US Oil Output 1% Below Last Year

The US EIA weekly petroleum report announced that US oil output fell 1.3% last week to a rate of 5.107 million barrels per day (Mbd). That is 1% below the same week in 2008 and 6.8% lower than the 2009 production peak of 5.48 Mbd hit in mid-April.

How Low Could Oil Output Fall?

US oil output will probably continue to gradually fall since drilling for new wells remains below average on the relatively lower oil prices of 2009. But production will be higher than last year in the period from late August to October — unless we have an unlikely repeat of hurricanes slamming directly into the Gulf of Mexico’s oil production and refining hub. But an interesting question is, “How low could US oil output go?” If the average output decline of .5% per week over the last 15 weeks continued for several weeks, production would be significantly below 5 Mbd by the winter. Such an occurrence could lift prices back to $80 per barrel, especially if current trends continue to our South.

Mexico Oil Output Plummets Further

Mexico’s state-run oil company, PeMex, recently reported its output fell even more in June. Its liquid production was 3.6% below May levels, and 10% below June 2008 (crude was 11% lower). Production is now at the lowest point since the early 1990s and shows little sign of curbing its fall. Output from Mexico’s largest discovered field, Cantarell, continued to nosedive — falling 41% from last June to a production of .604 Mbd. This country that was recently the second largest source of US imports may struggle to export a single barrel by 2015.

With lower output in the US and Mexico (along with depletion in Norway, the UK and Russia), the only way we can keep a lid on our transportation costs in the years ahead is to increase fuel efficiency and implement an active transportation revolution. A bicycle network for local and long-distance travel will be an important step for US planners to take (see the East Coast Greenway vision for a model). And as Fatih Birol of the International Energy Agency says, let’s leave oil before oil leaves us.

Onwards in the Sustainable Energy Transition-

Petroleum Inventories Remain Very High

The Energy Information Administration (EIA) reported yesterday in its weekly petroleum report that US crude oil storage fell another ~1% last week. Even so, crude supplies remain more than 10% above average and US output has been rather robust above 5.2 million barrels per day (Mbd). The lower oil rig count in 2009 has yet to lower crude oil production below last year’s levels. Gasoline is the only fuel with below-average inventory levels. And the lower pump price (compared to last year) allowed last week’s gasoline demand to rise 1.1% above the same week in 2008. But demand for distillates (mainly diesel) and propane continued to languish at recessionary low levels — 16.9% and 10.2% lower than last year, respectively. Either further demand recovery or lower output and imports are necessary to drive significant price increases from current levels.

Natural Gas Inventories Sky-High

And the storage level for natural gas has kept prices close to their recent lows below $4.50 per MMBtu. Even though natural gas is substituting coal for electricity generation across much of the Southeast, lower industrial demand and persistent high domestic production have storage levels moving toward record highs. Inventories are almost 23% above average and continue to surprise analysts with its weekly growth.

Higher Oil Prices Spur Hope for Alternatives

Bicycling, pedicabs, solar and wind power, and other alternatives to fossil fuel energy are benefitting from the return of higher oil prices. Oil is now more than double its winter low below $35 per barrel. If non-OPEC output begins to wane in the weeks ahead and the recession does begin to fade, these alternatives may surge forward quickly. I’ll keep you updated on progress in the weeks ahead.

Onwards in the Sustainable Energy Transition-

Rig Count Yet to Find Bottom

The number of active rigs drilling for oil and natural gas fell by 10. The rig count for oil fell 4.7% and for natural gas fell .3%. Even though prices for both fuels seem to have bottomed, producers aren’t taking a chance with extra exploration expenditure. If we don’t see rig counts stabilize shortly, a dramatic drop in production will take place in the months ahead.

Gasoline Price Now Higher Than Diesel

This morning, the national average pump price passed $2.30 and its alternative diesel stayed at $2.29 per gallon. The recent quick rise in gas prices should begin to moderate in the mid-$2.30s unless some big bullish news developments take place in the week ahead. The price hikes of the last month and the growth of China’s vehicle market (passing the US for top global market) are crucial reminders that efficiency should be a top priority for consumers.

I’ll keep you up-to-date on oil and gas prices and their impact on climate mitigation as they develop in the months ahead.

Onwards in the Sustainable Energy Transition-

Other Developments in the Weekly Oil Report

Crude oil inventories finally moderated this week but remain extremly high, falling more than 1% on lower imports. And gasoline storage fell almost 2% back to average levels for this time of year. Gasoline imports and production were both lower, though gasoline demand more than 4% below year-ago levels moderated the decline. Distillate (diesel) and propane inventories continued to climb way above average for early May as their demand was down 12.1% and 1.3%, respectively. US crude output remained steady ~5.3 Mbd, as new Gulf of Mexico oil made up for other fields’ decline.

Bottom line: Efficient diesel vehicles are competitive again with their gasoline counterparts. And a continued focus on efficiency will allow us to enjoy sub-$3 pump prices for a while with today’s high inventories.

Onwards in the Sustainable Energy Transition-

For our prices at the pump, it looks like a return to $2 per gallon gasoline nationwide is in the cards. Prices would need to rise another seven cents per gallon from today’s $1.933, an easy sum if wholesale gasoline stays above $1.30 (it climbed above $1.43 today). This higher price for oil can help lower carbon energy sources such as wind and solar compete while they figure out more ways to lower costs.

Another commodity that skyrocketed in price today is natural gas. But I will save that story for tomorrow with a discussion of tomorrow’s oil and gas rig count.

Onwards in the Sustainable Energy Transition-

Gasoline prices have increased from a low just above $1.60 to today’s level of $1.933 per gallon. And with wholesale prices having increased another six cents today to $1.38 per gallon, gasoline appears ready to pass the $2 per gallon mark in coming days. The retail price usually balances out to be ~70-75 cents above wholesale levels.

Meanwhile, high diesel prices – largely due to strong demand from diesel vehicles in Europe and Asia pressuring the global market – sent diesel production above average. This higher production amidst low demand has sent domestic diesel/distillates storage to more than 21% above last year and way above average, as today’s Energy Information Agency Petroleum Report shows. The imminent end to the winter heating season takes some pressure off of distillate heating oil demand, moving prices lower to $2.209 per gallon today. While today’s 27.6 cent difference between diesel and gasoline is significant, it’s less than 40% of the difference last July. And the fact that gasoline demand rose 1.5% last week compared to last year while distillate demand fell 12.9%, means the difference will probably fall further.

I’m not saying parity is guaranteed in the weeks ahead because almost anything can happen in today’s volatile market. But if you are considering a more fuel efficient diesel car, you may not have to worry so much that the price premium will always be as significant as 2008′s 70+ cents per gallon. The next two weeks will be interesting to follow whether diesel and gasoline prices meet again in the $2.00-$2.10 region.

Climate Relevance: Super-efficient diesel models such as the 2009 VW Jetta TDi who beat the Toyota Prius for highway fuel efficiency (while the hybrid Prius is much more efficient in the city) are again becoming a great option for people looking to lower their greenhouse gas emissions.

Onwards in the Sustainable Energy Transition-

The AAA reports that regular gasoline is selling for $1.94 today nationwide. And wholesale gasoline futures markets rose 5+ cents at 1pm today to ~$1.30 per gallon. Wholesale gasoline usually sells for ~70-75 cents less than gasoline at the pump. So, we look poised to see $2 gas again within a few days.

But there is a possibility events stop the rise of US gas prices. News of even worse economic deterioration in the US and globally could lower wholesale prices and keep pump prices below $2. For instance, if European drivers decide they can’t afford to drive as much, their surplus gasoline may flood our market and prevent higher prices. That seemed to begin last week as gasoline imports rose 500,000 barrels per day to a level 50% higher than the same week last year.

But returning to the support for the last several week’s bullish trend, gasoline inventories fell 2.6 million barrels (Mb) to 217.6 Mb. This supply is 11.6 Mb (5%) below last year, though demand is just as strong. And many oil refineries are going into a maintenance period over the next few weeks which usually brings gasoline supplies down significantly.

Another factor which could support gas prices would be if OPEC does indeed fully comply with their agreed upon cuts this month. Some IEA data point to 80% compliance thus far. If OPEC doesn’t act according to their stated goals, crude prices could fall back toward $30 per barrel, especially with the petroleum weekly report’s news that US crude oil production is now 300,000 barrels per day above last year on new Gulf of Mexico fields coming online.

Bottom Line: This situation appears to be a recipe for $2 gasoline again soon. But a long-term trend in gasoline prices won’t reappear until the depths of our current recession are known — hopefully in the months rather than years ahead. All the while, focusing on efficiency can keep our demand from stressing current supplies and keep our energy bills down.

Gasoline storage levels are down 3.2% from last year, but remain historically high. Propane supplies are almost 15% above last year and way above average. Distillates (heating oil and diesel) are 12% above last year and way above average. And today’s EIA weekly natural gas report shows this fuel also remains above average, though it is only .8% above.

The cold snap finishing up on the East Coast today will probably put a little more pressure on heating fuels to move toward average levels in next week’s report. But then some warmer weather may help them stay high in the following weeks.

There were two interesting tidbits in the latest oil report. Crude oil production was higher than last year for the first time this year. This doesn’t mean that the EIA will be right about the huge production gains they predict, but increases the chances that US production will actually increase instead of fall on lower oil prices.

And the second interesting occurrence was the increase in gasoline consumption last week. Even though it was only a 1.1% uptick, it was the first time I’ve seen higher gasoline demand than the previous year in many months. We’ll see if it was an anomaly or a sign that sub-$2 gasoline drives demand higher even when we are in a recession.

Bottom line: Production may become an issue down the road on these low fuel prices. But for now, lower demand continues to win the battle and keeps inventories of both petroleum and natural gas above average. Renewable energy companies will have to continue to lower prices in the near-term to compete at the resulting low oil and gas prices.

I’ll be in touch how this develops in the weeks to come…

That cuts our trip’s fuel cost in half to $80 for our ~1,200 mile trip. But like I’ve said before: these fuel prices are not to be counted on for long. The 7 cents per mile rate can only be preserved in the future by using more efficient vehicles. Instead of this year’s 30 mile per gallon vehicle, hopefully we’ll be able to use a 40 mile per gallon vehicle — preserving the 7 cents per mile rate even with a fuel price at $2.67 per gallon. Then in 2010 and 2011, $3.35 and $4 per gallon gas can be kept at 7 cents per mile with a 50 and 60 mile per gallon vehicles, respectively.

Another way of looking at our travel cost is $ per mile per person. This Thanksgiving trip will only cost 3.5 cents per mile for the two of us. So we can preserve this low per person cost by giving someone a lift part of the way (and they would contribute to gas costs), allowing us to upgrade our vehicle’s mpg at a slower rate than described above.

More information from Mexico’s national oil company, PeMex, is another reminder that these low prices are temporary. PeMex’s October production is 7.9% below last year’s level, with Cantarell producing only .9 million barrels per day (Mbd) — from 2.19 Mbd a few short years ago. I plan to write a blog next week detailing the difficult years ahead for Mexico as their net oil exports fall toward zero within five years. This has been a key source of government revenue (~40% the past couple years) and will disappear within five years.

In other news, the global recession is finally significantly lowering traded coal’s historically high price. It has fallen ~50% to less than $4 per MMBtu, almost as much of a drop as oil and natural gas prices. These demand-led price reductions lead me to wonder whether global greenhouse gas emissions may fall in 2009 for the first time in several years. I’ll share more details as they emerge…

Onwards to the sustainable energy transition-

The other dramatic news of the day came from oil. Its price fell below $50 per barrel, a number I thought we would never see again just three months ago. Gasoline at the pump slid to $2 per gallon, and the wholesale market makes $1.80 a likely nationwide average before the bear run stops. China is planning to take advantage of the low oil price to add a fuel tax to their pricing system. Will US federal leaders have the courage to raise fuel taxes a couple dimes to a level that enables us to maintain our roads and bridges? I sure hope so. Otherwise, get ready for more and more bumpy rides in the years ahead and the sad potential that US consumers re-embrace the SUV before prices shoot up again when the economy stops falling.

The EIA weekly oil report showed that low demand continues to allow lower fuel supplies to suffice. Gasoline, distillates/diesel, and propane demand were down 2.8%, 11.9%, and 16.2% from last year, respectively. Relatively mild weather last week was a big part of the lower demand, so next week’s report should test the continued price drops. It’s possible that pump prices will stabilize late next week (~$1.75-$1.90) as the inventory data reflect large draws for heating oil, propane and natural gas. But continued economic deterioration could allow prices to keep sliding, like today’s news that weekly unemployment numbers rose to the highest level in 16 years.

Today’s situation shows how a cap and trade system wouldn’t hurt us if the economy is struggling. In these times, emissions naturally fall so permit prices would drop significantly. The permit price would only rise again when the economy was growing and people could afford such an incentive to lower carbon emissions. And the more efficiency we deploy now, the lower emission permit prices will be in the decades ahead.

Bottom line: Nice work, House Democrats. Now it’s time to move progressive climate legislation that can help spur economic growth in the years ahead. Also, the months ahead are a unique window of opportunity to bring fuel taxes in line with road maintenance needs since gas prices are below expectations. Here’s to politicians with spines-

Onwards in the sustainable energy transition,
Dennis