Ecobella Blog

February 10, 2010 Release

Highlights

• Crude oil prices continue to fluctuate.  The West Texas Intermediate (WTI) spot price increased from $69.48 per barrel on December 14 to $83.12 on January 6 and then fell to $72.85 on January 29.  EIA expects the crude oil market to strengthen again this spring with WTI rising to an average of about $81 per barrel over the second half of this year and $84 per barrel in 2011.  The crude oil price forecast is unchanged from last month’s Outlook.  EIA’s forecast assumes that U.S. real gross domestic product (GDP) grows by 2.3 percent in 2010 and by 2.5 percent in 2011, while world oil-consumption-weighted real GDP grows by 2.7 percent and 3.6 percent in 2010 and 2011, respectively.
  

• EIA forecasts that the annual average regular-grade retail gasoline price will increase from $2.35 per gallon in 2009 to $2.84 in 2010 and $2.97 in 2011 because of the rising average crude oil price forecast.  Pump prices may exceed $3 per gallon at times during the approaching spring and summer.  Projected annual average retail diesel fuel prices are $2.95 and $3.16 per gallon, respectively, in 2010 and 2011.
  

• EIA expects this year’s annual average natural gas Henry Hub spot price to be $5.37 per million Btu (MMBtu), a $1.42-per-MMBtu increase over the 2009 average of $3.95.  EIA projects continuing price increases in 2011, averaging $5.86 per MMBtu for the year.  EIA expects working gas inventories to end the first quarter at about 1,644 billion cubic feet (Bcf) compared with 1,734 Bcf in the previous Outlook, because of colder-than-normal weather in early January.
  

• The annual average residential electricity price changes only slightly over the forecast period, falling from 11.6 cents per kilowatthour (kWh) in 2009 to 11.5 cents in 2010, and then rising to 11.7 cents per kWh in 2011.  These projections are unchanged from the previous Outlook.
  

• Projected carbon dioxide (CO2) emissions from fossil fuels, which declined by 6.3 percent in 2009, will increase by 1.5 percent and 1.3 percent in 2010 and 2011, respectively, as economic recovery contributes to higher energy consumption.

Crude Oil and Liquid Fuels Overview. The world oil market should gradually tighten in 2010 and 2011, as the global economic recovery continues and world oil demand begins to grow again.  Continuation of the production targets set by the Organization of the Petroleum Exporting Countries (OPEC), as well as lower overall growth in non-OPEC supply over the 2010-2011 forecast period, would also contribute to a firming of crude oil prices to above $80 per barrel this summer.  However, the combination of high commercial inventories among members of the Organization for Economic Cooperation and Development (OECD) and ample OPEC surplus production capacity should help dampen the likelihood of any large upward swings in prices.

Global Crude Oil and Liquid Fuels Consumption. EIA has revised upward slightly its projections for global liquid fuels consumption growth in this Outlook, as the Asian-led recovery continues.  China’s apparent liquid fuels consumption in December increased by 0.9 million barrels per day (bbl/d), or 12 percent, above year-earlier levels, as China’s economic stimulus package continued to help push up both oil usage and economic growth. While Japan is expected to continue its long-term decline in consumption, signs of an economic turnaround in that country lead EIA to be less pessimistic about the Japanese decline in liquid fuels consumption for 2010-2011.  EIA’s revised outlook is for global liquid fuels consumption to grow by 1.2 million bbl/d in 2010 and 1.6 million bbl/d in 2011 after showing annual declines in 2008 and 2009.  Non-OECD countries are expected to account for the majority of this growth in both 2010 and 2011.

Non-OPEC Supply. Non-OPEC supply increased by 560,000 bbl/d in 2009, the largest annual increase since 2004.  However, EIA does not expect this level of supply growth to continue during the forecast period. Non-OPEC supply is projected to increase by 430,000 bbl/d in 2010.  The largest source of growth in 2010 is the United States, followed by Brazil and Azerbaijan.  Offsetting this growth, production is forecast to decline in Mexico, the United Kingdom, and Norway.  Non-OPEC supply is expected to fall by 120,000 bbl/d in 2011, as declining production in mature areas overwhelms any new production growth.

OPEC Supply. OPEC cut its crude oil production by 2.2 million bbl/d in 2009, one reason why WTI crude oil prices stabilized between $70 to $80 per barrel since the middle of last year.  This range is consistent with the “fair price” range for crude oil proposed by King Abdullah of Saudi Arabia at the beginning of 2009.  Oil prices hovered in this range despite sustained high levels of oil inventories and rising spare production capacity, which rose, in part, because of cuts in OPEC production. OPEC surplus crude oil production capacity currently stands at about 5 million bbl/d and could grow to 6 million bbl/d by the end of the forecast period.  However, most of this surplus capacity is concentrated in Saudi Arabia, which is not likely to use it as long as the oil market is stable and its price target range is being met.  In contrast, OPEC surplus crude oil production capacity averaged 2.8 million bbl/d during the 1999-2009 period.

EIA expects annual OPEC crude oil production will increase by an average of 0.4 million bbl/d in 2010 and again in 2011 as global oil demand recovers. In addition, EIA expects OPEC non-crude petroleum liquids, which are not subject to OPEC production targets, to grow by 0.6 to 0.7 million bbl/d each year through 2011, for a total of up to 2.2 million bbd/d of increased OPEC liquids production over the next two years. OPEC is scheduled to meet in Vienna on March 17, 2010, to reassess market conditions.

OECD Petroleum Inventories. EIA estimates OECD commercial oil inventories were 2.69 billion barrels at the end of 2009, equivalent to about 58 days of forward cover, and about 90 million barrels more than the 5-year average for the corresponding time of year.  Projected OECD oil inventories remain at the upper end of the historical range over the forecast period.

Crude Oil Prices. WTI crude oil spot prices averaged $78.33 per barrel in January 2010, almost $4 per barrel higher than the prior month’s average and matching the $78-per-barrel forecast in last month’s Outlook.  The WTI spot price peaked at $83.12 on January 6 and then fell to $72.85 on January 29 as the weather turned warm and concerns about the strength of world economic recovery increased.  EIA forecasts that WTI spot prices will remain near current levels over the next few months, averaging $76 per barrel in February and March, before rising to about $82 per barrel in the late spring and to $85 by late next year.

Expected WTI price volatility was fairly steady over the month.  April 2010  implied volatility (based on options prices)  averaged 35 percent per annum during January, and, over the 5 days ending February 4, 2010, it was slightly over 34 percent.  April 2010 WTI futures averaged $75 per barrel over that same 5-day window, yielding a lower and upper limit for the 95-percent confidence interval of $60 and $94 per barrel, respectively.

One year ago, April-delivered WTI into Cushing, Oklahoma, was priced at $45 per barrel, and implied volatility, at 74 percent, was more than twice the rate now trading in the options markets.  Thus, the 95-percent confidence interval for April 2009 WTI futures had lower and upper limits of $28 and $72 per barrel at that time, respectively.

Source: EIA

September 9, 2009 Release

Global Petroleum Overview. WTI oil prices hovered in the $67-to-$74-per-barrel range in August as expectations of an economic recovery and higher oil consumption in the future were weighed against weak current demand and high inventories. As long as oil prices remain in their current range, EIA expects the Organization of the Petroleum Exporting Countries (OPEC) to maintain its existing production targets.

Global Petroleum Consumption. Preliminary data indicate that global oil consumption declined by 3 million barrels per day (bbl/d) in the second quarter of 2009 compared with year-earlier levels. Members of the Organization for Economic Cooperation and Development (OECD) accounted for most of the decline; total non-OECD consumption was virtually unchanged. The current macroeconomic outlook assumes that the world economy begins to recover at the end of this year, led by non-OECD Asia. As a result, EIA expects world oil consumption to grow in the fourth quarter of 2009 compared with year-earlier levels, the first such growth in 5 quarters. Projected world oil consumption grows by 0.9 million bbl/d in 2010, with relatively strong growth in non-OECD countries being partially offset by a slight decline in OECD consumption.

Non-OPEC Supply. Total non-OPEC supply averaged 50.1 million bbl/d in the second quarter of 2009, about 0.3 million bbl/d higher than in the second quarter of 2008. The largest amount of growth came from Central and South America (0.3 million bbl/d) and the Former Soviet Union (0.3 million bbl/d), which was offset by a 0.3 million bbl/d decline in Europe. Over the forecast period, higher output from Brazil, the United States, Azerbaijan, Kazakhstan, and Canada offsets falling production in Mexico and the North Sea.

OPEC Supply. OPEC crude oil production was 28.7 million bbl/d in the second quarter of 2009, similar to first quarter levels, but down 3 million bbl/d from peak production in the third quarter of 2008. The combination of higher prices and OPEC’s historical tendency for weaker compliance with production targets over time suggests that OPEC crude oil production could rise over the remainder of the year, unless prices fall sharply from current levels. Projected OPEC crude oil production climbs to 29.3 million bbl/d in the second half of 2009, then averages 28.9 million bbl/d in 2010.

Global Petroleum Inventories. Based on preliminary data, OECD commercial oil inventories stood at 2.74 billion barrels at the end of the second quarter of 2009. At 61 days of forward cover, OECD commercial inventories were well above average levels for that time of year. EIA expects OECD oil inventories to remain at above-average levels throughout the forecast period because of weakness in global oil consumption and continuing contango in the futures market, i.e., relatively high future prices compared with current prices.

Crude Oil Prices. Equity-market and exchange-rate expectations continue to be cited by market analysts as proximate causes of oil-price behavior, in addition to changing expectations of global oil consumption growth. EIA projects that WTI crude oil prices will average $69 per barrel in the second half of 2009, $19 per barrel lower than in the second half of 2008. This projection is largely unchanged from last month’s Outlook and reflects the view that an expected economic upturn will restore oil demand growth and gradually work off the surplus oil inventories. Although a consensus seems to be forming that the global economic downturn may have bottomed out, there still remains considerable uncertainty regarding the timing and pattern of any economic recovery.

U.S. Petroleum Consumption. EIA forecasts total consumption of liquid fuels and other petroleum products to decrease by about 800,000 bbl/d (4 percent) in 2009 compared with 2008. During the first half of the year, consumption declined by almost 1.25 million barrels per day (6.3 percent) from the same period last year, one of the steepest declines on record. The year-over-year projected decline in petroleum consumption slows to 300,000 barrels per day (1.6 percent) in the second half of 2009 as economic recovery begins to take hold. Monthly average motor gasoline consumption in June showed an increase over the same month from the prior year for the first time since September 2007 and continues to grow over year-ago levels through the forecast. The modest economic recovery projected for 2010 contributes to a 260,000-bbl/d (1.4 percent) increase in total liquid fuels consumption, led by increases of 110,000 bbl/d (2.9 percent) in distillate consumption, 60,000 bbl/d (0.6 percent) in motor gasoline consumption, and 10,000 bbl/d (0.7 percent) in jet fuel consumption.

U.S. Petroleum Supply. EIA projects total U.S. crude oil production to average 5.24 million barrels per day in 2009 and increase to an average of 5.30 million bbl/d in 2010. Crude oil production from the new Thunder Horse, Tahiti, Shenzi, and Atlantis Federal offshore fields accounts for about 14 percent of Lower-48 crude oil production in the fourth quarter of 2010.

U.S. Petroleum Product Prices. EIA expects the monthly average regular-grade gasoline retail price to fall from $2.62 per gallon in August and September to an average $2.56 per gallon over the last 3 months of the year. Higher projected crude oil prices in 2010 (about $12 per barrel, or 29 cents per gallon, higher than the 2009 average) increase regular-grade gasoline prices to an average of $2.70 per gallon next year. Projected diesel fuel retail prices, which averaged $2.63 per gallon in August, increase over the next few months to average $2.74 during the fourth quarter of 2009 as the winter heating fuel season begins.

U.S. Natural Gas Consumption. EIA projects that total natural gas consumption will likely decline by 2.4 percent in 2009 and remain flat in 2010. Despite low relative prices for much of the year, industrial natural gas consumption declined by 12 percent in the first 6 months of 2009 compared with the same period last year. EIA expects this year-over-year consumption decline will continue through the second half of the year for industrial users, although the trend will be less pronounced. Conversely, EIA expects natural gas use in the electric power sector will increase by 4.3 percent on a year-over-year basis during the second half of 2009 as natural gas continues to compete with coal for a share of the baseload power supply at current prices.

EIA expects natural gas consumption will increase slightly in the commercial and industrial sectors in 2010 as a result of improved economic conditions and low prices. Consumption remains relatively flat in the residential and electric power sectors next year. The anticipated addition of new coal-fired generating capacity and rising natural gas prices limits the potential for significant increases beyond the forecast 2009 level in natural gas consumption by electric generators.

U.S. Natural Gas Production and Imports. EIA expects total U.S. marketed natural gas production to increase by 0.9 percent in 2009 and fall by 3.5 percent in 2010. Despite a 20-percent drop in prices and a 45-percent drop in working natural gas drilling rigs since the start of the year, total natural gas production increased slightly from January to June 2009. This current production trend reflects significant improvements in horizontal drilling technology and robust productivity from shale gas discoveries in Louisiana, Oklahoma, Arkansas, and Pennsylvania. While lower prices have caused a reduction in drilling activity by all rig types, according to data compiled by Smith International, working horizontal rigs have fallen by only 27 percent since the start of the year compared with a 65-percent decrease among vertically-directed rigs. Working horizontal drilling rigs now represent more than half of the active natural gas drilling fleet.

As U.S. natural gas inventories swell to record-high levels, some curtailment of production is expected. The sustained reduction in drilling activity and production curtailments are projected to result in a 5.7-percent decline in marketed production from the Lower-48 non-Gulf of Mexico (GOM) between the first and second half of the year. The projected 1.3-percent increase in Federal GOM production during the second half of 2009 over the first half results from the addition of new producing wells and continued recovery from damage sustained during last year’s hurricane season.

Projected U.S. liquefied natural gas (LNG) imports increase to about 460 billion cubic feet (Bcf) in 2009 from 350 Bcf in 2008 and rise to about 660 Bcf in 2010. Maintenance to existing LNG supply facilities and delays to new liquefaction projects, in addition to higher world oil prices during the second half of 2009, contribute to the 43-Bcf downward revision in the 2009 LNG import forecast from last month’s Outlook.

U.S. Natural Gas Inventories. On August 28, 2009, working natural gas in storage was 3,323 Bcf. Current inventories are now 501 Bcf above the 5-year average (2004–2008) and 489 Bcf above the level during the corresponding week last year. While weekly stocks could exceed reported end-of-month levels, EIA now expects working natural gas inventories to reach 3,840 Bcf at the end of the 2009 injection season (October 31). This would be 275 Bcf above the previous record of 3,565 Bcf reported for the end of October 2007. The working gas inventory forecast assumes weekly storage injections will average about 57 Bcf over the next 9 weeks, compared with average storage injections of about 60 Bcf per week over this period during the previous 5 years.

U.S. Natural Gas Prices. The Henry Hub spot price averaged $3.23 per Mcf in August, $0.25 per Mcf below the average spot price in July. Prices continue to be pushed lower as robust production adds to already high inventories. As electric power demand for air conditioning wanes, a continuation of recent natural gas supply trends could cause spot natural gas prices to fall below current projections before cooler temperatures induce higher demand for space heating. In the projections, prices rise modestly in 2010, reflecting increased economic activity and lower production levels as a result of the current drilling pullback. However, it will take some time to work off current inventory levels and enhanced production capabilities should limit significant increases in prices throughout the forecast period. On an annual basis, the projected Henry Hub spot price averages $3.65 Mcf in 2009 and $4.78 Mcf in 2010.

U.S. Electricity Consumption. Total U.S. electricity consumption fell by 4.4 percent during the first half of the year compared with the same period in 2008, primarily because of the effect of the economic downturn on industrial electricity sales. The expected year-over-year decline in total consumption during the second half of 2009 is smaller, a 2.3-percent decline, as residential sales begin to recover.

U.S. Electricity Generation. While generation from coal fell by 12 percent in the first half of the year compared with the same period in 2008, natural gas generation has risen by 3 percent. Lower coal prices relative to natural gas prices next year and the planned addition of up to 10 gigawatts of coal capacity during 2009 and 2010 could mitigate or reverse the fuel-switching trend.

U.S. Retail Electricity Prices. EIA significantly lowered its electricity retail price projections through 2010 from last month’s Outlook due to the dramatic decline in natural gas fuel costs for power generation. Although retail residential prices during the first half of this year are up by 5 percent from the same period last year, EIA expects prices during the second half will show little change from the second half of last year. The projected annual average 2010 residential electricity price of 11.4 cents per kilowatthour is about 2 percent lower than the 2009 price.

U.S. Coal Consumption. Electric-power-sector coal consumption fell by 11 percent in the first half of this year. The decline resulted from lower total electricity generation combined with increases in generation from natural gas, nuclear, hydropower, and wind. Coal is expected to regain a larger share of the baseload generation mix beginning in 2010, as natural gas prices begin to rise. Projected coal consumption in the electric power sector increases by almost 2 percent in 2010 but remains below the 1-billion short-ton level for the second consecutive year. Coal consumed for steam (retail and general industry) and coke production declined by 15 percent in the first quarter of 2009 compared with the first quarter of last year. In the forecast, lower consumption of coal in both sectors continues for the remainder of the year, followed by a combined increase in coal consumed by these sectors of more than 5 percent in 2010.

U.S. Coal Supply. Coal production for the first 6 months of 2009 fell by more than 5 percent in response to lower U.S. coal consumption, fewer exports, and higher coal inventories; these conditions persist in the forecast for the remainder of 2009. Projected production declines by 1.4 percent in 2010, despite increases in domestic consumption and exports. Reductions in coal inventories and increased imports offset the increase in U.S. coal consumption.

U.S. Coal Prices. The monthly average delivered electric-power-sector coal price reached a record high of $2.29 per million Btu in March 2009. The delivered cost of coal to the electric power sector had continued to rise, despite decreases in spot coal prices, lower prices for other fossil fuels, and declines in demand for coal for electricity generation, because a significant portion of power-sector coal contracts was entered into during a period of high prices for all fuels. The projected average power-sector coal price of $2.18 per million Btu for September 2009 represents the first decline in price from the same month of the prior year since 2002. Projected power-sector coal prices fall over the forecast to about $1.95 per million Btu in December 2010.

U.S. Carbon Dioxide Emissions

Projected carbon dioxide (CO2) emissions from fossil fuels fall by 6.0 percent in 2009 because of the weak economic conditions and declines in the consumption of most fossil fuels. Coal leads the drop in 2009 CO2 emissions, falling by nearly 10 percent because of fuel switching from coal to natural gas in the electric power sector. The projected recovery in the economy contributes to an expected 0.9-percent increase in CO2 emissions in 2010.

Source: EIA

Mike Jackson, CEO of the nation’s largest auto retailer, tells Fortune’s Carol Loomis that the U.S. needs higher gas taxes

Tell me your opinions about the price of gas and what might be done to influence it?

I think we need a revenue-neutral gas tax that puts a floor under the price of gasoline at around $3.50 to $4. The price of gas totally determines the types of vehicles that people buy and how they use them. The fact that America has ignored this reality is the reason why our energy policies have failed for 50 years. With gas now around $2 per gallon, it won’t be possible to sell fuel-efficient vehicles. Already, another great migration away from them is underway. I’ve seen this movie three times in my career.

How would you establish a price floor?

Through taxation. But it doesn’t need to happen by next month. If you simply announce that taxes will be put in after the economy recovers, in 2011 or 2012, people will start now to factor that into their decisions.

And how about your revenue-neutral point?

This would be a very painful, regressive tax, which needs to be rebated quickly–maybe through the payroll tax. If there’s a rebate, I think the political backlash can be handled. The biggest lie in American politics is the following combination: “I care passionately about America’s dependence on imported oil and we must do something about it, and I’m passionate about global warming–and I strongly believe we should have cheap, affordable gasoline.” There’s intellectual dishonesty in those assertions coming out of the same brain and the same mouth at the same time. That’s what Washington has been saying for 15 years, and that position guarantees you failure.

Related sites: Fortune

January 13, 2009 Release
(Next Update: February 10, 2009)

Overview. The downward trend in oil prices continued in December as the worsening global economy weakened oil demand and the second Organization of Petroleum Exporting Countries (OPEC) agreement for substantial production cuts within a month has failed, thus far, to support substantially higher prices. The outlook for supply and demand fundamentals indicates a fairly loose oil market balance over the next 2 years. The global economic downturn points to declining oil consumption in 2009, while additional production capacity from both OPEC and non-OPEC nations should boost surplus production capacity, reducing the likelihood of a renewed strong upward pressure on prices. Global real GDP growth (weighted according to shares of world oil consumption) is assumed to be 0.6 percent in 2009 and 3.0 percent in 2010. These projections compare with 4.6 percent real GDP growth in 2007 and 3.2 percent in 2008. The oil price path going forward will be driven mainly by the depth and duration of the global economic downturn, the pace and timing of the recovery, and actual OPEC production.

Consumption. World oil consumption continues to be revised downward in response to the global economic downturn. Global consumption is estimated to have been largely unchanged in 2008 and is projected to fall by 800,000 barrels per day (bbl/d) in 2009. Total world oil consumption is expected to record a modest rebound in 2010, rising by 880,000 bbl/d from year-earlier levels, on the assumption of the beginning of an expected recovery in global economic growth. Oil consumption growth is concentrated in countries outside of the Organization for Economic Cooperation and Development (OECD), particularly China, the Middle East, and Latin America. However, projected declines in oil consumption in OECD countries more than offset any non-OECD oil consumption growth in 2009 (World Oil Consumption). If the world economic recovery happens sooner or is stronger than EIA now anticipates, oil consumption could decline at a slower rate or potentially increase at a faster rate than expected, putting upward pressure on oil prices.

Non-OPEC Supply. Non-OPEC supply is projected to rise modestly over the next 2 years. After falling by 340,000 bbl/d in 2008 because of project delays and disruptions in Central Asia and the Gulf of Mexico, non-OPEC supply is projected to grow by about 180,000 bbl/d in 2009 and 90,000 bbl/d in 2010. These projections assume that unexpected delays to new non-OPEC supply that have occurred in the past will continue through the forecast period. Supply growth in countries such as the United States, Brazil, and Azerbaijan is expected to more than compensate for continued declines in many non-OPEC nations, particularly Mexico, the North Sea, and Russia. The global economic slowdown and falling oil prices bring additional risk to the usual uncertainties concerning non-OPEC supply growth, such as unexpected disruptions, project delays, and underestimation of decline rates. Lower oil prices bring into doubt the viability of some high-cost non-OPEC projects, especially those utilizing nonconventional technology or those seeking to exploit frontier oil basins. The credit crunch associated with the global economic crisis can also make it difficult to acquire financing for new projects or even finance the investment required to prevent accelerated declines at producing fields. If conditions in global financial markets lead to delayed investment in existing and new oil fields, then even a short-lived economic downturn could have longer-term ramifications for world oil supply. This would heighten the risk of a return to a tight supply situation once the world economy and oil demand growth recover.

OPEC Supply. OPEC’s December announcement that it would cut crude oil production again, following its earlier cut in November, has not yet led to a substantial increase in oil prices. Together, the two announced cuts imply a new overall target for production (excluding Iraq) of 24.845 million bbl/d , 4.2 million bbl/d below actual September production. However, the market is not presently convinced that OPEC members will willingly curtail output enough to lead to much higher prices. Adherence to the announced cuts will be challenging, as several individual countries are motivated to maintain production at higher levels to to generate revenue needed to finance their government programs amid falling prices. The lack of transparency in the new agreement, highlighted by the failure to publicize individual country production cuts, is one indicator of the reluctance of countries to cut production consistent with the group’s new overall production target. OPEC plans to meet again on March 15 in Vienna to evaluate the effectiveness of its recent actions.

EIA projects that total OPEC crude oil production (including Iraq) will fall by more than 2 million bbl/d, from 31.4 million bbl/d in September 2008 to 29.3 million bbl/d in the first quarter of 2009, implying a compliance rate of a little more than 50 percent. Because of Indonesia’s exit from OPEC, EIA has revised its historic and forecasted values for OPEC oil production to be consistent with the current membership. OPEC crude oil production is expected to average 30.0 million bbl/d in 2009 and 30.7 million bbl/d in 2010. In addition, EIA expects that OPEC production of non-crude liquids will rise substantially next year, growing by 600,000 bbl/d in 2009 and by 850,000 bbl/d in 2010. The combination of lower demand for OPEC crude oil and the capacity expansions expected in several OPEC countries means that surplus production capacity could increase to roughly 4.0 million bbl/d in 2009 and 4.7 million bbl/d by the end of 2010, compared with the 1 to 2 million bbl/d of surplus capacity available over the past several years (OPEC Surplus Oil Production Capacity).

Inventories. Revised data indicate that OECD commercial inventories rose by 330,000 bbl/d in the third quarter of 2008, lower than historic rates for inventory builds during that time of year. OECD commercial inventories stood at 2.63 billion barrels at the end of the third quarter, equivalent to 57 days of forward consumption cover. On the basis of days of forward cover, OECD commercial inventories are well above average historic levels, and EIA projects that they will remain there through the end of 2010 (Days of Supply of OECD Commercial Stocks). The combination of substantial surplus capacity and above-average inventories should dampen price pressure over the period. In any event, a sustained rebound in prices is not likely until the economic recovery causes a sustained rebound in demand for OPEC crude oil.

Permalink: http://www.eia.doe.gov/emeu/steo/pub/contents.html

Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- ExxonMobil (XOM) Chief Executive Rex Tillerson on Thursday urged federal lawmakers to consider a “carbon tax” to reduce greenhouse gas emissions instead of a cap-and-trade law such as the one Congress is drafting.

Marking a major milestone in the evolution of the oil firm’s stance on the climate change issue, Tillerson’s policy call comes as Democratic leaders prepare to move toward creating stringent cap-and-trade legislation.

“My greatest concern is that policy makers will attempt to mandate or ordain solutions that are doomed to fail,” such as a cap-and-trade system, Tillerson said in a speech at the Woodrow Wilson Center here.

“A carbon tax would be a more direct, transparent and more effective approach, ” he said.

A carbon tax is a straight fee for emissions while a cap-and-trade system establishes economy-wide emission limits and a market for firms to buy and sell pollution allowances based on whether they were above or below their cap.

Only a few years ago, Exxon was a major financial supporter of climate change skeptics, though recently the firm’s position had begun to recognize the political reality in Washington as Democrats’ power rose, and the company started calling a carbon tax a more “reasonable” solution to cut emissions in the economy. Tillerson’s comments represent the first clear call by the CEO for a price on carbon.

Exxon’s public stance on a carbon tax comes as U.S. Rep. Ed Markey, D-Mass., one of the strongest advocates for stringent climate change legislation and clean energy legislation in Congress, is expected to be named chairman of the House subcommittee responsible for drafting greenhouse gas laws.

The move – if ratified as expected later Thursday – will likely mean tougher greenhouse gas and clean energy policies out of the Energy and Commerce Committee than industry had forecast before a major shake-up in the panel late last year. Markey’s play follows the successful November coup by Rep. Henry Waxman, D-Calif., for the chairmanship of the full Energy and Commerce Committee from more moderate Rep. John Dingell, D-Mich. It is widely believed to have been approved by House Speaker Nancy Pelosi, D-Calif., who also backs tough cap-and- trade legislation.

Analysts say Markey in the post will help Waxman to more easily pass tough new cap-and-trade legislation that would cut greenhouse gases sooner, faster and across a wider spectrum of the economy than Dingell or Boucher would have preferred. At one time, Dingell had proposed a carbon tax. By forcing lawmakers and the public to quantify the economic impact of cutting greenhouse gases, analysts said the veteran automaker advocate attempted to make it less politically tenable to support stringent emissions reductions.

Tillerson said cap-and-trade systems “inevitably introduce unnecessary costs and complexity that undercut their effectiveness,” calling it ultimately a ” stealth tax.” Taking advantage of the current economic crisis caused by a systemic problem failure in the financial houses, the Exxon CEO also raised the specter of more economic toil precipitated by a cap and trade. “This new Wall Street of emission brokers will take the emphasis away from the goal of reducing carbon emission and focus it’s attention on price volatility,” he said.

Tillerson said reductions and changes to other taxes, such as income or excise policies, could offset the carbon tax on the economy.

Although widely encouraged by economists – including within the Congressional Budget Office – who say it’s a more efficient and direct approach to cutting emissions, the carbon tax has been largely shunned by most lawmakers as it’s seen as politically unfeasible to pass. That may be why Exxon has joined the ranks of other heavy carbon emitters calling for a carbon tax, as it would reveal more transparently of the actual costs to the economy of putting a premium on greenhouse gas emissions.

Rising energy prices and a stumbling economy are thought to have played the biggest role in the embarrassing defeat of a climate change bill in the Senate last year. Majority Leader Harry Reid, D-Nev., withdrew Sen. Barbara Boxer’s bill from floor consideration after it was clear that a majority of Senators weren’t going to support the estimated $7 trillion measure.

And the failing economy – along with a massive fight over how the income from auctioning emission allowances will be re-distributed between industries – is why many lawmakers have said final passage of climate change bill isn’t likely this year.

Pressed by reporters to say what price level Tillerson thought carbon would need to be taxed to activate emission cuts, the oil chief said it would take at least $20 a ton. “It’s a question of how much you think the economy is willing to take and how aggressive you want to be,” he said.

-By Ian Talley, Dow Jones Newswires, 202-862-9285; ian.talley@dowjones.com

(END) Dow Jones Newswires

The Big Thirst

By JAD MOUAWAD
Published: April 20, 2008

Oil prices rose above $116 a barrel last week, setting another record for the world’s most indispensable energy commodity. What was striking about this latest milestone was what didn’t happen: there was no shortage of oil, no sudden embargo, no exporter turning off its spigot.

The weak dollar, worries about terrorism and speculation on commodity markets certainly played a role. But, of course, so did demand. Producers are struggling to pump as much as they can to quench the thirst not only of the developed world, but fast-growing developing nations like China and India, the two most populous countries. To many experts, the steadily rising price underscored longer-term fears about the future of a system that has supplied cheap oil for more than a century.

“This is the market signaling there is a problem,” said Jan Stuart, global oil economist at UBS, “that there is a growing difficulty to meet demand with new supplies.”

Today’s tensions are only likely to get worse in coming years. Consider a few numbers: The planet’s population is expected to grow by 50 percent to nine billion by sometime in the middle of the century. The number of cars and trucks is projected to double in 30 years— to more than two billion — as developing nations rapidly modernize. And twice as many passenger jetliners, more than 36,000, will in all likelihood be crisscrossing the skies in 20 years.

All of that will require a lot more oil — enough that global oil consumption will jump by some 35 percent by the year 2030, according to the International Energy Agency, a leading global energy forecaster for the United States and other developed nations. For producers it will mean somehow finding and pumping an additional 11 billion barrels of oil every year.

And that’s only 22 years away, a heartbeat for the petroleum industry, where the pace of finding and tapping new supplies is measured in decades.

The pursuit of oil will be just part of the energy challenge. The world’s total energy demand — including oil, coal, natural gas, nuclear power, as well as renewable energy sources like wind, solar and hydro power — is set to rise by 65 percent over the next two decades, according to the I.E.A.

But petroleum, the dominant fuel of the 20th century, will remain the top energy source. It accounts for more than a third of the world’s total energy needs, ahead of coal and natural gas. Refined into gasoline, kerosene or diesel fuel, oil has no viable substitute as a transportation fuel, and that is not likely to change much in the next 30 years.

The problem is that no one can say for sure where all this oil is going to come from.

That might not sound like such a bad thing for those concerned about carbon emissions and climate change. High prices might end up forcing people to conserve and encourage the development of alternatives. But the energy crunch might also result in a global scramble for resources, energy wars, and much higher energy prices.

Some oil executives are sounding the alarm bell. At a recent energy conference, John Hess, the chief executive of Hess Corporation, the international oil company, warned that an oil crisis was looming if the world didn’t deal with runaway demand and strained supplies. The chief executive of Royal Dutch Shell, Jeroen van der Veer, said recently, with some understatement, that, “the energy outlook does not look rosy.”

For one thing, the world’s oil supplies are already stretched. Countries outside of the OPEC cartel — which have been the main source of new oil discoveries and production since the 1970s — have said they expect little to no growth this year in oil production.

The North Sea and Alaska are slowly running out of oil and producers there are struggling to keep production from falling. Russia’s phenomenal oil surge is coming to an end; a top executive of Lukoil, the country’s second-largest oil group, said last week that the country’s production was unlikely to grow much. Nigeria is battling a violent militancy. And Mexico, the third-most-important supplier of crude to the United States, has been stuck in a crippling political debate over keeping out foreign investors while witnessing a dramatic drop in production that some analysts say may be irreversible.

What about OPEC? The 13 members of the Organization of the Petroleum Exporting Countries account for three-quarters of the world’s proven oil reserves. But for various reasons, most of those countries are making it harder, if not impossible, for foreign oil companies to invest within their borders. With energy prices rising, OPEC producers are seeing record revenues, which have reduced the incentive to dip into their supplies by boosting production.

At the same time, major oil companies like Exxon Mobil, BP and Chevron are finding it harder to compete worldwide, as national oil companies erode their once-dominant positions. Fourteen of the world’s Top 20 oil companies are state-owned giants, like Saudi Aramco and Russia’s Gazprom. That leaves Western oil companies in control of less than 10 percent of the world’s oil and gas reserves.

Facing higher costs, those companies are also having greater difficulty locating new oil deposits. Despite spending over $100 billion on exploration last year, the five largest international oil companies found less oil last year than they pumped out of the ground.

A small band of skeptics view today’s record prices as evidence that oil supplies have peaked — that half the globe’s oil supply has already been used up. But most experts believe that there are still enough oil reserves, both discovered and undiscovered, to last at least through the middle of the century.

The problem is that in many corners of the world, geopolitics, more than geology, has removed much of those reserves from the reach of independent oil companies.

“There are plenty of resources in the globe,” Rex Tillerson, the chairman of Exxon, recently told an investor conference. The difficulty, he said, was “just continuing to have access to all of the opportunities.”

Over the past century, the world burned through a trillion barrels of oil. Another 1.2 trillion barrels of known conventional oil reserves wait to tapped, according to BP, one of the world’s biggest oil companies. It sounds like a lot. But given the current rate of growth in demand, a trillion of those barrels will be used up in less than 30 years.

What then? Many analysts estimate another trillion barrels of yet-to-be-found oil remains, but in remote places like the Arctic Ocean where it will be expensive to extract, or in countries that might restrict access.

The big oil companies have been in a global dash to find and pump more oil. But it takes time, sometimes a decade, before the first barrels from a newly discovered oil field are pumped and sold.

What of the alternatives?

Corn ethanol, which was sold as a quick fix to the nation’s dependency on oil imports, is an imperfect substitute. It is now blamed for driving up food prices while emitting more carbon dioxide and providing a third less energy per gallon than gasoline.

It is no panacea either. Even if oil companies can meet the federal requirement to use 36 billion gallons of ethanol by 2022, which many say will be impossible, it would only amount to 10 percent of the country’s current oil demand.

Likewise, the rush to develop heavy oil, tar sands and shale oil reserves, and investments to turn coal into liquid fuels, like diesel, will yield only small amounts of fuel. But their cost to the environment will be much higher than the exploitation of conventional oil.

Some experts are not quite so worried. They argue that the oil industry is a cyclical one in which higher prices eventually push down demand. “We’re in a bubble right now,” said Robert Mabro, a well-known oil expert at the Oxford Institute for Energy Studies. “Prices are rising because everyone expects them to do so. We’ve seen the same thing in the real estate market.”

Still, the growth in oil consumption almost certainly will need to slow in coming years. But it seems unlikely that developing nations will cut their consumption first. China, India and the Middle East are in the midst of exceptional economic booms and need cheap energy, which is largely subsidized by their governments, to keep growing and modernizing.

Oil now accounts for just 19 percent of China’s energy needs. But China’s oil demand is expected to more than double by 2030 to over 16 million barrels a day, according to the International Energy Agency, as more people rise from poverty, move out of villages and buy more cars.

Just as in the United States, much of the increase in China’s oil demand has come from that country’s love affair with cars. The number of vehicles in China rose sevenfold between 1990 and 2006, to 37 million. China has now surpassed both Germany and Japan to become the second-largest car market in the world, and is set to overtake the United States by around 2015. China could have as many as 300 million vehicles by 2030.

William Chandler, an energy expert at the Carnegie Endowment for International Peace, estimates that if the Chinese were using energy like Americans, global energy use would double overnight and five more Saudi Arabias would be needed just to meet oil demand. India isn’t far behind. By 2030, the two counties will import as much oil as the United States and Japan do today.

What about the United States? The country has shown little willingness to address its energy needs in a rational way. James Schlesinger, the nation’s first energy secretary in the 1970s, once said the United States was capable of only two approaches to its energy policy: “complacency or crisis.”

The United States is the only major industrialized nation to see its oil consumption surge since the oil shocks of the 1970s and 1980s. This can partly be explained by the fact that the United States has some of the lowest gasoline prices in the world, the least fuel-efficient cars on the roads, the lowest energy taxes, and the longest daily commutes of any industrialized nation. The result: about a quarter of the world’s oil goes to the United States every day, and of that, more than half goes to its cars and trucks.

Rising prices and fears about the security of future supplies finally persuaded Congress last year to approve the first increase in fuel efficiency standards in 30 years, raising the average fleet-wide standards by 40 percent to 35 miles a gallon by 2020. The push, which was resisted by American carmakers for years, is underwhelming. The same goal could be reached overnight if everyone drove a Honda: the Japanese carmaker’s fleet already averages 35 miles a gallon.

“The country has been living beyond its means,” said Vaclav Smil, a prominent energy expert at the University of Manitoba. “The situation is dire. We need to do relative sacrifices. But people don’t realize how dire the situation is.”

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THE FREEDOM CAR AND FUEL PARTNERSHIP

The FreedomCAR and Fuel Partnership is a collaboration among the U.S. government, in particular the Department of Energy (DOE); the U.S. Council for Automotive Research (USCAR), whose members are Chrysler LLC, the Ford Motor Company, and General Motors Corporation; and five key energy companies: BP America, Chevron Corporation, ConocoPhillips, ExxonMobil Corporation, and Shell Hydrogen (U.S.).

The program supports a very wide variety of research activities needed to enable a transition pathway for automotive transportation. The pathway starts with internal combustion engines (ICEs) more efficient than today’s, proceeds through the increasing use of a variety of ICE hybrid electric vehicles, and then, by 2015, arrives at the point where the private sector can make a decision, based on information generated by the Partnership, about the commercialization of fuel-cell-powered vehicles fueled by economically competitive hydrogen produced from a variety of energy sources. Research goals have been established that, if achieved, promise to overcome the many, high-risk barriers to achieving this vision.

A major strength of the FreedomCAR and Fuel Partnership is that the research it sponsors is determined by joint industry/government teams request $1.7 billion over 5 years (FY04 through FY08), with appropriations thus far of about $243 million, $307 million, and $339 million in FY04, FY05, and FY06, respectively. The FY07 continuing resolution resulted in funding of about $401 million. The FY08 presidential budget request is for about $436 million.

There remain many barriers to achieving the objectives of the Partnership, including cost and performance at the vehicle, system, and component levels.

Does that mean a underfunded, overstretched goal, results in an expensive underperforming vehicles…