Viewpoint: Peak oil getting a tighter hold on supplies

Winter clamped a death grip on Russia last week, causing many deaths among people stranded on the icy streets. The temperature hit 31 degrees Celsius, the coldest on record since 1927.

As the mercury plunged and electricity use hit record highs, the government struggled to furnish enough energy to keep homes warm and factories humming and at the same time, maintaining exports of natural gas.

Like the U.S. in the immediate post-Katrina period, Fuel and Energy Minister Viktor Khristenko said Russia was considering releasing part of its strategic fuel reserve and Prime Minister Mikhail Fradkov said the government was aiding OAO Gazprom, the state-controlled gas monopoly, to meet its obligations.

AP reported seven people died of exposure in Moscow in the course of a four-day cold snap in which temperatures hit 24 below zero Fahrenheit. According to a Moscow ambulance service official, at least 31 people have died in European Russia since Siberian cold swept into the capital late Jan. 16.

A Moscow radio station said thousands of people and dozens of homes in a town outside Moscow had no heat overnight when a water main ruptured. A similar accident in Siberia’s Chita region, 3,000 miles east of Moscow, left thousands in the cold.

Khristenko’s remarks were a day after Italy, Croatia and Hungary said supplies of Russian gas had dropped off because of domestic demand. Electric power use in Russia earlier last week hit a 15-year record of 146,000 megawatts.

This week, the Chicago Tribune reported explosions in Russia’s natural gas pipeline and electric supply cables to its southern neighbor Georgia, causing a partial shutdown of that country. Formerly one of the Russian “republics,” Georgia was suffering from the same cold snap. Georgia’s President Mikhail Saakashvili noted the break was in keeping with Russian pressure against his “strongly pro-Western course.” Russian officials adamantly denied the break was purposeful and said a criminal investigation into the explosions was underway, reported the Tribune article.

We might think sudden supply interruptions matched with high demand can’t happen here, but take note of what is expected this week. Congressman Bernard Sanders is brokering a deal that would bring Venezuelan fuel oil to low-income residents of Vermont, through its U.S. oil company, Citgo.

With an obvious poke at his enemy George W. Bush, who opposes his rule, this program is the brainchild of Venezuela’s Hugo Chavez who “is a Latin American firebrand who is now in total control of the world’s fifth-largest oil producer,” crowed the Havana Journal. “The United States gets 15 percent of its oil from Venezuela, and Chavez is now threatening to bypass major oil companies and sell it directly to U.S. consumers.”

In fact, Chavez has already provided discounts on heating oil for some low-income families in the Northeast, and more may be coming.

The oil will be offered at a discounted price, and agreement on a deal is expected this week. “Our expectation right now is we expect to bring at least several million gallons of discounted oil into Vermont, and we expect to announce the details next (this) week,” said Erin Campbell, a spokesman for Sanders. “The bottom line is this should translate into a savings of several million dollars for the people of Vermont.”

Venezuela already has deals with Maine and Rhode Island through the Venezuelan-controlled Citgo oil company. Last November, Citgo, announced a program that makes home heating oil available to cold weather states at a 40 percent discount. Fuel oil this month is going for $2.45 a gallon, an increase of about 50 cents from a year ago.

Vermont Gov. James Douglas backs the plan. Jason Gibbs, a spokesman for the governor, said: “The governor’s first priority is the lowest-cost home heating option we can provide to Vermonters. The political situation and demagoguery we’ll leave to others.”

This past weekend, The Hartford Courant, among others, reported the price of crude oil topped $68 a barrel, the highest its been since last Sept. 1. The price was reacting to the international situation and fears about supplies.

Key issues were the rising tensions among Iran, the U.S. and the European Union. Additionally, there is labor unrest in Nigeria, a significant oil producer. Fears of supply interruptions outweighed the fact that inventories of crude oil are at multiyear highs, while weather in the U.S. has been mild, and demand for oil and natural gas for heating has been low.

Some analysts see even costlier crude oil prices. Michael Guido, director of commodity strategy for Societe Generale in New York, told the Aljazeera network: “Geopolitical fears and technical momentum continue to target the $70-a-barrel mark.”

Light, sweet crude oil futures rested Jan. 20 at $68.35 a barrel, an increase of $1.52. February heating-oil futures rose more than 7 cents at $1.86 a gallon, the highest level since Oct. 28. Gasoline futures for February climbed a little more than 4 cents to $1.81 a gallon.

Tom Kloza, an analyst at the Oil Price Information Service, Wall, N.J., said retail gasoline prices will rise in the coming weeks, and he believes $2.75 a gallon will be in place by May. Other observers predict $4 a gallon gasoline by year’s end.

In southern Nigeria, Royal Dutch Shell verified another contractor has been killed in an attack by armed militants on an oil platform. Shell has evacuated more than 300 workers from the area and cut production by 221,000 barrels a day.

Analyst James Williams commented: “The market was concentrating on Nigeria, Iran and the latest bin Laden tape. Of the three, Nigeria is of primary importance in the short term. It is a real threat, a current threat, and it involves tangible barrels of oil.”

A potential supply crisis looms from the clash with Iran over its nuclear program, but is really about Tehran’s plan to open an oil bourse or market center for oil. Iran is the second-largest crude oil producer in OPEC. It has asked that cartel to trim its production by 1 million barrels a day from April.

Iran’s OPEC representative, Hossein Kazempour Ardebili, told Aljazeera: “OPEC should not postpone the issue of output reduction. Iran has called for carrying out discussions and making decisions for a 1 million barrel per day output cut in the second quarter.”

In addition to all this, production from the Gulf of Mexico continues to be sharply reduced because of hurricane damage to pipelines and oil platforms. The earlier bailout by using some of the U.S. strategic reserves and getting some from European reserves, has just ended.

Even though we have seen a mild winter to date, that could change abruptly. If we get some severely cold weather, and there is even the slightest disruption in supplies, we shall have a very difficult time, even though most of the country doesn’t believe it.

From the Jan. 25-31, 2006, issue

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