However, the US production picture remains gloomy. Rig recovery from Gustav and Ike has proved to be a slow process, leaving almost half of the Gulf of Mexico’s oil production offline still today. With crude production poised to remain below last year’s level for at least a couple more weeks, 2008 production could end up significantly more than 2% below last year (it now stands 1.8% below 2007). With US oil production now less than half of what it was at its peak 38 years ago (1970), it’s clear that “drill, baby, drill”-ing has little chance of remedying our lack of oil security. Efficiency and conservation to reduce demand has proved this year to be the best way to reduce oil prices (as oil has fallen 40% from its record high in July and gasoline may approach $3 per gallon within a few weeks). If we do even more to drive demand down while growing green jobs manufacturing efficient vehicles and appliances, then we can keep oil from crippling our economy further in the future.

Unless we take such aggressive measures, much of our economy will depend on the generosity of OPEC to keep supply high. But with oil prices approaching $80-$85, many OPEC members are getting anxious for another cut in production. Even producers outside of OPEC like Russia may cut their production as its more expensive fields may lose money at such prices.

Natural gas producers in the US face a similar dilemma as their costs of production get undercut by the price in the market currently below $7 per MMBtu. The good news is this will leave more production for future generations. But we must make sure we don’t get complacent about our addiction to oil and gas just because current recession-induced prices remind us of the care-free 90s when SUVs replaced cars as the most favored means for the daily commute…

Onwards to the sustainable energy transition-

The EIA predicts that next year will be different (as they did last year) since two large new fields are scheduled to ramp up production by the end of 2009 (Gulf of Mexico deepwater projects Thunderhorse and Tahiti). But continued depletion in old fields, the 2009 hurricane season, and the tight credit market may prevent such an increase — at least from getting significantly above 2007 levels.

One of the exciting predictions in the STEO is that coal demand will fall almost 1% in 2009 as substitutes such as wind and natural gas generate more of our country’s electricity. The recent renewal of federal renewable energy tax credits could result in wind and solar alone fully replacing 2% of coal electricity. It should be exciting to see how this plays out.

Thanks to the many Princeton alumni who have endorsed the PACE statement in its first day!

Onwards-

OPEC made the move everyone was expecting, holding its quota at about the same level while saying its members will stop overproducing beyond their quota. But mixed signals were coming from Saudi Arabia, the major overproducer, as they said they would not change their production strategy. If the oil price falls much below $100, OPEC will likely cut production quotas at its December meeting.

The key bearish signals oil markets grasped onto were reduced demand and the dollar’s strengthening to ~$1.40 per euro as EU analysts cut their region’s economic growth forecasts.

The market again turns to Hurricane Ike, which has just strengthened to become a Category 2 hurricane with sustained winds of 100 mph. Ike is expected to become a Category 3 hurricane by tomorrow and churn toward hitting the Texas coast by Saturday morning. Ike is a huge storm with Tropical Storm winds extending out 205 miles from its eye. How much will it strengthen in the Gulf? How close will it get to the concentration of rigs near the Texas/Louisiana border? And how many refineries will be affected by its wind and rain? Those are the questions driving the market in the days ahead, alongside data from the EIA natural gas report I will share tomorrow.

Another revision to last month’s report was to lower estimated supplies of OECD oil inventories. But since oil consumption has fallen throughout the developed world, most analysts are not yet worried about the lower inventory levels.

Hurricane Ike projections shifted south to take it away from most oil and gas rigs through late Friday. This rosier news, along with the low probability of an OPEC quota cut, led markets to drive oil’s price lower toward the $100 per barrel mark. But that low level will be tested by tomorrow’s bullish oil market report that shows the effects of Hurricane Gustav and the strengthening Hurricane Ike which will still lower Gulf output for a few days (even if it doesn’t dramatically harm the region’s rigs). I’ll give you the full news on that tomorrow.

And the STEO also shared some exciting news that the consumption of dirtier coal is projected to grow a slow .7% in 2008 and even slower in 2009, due to the strong production of cleaner natural gas and rapid construction of wind power that can replace coal as the source of new electricity demand. Here’s to further progress in the sustainable energy transition!

One other bearish bit of news today was the reported beginning of production from Saudi Arabia’s delayed Khursaniyah field. It has the potential to make a strong contribution to the global market with ~500,000 barrels per day to help keep any decline in Ghawar from lowering Saudi production over the next several months. But two field delays were disclosed elsewhere in the world, with Kazakhstan’s Kashagan reportedly shifting its initial production even further back, to late 2013 to early 2014, and Russia’s Arctic Vankor field pushing its date back as well.

The natural gas market report continued to be more bearish, with supplies rising 50% faster than they usually do at this time. Increased domestic production has people guessing that this year’s buildup through early November may rival last year’s record numbers. Hurricane Gustav’s disruption will probably slow next week’s buildup toward normal levels, but it has been nice to see this lower-carbon fuel enjoy a massive fall in prices over the last several weeks. We’ll see if production can continue to provide ample gas for the winter heating season and electricity generation.

But we still don’t know what the overall effect of Gustav will be. By the middle of next week, the EIA will report that our crude oil, gasoline and other refined products are very low compared to historical averages at this time of year. Prices may swing up once the details emerge.

And the fact that three more tropical storms are brewing in the Atlantic (Hanna, Ike, and Josephine) may mean that the Gulf oil producing area gets hit a second time in 2008. Such a hit would, like Rita, send inventories down and prices up.

Another bullish factor came from the report today that Russian oil production continued to decline. In August, production was down .9% from last year at 9.82 million barrels per day. The supply focus will turn now to next week’s OPEC meeting as they decide whether to keep production flat or curtail it slightly to prevent oil from potentially falling below the $100 level they have enjoyed since the beginning of this year.

A discussion of the hurricane and its potential to disrupt oil and gas infrastructure can be found at the oil drum website. Other oil developments came from the weekly EIA petroleum report showing a slight drop in crude inventories, a continued fall in gasoline supplies below average, and unchanged distillates in storage. The report would have been bullish except that it showed continued petroleum demand reduction from last year of 3.6% (led by reduced use of residual fuel oil for electricity generation, jet fuel, oils for petrochemical products and propane). Therefore, price movement really looks to be determined by Gustav and other potential tropical storms which may hinder Gulf of Mexico oil and gas rig operations.

Another major story that emerged today was Mexico’s announcement that its oil production continued its rapid decline. Their main oil field, Cantarell, managed less than a million barrels per day of production in July — less than half its production a few short years ago. At 974,000 barrels per day, Cantarell production has dropped more than a third from last July. New production at key fields such as Chincotepec and Ku Maloob Zaap can only offset part of the decline from Cantarell — threatening our major source of imports to become a net importer themselves within a few years. On top of that, the President of major oil and gas producer Russia said today that they are not afraid of a new Cold War after they recognized the breakaway Georgian territories of Abkhazia and South Ossetia.

With hurricanes, oil production declines, accelerating melting in Greenland’s glaciers, and political gaming — it’s clear that a sustainable energy transition must become a higher priority for the US and all other oil importers.