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1. Oil and the Global Economy

After rebounding from recent lows on Wednesday, oil traded around $84 for the remainder of the week. As has been the case for the past month the European debt crisis which is strengthening the dollar continues to exert downward pressure on oil. However, China’s widespread diesel shortage suggests significantly higher imports are in the offing.

While the EU has the resources to bail out Greece, Ireland, and even Portugal if necessary, attention is now turning as to whether Spain is in serious trouble. With an economy twice the size of Greece, Portugal, and Ireland combined, serious economic troubles in Madrid could be more than the rest of the EU is willing to cope with. While EU officials dismiss the possibility that the euro-zone could break up, observers outside the EU are concerned that the diversity of the economies using the euro may be too much for a single currency. Nearly all agree that the collapse of the euro would usher in a period of economic hardships and a greatly reduced demand for oil.

In Washington, the Federal Reserve announced that it does not see much US economic growth in the coming year. Thus we seem to have a situation in which the EU and US are in a race to see which can contract the fastest. Most observers are talking about a stronger US dollar in the next few months which could keep downward pressure on oil prices no matter what happens to Chinese demand.

In China the twin “crises” of inflation and a nationwide diesel shortage continue to perk along. Beijing insists that the retail inflation it is experiencing is largely confined to food and fuel and that the steps it is taking to rectify the situation will only reduce growth rates modestly. The diesel shortage, however, seems to be spreading and there have been numerous reports of increased Chinese imports of distillates and crude coming in the next two months. It seems certain that China’s stockpiles of crude and distillates have been reduced significantly as its oil industry struggles to keep up with demand.

Chinese newspapers are quite open in attributing part of the diesel shortage to efforts to meet the energy efficiency goals of the current five-year plan before the end of the year. This has resulted in reductions in electricity generation and stepped up use of diesel powered generators at factories which do not seem to count in the five-year plan goals.

There is disagreement among Chinese energy experts as to just what happens next. Some see the shortages ending next month or so as domestic distillate production is increased and efficiency goals are relaxed at the beginning of another five-year plan. Others say the problem is much more serious and it will be some time and still more imports until the shortages are overcome.

The answer to this question may loom large in 2011. If China goes on an import binge as we saw prior to the Olympics then higher oil prices in the coming year seem likely. China also appears to be suffering from a coal shortage which could reduce economic growth unless compensated for by increased imports.

A new factor emerged on the international scene when North Korea showed off a new uranium enrichment facility and shelled a South Korean island. As could be expected, Seoul is waving the bloody shirt, Washington is sending an aircraft carrier, Pyongyang is threatening war, and Beijing is calling for talks and rebuking the US for the aircraft carrier. The Chinese have the power to bring North Korea to its knees, but so far has not publicly rebuked North Korea’s leaders for shelling South Korean territory for the first time in over 50 years.

Beijing may be concerned that North Korea is becoming politically unstable in the midst of what may be a transition from an ailing leader to a young son. So far the situation seems to have had a minimal impact on oil prices, but that could quickly change should the situation worsen.

2. Global oil glut ending

In the two years following the great oil price spike that ended in July 2008 global oil stockpiles grew substantially. Although OPEC eventually cut its production quotas by 4.2 million b/d following the drop in global demand that resulted from the ensuing recession, they were slow to do so and OPEC quota cheating was rampant. Global stockpiles grew to an all-time high. Moreover, futures prices went into contango meaning that it was profitable for well-healed speculators such as the international oil companies to hold massive quantities of oil in floating storage for later resale. In six months however, the situation has reversed. If the IEA is right, demand for oil is rising rapidly and is expected to continue rising next year. With global output flat and OPEC (read the Saudis and gulf allies) content to keep production steady and let oil prices float up, the growth in demand is being satisfied by a drawdown in stocks.

Goldman Sachs says that since August global oil inventories have fallen by 76 million barrels and that the oil market is in a seasonally-adjusted deficit of 1.3 million b/d. In the US alone, total crude and product stocks have fallen by 38 million barrels since September. Refined oil stocks held by China’s two largest oil companies have fallen for eight consecutive months and diesel stocks fell 14 percent in October alone.

Oil in floating storage reached almost 140 million barrels at the start of 2010. As demand picked up this year, these stocks were sold off to refiners. Some reports say oil in floating storage is already down by 90 percent and BP believes that the floating stocks will be gone by the 2nd quarter of 2011. Barclays Capital in London says that demand from Asia is so strong that oil prices are about to enter “backwardation” where oil for near term delivery sell for more than oil to be delivered in distant months.

The next few months should give some sort of insight as to whether we are going to see a 2008-type price spike in 2011 or simply a gradual increase in prices. Chinese demand is obviously the key to all this. Some see Beijing’s economic growth slowing significantly next year as efforts to fight inflation kick in. While China clearly is going to be importing a lot more diesel for the rest of this year whether this goes on into the spring is still an unknown. Sources in China’s two major oil companies are saying the shortage will be over before January and the IEA says the diesel shortage is a “temporary phenomenon;” others are not so sure. Some are saying that with stockpiles falling below desired levels, Beijing will be importing increased amounts of oil for some time in order to rebuild them.

The balance of all these forces seems to be saying that unless there is further major economic downturn in the US, OECD, and elsewhere next year, a combination of increasing demand, lower stockpiles, and an OPEC unable or unwilling to increase production means significantly higher prices are just ahead.

3. China says 5-year efficiency drive successful

While recognizing there is a global warming problem, Beijing has long rejected various schemes to limit carbon emissions, realizing that these could condemn the country to permanent economic inferiority to the OECD nations. Instead the Chinese have preferred to talk about per capita emissions and energy efficiency which leaves room to grow economically while still appearing to participate in efforts to halt global warming.

The centerpiece of Chinese policy has been an effort to reduce the use of energy per unit of GDP by 20 percent from where it was five years ago. As the end of the five years approaches, Beijing has put out the word “meet the plan or else” and local officials have gone to extremes to cut energy use. In some cities traffic lights, residential and electricity for small factories have been simply shut off. This of course has led to a rush to utilize or install small generators to make up for the power cuts, but this does not seem to enter into the book keeping.

Last week, a top Chinese environmental official announced that the five-year energy reduction plan will be a success. Energy use per unit of GDP fell by 15.6 percent during the first four years of the plan, but ran into trouble during the growth spurt we saw earlier this year. The official says that thanks to the extreme efforts we have seen this autumn, the plan will be fulfilled. While cutting back on energy consumption can’t hurt, the real question is whether or not this really slows emissions significantly or is anything more than propaganda for the Cancun global warming conference.

Quote of the week

“Recent data releases continue to show a phenomenal pace of recovery in global oil demand.”

– A report from Barclays Capital

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

  • A long, harsh drought may threaten the US and other populous countries in the next 30 years, a new study indicates. Dryness may increase substantially across the Western Hemisphere, Eurasia, Africa and Australia. Higher-latitudes from Alaska to Scandinavia will likely become moister, but not enough to balance out the drying elsewhere. (11/22, #6)
  • Since the start of October oil drilling companies have ordered 17 new rigs. (11/26, #4)
  • Iraq’s president has asked the prime minister to form a new government, giving him 30 days to choose a cabinet including the heads of oil and finance ministries. (11/25, #9)
  • The final draft of Iraq’s $12 billion deal with Shell to capture flared gas at southern oilfields will be completed within 10 days. Iraq flares 1 billion cu. ft. of gas every day. (11/27, #8)
  • Saudi Arabia says it has captured 149 al-Qaeda militants in recent months who had been raising money and recruiting members to carry out attacks inside the kingdom, with links to Somalia and Yemen. (11/27, #7)
  • An Iranian energy firm has announced a discovery of 34 billion barrels in associated oil reserves at an offshore gas field in the Persian Gulf. (11/23, #5)
  • The world’s largest ship-based power plant will begin supplying Pakistan with 230 MW next month, but the furnace-oil burning ship won’t end Pakistan’s energy crisis. (11/22, #11)
  • Azerbaijan, Russia, Iran, Turkmenistan and Kazakhstan are deciding whether the Caspian is a sea or a lake, which could have profound results for the 79 billion barrels of oil and 240 trillion cu. ft. of gas locked underneath it or within easy reach of its shores. (11/25, #10)
  • China’s prime minister was in Moscow to boost trade and finalize a pricing agreement on gas and is also going to Tajikistan for a meeting of the Shanghai Cooperation Organization, a central Asian group. (11/23, #22)
  • Deliveries of up to 9 million tons of crude next year from Venezuela to Belarus from the Black Sea may threaten Russian oil supplies bound for central Europe, Russia’s Transneft says. Belarus’s plan to take up to 9 million tons of crude from Venezuela next year means Transneft won’t be able to increase deliveries via Druzhba’s southern branch. (11/24, #19)
  • On a visit to Germany the Russian prime minister said Russia and Europe might someday adopt a single currency, calling the euro “stable world currency.” (11/27, #15)
  • Two of Venezuela’s four heavy-crude upgraders were offline Friday due to heavy rain. The four upgraders were producing 300,000 b/d in total; regional capacity is 620,000. (Reuters)
  • Offshore Brazil, Anadarko announced that its Itauna well co-owned by Colombia’s Ecopetrol has encountered 275 net feet of oil and natural gas. (11/23, #10)
  • Ecuador has taken control of the local operations of Brazil’s Petrobras after the company refused to sign a new service contract. Meanwhile Petrobras has started work on a $3.3 billion ethanol pipeline, to have annual capacity of 740 million cu. ft. (11/24, #9; 11/26, #9)
  • China’s current-account surplus in the third quarter was $102.3 billion, double a year earlier and equivalent to 7.2 percent of GDP. Including the effect of exchange rate and asset price changes, foreign-exchange reserves rose by $194 billion in the third quarter to $2.648 trillion. Investment in Brazil has ballooned to $25 billion to date this year from $82 million in 2009. (11/23, #9; 11/25, #15)
  • Independent firms supplying liquefied natural gas (LNG) around China are targeting 10 percent of China’s 1.6 million b/d diesel market for transport use by 2015. (11/25, #16)
  • Cameco plans to sell 13,000 tons of uranium concentrate to China’s Guangdong Nuclear through 2025. By 2020 Chinese demand may rise to 20,000 tons annually; 50,572 tons were mined globally last year. China may purchase 5,000 tons this year. (11/25, #21)
  • China has resumed exports to Japan of rare earths after a two-month de facto ban and a Japanese conglomerate has announced a supply deal with an Australian miner. (11/24, #16)
  • The vice president of China – after three days in South Africa aimed at securing minerals – has visited Angola. China has lent Angola $4.5 billion since 2002, said China’s ambassador to Angola, adding that bilateral trade is expected to reach $20 billion this year. (11/22, #12)
  • Nigeria will upgrade and expand its biggest oil refinery, the 210,000-barrel Port Harcourt, according to Nigerian National Petroleum. Meanwhile Shell says it is ramping up production in the Niger Delta after repairing a pipeline damaged by oil thieves. (11/22, #13; 11/26, #5)
  • Geneva, Switzerland, may overtake London as the world’s leading oil and energy trading hub as Trafigura transfers 80 of 300 employees and Vitol relocates 25 of 200. (11/23, #23)
  • Following Cairn’s exploration drilling last summer Greenland has awarded licenses for oil and gas exploration in Baffin Bay to seven international energy companies. (11/27, #14)
  • Pemex has produced 2.582 million b/d average year-to-date, compared with 2.607 million in the first 10 months of 2009. Its first auction of oilfield operating contracts in February will offer three blocks currently producing 14,000 b/d. Meanwhile Mexican regulators ordered Pemex to produce more evidence for its oil and gas reserve estimates. (11/22, #14; 11/26, #6, 7, 8)
  • PTTEP agreed to buy a 40 percent stake in Statoil’s oil sands project in Alberta for $2.28 billion in the biggest acquisition by a Thai company. (11/23, #20)
  • In failing for the last three years to get Alaska a natural gas pipeline, the state’s Alaska Gasline Inducement Act ignores oil and gas companies’ fiscal and legal realities known as the “four decision gates.” (11/23, #18)
  • Environmental organizations are asking President Obama to designate the Arctic National Wildlife Refuge as a national monument, which action would effectively put off-limits the oil and gas resources on ANWR’s coastal plains. (11/25, #17)
  • Michigan’s road construction budget may be halved by 2012, taking with it scores of repair projects and thousands of jobs. A freefall in gas tax revenue in the last decade has the DOT projecting its repair budget for 2012 to be $626 million vs. $1.4 billion in 2010. (11/24, #18)
  • US gasoline prices have risen to seven-month highs propped by the Fed’s $600 billion Treasury bond plan and by global refinery shutdowns leading East Coast inventories to fall 24 percent in the past two months. (11/22, #23)
  • Economic global coal reserves will run out faster than expected because of overly optimistic estimates and accelerating demand, leading to a surge in prices, Nature reports. Although most reserve estimates suggest there is plenty to last at least a couple of hundred years, peak coal may occur in the next two decades. (11/23, #24; 11/24, #6)
  • Leading supertanker operator Frontline says the market is still “vulnerable” after five months of unprofitable rates. Spot rates plunged up to 71 percent from January to $25,849 now; Frontline needs $31,300 a day to break even. (11/24, #5)
  • Researchers have developed a graphene-based supercapacitor that exhibits specific-energy densities comparable to nickel-metal hydride batteries in hybrid vehicles, but also can be charged or discharged within seconds or minutes. (11/27, #19)
  • A team of scientists in Japan say they have a way to provide 50 percent of world energy needs by 2050 with solar power plants in the Sahara desert. The Sahara Solar Breeder Project would construct solar-powered silicon-manufacturing plants. “The total research expenditure will be ¥100 million annually for five years, but that won’t be enough to complete the project,” says a Tokyo professor. (11/26, #14)
  • THINK North America has begun production of all-electric cars in Elkhart, Indiana. The company plans to produce 300 two-seater THINK City vehicles before the end of 2010. In 2011, production will jump to 2,000 or 3,000 vehicles. (11/27, #20)