1. Production and Prices
Oil prices surged to a six-month high above $66 a barrel last week, despite protests from most observers that fundamentals of supply and demand did not support such a move. A combination of factors was behind the sudden rise. Most important was the fall of the US dollar to a recent low of $1.41 against the Euro, sending traders into commodities for protection. An unexpectedly large drop in the US crude inventory of 5.4 million barrels and statements by the Saudi Oil minister that demand for oil from Asia was picking up contributed to the increase.

Other drivers behind the move were an increase in consumer confidence in the US; a 5.8 percent growth in India’s GDP in the first quarter; a 5.2 percent increase in Japan’s industrial production; and a statement from OPEC’s Secretary General that oil prices may reach $70 to $75 by the end of the year.

The recent fall of the dollar is tied to concerns about the extremely large offerings of US Treasury securities that have been coming on the market to finance the various bailouts, deficits, and stimulus packages. Last week there was a sudden surge in interest rates suggesting that the world’s financial institutions are becoming concerned about the size of US deficit spending.

Oil prices have now doubled from the January 20th low of $32.70 a barrel, raising concerns that sharply higher energy prices are damaging the prospects for an economic recovery. While Saudi Oil Minister al Naimi said the strengthening global economy can handle prices in the area of $75-$80 a barrel in coming months, others are worried. The $34 a barrel price jump and the increased burden on consumers since the Obama inaugural goes a long way towards offsetting this year’s benefits from the $800 billion stimulus package.

Despite the market’s optimism, the evidence for a near-term economic recovery remains thin. Higher interest rates are bound to trouble the US housing market. The consequences of the likely GM bankruptcy this week are unknown but are unlikely to be good in the near term. There is still no significant let-up in the pace of US job losses. OECD oil stocks, now at 62 days of consumption, are at their highest level in 16 years.

2. The rebound
For many months now the major question perplexing the world’s policymakers, and nearly everybody else, is just when some type of economic rebound will begin and what such a rebound might look like. While opinions range from the “next quarter” to many years, few seem to take the issue of slowing global oil production into account.

Some see slowing rates of economic decline in recent weeks as sure signs of a imminent recovery, while others say we are seeing normal spring increases in economic activity and wonder why the trillions in government money being poured into the economies around the world are not having a greater effect.

Those familiar with the world’s oil supply situation are becoming increasingly concerned that an economic recovery must inevitably collide with declining oil supplies. Currently, however, there appears to be an oversupply of oil and many are wondering if we are due for a precipitous drop in crude prices after the current speculative surge has run its course.

Last week IEA officials and the Saudis again expressed concern about the decline in ongoing investment in oil exploration and production. The Agency currently says that the oil companies have cancelled $170 billion in investment.

Analysts looking at the global supply situation say that while OPEC currently has spare capacity due to recently completed projects and curtailed production, rapid oil depletion in several non-OPEC countries continues to eat away at that surplus. In another two to four years world oil production is likely to be in an uncontrollable decline. Last week the respected consulting firm of McKinsey & Company issued a report arguing that an oil shock in the next few years is inevitable. The firm sees the shock coming as soon as 2010 if an economic recovery begins soon, or as late as 2013 if the downturn turns out to be more severe than seen to date.

Unless the global economic situation becomes much worse and is prolonged, within the next few years oil prices are likely to begin climbing towards economy-damaging levels such as we saw last summer. If a significant economic rebound starts within the next year or so, there is likely to be excess oil production around to support some increase of economic activity for another year or two. If the global economy stays in the vicinity of its current level for the next few of years, it is doubtful there will be sufficient spare oil production capacity available to support an economic rebound after that.

3. Brazil
Last week Brazil’s energy minister announced that international companies will be invited to bid for concessions in the pre-salt deep-water oil fields as early as next year. Brazil stopped selling concessions in the area soon after the size and importance of the discovery was recognized in 2007. Under a production-sharing system, the Brazilian government would own the oil but pay oil companies with part of the proceeds. Under the current system, companies buy concessions in an auction and own the rights to the oil they produce.

The announcement is a recognition that the task of developing the reserves trapped under kilometers of ocean, rock, and hard-to-drill salt would be too much for Brazil’s national oil company and that extensive international participation will be needed to exploit the oil.

The government’s new policy, which has yet to be ratified by the Congress, highlights the difference between Brazil and the Mexico-Venezuela-Bolivia model. These countries seek to have the international companies do the exploration, development and production with minimal participation in the large profits that high oil prices have engendered in recent years.

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

  • The Middle East’s LNG capacity will rise to 100 million tons a year by 2015 from the current 20 million tons a year according to Khalid Sultan al Kuwari, marketing executive at Qatar’s RasGas. (5/28, #8)
  • Saudi Arabia raised its oil production by nearly 300,000 b/d in March 2009 in spite of a collective agreement by OPEC to cut crude supplies to support prices, official figures revealed. (5/26, #11)
  • Russia’s crude oil output will be at least stable in 2009 compared to the previous year, according to the country’s oil minister. This contrasts with earlier statements that it would fall. (5/25, #18)
  • Exxon Mobil said the transition away from oil-derived fuels is probably 100 years away. Petroleum-based fuels including gasoline and diesel, as well as hydrocarbons such as coal and natural gas, will remain the dominant sources of energy for factories, offices, homes and cars for decades because there are no viable alternatives, said CEO Rex Tillerson. (5/28, #7)
  • PetroChina briefly overtook Exxon Mobil as the world’s most valuable company after China’s stimulus plan caused a surge in the nation’s stock market this year…The company also agreed to pay as much as $2.2 billion to buy Singapore Petroleum to gain a foothold in Asia’s largest oil trading centre in an acquisition that may extend China’s influence over global resources pricing. (5/25, #14-15)
  • Abu Dhabi National Oil Co. will spend almost a quarter less than planned to develop the Shah sour-gas project with ConocoPhillips as project costs declined amid the global financial crisis. (5/25, #11)
  • Continuous spats between Ukraine and Russia over natural gas contracts are leading to a reevaluation of supplies to Western Europe, according to the head of the International Energy Agency. (5/25, #19)
  • Deutsche Bank economist Adam Sieminski said that one of the few explanations for the bullish move they find compelling is that the replacement cost of crude is at least $60 and perhaps as high as $80 a barrel. (5/30, #4)
  • Oil prices could spike to beyond the $150 record high of 2008 within two to three years unless the industry invests in new projects to expand capacity, Saudi Arabian Oil Minister Ali al-Naimi said last week. (5/26, #8)
  • Iran’s news agency says the country has completed a major gas pipeline deal with Pakistan that could be extended in the future to take Iranian gas to India. (5/26, #12)
  • Russia cannot guarantee that there will be no halts in gas supplies to Europe, President Medvedev warned at a news conference closing an EU-Russia summit in Khabarovsk. Further raising the specter of a new gas shut-off, Prime Minister Putin separately indicated that the country would not extend any loans to Ukraine. (5/26, #23)
  • The IEA repeated its warning that reduced investment in energy could result in future supply shortages and a new oil price spike in a few years’ time. In a report prepared for last weekend’s meeting of G8 energy ministers in Rome, the IEA said it saw “clear evidence” that energy investment across the world would drop sharply this year, with global upstream oil and gas investment budgets already cut by around 21% from 2008 levels. (5/27, #6)
  • Supplies of liquefied natural gas from proposed plants in Australia, Papua New Guinea and Indonesia may exceed demand in the Asian region by at least 57 percent by 2015 according to data from Wood Mackenzie Consultants. (5/27, #13)
  • Iraq started exporting oil from its largely autonomous Kurdistan region for the first time on Wednesday, after years of deadlock over disputed Kurdish oil contracts. (5/29, #9)
  • The gap between Professor Kjell Aleklett’s work (with ASPO, and the University of Upsalla in Sweden) and that of the Paris-based International Energy Agency is huge. IEA projections of liquids supply puts total output at 101.5 million b/d by 2030. Aleklett’s research sees it at 75 million b/d or less (5/29, #6)
  • Roughly one-third of the world’s gas reserves and 13 percent of its oil reserves lie north of the Arctic Circle, estimate US Geological Survey researchers who suggest most of the gas is in Russian territory. Researchers cautioned that their team did not take into account the cost and difficulty of getting to these reserves. The researchers also expressed concerns about the potential environmental impact of removing gas and oil from the Arctic. (5/30, #16)
  • For the first time, Alberta and OPEC have established an official relationship. It’s a new strategy with big implications, including potential investment by OPEC members in Canada’s oil sands. (5/26, #20)
  • Russia is no longer a welcome guest at OPEC meetings after boosting its production to levels far above those pumped by the group’s biggest exporter, Saudi Arabia, and snatching away market share. While OPEC has cut output by over 3 million b/d since last fall, Russia has increased the supply by 6.4 percent, or 0.45 million b/d. In other words, Russia has compensated for close to 15 percent of the cuts made by OPEC. (5/29, #16)
  • Opponents of natural gas drilling in the US northeast welcomed new restrictions by an interstate regulator requiring prior approval for any new projects in the Delaware River basin. There is no current gas development in the area covered by the measure, though the basin drains areas above the Marcellus Shale formation. (5/30, #11)
  • The U.S. Geological Survey said it has proof that the U.S. Gulf of Mexico has a rich concentration of gas hydrate reservoirs, a potential source of natural gas. (5/30, #21)
  • ConocoPhillips expects oil supply to exceed consumption during 2009 and for the next several years because of the global recession. (5/26, #5)
  • Reduced spending on energy threatens to slow the economic rebound, trigger a surge in prices, and hurt future prosperity, the Group of Eight industrialized nations said at the close of their meeting in Rome. (5/26, #3)
  • The EIA said Thursday that over the four weeks that ended May 22, US demand for motor gasoline averaged about 9.2 million b/d, down 0.4 percent from the same period last year. Distillate fuel demand, largely for use in trucking, dropped 9.9 percent from the same period last year. Jet fuel demand fell 9.1 percent. (5/29, #5)
  • The declining air cargo market seems to have hit bottom, according to the head of the International Air Transport Association. Air cargo, a key barometer of world trade, has slumped amid the global economic downturn. Global air freight volumes in January saw a record 23 percent year-on-year drop. (5/25, #8)
  • Steven Chu, US Secretary of Energy, said that it would not be politically feasible for the country to lower its reliance on oil by raising petrol prices to Europe’s levels through higher taxes or regulation. (5/28, #15)
  • China views global warming as more serious than the world financial crisis, President Hu Jintao’s special representative on climate change wrote in an editorial. (5/27, #10)
  • China, the world’s largest emitter of greenhouse gases, said it will play a “positive and constructive” role to help the world fight climate change, according to US Senator John Kerry. (5/28, #13)
  • Chinese officials worried about heavy reliance on imported oil have drafted automotive fuel economy standards that are even more stringent than those outlined by President Obama last week. (5/28, #14)
  • Edison International, owner of California’s largest electric utility, said it will be difficult to keep increasing its use of renewable energy as the latest goal (33% by 2020) set by Governor Schwarzenegger stretches limits on the ability to manage such power sources. (5/30, #12)
  • Solar power stations that concentrate sunlight could generate up to one-quarter of the world’s electricity needs by 2050, according to a study by environmental and solar industry groups. (5/27, #19)

Quote of the Week

“The quickest and easiest way to reduce our carbon footprint is through energy efficiency. Energy efficiency is not just low-hanging fruit; it is fruit that is lying on the ground.”
— Dr. Stephen Chu, US Secretary of Energy