Peak Oil Pain is back!

For anyone interested to understand what is the effect of peak oil on economy I would recommend reading this excellent article on The Telegraph, brief excerpts below:

[Energy costs at 9pc of global GDP] That proved to be the pain barrier in the 1970s and again in 2008, and we are just shy of that level right now. “Oil is already capturing a higher level of European GDP than in 2008,” said Francisco Blanch from Bank of America.

The unpleasant fact we must all face is that the relentless supply crunch - call it `Peak Oil’ if you want, or `Plateau Oil’ - was briefly disguised during the Great Recession and is already back with a vengeance before the West has fully recovered.
The IEA said non-OPEC production stalled in 2010 and 2011. There was no net increase. While there was a boost from Canada’s tar sands, and America’s shale-oil, and Brazil’s offshore rigs, this was offset by the relentless erosion of the North Sea fields and Mexico’s operations, a collapse in the Sudan, and Libya’s woes.
Meanwhile OPEC spare capacity has fallen to 2.5m barrels a day (bpd), compared to 3.7m this time last year during the Arab Spring, the event that caused a comparable spike in crude prices and arguably triggered the sharp global slowdown a few months later.

The issue is not whether Iran has the military kit to close the Straits of Hormuz and cut off 18pc of global oil shipments for more than a few days (probably not), but whether an Israeli/US attack on the regime’s nuclear facilities would later set off an uncontrollable chain of events in the Middle East.
There is clearly danger of a spill-over into Bahrain and the eastern province of Saudi Arabia, home to the Kingdom’s aggrieved Shia and most of its oil. Even so, the Iran risk premium in global crude prices is only $10 to $15. We must still face the overwhelming fact that global energy supply is on a knife-edge regardless of events in the Gulf - with no relief in sight.

The IEA warned in its annual report that energy demand will rise 40pc by 2035. 

China alone will be adding 125m cars to its roads over the next five years, with auto production targets of 30m annually by 2016. India is spending $1 trillion on infrastructure projects over the next five years.
Variants of this are happening across Asia and Latin America. Two billion people in the emerging world are joining the global economy and competing toe-to-toe for scare resources with the West.

Iran Oil Embargo delayed for six months

Iran is OPEC's second largest oil producer. Bloomberg estimates that Iran pumped 3.58 million barrels of crude a day last month.
Phasing in an embargo is the same as phasing in higher prices smack in the midst of an already guaranteed monster European recession.
Maybe another reason for the delay is that by then they will have accomplished to get rid of the last obstacle (Syria) on the way to Tehran.

Worth reading the timeline and details below since when it will be done all hell will break loose in the Middle East.


Under pretence of looking for other sources of oil, EU Iran Oil Embargo Over Nuclear Work Said Likely to Be Delayed Six Months

A European Union embargo on imports of Iranian (OPCRIRAN) oil will probably be delayed for six months to let countries such as Greece, Italy and Spain find alternative supplies, two EU officials with knowledge of the talks said.

The embargo, which would need to be accepted by the 27- nation bloc’s foreign ministers on Jan. 23, is also likely to include an exemption for Italy, so crude can be sold to pay off debts to Rome-based Eni SpA (ENI), Italy’s largest oil company, according to the officials, who declined to be identified because the talks are private.

A ban on petrochemical products would start sooner, about three months after EU ministers agree to the measure, one official said yesterday. Once a decision is made, member states would be barred from concluding new oil contracts with Iran or renewing those that are due to expire, while existing deals will be terminated within six months, according to a second diplomat today. Long-term contracts constitute the bulk of Europe’s purchases of Iranian oil.

Phasing in the European embargo would satisfy the concern of nations most dependent on Iranian crude, including Italy, Greece and Spain, the first EU official said. Those three nations accounted for 68.5 percent of EU imports from Iran in 2010, according to European Commission data.

As Europe weighs its embargo, President Barack Obama’s administration has sent teams worldwide to consult with countries on managing the supply and demand of oil, according to an administration official who briefed reporters in Washington.

OPEC’s other members would be able to make up for a drop in Iranian oil supply if the EU agrees to an embargo, said Chakib Khelil, the group’s former president. Even so, prices may temporarily rally to as high as $200 a barrel on news of any such blockade, he said today in London.

“It should be possible to replace, at least, the European consumption of Iranian oil,” Khelil said in an interview with Mark Barton on Bloomberg Television’s “On the Move.”

Peak Oil alert gaining momentum

Since 2006, the international oil company TOTAL has consistently voiced warnings about the future inability of the oil industry to meet continued oil demand growth. In 2006, then CEO Thierry Desmarest stated that maximum oil production lies between 100 to 110 million b/d, reached potentially by 2020. Only a year later the new CEO Christophe de Margerie announced that it would be difficult for the industry to produce beyond 100 million b/d.

To summarize, according to TOTAL the world can likely not produce over 95 million barrels per day due to constraints in producing more technically challenging oil fields such as deepwater, heavy oil, and fields located in the arctic. Furthermore, such a production level is only possible if the countries in the Middle-East, especially Saudi-Arabia, Iran, and Iraq, will be able and willing to increase their production.

Ad when it comes to Saudi Arabia being able to increase production well the latest news are not encouraging:

From elEconomista.es (translation in English here)

The electricity company of Saudi Arabia warns that oil in this country could be depleted by 2030 if left unchecked domestic consumption. According to a report of Saudi Electric, domestic consumption is estimated to be between 2.5 and 3.4 million barrels a day.

The report, published in the magazine Al Mashka says that the increase in domestic consumption of oil is one of the main challenges facing the country, mainly because oil accounts for 80% of national income.

Abdel Salam al-Yamani, head of the Saudi Electricity Company also warned of the consequences for citizens to ignore the calls to save electricity and water, and has advised that they depend more on solar energy.

It appears the Saudi governement is well aware of this issue since on the 1st of June announced its intention to build 16 nuclear power plants which is quite ironic for a country supposedly full of oil.

From Reuters

DUBAI, June 1 (Reuters) - Saudi Arabia plans to build 16 nuclear power reactors by 2030 which could costs more than $100 billion, a Saudi-based newspaper reported on Wednesday, citing a top official.

The world's top crude exporter, Saudi is struggling to keep up with rapidly rising power demand. It has considered boosting its domestic energy capacity using nuclear reactors.

"After 10 years we will have the first two reactors," Abdul Ghani bin Melaibari, coordinator of scientific collaboration at King Abdullah City for Atomic and Renewable Energy, told Arab News.

Many have backed away from atomic plans after the accident at Japan's Fukushima Daiichi plant but oil-rich Gulf states are among the few countries looking to make major investments in nuclear power plants.

"After that, every year we will establish two, until we have 16 of them by 2030," he said.

Also from The Economist: Oil production fails to keep up with demand

CRUDE-OIL prices shot up on June 8th—Brent crude to a one-month high of $118.59 per barrel—after OPEC representatives meeting in Vienna were unable to reach an agreement on production quotas. Many had expected an increase in quotas as members with spare production capacity, led by Saudi Arabia, pushed to avoid a price spike that may dampen long-term demand. As figures released in BP’s "Statistical Review of World Energy" show, global oil production has struggled to keep up with increased demand recently, particularly from Asia. In China alone consumption has risen by over 4m barrels per day in the past decade, accounting for two-fifths of the global rise. In 2010 consumption exceeded production by over 5m barrels per day for the first year ever, as world oil stocks were run down.

Long-term consumption cannot exceed production. Even in short time frames, consumption can only exceed production if there is sufficient production in storage.
To cover 5 million barrels per day of excess consumption for a year, global oil stocks would have had to drop by 1.825 billion barrels. If that did not happen, we need another explanation.

Possible Explanations

Cheating (under-reporting production) by OPEC
Poor consumption numbers from China or elsewhere
Another source of production not shown
Some combination of the above 

Regardless, it simply is not possible for oil consumption to grow faster than production for years on end.