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Deep Creek Hot Springs

The Moon is Waxing Crescent (16% of Full)


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December 01, 2008 10:28PM

Peak Oil Review - December 1

..........3. Investment

As US motorists rejoice that the price of gasoline is now approaching an all-time, inflation-adjusted low, many thoughtful observers are bemoaning the effects on future oil production as project after project is delayed or cancelled due to low oil prices and a lack of liquidity. It is starting to dawn on many that, should oil prices and demand remain low for an extended period, new investment in oil production will fall to such an extent that, with worldwide depletion, now thought to be in the range of 5 to 6 percent a year, there simply will not be enough new oil to power an economic recovery.

Cancellations of high-cost oil sands and deep water drilling projects are most prevalent at the minute as are new multi-billion dollar refinery projects intended to process the lower grades of crude. Although the international oil companies are still making money, and seem to be continuing with the next round of projects, the national oil companies, which must turn over bulk of their revenues to support their governments, will soon be in no position to finance new production projects. The resource nationalism that has been rampant in recent years has led to troubled relations between the international oil companies and several major producers including Russia, Venezuela, Iran, and Ecuador. Last week a senior Iranian oil official said his company is going to need $14 billion a year for the next decade in order to maintain oil and gas production.

A few months ago, the major US oil companies were earning so much money that they could afford it all – stock buy-backs, raising dividends, debt buy-down, and expanding investment budgets. With oil at $55 a barrel and sales contracting, they now are forced to make choices.

Of most concern is that expensive clean and renewable energy projects are starting to go on hold as demand for energy drops and investment loans become scarce. So-called “clean coal” with carbon sequestration is extremely expensive. There are increasing calls for new energy taxes in the US, similar to those in Europe, which would bring prices back to a level where investment would be worthwhile and would foster conservation.

4. China

Unlike most of the world’s economies, China is widely believed to need a minimum of 7 percent annual growth to maintain social stability. New jobs are required for the millions of young workers graduating from school each year and the millions more that continue to migrate from rural areas into the industrialized urban economy.

As a major consumer of world energy supplies, the state of China’s economy will play a major role in oil demand for a long time to come. Officially the Chinese government remains optimistic that it has the internal resources to continue to grow even with faltering exports. Last week Beijing cut interest rates by the most in 11 years and unveiled a $586 billion stimulus plan to keep the economy growing in the midst of a global recession.

Over the past two months, however, there has been a rapid deterioration in China’s economic situation. Chinese manufacturing in October contracted by the most on record as demand from the US, Europe, and Japan dropped rapidly. China's State Information Center, a government think-tank, forecasts that the annual growth would slow to 8 percent this quarter from 9 percent in the third quarter, a rapid cooling from double-digit rates recorded in the past five years. The World Bank just cut its growth forecast for China during 2009 to 7.5 percent.

Over the weekend, the government news agency reported that on Saturday President Hu warned the Politburo that China’s competitiveness and trade are being threatened by the global economic downturn. This announcement suggests that Chinese leadership does not foresee a quick end to the economic downturn and worsening conditions ahead.

5. Detroit

General Motor’s board is currently reviewing the rescue plan that will be released on Tuesday and will be considered by Congress next week. GM said on November 7th that it may not have sufficient cash to operate after December. A 10-12 page summary of the plan will be released to the public and a more detailed 80 page version will be sent to Congress. The plan is rumored to entail closing factories, eliminating half the US brands, delaying health care benefit payments, and converting some of the companies’ $43 billion debt into equity in the company.

November car sales will be released this week and early indications are that sales of US brands may be down again – possibly by as much as 35 percent over last year. Detroit automakers owe banks and bondholders more than $100 billion in debt and considerably more when their parts suppliers and dealers are included.

Where this all comes out is still up in the air. Senior Republicans continue to argue that a $25 billion “bridge loan” to Detroit will only prolong the agony. Congressional Democrats and the Obama team seem predisposed to mitigating the effects on the US economy that would stem from widespread bankruptcy of the automakers, their suppliers and dealers. Events, however, may be spinning out of control...............


Wizard 1329December 01, 2008 08:20PM

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