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News From The Dark Side

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News From The Dark Side

An almost overwhelming amount of news has been crossing the wires this week concerning Peak Oil. Considering nobody wanted to mention the term two years ago and 97% of consumers have never heard the term three years ago the sudden acceptance has been amazing.

I could not list all the headline here if I tried simply because of lack of space and time. I have hundreds of readers forwarding me relative emails and news items every day. The sheer numbers of articles have nearly tripled over the last month. I will try and hit a few every day for the next week or so.

Saudi Arabia inks a new deal with China. Saudi made the news over the last couple of weeks as they announced when their new production would come online. Saudi is trying to boost daily production from 11.3 mbpd to 12.5 mbpd by the end of 2009. This 1.2 mbpd increase is costing them well over $50 billion to bring online. This was good news for global demand since the demand numbers are rising faster than the supply numbers. The good news turned negative today. Saudi said their new Khursaniyah field just recently came online and will eventually pump 500,000 barrels per day beginning in 2009. Saudi announced today they are send all of that oil to China. The deal calls for Saudi to increase its exports to China from the current 650,000 bpd to more than 1 mbpd and that is to Petrochina alone. That does not count other receivers. Great news, we are going to pump 1.3 mbpd more by 2009. Bad news, we are going to give at least half to China.

I reported earlier in the week that Saudi claims it will not develop any additional capacity above that 12.5 mbpd in order to prolong the wealth for their grandchildren according to the Saudi ruler. Several detailed reports have come out since then claiming Saudi probably can't create any further increases in supply because their remaining fields will be slow to produce and will be offset by depletion in the older fields. At the time I said the announcement was smoke and mirrors by Saudi to keep the price up but these follow on reports suggest it was a political move to cover their own inability to produce more. Either way it is a death knell for the global oil business. The IEA has always used new OPEC production (mainly Saudi Arabia) as the main source of supply from 2010 to 2030. Open production was expected to rose another 12-15 mbpd depending on which version of the reports you read. Odds are slim today that we will see another 3 mbpd by 2015.

Mexico reported that crude production fell -7.8% in the first quarter while gasoline imports rose 6.5%. Production from the Cantarell field alone fell -5.7% in March from February levels. Gasoline imports are expected to rise by 58% by 2015 unless the congress approves and funds additional refining capacity. Pemex is planning on adding two 300,000 bpd refineries by 2015 but a shortage of oil could hamper those plans. Mexican crude exports fell by 12.5% for the quarter.

Delta and Northwest Airlines together reported a $10.5 billion loss for the quarter due mostly to the higher cost of fuel. This was when crude was only $100 a barrel. Now with prices nearly $20 higher the major U.S. airlines are on track to lose $30 billion in 2008. They will not be able to continue flying with those kinds of losses. Everyone is already planning cutbacks and there is talk of parking planes until oil prices drop. We know how effective that will be.

Russian oil has peaked. Oil output in Russia has fallen below 10 mbpd to 9.76 mbpd and is expected to continue lower. Russian output rose 58% since 1998 but according to Russian experts that surge is over. Many Russian fields are well past their prime and are in full depletion mode. The new fields are smaller, harder to produce and produce at slower rates. These new fields and the expiring oil ones will require vast amounts of money, some say $1 trillion over the next 20 years to shore up production. Odds are slim Russia will find that kind of money to invest and they have burned all their international partners over the last several years. The future is not bright for Russian oil.

The future is not bright for us as consumers. CIBC World Markets said on Thursday that oil is likely to hit $150 by 2010 and $225 by 2012. I personally think those dates are too far in the future. CIBC claims the IEA forecasts for supply are overstated by 9% because they include natural gas liquids. Those liquids are not suitable for transportation fuel. CIBC pointed out that production increases were at a virtual standstill but demand growth was unrelenting.

For instance India's Tata Motors recently announced a $2500 car that will allow millions of Indians to become drivers over the next several years. Car sales in Russia were up 60% in 2007, +30% in Brazil and +20% in China. More than 2 billion people in Asia currently do not have a car and better than 25% are currently planning on getting one.

$4 gasoline? We are going to wish we could buy $4 gas a couple years from now when it is $7.50 or more.

Jim Brown     

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