You have to repay a loan

Thanks to Amy for the news that the IEA loan is now over.  This with the need to also repay some of the loans, though not the purchases, from the SPR will no doubt add some pressure to any demand drop in the second quarter.
The members "agreed that the impact of hurricanes Katrina and Rita has been successfully addressed by a combination of the IEA collective action, lower than expected demand, worldwide refinery flexibility and additional efforts by producer countries.

__"The IEA member countries will exercise flexibility in re-establishing their emergency stock levels through 2006, noting the need to take into account seasonal demand and the possibility of higher than expected refinery maintenance," (IEA Chief Claude) Mandil said on Monday.

One of the activities that has, in the past, mopped up a certain amount of surplus supply was the steady purchase of oil for the Strategic Petroleum Reserve. About a year ago we were looking to the Chinese to put a significant effort this year into building their own reserve.  Several posts have discussed, either in the lead or comments, the investment that has been made in the required infrastructure. And there is a concern that this will act as another drain on a tight supply.
There does not appear to be much discussion of the topic recently, but earlier the conclusion had been that China would not fill its SPR until the price dropped a little.  The greatest chance for this to happen may well be in the 2nd quarter, but if the "chat" I referred to yesterday is meaningful in result, then that dip in prices may not occur.  In such a case will the Chinese go ahead and fill their tanks, or not?

The experience of the US in the last year has surely suggested the benefits of having some reserve, and the Chinese had a similar bad experience with bad weather, though on a much reduced scale, that caused some shortage early this fall.  On the other hand they may wait until they get the oil flowing from the Caspian, though that would delay the insurance policy.

And in a small note on keeping oil flowing Rigzone is noting the move by Kuwait to get major oil companies to assist in upping production.  The catch

Kuwait pumped about 3 percent of all the oil produced worldwide last year, or about 2.5 million barrels a day. The country hopes to increase daily production by 2020 to four million barrels. By then, Project Kuwait is expected to account for a third of the country's production.

But at these volumes, Kuwait will also be pumping out 10 million barrels a day of water associated with the oil-production process, something that officials say the country's state-owned oil company cannot do without foreign expertise.

For the past 70 years, there have been two swing producers, Texas, 1935 to 1970, and then Saudi Arabia, 1970 to 2005.  

Emergency reserves are now filling the role of swing producer.  The problem of course will be refilling the reserves.  

If oil production has peaked or is close to peaking, then how many times will these SPRs be opened to keep prices low.  I would expect that the first time cheap oil is replaced with expensive oil will change the use of the SPRs as a swing producer.  Or perhaps another emergency will require using more of the SPRs before the last use is replaced.  At some point, holding the oil in these SPRs will become a matter of national security.  I imagine that the recent use of SPRs to control prices was an unusual event.  With so many, like CERA, promising cheap plentiful oil by 2010, it may have appeared to be a good bet.
While SPRs are very beneficial in terms of insurance against the unexpected, from an economic standpoint their effect is possibly a wash.  

They can be used to soften prices to prevent runaway panic, but they eventually have to be replenished, and when that it done, it creates increased demand with resulting upward pressure on prices.

The danger is that if high prices stay around, there will be a strong economic disincentive for countries to replenish their SPRs. Then when the next crisis hits, the SPRs will be drawn down either further.  It these SPRs get run down too low, chances are they will never be completely refilled. In which case the insurance gets thinner and thinner. To use the food analogy, if you have several famines in a row, you are very likely never going to get your emergency food supply back up to where it should be.

I have done a critique of IEA world energy outlook 2005.

You can read it here. They still maintain the preception of 35$ oil and 6$ /MBtu nat gas. they were wrong on wind power by a factor 20 in 1998, the real growth of wind exceeded the IEA forecast 20times...

you can find my speech on IEA here

Rudolf Rechsteiner, Switzerland

Great presentation.

Great graphs as well.

It's amazing how hard it is to convince people that wind is cheap!
America is entering a dangerous situation the next couple years; relying on LNG to heat our homes and make electricity.
Close to 20 billion will be invested in the LNG terminals/tankers/pipelines.
Imagine what 20 billion could do for wind power.
20,000 megawattts! At 5 cents a KWH! For 25+ years and minimal operation costs.

Unfortunately, diverting that money to wind wouldn't solve the problem; the US gets about 90,000 MW from gas.

OTOH, at $5/mmBTU and 40% efficiency, gas costs 4.3¢/kWh for fuel alone.  "Pay for the next 20 years, or pay once and be done" sounds like a good slogan.

I think that is a fair and reasonable presentation, Rudolf. The key aspect I got, and would emphasize: you cannot trust IEA (and similar organisations) predictions - you have responsibility to make your own assessments and justify them. The point about IEA predicting demand then inventing production to supply that is well appreciated here.

For governments to make correct decisions energy supply must be viewed as a risk analysis. It can be a wise insurance to diversify energy supply even if oil and gas prices drop (they won't). One can easily trash IEA oil price predictions by the fact: oil prices have increased by more than 30% in each of the last 3 years, they have probably predicted a static or fall in oil price every year.

Did you know China are building straw fired power stations?
(it seems to be subscribers only now, and chargeable, it wasn't when I first accessed it)

Same thing is happening in Iowa.
Rudolf Rechsteiner's pdf presentation is worth taking the time to read.  His criticism of the IEA and praise of wind is sound.

Unfortunately, investor return in the wind sector was poor in 2005.  Vestas and Gamesa have half of the global wind turbine market.  Vestas is on track to lose money this year, Gamesa isn't doing much better.  Likely both of these stocks will finish the year with single digit share price gains.  Compared to any fossil fuel company, these stocks were losers in 2005.

The way that money works now, wind just isn't getting the job done.  Suppose you knew that a wind company would return 5% per annum (less than the real rate of inflation) but an oil company would return 15% per annum.  Where would you put your family's life savings?  I am considering divesting from wind in 2006.  It might be good for the planet, but it hasn't been good to me.

We will be slaves to fossil fuels and the people who own them.
Which proves only that the financial system is fucked up.
When natural gas prices rise to the point that generating electricity via wind is cheaper than via natural gas, those stocks in wind electricity generation companies won't be cheap. Wing-gen stocks won't gain much until that event looks likely to the market. Remember, knowledge that an event will happen isn't enough to move the market. Timing is also a critical factor.

From my seat, those wind-gen companies look like a bargain. But I'm not betting the farm on it either.

That is why we cannot trust the market to prepare for the future. The transition to renewables needs big government support either as a big gauranteed cutomer or as a direct investor. We have precedents in the Rural Electrification project and TVA. Hoover Dam was financed by government bonds as well as many other hydroelectric projects. I would rather have the government borrowing a billion dollars a week for a new energy infrastructure than for military occupation of foreign countries.