly revealed underground nuclear enrichment plant voiced strong suspicions in a report on Monday that the country was concealing other atomic facilities. (11/17, #8)
  • Arthur Berman runs a one-man energy consulting firm out of his home near Houston, producing research that says forecasts for natural-gas production in the U.S. are flawed. He’s won the industry’s attention and its anger. Since last month, Chesapeake Energy Corp. and Devon Energy Corp., two of the five largest gas producers in the US, attacked Berman’s claims. (11/18, #16)
  • The Independent Petroleum Association of Mountain States estimates that federally regulating fracing under the Safe Water Drinking Act’s underground injection program would add about $100,000 to the cost of drilling each well. (11/18, #17)