Re: SC70

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Peak oil review -- June 9, 2008

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.........

..........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..............