Random Notes  

Heading Out has some analysis of the figures in the CERA report (particularly Saudi depletion). I've also been enjoying his periodic posts on how you set up a drilling rig and the process you go through to get the oil out of the ground (which may explain why one of my friends called me an energy geek recently) - see drill, mud, derrick, casing and pressure for the story so far.

In local news, there were more rumours about CNOOC launching a takeover for Woodside on the weekend, which CEO Don Voelte has poured cold water on.

Santos keep revising Jeruk reserves downward - what started out as a 500 million barrel discovery now seems to be more like 170 million not-particularly-easy-to-get-to barrels.

Nexus have announced their intention to drill for oil off Rottnest Island (pdf) in WA, which has no doubt alarmed the quokkas.

BHP is in the news in California, with their typically hard-nosed choice of lobbyists for their proposed LNG terminal coming under fire (it would be interesting to see who is lobbying on behalf of Chevron and Shell, who are their main competitors to supply California with LNG).



China has announced plans to construct an offshore wind farm in the Bohai Sea with a capacity of 1 million kilowatts in the hope of easing chronic electricity shortages. The completion date isn't until 2020 though, so this isn't a short term fix - but at least they are taking steps in the right direction.

MIT Tech Review has an article on the first steps being taken to try and build new nuclear power plants in the US, led by Entergy Nuclear.

The U.S. nuclear-power industry has been stagnant for three decades; the last successfully completed reactor order was made back in the early 1970s. The 1979 Three Mile Island accident, and the far worse 1986 Chernobyl catastrophe, helped stop the industry in its tracks. Public confidence plunged; regulatory pressures, political opposition, and costs surged. And by the 1990s, fossil fuels were cheap enough that nuclear power--even with more-efficient designs--wasn't worth pursuing. Instead, U.S. utilities dotted the landscape with advanced natural-gas-fired power plants.

But today, natural-gas prices are three times what they were 10 years ago, making all alternatives, from wind turbines to nuclear reactors, more attractive. Abroad, 24 nuclear plants--including eight in India, four in Russia, and three in Japan--are now under construction. And in the United States, several utilities are reconsidering the nuclear option.

Apparently there is going to be a repeat of the "Oil Shockwave" exercise, this time as part of an Alternative Energy Expo in Torrance, California later this week.

Steve Roach's latest gloomy assessment of the world economy is out - this time he takes a look at the oil price spike.

On the surface, the global economy seems to be doing just fine. Yet just beneath that seemingly tranquil surface, the imbalances and tensions are only getting worse.

The shock of the summer -- or for that matter of the year -- has been the unrelenting surge in oil prices. In real, or inflation-adjusted, terms WTI-based oil prices are now more than 25% above levels reached in the run-up to the first Gulf War in late 1990 and back to levels last seen in late 1982. In the past six months, alone, the increase has been close to 40% -- taking real oil prices up more than three-fold relative to levels prevailing at the trough of the last recession in late 2001. Yet even more stunning than the price run-up itself has been the apparent resilience of the global economy to this full-blown energy price shock. Standard rules of thumb tell us that every $10 increase in oil prices should knock about 0.4% off GDP growth during the following four quarters. But after the briefest of soft patches this spring, the world proceeded to zig rather than zag, as the business cycle miraculously sprang back to life. So much for the precision -- or even the relevance -- of our time-honored macro metrics! Those who felt that $50 oil would derail the global economy have been dead wrong. Why worry about $60 or even $70?

The reason to worry, in my view, is that the cost of this cyclical resilience in the face of an energy shock is not without serious consequences for an unbalanced world. In particular, it has pushed the asset-dependent American consumer to a new state of excess. At first blush, there seems to be little reason to worry -- according to our US team, personal consumption growth is tracking a 5.5% gain in the current quarter. But consider the costs of that stellar accomplishment -- a personal saving rate that has finally hit the “zero” threshold, debt ratios that continue to move into the stratosphere, and asset-led underpinnings of residential property markets that are now firmly in bubble territory. Courtesy of surging oil prices, these costs are now at the breaking point, in my view.

...

While this penchant for spending may make sense in normal periods, it is the height of recklessness in the face of an energy shock. In the two oil shocks of the 1970s, the personal saving rate averaged about 9.5%, whereas in the oil shock just prior to the Gulf War of early 1991, it was around 7%. That means that in each of those earlier instances, US consumers had a cushion of saving they could draw upon in order to maintain existing lifestyles. Today’s “zero” saving rate underscores the total absence of any such cushion. The only backstop available to support the spending excesses of American consumers is the saving that is now embedded in their over-valued homes. Yet with the housing bubble now in the danger zone, that’s not exactly a comfort zone.

There is another eerie parallel with earlier energy shocks that should not be taken lightly. Just prior to the two oil price spikes of the 1970s, discretionary spending by US households had also gone to excess. The GDP share of consumer durables and residential construction -- the latter being a proxy for the discretionary demand for shelter -- was running at peak levels of around 14.5%. In the aftermath of those two earlier energy shocks, discretionary spending collapsed -- with the combined share of consumer durables and homebuilding falling to 11.5% in the mid-1970s and 10.5% in the early 1980s. These were the most severe consumer-led recessions on record in the United States. In the current expansion, discretionary household spending has moved into a similar zone of excess.

...

I don’t know where oil prices are going. But I do feel strongly that an important macro threshold has now been breached -- one that adds unmistakable tension to the world economy’s greatest imbalances. At the current level of oil prices, I suspect one of two things will happen -- either the over-extended American consumer will finally cave or the long-awaited US current account adjustment will finally unfold. Courtesy of a full-blown energy shock, the venting of global imbalances can no longer be deferred indefinitely. If consumers remain unflinching in the face of sky-high oil prices, a plunging saving rate will push an already outsize current account deficit to the flash point.

Xymphora has a post on the troubles facing the US$ - "American Dollar R.I.P", which includes a comment that would indicate that the days of petrodollar recycling may be over.

Saudi Arabia, immediately after the death of King Fahd, announced that it was going to repatriate $360 billion invested overseas in the last 18 months. Of course, the majority of this was invested in the United States, and Saudi Arabia can't possibly absorb all that money, so this is a polite way of saying that they will invest their oil revenues in countries other than the United States. Thus quietly ends the scheme that Saudi oil surpluses would be invested in the United States. This has worked exceptionally well for the Americans, and the thanks the Saudis got for it was to be constantly blamed for financing terrorism, financing which started at the insistence of the United States! The replacement of Prince Bandar - a man perceived as very close to American interests, particularly the Bush crime family itself - as Saudi ambassador to the United States almost certainly also signals that the Saudis are tired of propping up the American economy and receiving only aggravation in return.

Jerome a Paris at DailyKos also has a post up on economics as we approach the peaks of oil and global credit.

On a non energy related note, can anyone explain what on earth this is all about ?