365. MASSIVE DROP IN U.S. DEMAND IN APRIL

On Monday (6/30), the EIA reported a gigantic drop in U.S. oil demand. And the figures are for April -- way back in the good ol' days when crude prices ranged between $110-$120.

EIA revises down U.S. April oil demand by 4.2 pct

WASHINGTON, June 30 (Reuters) - U.S. oil demand in April was 863,000 barrels per day less than previously estimated and down 811,000 bpd from a year earlier, putting petroleum consumption at the lowest level for any April month in six years, the Energy Information Administration said on Monday.
The lower oil demand was due to rising fuel prices and a faltering U.S. economy that has cut into petroleum use.
U.S. oil demand in April was revised down 4.2 percent from the EIA's early estimate of 20.631 million bpd to the agency's final demand number of 19.768 million bpd, and was 3.9 percent less from 20.579 million bpd a year earlier.
The final numbers were included in the EIA's monthly petroleum supply report and are always different than the initial estimates in the agency's weekly petroleum report.Source

The size of this drop (down 811,000bpd, year-on-year) is massive. Indeed it's almost enough to wipe out total worldwide growth in oil consumption from 2006 to 2007 (990,000bpd, according to the BP Statistical Review 2008). It is enough to wipe out two years worth of consumption growth from China:



So it strains credulity in the extreme to say Chinese demand is behind the run-up in prices since March. The drop in U.S. consumption in one year (April 2007 to April 2008) was more than twice the rise in Chinese consumption from 2006 to 2007 (325kbd, according to the BP Statistical Review 2008). In other words, the April drop in U.S. consumption wiped out one year's worth of growth from China (325kbpd), Saudi Arabia (149kbpd) and India (168kbpd) combined, and then some.

Furthermore, Chinese demand can't be fingered for price rises in April because Chinese imports were down year-on-year, as I noted earlier:

A decline in China's oil imports in April, the first year-on-year drop in 18 months, also raised questions over demand. China is the world's second-largest oil consumer after the United States. [...] China's April crude oil imports fell by 3.9 percent from a year ago to 3.47 million bpd, and were also down from the record of 4.07 million bpd in March, official Chinese data showed.Source

There's been no serious decline in supply. We're on the same old plateau, and in fact the IEA reports that supply was up considerably in the 1Q 2008:


Put it all together, and the "demand outstripping supply" theory of the feverish price action since March is emanating an extremely fish-like odor. U.S. demand down by a whopping 0.8mbd year-on-year. That's the elephant in the room now.

Update and more detailed info on this topic here.

by JD

364. THE OTHER "PEAK OIL"

We all know the classic image of peak oil. This graph of U.S. production says it all:


The peak oil community is obsessively focused on images like this. Peak graphs are presented for every country, like a slide show, and after viewing the whole series, you're damn lucky if your eyeballs haven't turned white and coagulated from raw anxiety.

But that's just one side of the story. Today I'd like to show you a different series of peak oil graphs -- the ugly stepsisters who don't seem to get any attention. These are the graphs of peak oil consumption. Figures and images come from EIA country profiles. Take a deep breath, and fasten your seatbelt for a rude awakening to the realities of "peak oil".

Figure 2: Japan Oil Consumption Has Been Declining Since 1996


As you can see, "peak oil" occurred in 1996 in Japan -- 12 years ago -- and was an entirely demand-driven phenomenon.

Figure 3: Israel Oil Consumption Has Been Declining Since 2001


Wooh baby, that'll turn your hair white... Israel "went over the cliff" in 2001, and is now down 16% from it's peak level.

Figure 4: Germany Oil Consumption Has Been Declining Since 1998

The decline of Denmark has an interesting dual-peak structure. It's down 34% from its primary peak in 1980, and 20% from its secondary peak in 1996:

Italy peaked in 1995 and is now down 14%:

Savinar says a 10-15% drop will put your economy in the hospital -- shatter the economy and reduce the population to poverty. Apparently Italy didn't get the memo.

Sweden hit its final peak in 1996:

It's such a shame because these graphs hold the important clues about peak oil. Yet they get almost none of the airplay. The fact that oil production will peak is just a truism -- a statement of basic logic. The fact that a country can reduce it's oil consumption without duress is like a miracle... something to really think about and learn from.

by JD

363. PEAK DEMAND

Lots of recent signs that we are hitting peak demand (with a salute to our wise and prescient friend, Benny "peak demand" Cole ;-)...

The US Department of Transportation reports that vehicle miles traveled (VMT) has begun its terminal decline:

The FHWA's “Traffic Volume Trends” report, produced monthly since 1942, shows that estimated vehicle miles traveled (VMT) on all U.S. public roads for March 2008 fell 4.3 percent as compared with March 2007 travel. This is the first time estimated March travel on public roads fell since 1979. At 11 billion miles less in March 2008 than in the previous March, this is the sharpest yearly drop for any month in FHWA history.Source

Here's the graph:

As you can see we're having a "Hubbert Peak" in demand.

Meanwhile CERA is reporting peak demand for gasoline:

Gasoline demand in the United States may have reached its peak, as rising prices lead consumers to make long-term decisions that will weaken demand in the years to come, according to a new analysis by Cambridge Energy Research Associates (CERA), an IHS Inc. (NYSE: IHS) company.

The report, Drivers Turn the Corner in the United States, conducted by CERA’s global oil service predicts that U.S. gasoline demand will likely decline in 2008 for the first time in 17 years. If petroleum prices stay at or near their current levels, 2007 could prove to have been the peak year for U.S. gasoline demand.

"Americans are now driving less and demanding greater fuel efficiency from their vehicles when they do drive," said Aaron Brady, CERA director, global oil. "Automakers are responding by accelerating the shift in their model mix. Both short- and long-term signals are all pointing toward decreasing future demand."Source

MasterCard reports a big drop in U.S. gas sales:

During the week leading up to the Memorial Day holiday, the traditional start of vacation season, Americans pumped 5.5 percent less gasoline than a year ago as average prices hit a peak $3.84 a gallon, MasterCard Advisors said in a report.Source

Demand in the UK is sagging:

Gasoline demand in Britain dropped 7 percent below year-ago levels in April, with diesel use down almost 2 percent, according to government figures released on Wednesday.Source

Gasoline demand in Japan has declined for the last two years:

Japan's Ministry of Economy, Trade and Industry reported on Thursday that gasoline demand declined for a second year in 2007 on rising oil prices, urging refiners to export record amounts of fuel.

Sales of gasoline slipped 1.7% to 59.8 million kiloliters in 2007, while exports of all refined oil-products climbed 27% to 28 million kiloliters, exceeding the prior record of 22.3 million kiloliters posted in 1975.Source

And the trend is continuing. The most recent May 13 Oil Market Report from the IEA reports (P. 6) gasoline demand for March 2008 down (year-on-year) by -8% in Germany, -4% in the UK, -14% in France, -10% in Italy, -9% in Spain and -14% in Japan. Similarly, diesel was down -4% in Germany, -6% in France, -4% in Italy, -10% in Spain and -10% in Japan. And those are the figures for March, before oil prices really went vertical.

Anyway, lots of good news. The fear factor of peak oil drops considerably if demand peaks before oil does.

-- by JD

362. MORE SURPLUS OIL PROBLEMS

Inconsistencies are appearing in the "not enough oil" theory of the recent price rise. We've previously seen that Iran has been accumulating unwanted oil in tankers, as reported by Bloomberg:

June 2 (Bloomberg) -- Iran, OPEC's second-largest oil producer, increased the number of tankers idling in the Persian Gulf to at least 14, indicating it may be storing more crude, ship-tracking data show.

Iran has at least 14 very large crude carriers, or VLCCs, floating near Kharg Island, a loading facility. In April, there were 10, holding at least 20 million barrels of oil, people familiar with the situation said at the time. Shipbrokers also reported that Iran hired three more tankers, which have been near Kharg Island for at least two weeks.Source

Now the surplus crude problem has expanded to Kuwait and Saudi Arabia:

Kuwait and Iran on Wednesday joined Saudi Arabia in slashing the price of their heavy crude exports to the deepest discounts in at least nine years, seeming to support OPEC's view that the world has enough of its supplies.Source

It turns out that we've got a heavy oil glut. The physical oil is being discounted, to make it move.

Saudi oil minister Ali al-Naimi said last month Saudi Arabia had boosted oil output by 300,000 barrels per day and would achieve 9.45 million bpd in June to meet rising demand and to compensate for lower output from other producers.
The kingdom's state oil company Saudi Aramco is due to inform refiners how much crude they can lift in July later on Wednesday or on Thursday, refinery sources say.
But refiners expressed little interest in additional crude supplies, especially if these were of the heavy type.
"We just asked for full term volumes, not for extra volumes," one trader with an Asian refiner told Reuters. "Supply is not tight anyway. Heavy sour crudes are under pressure this month."Source

So it's clearly a distortion to call the current situation an "oil shortage". It would be more accurate to call it a shortage of refining capacity. Why is there a refinery shortage? Well, in the U.S., this will give you a clue:

Refiners faced with rising prices for premium grades of crude oil are rushing to expand their ability to process less expensive, dirtier crudes, but their efforts face concerns about pollution and global warming.

Several expansion projects in the U.S. are being slowed by worries that the processing of heavier crudes produces more air pollutants and greenhouse gases that contribute to climate change. While environmentalists have long been critical of heavier crude, government officials responsible for signing off on expansion projects are echoing that unease and demanding countermeasures to reduce the amount of pollution.Source

Yup, NIMBYs and global warming activists are jacking up the price of oil. "Not enough oil" is just the cover story. LOL.

-- by JD

361. JAPANESE NUCLEAR FIRMS PREP FOR SURGE OF GROWTH

As expected from Day One of this blog, peak oil continues to drive a strong resurgence of nuclear power.

Toshiba expects 33 reactor orders by 2015

Japan's Toshiba Corporation expects orders for at least 33 nuclear power reactors by 2015, and plans to expand all its nuclear businesses over the period to 2020, according to the company's president.

The predictions were made earlier this month in Strategies for Growth 2008, the company's outline of the business directions planned for all its divisions. In a question and answer session, the company said that 33 units could be a conservative estimate, adding "we believe it is possible that the number of orders might increase." The Toshiba presentation does not say where it expects the orders for 33 units to come from but highlights the US, China, South Africa and the UK as countries with plans for new projects and where it is making sales efforts. The company plans to more than double its current annual sales target for the nuclear division, to ¥1 trillion ($9.6 billion) in 2020. Source

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MHI tools up for surge in construction

Mitsubishi Heavy Industries (MHI) has announced a major project to increase capacity at its Kobe shipyard, where it will double capacity for large nuclear power plant components.

Akira Sawa, head of the company's nuclear power division, announced his major goals at a briefing attended by reporters for the Japan Atomic Industry Forum's Atoms in Japan publication.

According to Atoms In Japan, the company will double capacity for forging reactor pressure vessels and internal reactor components with the aim of boosting its share of the global reactor business. It should be able to produce all the major components (reactor vessel, main coolant pumps, steam generators, steam turbines and generators) for two nuclear power units per year. It will be hiring 1000 more employees for its nuclear division, taking the total to around 5000 by 2013.

Already, MHI's Futami plant in Kobe can produce vessels for two-, three- and four-loop pressurized water reactors (PWRs), including a 590 tonne model for the 1538 MWe APWR. After the upgrade the plant would be expected to handle even larger components. At present, the largest reactor in the world is Areva's EPR at 1650 MWe, and in future the largest could be expected to reach 1800 MWe and require a correspondingly larger pressure vessel.

Sawa said his company expects to gain 25-30% of an export market of 130 reactors by 2030. His figure represents a target market that does not include the 12 units forthcoming in Japan, or the 20 and 110 light water reactors to be built in Russia and China respectively by that date. Russian and Chinese planners are preparing domestic facilities for their own needs as well as for export.

In total, MHI is to invest ¥40-50 billion ($380-470 million) in its facilties at Kobe and Takasago. Source

by JD

360. WHEN INDEX SPECULATORS SELL...

As noted in #357, Michael Masters sparked a whirlwind of debate by pointing out the role of long-only index speculators in pumping commodity prices.

With oil prices as high as they are, this topic is still hot, so let's look at a specific example where index speculators liquidated a large position, and see what effect it had on the market. It occurred in 2006, and I learned about it from this article by Mack Frankfurter:

In addition to the issue of index funds accumulating long positions and thereby imputing an upward bias to commodities, there is another opportunity for market manipulation with respect to the construction and rebalancing of prominent commodity benchmarks such as the Goldman Sachs Commodity Index (GSCI).

As reported by the New York Times on September 30, 2006 Goldman Sachs significantly readjusted in August of that year the GSCI's gasoline weighting. Index products tracking the GSCI, and representing an estimated $60 billion in institutional investor funds, were forced to rebalance their portfolios resulting in an unwinding of positions. Originally, unleaded gasoline made up 8.75 percent of the GSCI as of 6/30/2006 , but this was changed to just 2.3 percent, representing a sell-off of more than $6 billion in futures contracts.

As a result, gasoline fell 82 cent in the wholesale market over a four-week period, an unprecedented move; and crude oil, which in July 2006 traded over $79 per barrel for August delivery—at the time an all-time record—subsequently fell to around $56 by January 2007.

Many at the time argued that these moves were due to fundamentals, but… it should also be noted that the U.S. was in the midst of mid-term elections with Republicans facing a major fight to retain control over both Houses. According to a Gallup poll at the time, 42% of respondents thought that the Bush administration “deliberately manipulated the price of gasoline so that it would decrease before the elections.”

While the notion of a president single-handedly having the power to muscle a global market is highly questionable, the downturn in prices was welcome news for the then ruling party. Subsequently, Goldman Sachs sold its index business to Standard & Poor's including the GSCI commodity index family.

Unsurprisingly, the visibility of the GSCI brought Goldman Sachs unwelcome attention, especially given the coincidence of its former chairman's appointment as Secretary of Treasury, and an unscheduled GSCI rebalancing that forced a dramatic sell-off in the gasoline and crude oil futures market.

I find this extremely interesting. Institutional investors were forced to liquidate their unleaded gasoline futures due to a change in the composition of the GSCI, and gasoline dropped 82 cents in a month.

The New York Times article Frankfurter refers to is online here: Change in Goldman Index Played Role in Gasoline Price Drop.

Goldman Sachs, which runs the largest commodity index, the G.S.C.I., said in early August that it was reducing the index’s weighting in gasoline futures significantly. The announcement did not make big headlines, but it has reverberated through the markets in the weeks since and some other investors who had been betting that gasoline would rise followed suit on their weightings.

“They started unwinding their positions, and those other longs also rushed to the door at the same time,” said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation.

This information strengthens my view that institutions/individuals investing in commodities through index products should be strictly regulated.

by JD

359. HYBRID SCOOTERS

Scooter sales are surging according to a new article in the New York Times. Make that another industry getting a big shot in the arm from peak oil:

In the first three months of 2008, scooter sales were up nationwide by 24 percent compared with the same period a year earlier, according to the Motorcycle Industry Council. And that was before gas starting hitting $4 a gallon. A continued rise in fuel prices could accelerate sales further. The increase in gas prices in summer 2005 correlated with a jump in scooters sales of 64.5 percent during the summer months compared with summer 2004. (Sales in the entire motorcycle category went up also, but by only 16 percent.)

This guy is starting to understand "peak oil". Get a scooter and quit worrying about it.

Scooters are winning converts, and not just for the romance of Vespas. Last August, Chris Casal, a 32-year-old elementary school teacher who lives in Brooklyn Heights, bought a scooter for his commute to Williamsburg, in part because of concerns about gasoline prices and parking. Since then, he estimates he has driven his car only 15 times and usually only when it was cold or less than 20 degrees outside. Even though he lives only five miles from work, it is a 45-minute trip by subway or a 12-minute drive.

“Because I know I am going to get a gallon, gallon-and-a half max,” Mr. Casal said, he no longer worried about gas prices. “That’s the first time in my life I’ve ever not cared what the price of gas was.”

Check out this 3-wheeled hybrid scooter from Piaggio:

This machine has an unbelievable fuel efficiency of 170mpg (=71km/liter), and will be available later this year (Source). This particular model is quite expensive, but that's not important. Cheaper competitors will flood the market when demand justifies it. The important point is how incredibly fuel efficient personal transportation can become in response to higher oil prices -- with off-the-shelf technology that is ready to roll, today.

by JD

358. JAPAN: BECOMING A POST CAR SOCIETY

This is a great trend, and a model for the future. People losing interest in cars... Why do we need oil again?

Favorite quote from the article: "Having a car is so 20th century."

Suda reflects a worrisome trend in Japan; the automobile is losing its
emotional appeal, particularly among the young, who prefer to spend
their money on the latest electronic gadgets. While minicars and
luxury foreign brands are still popular, everything in between is
slipping. Last year sales fell 6.7 percent—7.6 percent if you don't
count the minicar market. There have been larger one-year drops in
other nations: sales in Germany fell 9 percent in 2007 thanks to a tax
hike. But analysts say Japan is unique in that sales have been eroding
steadily over time. Since 1990, yearly new-car sales have fallen from
7.8 million to 5.4 million units in 2007.

Alarmed by this state of decay, the Japan Automobile Manufacturers
Association launched a comprehensive study of the market in 2006. It
found a widening wealth gap, demographic changes—fewer households with
children, a growing urban population—and general lack of interest in
cars led Japanese to hold their vehicles longer, replace their cars
with smaller ones or give up car ownership altogether. "Japan's
automobile society stands at a crossroads," says Ryuichi Kitamura, a
transport expert and professor at Kyoto University. He says he does
not expect the trend to be reversed, as studies show that the younger
Japanese consumers are, the less interested they are in having a car.
JAMA predicts a further sales decline of 1.2 percent in 2008. Some
analysts believe that if the trend continues for much longer, further
consolidation in the automotive sector (already under competitive
pressure) is likely.

Japanese demographics have something to do with the problem. The
country's urban population has grown by nearly 20 percent since 1990,
and most city dwellers use mass transit (the country's system is one
of the best developed in the world) on a daily basis, making it less
essential to own a car. Experts say Europe, where the car market is
also quite mature, may be in for a similar shift. Source

by JD