June 10, 2008
Peak Oil Review - Vol. 3 No. 23, June 9, 2008
Tom Whipple, Editor
Steve Andrews, Publisher
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1. A week to remember
By Wednesday of last week oil prices had fallen by 8 percent from their all time high based on major reductions in oil product subsidies in by Asian countries, the perception that US consumption was falling, and expectations that the Federal Reserve would stabilize the dollar.
Analysts began talking about the end of the oil bubble and that prices would soon be down to $100 a barrel or perhaps even $80.
This attitude was reinforced by the week’s US stocks report which showed that US gasoline and distillate stocks had grown the previous week. In its enthusiasm for a price drop, the markets ignored a 4.8 million barrel drop in US crude stocks. Few seemed concerned that US crude imports for the last month were down by nearly 8 percent over last year.
Then the roof blew off. On Thursday and Friday, oil prices jumped by nearly $16 a barrel to a new high of $139 – a 13 percent increase. At least a half dozen developments coming in rapid succession were responsible for the surge. In Europe the Central Bank hinted that it was thinking of raising interest rates, which in turn sent the dollar down and started a flight to the safety of oil. Then an Israeli cabinet minster told a newspaper that it looked as if an attack on Iran’s nuclear facilities was “unavoidable.”
Morgan Stanley released a report saying that their study of tanker movements showed more Middle Eastern oil was being shipped to Asia rather than to Europe and the US so that prices would reach $150 a barrel by the 4th of July. This was followed by an unexpected jump in US unemployment and falling equity markets. Speculators rushing to buy back the short positions they had established earlier in the week were the icing on the cake.
Nearly lost in the midst of a 400-point drop in the Dow Jones and the $16 dollar jump in oil was the natural gas price jump which reached a high of $12.82 /mbtu on Friday — the highest it has been since the 2005 hurricanes. Sympathy with oil prices and unusually hot weather, which will increase gas-fired power consumption, was cited as reasons for the increasing price.
As has become usual, opinions are mixed as to whether the latest price jump was caused by a mixture of speculation, a falling dollar, and fear of war, or plain old supply and demand. Some observers are noting that a rather minor drop in US consumption is more than offset by Chinese demand to prepare for the Olympics and cope with the consequences of the earthquake. The increasing failure of national electric grids across much of the third world is leading to significant new demands for imported oil, especially diesel, to keep vital systems operating. These observers are suggesting that markets are becoming so tight that shortages could occur in developed countries before the year is out.
2. Speculation vs. fundamentals
Every increase gasoline price increase renews the debate of just what the “proper” price should be and just how much of the price of oil is caused by speculators. Nearly everyone in Congress would love to find that indeed someone is manipulating oil prices or that some large share of recent price increases can be attributed to speculators. There is little the Congress can do to increase oil supplies in the short run and they are loath to institute what would be highly unpopular measures to restrict consumption. Hence the continuing interest in exposing and restricting speculation as the only avenue to show their constituents they are doing something.
Last week the US Senate held yet another hearing on the role of speculation in raising energy prices. Carefully chosen witnesses for the most part told the hearing that indeed high prices arose from speculation. Only George Soros and a few others got off the reservation and opined that supply and demand had more to do with the problem. Much of the hearing was devoted to how the US’s Futures Trading Commission could regulate trading in London and Dubai. Despite frequent and fervent assurances from the US Treasury and Energy Secretaries and the head of the futures trading commission (CFTC) that high prices are primarily caused by tight supply, Congress shows no indication that it will let go of the issue. The CFTC continues to investigate and Congress continues to threaten legislative restrictions on futures trading.
3. Growing shortages
Despite endless repetition of the mantra “the markets are well supplied” from OPEC and occasionally senior international oil company officials, reports of actual shortages of petroleum products continue to increase across the globe. Reasons for these shortages vary from country to country, but most seem to stem from the cost of petroleum on the world market or efforts by governments to keep retail prices affordable. In the last week we have reports of retail shortages from China, the Indian sub-continent, numerous countries in Africa, Latin and Central America, parts of East Asia, and even from the poorer countries in the Middle East.
In China, the world’s number three importer, retail shortages seem to have reappeared as the government keeps price caps in place at least until the Olympics. The government’s newest plan is to turn the small private oil companies that were shutting down because of the high cost of crude into “contract refiners” who simply refine oil for the state companies without any price risk. China, with $1.6 trillion in reserves, can afford oil at any cost. It is still not clear just how much their imports have increased in recent weeks.
In a few countries, the shortages may be temporary such as in Malaysia where a 40 percent price increase was accompanied by hoarding and a run on the pumps. In a few countries, national oil companies can no longer afford to sell products at government-mandated prices. In still others, the local importers simply do not have enough liquidity to pay for the products. This situation is unlikely to improve. Except for countries producing enough oil to cover their own needs, and the very wealthy, all others are likely entering an era of permanent shortages.
4. Air Travel
Hardly a day goes by without reports of more problems for the airline industry. Last week the International Air Transport Association warned that its members will collectively lose $6.1 billion should oil continue to trade at over $135 a barrel for the rest of the year. During the last six months 24 airlines went bankrupt and more bankruptcies are expected soon.
Nearly all the major airlines have announced cutbacks in their flying schedules with many grounding their older less-efficient aircraft and dropping service to smaller cities. Fare increases, baggage charges and fuel surcharges are becoming the norm. Cheap fares and frequent flyer seats are becoming more difficult to obtain.
The problem is compounded by EC emissions regulation rules that the industry claims will cost $10 billion to comply with. Recent attempts at airline mergers in the US failed because labor contracts would hamper efficient integration of separate systems.
The pace at which the industry’s problems are compounding suggests that a day of reckoning is at hand. If oil prices continue to rise at a time of economic stagnation, mass discretionary air travel will soon be priced out of the market and the industry will shrink to a fraction of its current size. Re-regulation of the industry seems likely within in the next few years in order to insure a minimum of essential flights between major hubs remain available.
5. Briefs
(clips from recent Peak Oil News dailies are indicated by date and item #)
• Saudi Arabia’s Shura council (parliament) will hold a series of meetings over the next two weeks to discuss a controversial proposal by a key member to curb oil production to save reserves for better prices. (6/5, #4)
• An explosion in Western Australia at Apache Energy’s natural gas processing facility has cut the state’s gas supply by a third. It could take months to repair. The gas shortage is seriously impacting the resource industry, with companies having to cut back on production and having to buy more diesel for power generators. (6/7, # 
• GM announced drastic cuts in production of sport utility vehicles and pickups and stepped up plans for building smaller cars. CEO Wagoner said GM will close four North American assembly plants by 2010. And in a humbling admission that the SUV era is all but over, GM said it is considering selling the gas-guzzling Hummer brand. (6/4, #14)
• Some 74 percent of Americans said $4 a gallon would be their threshold for driving less— from a survey of 1,000 adults nationwide conducted by Ipsos Public Affairs. American demand for gasoline dipped 1.4% over the last four weeks. (6/7, #10; 6/5, #1))
• Demand for diesel in Chile is skyrocketing as the energy-poor country enters winter amid very large cuts in natural gas imports from its sole supplier Argentina. (6/5, #10)
• Russia produced 0.8 percent less crude in May than in the same month last year, bringing the country closer to the first annual drop in oil output in a decade. Exports also fell. (6/2, #4)
• Later this year, China will start operating a coal to liquids plant that is expected to convert 3.5 million tonnes of coal per year into 1 million tonnes of oil products —the equivalent of about 20,000 b/d. By 2020, Beijing hopes to up production to 286,000 b/d. The Oil & Gas Journal suggests it will cost around $70 to $80 a barrel to produce oil in this manner. The plants are very expensive and release prodigious quantities of greenhouse gases. (6/4, #9)
• India announced an increase of roughly 11% in retail prices of gasoline, diesel and cooking gas to bail out its cash-strapped oil marketing companies. (6/6, #13)
• Canada’s oil sands production averaged 1.32 million barrels a day during 2007. A group that includes major oil sands producers urged Alberta’s government Thursday to cool development of the province’s vast oil sands to protect the environment. (6/6, #1
• Tougher environmental rules governing production from Canada’s oil-sands region will contribute to a global crude supply crunch, Total SA Chief Executive Officer Christophe de Margerie said last Wednesday. (6/5, #1
• Iraq exported an average 2.01 million barrels of oil a day in May, up 100,000 barrels from the previous month and the highest since before the invasion. Saudi Arabia raised production by 130,000 barrels to an average 9.25 million barrels a day in May. (6/5, #2)
• Iraq expects to conclude negotiations soon for six oilfield service contracts with international companies that could boost output by 600,000 barrels/day later this year. (6/5, #5)
• Brazil’s oil discoveries, including the Western Hemisphere’s largest in three decades, may cost $100 billion more to develop than the industry’s most costly field. The Tupi deposit and nearby offshore prospects probably will cost $240 billion to exploit. (6/5, #11)
• Pemex said the state-run company’s oil exports were headed for an average of 1.40 million to 1.45 million barrels per day over 2008, around 15% below their target and a 14% decline compared to their exports in 2007. (6/5, #12)
• Ethanol from corn accounts for a 20 million ton increase in the amount of grains consumed each year, far outpacing growth of about 2 million tonnes a year on average in demand from China, Lester Brown told reporters in Beijing. (6/4, #3)
• Freight trains in the US face a crisis. The nation’s 140,000-mile (225,297-kilometer) network is already congested with trains forced to wait for hours because of one-track rail lines. A new Chamber of Commerce report warns demand for freight trains is expected to double over the next 25 years. (6/4, #12)
• US EIA: Oil prices should stay above $100 a barrel through 2009 and potentially longer as supply struggles to keep up with demand, the energy forecaster said on Monday. (6/3, #3)
• In New England, retail heating oil prices have risen to more than $4.50 a gallon, nearly double what they were last year at this time. Some oil dealers have delayed rolling out their payment plans for next winter as the world oil markets continue their wild ride. (6/3, #1
• Sporadic riots in OPEC member Algeria this year risk triggering wider protests against a political elite slow to turn major oil wealth into jobs and homes.(6/2, #10)
• Indonesia cannot rule out further hikes in fuel prices ahead of the 2009 presidential elections due to the impact of fuel subsidies on the budget. The government raised fuel prices by almost 30 percent last month, sparking protests in a country where millions are already suffering from rising energy and food costs. (6/2, #14)
Quote of the Week
• “While [Rep. Roscoe] Bartlett’s vindicated [for all his focus on peak oil], it’s a hollow victory. We’re approaching a crisis he predicted, a crisis that might have been circumvented if, as a nation, we’d paid attention.” — Katherine Heerbrandt, (Frederick News Post)
