Peak oil review – Dec 15

1. Prices and production

It was yet another volatile week with oil prices swinging wildly in reaction to the latest news. At week’s end oil settled at $46.28. Bad economic news, the ups and downs of the Detroit bailout, the massive Obama stimulus proposal, Saudi confirmation that it is producing at quota, and prospects for another OPEC production cut all contributed to the swings.

The IEA released a new estimate that worldwide demand for 2008 will decline by 0.2 million b/d to 85.8 million b/d, the first drop in 25 years. Much of the decrease in demand comes from the US where the EIA now estimates that US consumption for this year will be down by 1.2 million b/d or nearly 6 percent. US demand for gasoline in 2008 dropped 3.4 percent, for distillates 5.7 percent and for jet fuel 6.3 percent.

For 2009 the IEA, while revising its forecast down by 350,000 b/d, still forecasts that consumption will increase again to 86.3 million barrels. The Agency notes, however, that this increase could disappear if the economic slump deepens.

Not all analysts are so optimistic about the demand for oil 2009 as the IEA. The World Bank issued a very pessimistic report forecasting that global demand for oil will collapse next year as the commodities boom has come to an end. Even more pessimistic is oil market analyst Philip Verleger, who believes that oil demand is dropping much faster than is being reported and may now be in the vicinity of 82 million b/d or a 5 million b/d drop over last December. If these numbers are anywhere near true, it implies that OPEC will need to cut production on the order of 6 or 7 million b/d to bring the markets into balance.

The world’s investment banks continue to issue pessimistic forecasts for prices and the economy. Goldman’s foresees oil at $30 a barrel early next year. Deutsche Bank forecasts global GDP growth to be zero next year and forecasts that oil will average $47.

2. The December 17th OPEC meeting

The tone for the OPEC meeting was set by Saudi Arabia last week when Oil Minister al-Naimi, in a highly unusual announcement, said that in November the kingdom produced 8.493 million b/d, very close to at its OPEC quota of 8.477 million. The announcement was made to counter a new IEA estimate that Saudi production for November had been 287,000 b/d above quota and sent a message that Riyadh expected other OPEC members to comply too.

For two weeks now, OPEC President Chakib Khelil has been telling the press that the decisions had already been made and to expect a “surprise” production cut at the Oran meeting on Wednesday. As the conventional wisdom had been that the production cut would be 1.5 million, the new formulation suggests that the cut will have be 2 million b/d or higher to be a surprise and 3 million b/d or more to be a market-moving real surprise.

The question of compliance to an OPEC production cut is more complicated than usual. Heretofore the more fiscally strapped members of OPEC, most notably Venezuela and Iran, made token cuts and ignored their official quotas. This time the situation may be different. With the deepest economic recession in decades getting worse, oil prices plunging, and the world watching, some OPEC members may conclude that quota-cheating at the expense of fellow cartel members may no longer be the best policy option. Should oil prices fall much further, and numbers like $30 and even $20 a barrel are being thrown around, and the economic recession be prolonged, no amount of quota cheating is going to soften the impact. It will be a question of hanging together or hanging separately.

The issue of Russia joining OPEC or making parallel production cuts has been much in the news for the past week. The Moscow Times reported that President Medvedev had indicated for the first time that Russia was ready to join the cartel. While it appears that Moscow will send a senior delegation to the Oran meeting, many are skeptical that the Russians will make more than token cuts. As Russia is now the world’s largest producer, pumping about 9.8 million b/d, it is clearly in a position to make a large cut, but recent reporting suggests that Moscow may be backing off the idea of joining OPEC or at least joining in with a substantial production cut.

3. Obama’s energy team

Later today President-elect Obama will introduce the team that will lead the development and implementation of the country’s energy and environmental policies for the next four years. The names released so far indicate that major shifts in US environmental and energy leadership are in the offing.

The senior White House coordinator of energy and environmental policy will be Carol Browner, who ran the EPA during the Clinton administration. Lisa Jackson, who was New Jersey’s top environmental officer, will run the EPA. Nancy Sutley, who has the top environmental job in Los Angles, will head the White House Council on Environmental Policy.

The most interesting pick is Steven Chu, the Nobel-winning Director of the Lawrence Berkeley National Laboratory and one of the country’s leading advocates for reducing emissions and for the development of sustainable forms of energy. While at LBNL he redirected much of the lab’s efforts towards working on energy and environmental problems. The New York Times has already editorialized that “he has a sophisticated grasp of the complexities of global warming and a strong belief in fighting it aggressively.”

While the scope of Browner’s White House job is still under discussion, it is expected that she would coordinate administration policies across departmental lines and be the chief advocate for energy and environmental legislation. The position is already being called the “Energy Czar.”

Thus far, the prospective appointments have been well received in many parts of the political spectrum with the League of Conservation Voters calling the group a “green dream team.” The oil industry will likely be unhappy with the proposed team, based on recent comments.

4. Automobiles

Last week’s news was headlined by efforts in Congress to provide temporary aid to Detroit until the new Congress and the Obama administration are ready to grapple with long term industry restructuring. The failure to reach an agreement in Congress last week led to the Bush administration reversing course and apparently agreeing to release enough TARP money to keep GM and Chrysler solvent for the next few months.

Washington is not alone with this problem. Automobile manufacturers in Europe and Asia are having similar problems and are appealing to their governments for support. Although the problems might not be as serious as those of Detroit, no government wants to see such an important segment of its economy as the automobile industry fail. All governments want to bring a new generation of fuel efficient, low emission vehicles into production as soon as possible.

At the minute these goals are very much in air. As we have seen in the Congressional debate last week, there is much concern that the industry, whose sales are fast approaching 50 percent of recent highs, will require massive subsidies to keep the industry viable long enough to achieve the needed reforms. Whether these massive subsidies are deemed worthwhile and affordable is one of the key questions facing the US and many other governments around the world.

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

• Iran faces the prospects of an 8 percent annual decline in production because of a lack of investment and old technology. Sanctions by western nations and a tight credit market because of the global financial crisis have crimped financing for Iranian projects while a 70% decline in crude oil prices since July cut investments. (12/10, #9)
• Driving in America has undergone its most dramatic continuous decline in history. Americans drove 100 billion fewer miles during the 12-month period between November 2007 and October 2008 compared with the prior year. During October, Americans drove 3.5% less, or 8.9 billion fewer miles, compared with October 2007. Trips on mass transit were up 6.5% during the third quarter, the largest jump in 25 years. (12/13, #13)
• Mexico’s crude exports are expected to drop steadily over the next 10 years, from 1.42 million b/d in 2008 to 875,000 b/d in 2017, for an average annual rate of decline of 5.3%, according to the Energy Ministry’s recent 10-year outlook. (12/11, #12) (Editor’s note: we suspect that Mexican exports could cease altogether by or even before 2017.)
• Petrobras plans to spend at least $20 billion a year through 2012 to expand oil output, refining and other operations. The company intends to borrow about $4 billion a year on international markets to finance the investment program. (12/13, #7)
• Brazilian oil workers are threatening a nationwide strike to protest the scheduled auction of oil and gas exploration blocks scheduled. The oil workers are demanding that Brazil’s government maintain control over all unlicensed oil and gas exploration blocks. (12/13, #8)
• Falling oil prices and the credit crunch have ended the euphoria surrounding Brazilian state-controlled Petrobras. Much of the company’s profit has been used to pay royalties and taxes, as well as to compensate for the impact of a 40% fall in the exchange rate in the past two months. The current low price of crude oil will greatly reduce Petrobras’ profitability and its ability to finance spending from its own resources in the near future. (12/13, #9)
• Heating-oil dealers in the Northeastern US currently have more than $100 million in unpaid bills from residential and business customers after fuel prices rose to a record. (12/13, #16)
• Alberta’s oil balloon continues to deflate after Canadian petroleum giants EnCana and Petro-Canada squeezed more than $3 billion from their 2009 capital spending plans, citing the need to stay flexible. The capital deferrals are in effect a wait-and-see strategy at a time of unprecedented volatility in the price of oil. (12/13, #17)
• The Canadian Association of Petroleum Producers now expects the country’s total oil production to near 3.6 million b/d in 2015, down around 300,000 barrels a day from the forecast made in June. Analysts say most new developments need crude prices above $80 a barrel to make a decent return. (12/12, #15)
• Total, Europe’s third-largest oil company, said crude oil prices need to be about twice current levels for investment in Canadian oil sands projects to be profitable. (12/11, #19)
• Gazprom has offered Ukraine a compromise deal on its outstanding gas supply debts. Gazprom says Ukraine’s Naftogaz state gas company owes it $2.4 billion and Russian officials have warned of steep price rises or cuts in supplies if the outstanding debt is not cleared. (12/13, #19)
• Russia’s energy ministry believes that the country’s oil production will stabilize at 10.7 million barrel/day by 2020, after which it will start falling. The country’s oil production is projected to reach 10 million b/d in 2010, 10.6 million b/d in 2015, 10.7 million b/d in between 2020 and 2025, and to decline to 10.6 million b/d in 2030. (12/8, #17)
• Russia became the first G8 country since the start of the financial crisis to have its credit rating downgraded after Standard and Poor’s noted the recent exodus from the ruble and sharp drop in oil prices. (12/9, #16)
• Goldman Sachs, which earlier this year had predicted $200 per barrel oil, virtually halved its 2009 price forecast to $45 and said the price could fall to $30 in the short term.
• The Deutsche Bank economics team expects global gross domestic product growth to be nearly zero in 2009 and 2.6% in 2010. The bank expects the current economic downturn to be the worst in 50 years, and forecasts that oil will average $47.50 a barrel during 2009, $55 during 2010 and $80 during 2011. (12/12, #5)
• China’s top oil firms may have to scale back investment if crude oil prices do not recover from their current doldrums, according to the president of the Chinese Petroleum Society. (12/12, #10)
• California has set detailed goals to cut greenhouse gases and address global warming but faces criticism that the new plan’s economic assumptions are hopelessly optimistic. (12/12, #12)
• ExxonMobil’s CEO Tillerson confirmed the largest US oil company is planning to invest around $125 billion in capital projects over the next five years, the same amount it has previously announced. (12/12, #14)
• In Nigeria the power situation today is the worst in the country’s history. In an average home, the maximum time of uninterrupted supply is often two to three hours a day. (12/11, #11)
• The 13 OPEC members pumped an average 31.38 million barrels per day of crude oil in November, according to a Platt’s survey of OPEC and oil industry officials just released. This is a decline of 880,000 from the October level of 32.26 million b/d. (12/10, #4)
• Oil would have to sell for between $55 and $65 per barrel for developers to produce transportation fuels derived from coal, according to a Rand report. (12/10, #17)
• Natural gas futures in New York fell to a 15-month low after Dow, the largest U.S. chemical maker, said it plans to shut plants and cut jobs because of declining sales. (12/9, #3)
• A study commissioned by the American Petroleum Institute concluded that developing offshore areas covered by congressional moratoriums until recently, along with resources in the Arctic National Wildlife Refuge and a small portion of currently unavailable land in the Rocky Mountains, could increase US crude oil production by as much as 2 million b/d by 2030, offsetting nearly a fifth of the nation’s crude imports. (12/9, #12)
• Oil producer and refiner Hess Corp said on Monday it would cut 2009 capital spending by more than 27 percent from 2008 levels to protect its financial health during the economic slump. (12/9, #13)

Quotes of the Week