Trends I'm Watching

Iraqi Oil Production Could Delay Peak Oil for a Decade

Trend: If political stability can be sustained, Iraq's oil production could keep oil prices relatively low for a decade, undermining many efforts to switch to alternative sources of energy.

Stuart Staniford at the Early Warning blog describes how Iraqi oil production could delay the grim impact of the end of cheap oil (Peak Oil). Click on the link below to see the supporting facts and logic.

Political and economic stability in Iraq is essential to this scenario.

Link: Early Warning: Iraq Could Delay Peak Oil a Decade

A couple of years ago, Iraqi oil production was declining and it didn't seem too likely the country would stabilize any time soon to allow that to change.  However, the post-surge stabilization of Iraq has now allowed Iraqi oil production to start creeping up, and in 2009 the Iraqi oil ministry has announced large numbers of contracts with major oil companies to bring production up from the current 2.5mbd or so to 12 mbd over the course of the next 6-7 years. It is also announcing a series of projects to increase the physical export capacity of the country in line with these oil production projects.

It seems to me that the possibility that Iraq may actually succeed in doing this should be taken seriously. If it did succeed, that would act to delay the final plateau of oil production by a decade (ballpark), make that plateau be at a higher level (95-100mbd ballpark), and significantly moderate oil prices in the meantime, with even some possibility of causing a serious breakdown of OPEC discipline and a period of significantly lower prices akin to the 1980s-1990s lull (though probably not as long or as deep a lull as that). If that were to occur, it would likely have profound consequences for alternative energy projects, biofuel companies, and automobile fuel efficiency. A period of lower oil prices will put adaptation projects on hold for the duration.

At the same time, even in this scenario, there's a real chance of another oil price shock before the main rise in Iraqi oil production arrives.

Dept of Energy Grants $3.4 Billion to the Smart Grid Development

Trend: Smart grid technology, designed to increase energy efficiency, received a boost from $3.4 billion in grants from the Obama administration.

The focus is on smart meter installations, including advanced metering infrastructure, customer systems, electric distribution systems, electric transmission systems, equipment manufacturing, and integrated and/or crosscutting systems. Excerpts below.

Link: DOE Grants Jump-Start the Smart Grid Toward a Still Undefined Future - NYTimes.com.

President Obama traveled to Florida to highlight DOE awards to 100 utilities, equipment manufacturers, cities, systems developers and other recipients. The winners have committed $4.7 billion of their own resources to match the smart grid grants.

The president sketched his vision of a clean-energy future marrying solar panels, advanced storage batteries, plug-in electric hybrid cars, home energy management systems and smart appliances together in a grid studded with new sensors and control devices.

Smart grid technologies will reduce electricity use by more than 4 percent by 2030, saving $20 billion in customer costs that year and cutting greenhouse gas emissions accordingly, the White House said, citing analysis by the Electric Power Research Institute (EPRI). Demands for "peak" power on the hottest summer days could drop by 20 percent. Tens of thousands of new jobs will be created, the administration projects. "We're on the cusp of this new energy future," Obama said at a solar energy center in Arcadia, Fla. "In fact, a lot of it is already taking place."

Scarcity Industrialism Gaining Momentum

Trend: China is banning the export of rare earth elements – and they currently produce about 90% of the world’s supply.

John Michael Greer describes what he calls "scarcity industrialism." Companies in countries where scarce resources are available will have a competitive advantage as this trend grows more prevalent (look at Saudi Arabia). Excerpts below.

Link: The Archdruid Report: The Dawn of Scarcity Industrialism.

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...the Chinese government is planning to ban the export of rare earth elements ...these have become crucial to many cutting edge technologies. Lanthanum, for example, is used in high-tech batteries, and neodymium goes into the permanent magnets used in electric motors and wind turbines. The innards of the Prius and other hybrids, to say nothing of the as-yet-imaginary electric cars being hyped by what’s left of the American auto industry, depend on rare earth elements, and China currently produces well over 90% of the world’s supply of most of them. The report thus sparked claims of an imminent shortage in these minerals and, predictably, a flurry of speculative interest in (and hype-ridden articles about) mines outside of China that can produce the same minerals.

Natural Gas ETF (UNG) Surges

Trend: Natural gas prices may have bottomed recently if the demand for the natural gas ETF UNG indicates a viable trend.

Stephen Schork at Seeking Alpha describes why a natural gas ETF (UNG) has steadily climbed in price in the last 15 days. Excerpts below.

Link: Look Who's Buying Natural Gas Now -- Seeking Alpha.

Since March the number of shares outstanding in the United States Natural Gas (UNG) exchanged-traded fund have surged 260%, from 37,500 to 98,000. At the same time, interest in the equivalent crude oil ETF, the USO, has dropped 39%, from 157,800 at the end of February to 96,100. Thus, last week equal amounts of bets were being placed on both commodities, whereas two months ago passive investors in energy favored crude oil at a 4:1 margin.

... the flood of money into the UNG has undoubtedly helped to establish a floor in the NYMEX market – regardless of extant weak fundamentals – and is now propelling the market higher. To wit, with natural gas’s strong performance last week, we imagine that will serve to attract even more funds into the UNG, et al.

That makes sense. Given WTI’s [West Texas Intermediate oil] push towards $60 (and beyond), natural gas – regardless of extant weak fundamentals – is cheap. So if you are a passive investor and you want to play the energy trade, then buying gas in our book makes a lot more sense than punting WTI. For instance, since April 27th, the former for July delivery has risen by 12.8%, while the latter has jumped by 24.4%. Nevertheless, this is still one of our favorite trades. That is because WTI relative to gas remains overbought. As we noted in Friday’s issue of The Schork Report, this cross-commodity play broke through support at a nearby trendline last week and is now threatening longer dated support.

Disclosure: We may own shares in the ETF described above.

Are Natural Gas Stocks Ready to Rebound?

Trend: Demand for natural gas could boost the prices of natural gas stocks soon.

Keith Kohl at Energy and Capital sees natural gas stocks rebounding as winter increases demand. Excerpts below.

Link: Top Natural Gas Stocks.

The first question to address is where natural gas prices are headed.

In the wake of oil's fall from grace since July, natural gas has also declined from record highs. However, unlike oil, I believe we are a lot closer to bottom for natural gas prices.

Although we are still 2% above the 5-year average, the latest 64 Bcf drop from storage was enough to give us pause. Analysts had only anticipated a drop between 43 billion to 48 billion cubic feet.

Now take a few other factors into account...

Winter is no longer around the corner, it's here. If they haven't already, people will start turning the heat on. As a result, storage levels will continue dropping. If the temperature begins to drop as we move through the winter season, heating demand will inevitably rise.

Top Natural Gas Stocks

Even though I've mentioned these stocks in the past, there's one thing they all have in common. All three have been oversold during this tumultuous market. If you've been looking for a window to jump into one of these three stocks, now is your chance.

Here's the three top natural gas stocks:

Will Oil Stay Cheap?

Trend: The fall in oil prices is temporary. Demand will grow much faster than supply unless an alternative energy breakthrough occurs.

SUV sales increase

Sales of gas-guzzling trucks and SUVs, which have long been the main source of profits for Detroit's auto makers, plunged earlier this year as gasoline topped $4 per gallon. Light truck sales were down 39% in October, but dealers say there have been signs of life in the segment in recent weeks. (Nov 26, CNN Money)

The new middle class wants the American Lifestyle

Charles Hugh Smith  says: despite the current "head fake" of $2/gallon gasoline, petroleum supplies are still limited/in decline even as 2 billion new consumers gear up for their share of the energy-intensive Western lifestyle of autos, heat, air conditioning, malls, office towers, etc.

Price Declines are temporary

Simmons & Company reports:

■ Like the financial crisis, the energy crisis is real.
■ It has been building for years.
■ Supply is waning, demand is soaring.
■ Oil price collapse marks serious risk that demand will pull ahead of supply.
■ Once stocks get too low, we will have a run on our energy bank.

Fossil Fuel Production Rates

Food for Thought

The collapse of energy prices will boost demand.

The financial crisis and economic slowdown affect will reduce investment in energy efficiency.

Economic worries are diverting attention from strategic energy security and environmental challenges.

U.S. Oil Supplies Depend on Middle East

Trend: The U.S. grows more dependent on Middle East oil as Venezuela commits oil to China.

Jim Kingsdale's Energy Investment Strategies describes a Venezuela - China energy alliance that will reduce the amount of oil available to the U.S. Excerpts below.

Link: More Chavez Oil Mischief | Jim Kingsdale's Energy Investment Strategies.

Kingsdale writes:

Hugo Chavez would like nothing more than to sell all his oil to some customer other than the U.S.  That way he both gets his revenue and hurts his enemy.  He seems to have found his customer - China.  As the report below describes, Venezuela, which has ramped up its China oil sales.... Since the Venezuela currently is the fourth largest supplier to the U.S. at 1.1 mb/d and since exports from Mexico, our third largest supplier, are declining rapidly the U.S. will be increasingly dependent, it seems, on Middle East  and African oil.  But mostly the Middle East. 

It may be that global oil supplies are fungible, but as supplies peak and demand from China and other growing economies increases, one-to-one deals between a major supplier and a major exporter result in more oil being taken off the free market, which will put increasing pressure on the free market price of oil. 

I imagine that the U.S. civilian and military planners, who are both already concerned about the increasing cost of fuel, are now starting to become even more concerned about the increasing vulnerability of U.S. oil supplies to the vagaries of very long distance transportation.  Again, oil becomes more and more of a national security risk as time goes on.

Chavez sees 1 million-barrel oil exports to China

By CHRISTOPHER BODEEN, Associated Press Writer Wed Sep 24, 6:35 AM ET

BEIJING - Venezuelan President Hugo Chavez says his country’s oil exports to China could soar to 1 million barrels a day by 2012.

Chavez’s visit this week to Beijing has focused on trade and business ties, including refinery construction deals and China’s launch of a Venezuelan communications satellite.

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Countries Are Guarding Their Oil Wealth

Trend: Countries with oil reserves are moving towards hoarding the oil, reducing the power and profitability of international oil companies.

Keith Kohl at Energy & Capital describes why the price of oil for countries without abundant reserves will increase in the long run. Excerpts below.

Link: Oil Wealth

Within the last few years, countries have been taking control of their oil reserves. And in order to secure a larger amount of their oil revenues, time and again countries have gone to great extent to tighten that grip.

I'm certain most of you remember when Russia pushed Shell out of their controlling stake in the Sakhalin Island. Of course, we can't forget when Chavez wrested control of Venezuela's oil projects back in 2007.

After the recent discovery of the Tupi field off the coast of Brazil, the government appears to be looking forward to those revenues. In order to get a larger piece of the revenue pie, Brazil's government will obviously make a move and grab more shares in the state-controlled company.

If you really want an idea of how serious these countries are to protect their oil wealth just look at the latest deal inked between Iraq and China.

Last week, the Iraqi government approved a contract between Iraq's state-owned oil company and the Chinese National Petroleum Company (CNPC). The deal was to let the Chinese develop the Ahdab oil field. The deal was originally signed back in 1997.

The real blow came when Iraq renegotiated the terms from a production sharing agreement to a set-fee service deal. Now, the CNPC will only get approximately $6 per barrel produced. The fee is cut in half once production hits its target of 115,000 barrels per day. No matter how high oil prices move in the future, the CNPC's profits are set in stone.

The reason is simple enough. Over the next few years, oil markets will continue to tighten, and you can bet these countries will protect their oil wealth at all costs, right down to the last drop.

Brazil to join OPEC?

Trend: Brazil is considering an invite from Iran to join OPEC, potentially giving OPEC more control over the world's available oil supply.

BBC NEWS reports that Brazil discovery of major sources of offshore oil has attracted the attention of OPEC, who likes to coordinate oil production among the major producers.

Link: BBC NEWS | Business | Opec invites Brazil to join group.

Iran has invited Brazil to join oil producers' cartel Opec, Brazil's energy and mines minister has said.

The moves comes after Brazil recently announced finding major sources of offshore oil, prompting significant international attention.

Brazil is considering the invite. Its National Energy Policy Council has the final word on whether it wants to join.

While oil prices have fallen from record levels, many analysts say the longer trend remains high prices.

As a member of the oil producers' organisation, Iran can suggest the membership of another country.

Untapped oil

In April, the head of Brazil's National Petroleum Agency said an oil field offshore from Rio de Janeiro's coast could contain 33 billion barrels.

That finding came after state-owned Petrobras said the offshore Tupi field was estimated to hold between five billion and eight billion barrels of untapped light oil.

The discoveries could turn Brazil into a major oil exporter, say analysts.

Slower economic growth has dented demand for oil, pushing prices down to around $110 a barrel from above $147 per barrel reached in July.

Why Are Natural Gas Stocks Falling?

Trend: Natural gas production exceeds demand in the US at the current time, resulting in falling prices and storage facilities that are approaching capacity.

Gail the Actuary at The Oil Drum analyzes the natural gas production data for the US. Excerpts below.

The Pickens Plan looks like a viable energy strategy in light of the surplus of natural gas in the US.

Link: The Oil Drum | Can US Natural Gas Production Be Ramped Up?.

What happens when one increases natural gas production by 8% per day? There are a few places this can go--a little to offset a decline in imports from Canada, a little to use as exports to Canada and Mexico, and a little to meet the growing demand of electric utilities. Liquefied natural gas (LNG) imports can be reduced to their contractual minimum. On the industrial side, some factories with spare capacity can use some additional natural gas. It is difficult for these uses to absorb the 8% growth in production, however.

Once demand is satisfied, the remainder is added to natural gas underground storage. This past week, 102 billion cubic feet were added to storage; the week before 88 billion cubic feet were added to storage. The US is currently producing about 56 billion cubic feet of natural gas a day, so over the past two weeks we have put about 20% of production into storage.

Figure 8. Recent EIA Natural Gas Underground Storage Graphic

The problem is that natural gas underground storage is not terribly large, and it hasn't been increased recently in size to accommodate the new larger natural gas production. Historical data suggests that the practical limit of working storage is 3,600 billion cubic feet. This is a bit over two months' production. As of August 22, 2008, the amount of natural gas in working storage was 2,757 billion cubic feet, leaving only 843 (= 3,600 - 2,757) billion cubic feet of "space" available.