ODAC Newsletter - 23 May 2008
Welcome to the ODAC Newsletter, a weekly roundup from the Oil Depletion Analysis Centre, the UK registered charity dedicated to raising awareness of peak oil.
Another week of oil price records saw the latest milestone of $135/barrel reached, driving more talk of $200 oil. The oil price record happened despite news of a 300,000 barrel per day rise in production from Saudi Arabia which came in response to repeated requests from President Bush. As US politicians feel the pressure, the executives of the major oil companies were once again hauled before the Senate, and the House of Representatives demonstrated their desperation to find an easy scapegoat by passing an absurd bill that would allow the US to sue OPEC. Right, that’s solved it then.
The big supply story this week came from Iraq, where the deputy prime minister Barham Salih made the astonishing claim that Iraq’s reserves may be 3 times as big as originally estimated. Our Guest Commentary this week explains why this is highly unlikely. Even if true, it would be entirely academic given the daily violence in Iraq and continuing failure to agree a new oil law.
Anyone who was hoping that constraints on oil supply would be a good thing for fighting climate change should think again: Eni this week announced a tar sands project in the Congo; Gulf states are turning to coal as natural gas supplies in countries like UAE and Dubai are strained; and in the UK the energy companies met to coordinate on how to protect their coal expansion plans from the efforts of environmental demonstrators.
The UK government is increasingly feeling the heat as fuel costs soar. Both road and airports policy were roundly attacked this week. In parliament the Lib Dems questioned the fact that the government’s road policy is based on the astonishing assumption of $70/barrel oil in 2020, while a report by the Sustainable Development Commission questioned the assumptions of the airport expansion policy. Meanwhile road haulers are preparing a protest for next week. Energy Minister Malcolm Wicks speaking on BBC Radio 4 on Thursday put the problem down to ‘the perfect storm’ that no one could have predicted. The fact that this was predicted by peak oil theorists and by Goldman Sachs, was conveniently ignored.
Finally, the airlines are increasingly feeling the pain in the US and Europe. American Airlines announced that they are cutting flights, following BA’s similar announcement last week. Ryan Air admitted that it too was hurting.
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Oil surged to a record $135 after an unexpected drop in US inventories prompted more investors to join in this year's rally.
Oil for delivery in July hit $135.05 in New York after inventories of crude in the US had their sharpest drop in four months. Brent crude oil also set a fresh record.
The news came as a a Nobel prize-winning economist warned that sky-high volatile prices in oil, food and a swath of minerals are now a permanent feature of the economy.
Michael Spence of Stanford University said that volatile commodity prices were perennial features of the modern economy, but were "worth suffering".
In a further sign that investors are betting on prices staying high well into the future, the cost of buying a barrel of oil for delivery in 2016 rose briefly above $142.
Analysts said that the rise in the oil price was down to a cocktail of factors, including strong demand from emerging economies and poor production performance by oil cartel Opec. However, in an unusual statement, the Bank of England dismissed claims that the recent spike in crude prices was due to speculation.
Prof Spence, the 2001 Nobel prize-winner, said the price rises in oil and in food, where crops have soared in value in the past year, were "a consequence worth suffering" of globalisation.
"It would be a mistake to view this as a one-time phenomenon," he said.
"This is a natural consequence of higher growth in many developing countries. This isn't just a story about food or oil - it could be about cement, about metals and a whole range of materials.
"Perhaps it will be minerals or uranium, or the costs of logistics and transportation. Either way, I would be very surprised if the relative price of oil and gas fell to the level it did in past years. The rise in energy is semi-permanent."
The warning from Prof Spence, author of a major new report on growth in developing economies, came as crude inventories in the US unexpectedly fell, triggering a fresh rise in the oil price.
The US Energy Department said inventories dropped by 5.4m, or 1.7pc, this month.
Analysts are split on how much of the current oil price reflects actual supply and demand, and how much is speculative froth.
Some suspect the recent rise indicates the oil market has become a bubble, however the Bank of England said in the minutes to its interest rate meeting earlier this month: "According to... market contacts, speculative purchases did not seem to be the prime cause of the recent increases in the oil price.
More fundamental demand and supply factors had probably been at the root of its steep rise during recent months".
It added that while prices were likely to fall back in the coming months, this was unlikely to happen within the "time horizon relevant for current monetary policy" - around two years.
Societe Generale and Credit Suisse have raised their oil price forecasts for this year, while Goldman Sachs warned recently that crude could soar to $200 a barrel.
Chancellor Alistair Darling has pledged to lobby Opec to raise its production levels, but the cartel has said a further increase is unlikely, adding that it should not be held responsible for high prices. It has said that $30 of the recent increase in the price of a barrel is due to speculation.
When oil was $10 a barrel, the idea that the stuff was running out seemed demented. What a difference a decade makes. It is now possible to make the case that global crude oil production has nowhere to go but down. While that disaster scenario remains unlikely, it is hard to see a comfortable adjustment to oil near $130 a barrel.
In the near future, there is no saying how high the price may go – forecasting $200 a barrel is a nice way to get some headlines. Such forecasts may come true because in the short term there is little scope either to reduce demand or to increase supply, so it would not take much to drive prices higher.
Yet it is the longer term that really counts, and over such time horizons both demand and supply should respond. The question is whether prices will eventually fall because of a substantial expansion of oil supply, a switch to alternative fuels, or a collapse in energy demand. The prospect of the first response has discouraged the other two until recently – why bet on solar technology, or trade your Hummer for a bicycle, if the Saudis and Russians were about to turn on the taps and bring the price down?
Yet the flood of oil has not been forthcoming. At over $125 a barrel that is a surprise. Why has the supply response been so tepid? One answer is that the big producers have all the revenue they can spend, and the higher prices climb, the less oil they are inclined to pump. After all, oil in the ground has so far proved a better investment than most assets a sovereign wealth fund could have bought with extra oil revenue.
Drilling equipment and engineers are also scarce: oil companies have doubled their investment spending in nominal terms but that expansion has been largely offset by cost increases. The gloomiest explanation is that all the big fields have been discovered and most are in decline. These possibilities are not mutually exclusive.
While the world waits and waits for a resumption of serious oil supply growth, oil prices will only fall if we burn less oil.
All the signs are that this is beginning to happen. Sales of gas-guzzling light trucks in the US have plummeted and drivers seem to be curbing their mileage, too. Consumers are switching to tiny cars, bicycles and even (in Rajasthan, India) to camels. Once-marginal substitutes, such as wind power, start to look like profitable bets.
There is no doubt that the world will adjust to high oil prices. Yet the adjustment would be far easier if oil producers discovered that they could expand their output.
Saudi Arabia has disclosed, during a visit to the Kingdom by George Bush, that it has lifted oil production to its highest in two years.
But the agreement to pump an extra 300,000 barrels per day did little to relieve runaway oil prices, which had earlier struck a record high of nearly $128 a barrel.
The price of a barrel of US crude hit an all-time peak of $127.82 while London Brent rose $2.36 to $124.99.
The announcement from Saudi Arabia, the world's largest producer, to increase supplies by 3.3 per cent to 9.45 million barrels per day came during the second trip made by President Bush this year to visit King Abdullah in Riyadh.
Saudi Oil Minister Ali al-Naimi said: "On May 10, we raised supplies to customers by increasing 300,000 barrels per day of oil (output) ... In the future if the need appears, Saudi Arabia has no objection to producing more."
He said most of the extra supplies would go to the US, the world’s largest oil consumer.
The picture was, however, muddied by warnings from the Kingdom that future rises in production would only come about in response to customer demand.
Naimi also warned the increase would not lead to a significant fall in prices paid at the pump in the US.
News of an increase in Saudi oil production came as the US said it would stop shipments to its strategic oil reserve for the second half of the year after Congress passed a bill calling for a suspension.
The US Energy Department announced it had not signed a six-month contract for deliveries to the US Strategic Petroleum Reserve (SPR), the world’s largest stockpile of government-owned emergency crude oil.
The decision affects up to 13 million barrels of crude.
US officials are concerned about the impact the oil price, which has doubled since last year, is having on the US economy, which is already under pressure from a sliding housing market and the credit crisis.
Oil prices have risen six-fold since 2002 amid booming demand from China and other developing economies, as well as constraints in global production capacity.
Other big producers including Russia and OPEC members Nigeria and Iran are either unwilling or unable to lift production.
While the announcement did prompt a slight easing in the oil price, traders said they were focused on a new price forecast from investment bank Goldman Sachs, which predicted oil prices would average $141 per barrel in the second half of this year because of weak global inventories.
Goldman Sachs is one of the most active investment banks in global energy markets and correctly predicted the current rally as far back as 2005.
Washington overcame a significant obstacle yesterday in its attempt to sue Opec for behaving as an oil cartel and keeping the price of fuel artificially high.
The House of Representatives overwhelmingly approved legislation to bring a lawsuit against Opec members because they have collectively set the price of oil and limited oil supplies.
The price of oil is at an all-time high of about $129 a barrel and has been in part responsible for surging inflation in the United States, Britain and across Europe.
President Bush is opposed to the legislation because he believes that it will trigger retaliatory measures by Opec member countries such as Saudi Arabia against American business interests.
While the Bill has still to be passed by the Senate, the size of the majority in the House of Representatives — 324 votes in favour versus 84 against — is sufficient to stop Mr Bush from vetoing any new legislation.
Should the Senate approve the Bill, a new American task force would be created as part of the Justice Department to investigate energy markets to root out manipulation and unwarranted speculation.
The legislation passed yesterday would remove the present prohibition against pursuing antitrust actions against a sovereign country.
Opec — the Organisation of the Petroleum Exporting Countries — is a group of countries made up of Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.
Oil ministries from each of the oil- producing countries meet regularly to discuss global demand and whether to boost supply to control the oil price. Recently, Opec has refused to increase production even though the oil price has hit a record level.
At the same time, America is trying to cope with a slowing economy and surging inflation. Americans are suffering from soaring energy costs and rising food prices — pressures that are forcing consumers to curtail their spending, which in turn is depressing the economy further.
Economists have pointed out that, stripping out food and fuel, inflation in the US is rising at 2.4 per cent each year, a rate that is not perceived to be problematic.
Some Republicans have argued that the legislation, similar to a Bill pushed through by Democrats last year, does not address the country’s energy problems. Sceptics claim that Congress should instead open the way for more domestic oil production including drilling in the protected Arctic National Wildlife Refuge in Alaska and some offshore waters that have been off limits to oil companies for more than 25 years.
Opec insisted yesterday that the rising cost of oil was not related to a shortage of demand but to the weakness of the US dollar and financial speculators. Both Venezuela’s energy minister and Abdullah al-Badri, the Opec Secretary-General, yesterday argued that global oil markets were well supplied.
NEW YORK - Amid increasing public outcry over record-shattering oil and gas prices, senators on Wednesday hauled industry executives in to testify about the recent runup.
The Senate Judiciary Committee called the hearing to explore the skyrocketing price of oil, which jumped over $3 a barrel Wednesday to a new record of over $132. The committee grilled executives from Exxon Mobil (XOM, Fortune 500), ConocoPhillips Co. (COP, Fortune 500), Shell Oil Co. (RDSA), Chevron (CVX, Fortune 500) and BP (BP) as to how their companies can in good conscience make so much money, while American drivers pay so much at the pump.
"You have to sense what you're doing to us - we're on the precipice here, about to fall into recession," said Sen Richard Durbin (D-Ill.) "Does it trouble any one of you - the costs you're imposing on families, on small businesses, on truckers?"
The executives said it did, and that they are doing all they can to bring new oil supplies to market, but that the fundamental reasons for the surge in oil prices are largely out of their control.
"We cannot change the world market," said Robert Malone, chairman and president of BP America Inc. "Today's high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation."
Malone's remarks were echoed by John Hofmeister, president of Shell.
"The fundamental laws of supply and demand are at work," said Hofmeister. The market is squeezed by exporting nations managing demand for their own interest and other nations subsidizing prices to encourage economic growth, he said.
In addition, Hofmeister said access to resources in the United States has been limited for the past 30 years. "I agree, it's not a free market," he said.
The executives pushed the idea that large parts of the U.S. that are currently closed to drilling - like sections of Alaska, the Rocky Mountains and the continental shelf - should be opened.
"The place to start the free market is in our own country," said one executive. [The drilling ban] sets the stage for OPEC to do what we are doing in our own country, and that is effectively limiting supplies."
John Lowe, executive vice president of ConocoPhillips, said Congress should enact a balanced energy policy. In addition to lifting the drilling ban, such a policy could include measures to encourage alternative energy sources, remove the ethanol tariff, promote energy conservation, cut regulations around refining.
"We must work together to find a real solution," said Lowe. "U.S. oil companies should be viewed not as scapegoats, but as assets."
The executives also named several things that Congress should not do, first among them being a hike in taxes or an undoing of the mergers of the late 1990s.
"Americans need companies that can effectively compete for access to new resources," said Peter Robertson, vice chairman of Chevron. "Punitive measures that weakened us in the face of international competition are the wrong measures."
The executives also frowned on a recently passed House bill giving the Justice Department the power to sue OPEC, saying it would have little effect in boosting production.
The testimony was colored by a few outbursts of protest from members of the public. Before the hearing even began, a heckler in the crowd shouted: "Stop ripping off the American public - bring these oil prices down."
The panel took issue with the amount of money oil firms are investing in finding oil, and investing in renewables.
"You know how much cash you have on hand compared to capital investment," said Sen. Durbin. "They are begging us for more refineries, for more exploration, when their refineries are only operating at 85 percent."
Chevron's Robertson said the issue wasn't really one of refining, and more just the price of crude.
We are investing all we can [in finding new oil] given the limitations of access and our own human capacity," he said. "We have adequate refined capacity, inventories are at an all time high. The issue is the price of crude."
Committee Chairman Sen. Patrick Leahy, D-Vt., likely summed up the feeling of many senators on the panel.
"The people we represent are hurting, while your companies are profiting," he said. "We need to get some balance."
Congress: Familiar ground for execs
The hearing marked the second time in as many months that top oil industry officials have been called before Congress.
In April, roughly the same lineup defended their firms before a House committee. The hearing was ostensibly called to ask the executives why they needed some $18 billion in federal subsidies in light of their record profits, but quickly became a Q&A on bigger questions in the energy business.
Lawmakers criticized the firms for not investing enough in finding new oil and developing renewable resources and told them, in thinly disguised terms, that they'd be forced to enact extra profit taxes if Big Oil continued to post such large earnings.
The oil men said they're making business decisions in the best interest of their shareholders. They repeated their often-stated position that the best way to lower prices and bring more oil to market is to open up wide swaths of the U.S. that are currently off-limits to drilling.
Although lawmakers don't vote on energy issues strictly along party lines, Democrats generally want to increase taxes on Big Oil and use the money to fund renewable energy research.
Republicans generally favor opening up the Alaska Wildlife Refuge, large parts of the Rocky Mountains, and areas off the east and west coast that have been closed to drilling since the 1970s following a public backlash after several big oil spills.
The parties are widely apart on the issues - a Republican effort to expand drilling recently failed in the Senate - and a compromise is not expected soon.
But both the Democrat and Republican proposals are long-term solutions that would have little impact on the nation's energy picture for several years, if not decades.
In the short run, experts say there's little politicians can do to bring down the price of gas.
Recent proposals to suspend the gas tax from the Democratic presidential contender Hillary Clinton and presumed Republican nominee John McCain were roundly criticized for leaving the government with a cash shortfall while possibly encouraging more driving, and by extension higher prices.
A measure to stop filling that nation's Strategic Petroleum Reserve was enacted last week with wide bipartisan support, but has done nothing so far to stem surging crude prices.
Iraq dramatically increased the official size of its oil reserves yesterday after new data suggested that they could exceed Saudi Arabia’s and be the largest in the world.
The Iraqi Deputy Prime Minister told The Times that new exploration showed that his country has the world’s largest proven oil reserves, with as much as 350 billion barrels. The figure is triple the country’s present proven reserves and exceeds that of Saudi Arabia’s estimated 264 billion barrels of oil. Barham Salih said that the new estimate had been based on recent geological surveys and seismic data compiled by “reputable, international oil companies . . . This is a serious figure from credible sources.”
The Iraqi Government has yet to approve a national oil law that would allow foreign companies to invest. Mr Salih said that the delay was damaging Iraq’s ability to profit from oil output, robbing the country of potentially huge revenues. With oil selling for more than $125 dollars a barrel and demand rising, Mr Salih is frustrated that Iraq still struggles over the establishment of a regulatory framework. “There is a real debate in the Government and among political leaders about the type of oil management structures we should have. I am for liberalising this sector and allowing the private sector to come in to develop these vast resources.”
BP, Exxon Mobil, Chevron, Royal Dutch Shell and Total have been queuing for rights to exploit Iraqi reserves. Mr Salih confirmed that Iraq was negotiating the outlines of two-year deals with some of the companies. He was optimistic that a draft law could be approved in the near future.
“We need to recognise after so many decades of mismanagement of the oil industry that we need to call a spade a spade,” he told a group of delegates at the World Economic Forum in Sharm el-Sheikh. “We can regulate it, but we need private investment to develop Iraq’s production capacities.” He said that Iraq was pumping 2.5 million barrels of oil a day at present, earning about $70 billion (£35.9 billion) in revenue this year.
The price of oil bounced back to record highs yesterday when Opec refused to increase supplies following Saudi Arabia's promise to the US that it would provide an extra 300,000 barrels a day. In New York, the price of light, sweet crude for June delivery rose from $125.92 to US$126.35. In London, Brent crude for July delivery was up 82 cents at $125.81 per barrel.
The announcement of large additional reserves by the Iraq Government does not appear to be backed up by new hard data. Although the country undoubtedly has very large volumes of unproduced oil it is impossible for the “reputable, international oil companies . . ." cited to be able - at a sweep - to triple available resources merely with the compilation of "recent geological surveys and seismic data".
Eni, the Italian oil group, has discovered a large oil sands deposit in the Republic of Congo that is expected to become Africa’s first large unconventional oil development and could hold several billion barrels.
Paolo Scaroni, Eni’s chief executive, said the project, due to begin production in 2011, opened “a new front” in the development of “unconventional” oil.
Unconventional resources, such as oil sands, which have in the past been considered too difficult or expensive to extract, are expected to provide an increasing proportion of the world’s fuel supply in future as conventional reserves run down.
Canada’s oil sands and Venezuela’s Orinoco belt have the world’s biggest known heavy oil reserves. The area to be developed by Eni is on a smaller scale, but is still likely to be very substantial.
Eni has not put a figure on the scale of the resources in its 1,790 square km licence area, but a sample 100 square km area that Eni has studied is estimated to hold 500m to 2.5bn barrels of recoverable oil.
That suggests the area as a whole could hold more oil than Eni’s entire reserves of 7bn barrels of oil equivalent.
It would put the resource base on a par with the 9bn-13bn barrels of oil equivalent at the problem-plagued, Kashagan field in Kazakhstan, where Eni is one of consortium members.
The deal giving Eni the oil sands licence, which was agreed last month, is part of an energy package it signed with Brazzaville.
It also includes investment in conventional oil production, a new power plant that will supply 80 per cent of Congo’s electricity, and 70,000 hectares of plantations to produce palm oil for food consumption and biofuels. Eni is also investing in capturing the associated gas from its oil fields that is burnt off in flares, to use in the power plant and the heavy oil processing plants or upgraders.
In total, Eni plans to invest $3bn in Congo, during 2008-11, excluding the heavy oil project. It could spend several billion more on upgraders to process the heavy oil into a form that can be readily sold on world markets. Each upgrader, with a capacity of 40,000 barrels per day, is expected to cost €1bn ($1.5bn). Eni suggested it could build five.
Eni has been in Congo since 1969, but stepped up its interest last year with the $1.4bn purchase of assets from Maurel & Prom of France, and the £1.7bn ($3.3bn) takeover of London-listed oil independent Burren Energy.
Although ENI have perhaps decided that the large deposits of oil sands located in Congo (Brazzaville) are viable as commerical developments these are unlikely to be new discoveries. There are numerous undeveloped oil sand outcrops known throughout the world which remain undeveloped due to the lack of a technological and financial solution. With much higher energy prices many of these are now being examined, albeit dogged by supply chain problems as costs escalate.
President Umaru Yar'Adua has ordered Nigeria's state-run oil company to demand nearly $2bn in arrears from two major oil companies.
The government say Royal Dutch Shell and ExxonMobil have not paid taxes and production sharing costs they owe on two offshore oil fields.
The companies say they have followed the law and are in discussions with the government.
Militant attacks and funding troubles have seen Nigeria cut its production.
"ExxonMobil affiliate fully complies with all laws and regulations and has paid taxes and royalties to Nigeria accordingly," AFP reported ExxonMobil responding.
"Our affiliate routinely has ongoing discussions with a number of government agencies on a variety of topics, including tax. We do not comment on ongoing discussions," it said.
Shell Nigeria Exploration and Production Company (Snepco) refused to comment while there were "ongoing discussions" between it and the government.
The Production Sharing Contracts agreed with the oil majors in the deep water production fields are coming up for renegotiation.
A BBC correspondent says the price of oil has rocketed since they were first negotiated and the government may be trying to improve their negotiation position.
At the same time, the Nigerian National Petroleum Company (NNPC) has not been able to fund its share of the joint venture agreements for on-shore oil production, and is trying to find other ways of paying for them, says the BBC's Alex Last in Lagos.
Militant attacks and strikes by Nigerian oil workers have helped push oil prices to record highs.
The defence ministry has suggested militant attacks could be brought under control by employing the very militants conducting the attacks to police the pipelines, newspaper This Day reported.
"We will engage them to police oil pipelines, but they must first form themselves into limited liability companies for us to discuss with them," Defence Minister Yayale Ahmed told a House of Representatives committee on Tuesday.
"That's a matter for the defence ministry to comment on," a spokesman for the oil company Royal Dutch Shell told the BBC.
A defence ministry spokesman was not available for comment.
Britain's leading power generating companies have put rivalries aside to draw up plans to counter the expected wave of protests against a proposed new generation of coal-fired power plants.
More than 40 security and media executives from the "Big Six" energy companies, as well as an array of independent generators including Drax, met in London to discuss how to prevent demonstrators disrupting their planned expansion.
They discussed tactics for keeping demonstrators from entering power stations and potentially causing costly shutdowns. Companies fear this summer could see one of the strongest campaigns against coal-fired power stations by environmental groups for years.
"It was to help companies learn from experience and to make sure they are able to deal with protests effectively and safely so they can also maintain their responsibilities toward customers," said David Porter, chief executive of the Association of Electricity Producers, which organised the event.
How best to handle such situations from a public relations perspective was high on the agenda of the summit, held on 27 March. Some companies have already been targeted by protesters over plans to expand coal operations this year.
There are at least eight coal-fired power plants – the dirtiest form of power generation – in various stages of the planning process around the country, campaigners say. These include sites in Essex, West Yorkshire and Northumberland. Amid increasingly urgent warnings about global warming and the difficulty Britain will have in meeting ambitious emissions reduction targets, opposition to coal-fired plants has grown.
Several campaign groups have promised big protests this summer. Camp for Climate Action, the group that scaled the Houses of Parliament and a British Airways jet tailfin earlier this year to protest against the new runway at Heathrow, is one. It plans a week-long demonstration at Kingsnorth in Kent, where Eon is proposing to build the country's first new coal-fired plant in decades. Other targeted campaigns are expected.
The week-long protest will start on 4 August. "It looks as if they might try to get inside, which we would obviously discourage them from doing on safety grounds," said a spokesman for Eon. The group has dubbed 9 August a "day of mass protest and direct action".
Eon hopes to build two coal-fired generators to replace a plant at the site which is closing because tighter emissions laws will render it inoperable by 2015. The plants would generate enough energy to supply 1.5 million households.
Eon expects the new plant, equipped with updated technology, to pollute far less than the current facility. It has also applied for the site to be used as a commercial testing ground for carbon capture and storage technology, which pumps emissions generated from burnt coal underground. The viability of the technology on an industrial scale is still unproven, however, and industry is lobbying the Government for financial incentives to pay for its rollout. Critics still maintain that despite the advances in technology, coal will still be the most polluting of all power stations.
BIBAI, Japan — These rugged green mountains, once home to one of Asia’s most productive coal regions, are littered with abandoned mines and decaying towns — backwaters of an economy of bullet trains and hybrid cars.
Fumihiro Yamamoto, the Hokuryo mine’s director, with lumps of coal. He said the mine would produce 120,000 tons this year.
But after decades of seemingly terminal decline, Japan’s coal country is stirring again. With energy prices reaching record highs — oil settled above $135 a barrel on Thursday — Japan’s high-cost mines are suddenly competitive again, and demand for their coal is booming. Production has jumped to its highest in nearly four decades, creating a sensation rarely felt in these mining communities: hope.
“We are seeing a flicker of light after long darkness,” said Michio Sakurai, the mayor of Bibai, on Japan’s northernmost island of Hokkaido. “We never imagined coal would actually make a comeback.”
Soaring commodity prices have had distorting effects across the global economy, driving up food prices and prompting fears of future energy shortages. But they have been an unanticipated boon to the coal producing regions of countries like Japan that had written off coal mining as a relic of the Industrial Revolution.
In Bibai, once a thriving cultural center that had a ballet troupe and five cinemas showing first-run Hollywood movies in its heyday in the 1950s, the population shrank to 27,800, from 92,000. As mining jobs evaporated, they left behind rows of abandoned clapboard-fronted stores that give some neighborhoods the air of a ghost town.
While Japan’s coal industry remains tiny, its revival is an example of how higher commodity prices are driving a search for resources even in some of the world’s most urbanized and developed nations.
In recent months, South Korea has experienced calls to create a domestic coal industry in order to reduce dependence on imports. In the United Kingdom, where coal’s decline became a symbol of withered industrial might, companies are increasing production and considering reopening at least one closed mine as demand for British coal rises.
“It’s now the perfect storm with demand for our coal from South Africa to China and Australia,” said Rhidian Davies, president of Energybuild, an operator of mines in South Wales that will increase production at one of its mines tenfold over the next five years.
In Japan, higher commodity prices have also unleashed soaring demand for the heavily populated nation’s other limited natural resources, including lumber and natural gas, where production has risen nearly 20 percent this year to a three-decade high.
But coal is the most potentially plentiful fossil fuel in Japan, and companies have been quick to embrace now affordable domestic supplies out of deep-rooted anxieties about Japan’s heavy reliance on imported energy.
While there are no national figures yet, mining communities report sharply higher production in the last two years. For example, in Bibai the city’s last two mines, both small strip mines, produced just 34,961 tons of coal in 2005. This year, they expect to surpass 150,000 tons, the highest production since 1973, when the city’s last large underground mine was shutting down.
For decades, Japanese coal, at $100 or more a ton, was simply too expensive because of high wages and extraction costs. But with global prices now reaching the same heights, Japanese coal is looking more attractive.
The price of power-station coal shipped from Newcastle, Australia, settled at $134 a metric ton for the week ending May 16, from a high of $142 for the week ending Feb. 15. In May 2003, the price was $23.25 a metric ton.
The utility company Hokkaido Electric Power announced it would nearly double purchases of domestic coal this year to 110,000 tons, while Mitsubishi Materials, a cement maker, said it would buy domestic coal for the first time in 18 years.
Demand is so high that one of Bibai’s mine operators, the Hokuryo Corporation, is now scouting a second mine to double its output.
But the industry’s long decline has made it difficult to gear up. There are almost no geologists left in Japan specializing in coal, or recent surveys of coal deposits in the region. To conduct its search, Hokuryo is relying on a stack of torn, yellowed maps hand-drawn by company geologists more than 40 years ago.
“Our predecessors braved the bears in the woods to leave us these maps,” said Fumihiro Yamamoto, the Hokuryo mine’s director.
Other changes in the last four decades could also hamper efforts to increase production. Hokuryo and other companies say they can no longer build large underground mines because no Japanese worker would want to work in such dark and dangerous conditions today.
At the same time, environmental regulations prevent most strip-mining, which creates huge open pits that can be eyesores. There have been proposals to raise production using new, untested technologies like pumping in water or heat to liquefy coal so it can be sucked it out of the ground like oil.
Even if such technologies worked, no one is expecting Japan to become self-sufficient in coal anytime soon. Domestic coal production contributes only 0.8 percent of the total coal consumed by Japan. Still, there is enormous potential: Sorachi, the region that includes Bibai, sits on an estimated six billion tons of coal, enough to supply Japan’s current level of use for 30 years.
“I don’t think we can expect a dramatic increase in the near future” in domestic coal production, said Hirofumi Furukawa, general manager of the Japan Coal Energy Center, an industry-affiliated research group. “But still, it is good to have a rare bit of encouraging news.”
Japan’s coal industry needs cheering up: nationwide, production is down from its peak in 1961 when 662 mines yielded 55 million tons of coal. Last year, eight mines produced about 1.4 million tons, according to Mr. Furukawa and Japan’s economy ministry.
Japan’s hard-hit coal mining communities have sought ways to cope with the industry’s long decay. The town of Yubari, an hour east of Bibai, went bankrupt after building an extravagant amusement park, the Coal History Village, which failed to attract tourists.
That does not mean coal is a savior. In fact, so far the coal revival has failed to produce new jobs in Bibai’s mines, where machines now do most of the digging. Many residents doubt a real renaissance is even possible. Much of the city’s population is in its 70s or older. Some doubt that working-age people who left when the mines closed will ever want to come back.
“Even if a few young people come back, it won’t be enough to save this town,” said Mitsuko Michiyama, 69, who owns a clothing shop on an empty shopping street where most storefronts are boarded up.
Still, business is looking up for Hokuryo, a unit of the Mitsubishi Corporation that once operated vast mines producing a million tons of coal a year and employing 8,000 workers.
Today, it employs just 40 at its single remaining strip mine.
The mine had survived by supplying about 30,000 tons a year to Hokkaido Electric, which bought the coal in order to support a local industry. Then, starting last year, the mine began receiving calls from other potential buyers. This year, it has promised to deliver some 120,000 tons of coal, far beyond the mine’s initial projected output of 50,000 tons, said Mr. Yamamoto, the mine’s director.
With its half dozen bulldozers and power shovels digging full-time, the company has had to turn down a half dozen would-be buyers.
“It’s frustrating,” said Mr. Yamamoto, who has witnessed the industry’s decline after he started working 36 years ago in one of Japan’s last big underground mines. “It was so hard for so long, and now we refuse big customers.”
At the mine, an open pit cut into a mountainside above Bibai, the mood is noticeably upbeat. Workers say they are working every day of the week, which was not the case even last year.
“We’re all really thankful,” said Takeshi Sasaki, who wore a hard hat as he checked one of the conveyers that wash and sort newly unearthed coal. “If this keeps going, it will mean a whole new era for Bibai.”
Julia Werdigier in London contributed reporting
They are countries so rich in oil and gas that they would never want for fuel to drive their booming economies and the lavish lifestyles of their rulers.
Now, however, in a role reversal that makes selling sand to Saudi Arabia look like a sensible business transaction, the oil-rich Gulf states are planning to import coal.
An acute shortage of natural gas has led to the city states of the United Arab Emirates seeking alternative fuels to keep the air cool, the lights on and the water running.
Abu Dhabi is working with Suez, the French utility company, on a nuclear power project but coal is emerging as the best quick fix to avert blackouts as the world’s biggest hydrocarbon exporters struggle to cope with high prices for oil and natural gas, infrastructure weakness and a development boom. Some of the world’s biggest oil exporters may soon find themselves reliant on imported fuel from a leading coal exporter, such as South Africa.
As a result, Taqa, Abu Dhabi’s national energy company, plans to take a half share in a proposed £500 million coal-fired power plant, while Dubai Electricity and Water Authority (DEWA) hopes to start work on a clean-coal project this year.
Oman Power and Water Procurement Company indicated in December that a planned 700-megawatt power and water desalination plant may need to be fuelled by coal instead of natural gas.
The dramatic transformation is taking place because, for the first time, the Gulf states are beginning to feel the burden of the soaring cost of fossil fuels. In March Dubai introduced an electricity pricing system that increased tariffs for heavy users. The new tariffs apply only to foreign businesses, expatriates and foreign-owned businesses. Emiratis are exempt.
The sudden gas shortage has caught the Gulf states by surprise at a time when demand for power and water desalination is increasing annually at double-digit percentage rates. Investment in infrastructure has lagged behind the region’s population expansion and construction boom. Anecdotes abound of apartment complexes left empty because there is not enough capacity in the local electricity grid.
According to Wood Mackenzie, the energy consultancy, the UAE’s demand for gas will double within a decade if power consumption continues to grow. Dubai’s peak power consumption rose by 15 per cent last year, according to DEWA’s statistics.
“Demand for natural gas is rising at 12 per cent per annum. In the summer the UAE is burning liquid fuel [fuel oil and diesel] for peak power generation,” said Peter Barker-Homek, Taqa’s chief executive. “Should there be alternatives [to burning oil], such as coal and nuclear? Probably, yes. If you have a product worth $120 per barrel, you want to sell it. The question about coal is always the environment. It is definitely cheaper than using crude oil.”
Last summer Abu Dhabi’s oil output fell by 600,000 barrels per day as natural gas was diverted from injection into oil wells to power stations to meet peak demand for electricity.
The Emirate has substantial reserves of gas but much of this is earmarked for injection into wells to maintain pressure and to improve oil output. With the crude oil price reaching $125 (£64) per barrel, the diversion of gas into local power stations is a huge cost to the country.
Meanwhile, the price of natural gas in the Gulf has soared amid shortages and increased global demand. Local gas resources in the Emirates have dwindled, and Abu Dhabi and Dubai are already importing gas by pipeline from Qatar.
Iran, which holds some of the world’s biggest gas reserves, is another option, but relations between the Western-friendly Emirates and Iran are uneasy. A project led by Dana Gas, a private sector company based in the Middle East, to bring Iranian fuel across the Gulf to Sharjah has been locked in pricing disputes.
In a desperate attempt to avert power and water shortages in the summer, Dubai entered into a 15-year contract with Royal Dutch Shell last month to supply liquefied natural gas in the summer period from 2010. However, this is an expensive fuel, and the Emirates have built their economies on gas at almost nil cost.
ROME — In the past year, as the diversion of food crops like corn and palm to make biofuels has helped to drive up food prices, investors and politicians have begun promoting newer, so-called second-generation biofuels as the next wave of green energy. These, made from non-food crops like reeds and wild grasses, would offer fuel without the risk of taking food off the table, they said.
But now, biologists and botanists are warning that they, too, may bring serious unintended consequences. Most of these newer crops are what scientists label invasive species — that is, weeds — that have an extraordinarily high potential to escape biofuel plantations, overrun adjacent farms and natural land, and create economic and ecological havoc in the process, they now say.
At a United Nations meeting in Bonn, Germany, on Tuesday, scientists from the Global Invasive Species Program, the Nature Conservancy and the International Union for Conservation of Nature, as well as other groups, presented a paper with a warning about invasive species.
“Some of the most commonly recommended species for biofuels production are also major invasive alien species,” the paper says, adding that these crops should be studied more thoroughly before being cultivated in new areas.
Controlling the spread of such plants could prove difficult, the experts said, producing “greater financial losses than gains.” The International Union for Conservation of Nature encapsulated the message like this: “Don’t let invasive biofuel crops attack your country.”
To reach their conclusions, the scientists compared the list of the most popular second-generation biofuels with the list of invasive species and found an alarming degree of overlap. They said little evaluation of risk had occurred before planting.
“With biofuels, there’s always a hurry,” said Geoffrey Howard, an invasive species expert with the International Union for Conservation of Nature. “Plantations are started by investors, often from the U.S. or Europe, so they are eager to generate biofuels within a couple of years and also, as you might guess, they don’t want a negative assessment.”
The biofuels industry said the risk of those crops morphing into weed problems is overstated, noting that proposed biofuel crops, while they have some potential to become weeds, are not plants that inevitably turn invasive.
“There are very few plants that are ‘weeds,’ full stop,” said Willy De Greef, incoming secretary general of EuropaBio, an industry group. “You have to look at the biology of the plant and the environment where you’re introducing it and ask, are there worry points here?” He said that biofuel farmers would inevitably introduce new crops carefully because they would not want growth they could not control.
The European Union and the United States have both instituted biofuel targets as a method to reduce carbon emissions. The European Union’s target of 10 percent biofuel use in transportation by 2020 is binding. As such, politicians are anxiously awaiting the commercial perfection of second-generation biofuels.
The European Union is funding a project to introduce the “giant reed, a high-yielding, non-food plant into Europe Union agriculture,” according to its proposal. The reed is environmentally friendly and a cost-effective crop, poised to become the “champion of biomass crops,” the proposal says.
A proposed Florida biofuel plantation and plant, also using giant reed, has been greeted with enthusiasm by investors, its energy sold even before it is built.
But the project has been opposed by the Florida Native Plants Society and a number of scientists because of its proximity to the Everglades, where giant reed overgrowth could be dangerous, they said. The giant reed, previously used mostly in decorations and in making musical instruments — is a fast-growing, thirsty species that has drained wetlands and clogged drainage systems in other places where it has been planted. It is also highly flammable and increases the risk of fires.
From a business perspective, the good thing about second-generation biofuel crops is that they are easy to grow and need little attention. But that is also what creates their invasive potential.
“These are tough survivors, which means they’re good producers for biofuel because they grow well on marginal land that you wouldn’t use for food,” Dr. Howard said. “But we’ve had 100 years of experience with introductions of these crops that turned out to be disastrous for environment, people, health.”
Stas Burgiel, a scientist at the Nature Conservancy, said the cost of controlling invasive species is immense and generally not paid by those who created the problem.
But he and other experts emphasized that some of the second-generation biofuel crops could still be safe if introduced into the right places and under the right conditions
“With biofuels we need to do proper assessments and take appropriate measures so they don’t get out of the gate, so to speak,” he said. That assessment, he added, must take a broad geographical perspective since invasive species don’t respect borders.
The Global Invasive Species Program estimates that the damage from invasive species costs the world more than $1.4 trillion annually — five percent of the global economy.
Jatropha, the darling of the second-generation biofuels community, is now being cultivated widely in East Africa in brand new biofuel plantations. But jatropha has been recently banned by two Australian states as an invasive species. If jatropha, which is poisonous, overgrows farmland or pastures, it could be disastrous for the local food supply in Africa, experts said.
But Mr. De Greef said jatropha had little weed potential in most areas, adding: “Just because a species has caused a problem in one place doesn’t make it a weed everywhere.”
The UK's largest power station, Drax, launched a £50m project today aimed at replacing 10% of the coal it uses with biomass. Mixing materials such as wood chips, sunflower husks or grasses with coal to generate electricity could reduce the power station's annual carbon dioxide emissions from coal by several million tonnes.
Executives from Yorkshire-based Drax signed a deal with Alstom to build a processing plant that could prepare 1.5m tonnes per year of biomass for use in the power station. Under the plans, biomass would be ground into a fine powder and injected directly into the power station's coal-fired furnaces. Building work for the processing plant will start later in 2008 and the first part of the facility is expected to be completed by the end of 2009.
Dorothy Thompson, chief executive of Drax, said that the "co-firing" technology would deliver 2m tonnes of CO2 savings from coal and take the power station towards their overall target of a 15% reduction in carbon emissions by 2012. "Last year, we set ourselves the target of 10% of co-firing of biomass - that's equal to the output of about 500 wind turbines. In capacity terms, that's 400MW." She added that it would make Drax the single biggest site generating electricity from biomass.
She added that, in recent years, co-firing coal with biomass fuels had emerged as a credible renewables technology. "We think of it as the forgotten renewables technology, we think it's very important and can deliver a significant amount of the carbon-abatement needed across the world. We are very aware that we need to tackle climate change and we firmly believe that we, as a coal station, can be part of the transition to a low-carbon economy while still delivering reliable and secure electricity supplies."
Neil Crumpton, energy campaigner at Friends of the Earth, said that using biomass in power stations or combined heat and power schemes is a better use of the resource than, for example, turning it into liquid biofuels for use by diesel-engine vehicles. "Co-firing with biomass is a reasonable way forward - it's a logical extension of what Drax is already doing and I've got no qualms with it on that score. If it helps build the sustainable biomass market in the UK, then all well and good."
Drax already produces up to 7% of the UK's electricity needs and is one of the country's biggest emitters of greenhouse gases. Since biomass is regarded as carbon neutral, any CO2 it produces does not count towards the power station's total emissions; hence Drax can claim a reduction in CO2 emissions by mixing biomass into its furnaces.
To test whether co-firing would work, Drax has used a 2-3% mix of biomass in some of its coal-fired furnaces for several months already. In their current experiments, the biomass fuel is mixed directly into the coal as it burns but this technique would not work for larger quantities of biomass.
"When you burn just a few per cent of biomass, you can afford to use exactly the same lines as coal," said Patrick Fragman, managing director of Alstom, the company that will build the biomass processing plant at Drax. But, for a higher percentage, he said, dedicated infrastructure is needed.
Peter Emery, production director at Drax, said that the new processing plant was a crucial part of the power station's attempt to scale up their biomass usage. He also added that it would be able to handle a wide variety of biomass fuels.
Different biomass materials burn in different ways, so the processing plant needs to be able to handle the materials accordingly. The resulting fuels then need to be inserted into the coal-fired boilers at different positions to ensure they burn properly. Engineers at Drax estimate that it will take 1.5m tonnes of biomass to replace the energy that comes from 1m tonnes of coal.
If co-firing coal with biomass proves successful, Thompson said that Drax would consider increasing the proportion of plant material it adds to its fuel mix, perhaps up to 20%. Drax has also committed to upgrade its turbines to improve efficiency, which it claims will deliver a further 1m tonne reduction in CO2 emissions.
Lorry drivers are to descend on London next week in what organisers hope will be the largest-ever fuel duty protest in the capital.
Hauliers from around the country will stage their slow-moving demonstration on Tuesday before parking in central London.
A delegation will hand a letter to 10 Downing Street demanding the immediate introduction of a fuel rebate allowing HGV drivers to claim some of the duty back.
The protest comes as the price of a litre of diesel has soared past 120p.
Mike Presneill, a leading member of Transaction 2007, which is helping to organise the protest, said: "Fuel is rocketing. The government has the power to act but appears not to be listening. Hundreds of UK transport firms are being driven to the wall. Thousands of UK jobs are being lost.
"Foreign hauliers are entering the UK with cheaper fuel purchased abroad. They contribute nothing to our economy. We are paying the highest rate of fuel duty in the UK. All we are asking for is that the government introduce an essential-user rebate so that we can compete on a level playing field with continental hauliers."
The Kent-based haulier Peter Knight said: "This is the economics of the madhouse. If the prime minister doesn't listen, the government will lose out. As UK hauliers we pay enormous amounts of tax to the UK exchequer; we pay employment tax, road tax and, of course, fuel duty. If we are wiped out, the work will be done by foreign hauliers who pay nothing to the UK in tax."
The government's roads policy has been labelled "absurd" after it emerged that decisions on road building and pay-as-you-drive schemes over the next decade will based on an oil price of no more than $70 a barrel.
New traffic and congestion forecasts, which are integral to government road policies, are based on an oil price of $65 a barrel in 2010, rising to $68 a barrel in 2015 and $70 a barrel in 2020, the Department for Transport has revealed.
The DfT is using the projections from the Department for Business, Enterprise and Regulatory Reform despite widespread concerns over a sustained spike in the global oil price, which nearly breached $130 a barrel on Tuesday.
"We are in the process of using these updated projections to make new road traffic and congestion forecasts," said Jim Fitzpatrick, transport minister. The admission came on the same day that the Sustainable Development Commission, a government green watchdog, called for a revision of national aviation policy due to doubts over the integrity of the environmental and economic data underpinning airport expansion plans.
Norman Baker, the Liberal Democrats' shadow transport secretary, who asked the parliamentary question that revealed the oil price estimates, said the forecasts were "absurd".
"It is absurd to assume that the price of oil will be $70 a barrel in 2020. Nobody outside the government thinks that will be the case," he said.
The DfT said the $70 a barrel figure was a "central estimate" in its calculations and it would also include so-called "high high" estimates of $107 a barrel in 2010 and $150 a barrel in 2015.
"To ensure robust estimates are produced, we also factor potential high oil prices into our modelling," said a DfT spokesperson.
Stephen Glaister, director of the RAC Foundation, said the government would need to reassess road building and road pricing plans if it kept to $70 a barrel forecasts. Nonetheless, he added, expensive fuel is unlikely to alleviate the UK's traffic problems.
"The shortage of road capacity is so severe, and because we are expecting economic growth in the longer term, we do not expect the road building programme to decline," he said.
According to a government-commissioned study of Britain's transport needs by Sir Rod Eddington, the former boss of British Airways, a rise in the oil price from $35 a barrel to $100 will cut traffic by 6%.
Sir Rod's study added that the UK would need between 2,900 and 3,350 extra lane kilometres (or betwween 1,800 and 2,500 miles) of motorways and A-roads between 2015 and 2025 if it did not have road pricing. However, the total length required will be slashed to 500 to 850 lane kilometres if a comprehensive national road pricing system is introduced.
The AA will add to the congestion debate tomorrow by revealing that AA employees are saving 90,000 litres of fuel or 620,000 miles commuting each year by working from home. It said 250 AA breakdown call centre employees and 50 insurance call handlers now use their homes as their office, saving fuel and relieving some of the burden on roads.
"In transport terms home working cuts out the commute, reduces congestion and carbon emissions. Hopefully other companies will follow the AA lead to put more workers on the superhighway rather than the actual highway now that the technology is much more affordable," said Edmund King, AA president.
The government should completely rethink its aviation policy and shelve plans to expand Heathrow and Stansted airports, according to an influential advisory body.
The Sustainable Development Commission, chaired by Sir Jonathon Porritt, said there were big question marks over the environmental and economic arguments underpinning the proposals for British airport expansion. It warned that the government faced a wave of legal challenges if it did not hold an independent review of its 2003 aviation white paper, which sanctioned new runways at Heathrow, Stansted and other airports.
"A lot of basic data upon which important decisions will be made is heavily contested. Our recommendation is that an independent assessment is undertaken," said Hugh Raven, a SDC member. He added: "The SDC is not in the business of launching legal challenges, but there may well be other key stakeholders who are."
The report warned that the unresolved debate over the environmental and economic impacts of aviation was "not in the interest of government, the public, or the aviation industry". It added: "It undermines government plans for aviation, delays decision-making, and diverts the efforts of government and industry to mitigate the environmental impacts of aviation."
Raven said some economic arguments behind airport expansion, such as the financial value of transfer passengers who spend a short time in the UK, were "fundamentally grey". The alleged financial benefit of aviation is an important issue in the airport expansion debate, including one fiercely contested claim that a third runway at Heathrow would boost the UK economy by £5bn. The integrity of environmental data was also in doubt, the report added, amid disputes over the impact of noise and air pollution on communities near airports.
In a demand for a review of the government's aviation policy, the SDC said a special commission should be established with four tasks: to re-examine the economic, social and environmental costs of aviation; start talks with the public and "key stakeholders"; recommend changes to the government's aviation white paper; and encourage action in areas where both sides of the debate agree on a way forward, such as new technologies.
It added that the review could be carried out by the government's Sciencewise centre, part of the Department for Innovation, Universities and Skills, and that it should contribute to a new aviation policy to be published by 2011.
In an update to its white paper last year, the Department for Transport predicted a doubling of UK air travel to 465 million passengers a year by 2030. The government is expected to give the go-ahead to a third runway at Heathrow during the summer, while a planning inquiry into lifting a passenger cap at Stansted, Britain's third largest airport, is expected to deliver its verdict imminently.
Last night a government spokesperson said: "We fundamentally disagree with the findings of this report. It is simply wrong to claim that there is a consensus that the evidence base is flawed and, as the report admits, the most recently published background data on Heathrow was not even discussed.
"We strongly believe the aviation industry must play its part in meeting its environmental costs, which is why the government championed the inclusion of aviation in the EU emissions trading scheme. But, given the government has conducted a widespread debate over the last six years, deferring a decision in favour of a further three-year debate, as this report suggests, is not a serious option."
BAA, Britain's largest airport group, said there was an "urgent need" for new runways at Heathrow and Stansted: "BAA does not support a review of the air transport white paper, which could only add another substantial delay to the government's strategy for aviation in this country."
Michelle Di Leo, director of aviation industry lobby group FlyingMatters, said: "The air transport white paper was based on 13 months of public consultation and 500,000 responses. If that doesn't represent thorough consultation, I don't know what does."
The rocketing price of a barrel of oil has prompted American Airlines to make swingeing cuts to its aircraft fleet, workforce and timetable in a sign of the severity of the cost storm gathering over the global aviation industry.
The world's largest airline intends to scrap 75 planes and will reduce the number of seats available on domestic routes by between 11% and 12% this year. An unspecified number of jobs will be lost from AA's 85,000-strong payroll as the airline closes and merges facilities.
The downsizing is AA's sharpest since the aftermath of the terrorist attacks of September 11 2001. On Wall Street, the company's shares plunged by 16% to a three-year low of $6.93.
Speaking at AA's annual meeting in Texas, chief executive Gerard Arpey said: "The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak US economy."
Airlines around the world are struggling to cope with oil prices which have pushed the cost of aviation fuel to record levels. Each increase of $10 in a barrel of oil means a cost of $800m (£406m) for AA - which means that the commodity's surge since the start of the year has raised the airline's annual costs by $3bn.
"Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve," said Arpey.
Experts believe that AA's downsizing will be merely one of many belt-tightening moves by air carriers.
British Airways' board has examined a scenario in which the £883m pre-tax profit falls to zero this year. Japan Airlines has raised fuel surcharges on its tickets by 40% citing an "unprecedented increase" in the price of fuel. Ryanair's boss, Michael O'Leary, today admitted that oil was "really hurting" and that his low-cost carrier "certainly won't make a lot of money" if the price of a barrel stays over $125.
Chris Tarry, an aviation industry analyst, said: "Here you have an industry that has the potential, if nothing changes to current oil prices, to lose $40bn this year."
He said the impact was "several magnitudes greater" than the downturn in international travel which forced several US airlines into bankruptcy after terrorists struck the World Trade Centre: "Airlines have not been particularly successful in recouping the price of fuel."
Fierce competition has made it difficult for carriers to raise headline fares. Many are trying to claw back revenue through supplementary fees - AA announced that it was imposing a $15 charge for checking in bags, although this will not be levied on international passengers.
The aircraft to be retired by AA are largely regional jets which burn more fuel per passenger than larger planes. Transatlantic services, which are relatively profitable, are unlikely to be significantly trimmed - AA said its international capacity will fall, at most, by 0.5%.
Roger King, an analyst at CreditSights in New York, told Bloomberg News that the carrier's cuts may not be drastic enough: "When oil is this high and they're bleeding this much cash, you have to shrink to a core market that is profitable."
As they scramble to reduce costs, other airlines are reducing flying speeds andcutting the weight of aircraft - measures have even included removing magazine racks and altering drinks trolleys to make them lighter.
The US airline industry recently called on the Bush administration to tap the nation's reserve supplies of home heating oil in order to bring down the price of fuel. Top carriers are exploring mergers to cut costs - Delta Airlines is planning a combination with Northwest Airlines, while United Airlines has held talks with US Airways.
Fuel costs have contributed to several airlines going bust. Recent casualties include the all-business transatlantic carriers MaxJet and Eos, together with Hawaii's Aloha Airlines and the US carrier ATA. In Europe, Alitalia is relying on financial support from the Italian government to keep flying.
Kevin Crissey, an airlines analyst at UBS, said in a research note: "The industry needs to shrink in a huge hurry to be able to raise fares and reduce fuel burn and other expenses."
Oil is becoming an increasingly contentious political issue. Executives from leading oil companies including BP, Shell and ExxonMobil were accused of taking advantage of consumers' pain during a hearing by the senate judiciary committee in Washington today.
"The president once boasted that with his pals in the oil industry, he would be able to keep prices low," said senator Patrick Leahy, a Democrat from Vermont. "Instead, it is his pals in the oil industry who have benefited."
British Airways hit turbulence after brokers warned that the high oil price would dampen the flag carrier's earnings.
Shares in the airline, which posted record profits last week, tumbled 10¼ to 222¾p as Deutsche Bank turned decidedly bearish.
Deutsche, which thought the shares were worth 361p last week, now thinks they should sell for just 200p.
It said the company, steered by former pilot Willie Walsh, has recognised the downturn in the market but warned that the rising cost of BA's inputs (oil, basically) are not being passed through to customers.
"We believe British Airways is losing its ability to price up while maintaining volumes," the broker told clients in a note. "While a strong management team is taking measures to reduce capital expenditure and cut capacity, earnings per share impact is significant." Deutsche slashed its current year EPS forecast to 9.7p from 28.8p.
Morgan Stanley raised its price target on BA but only to 160p from 120p. Collins Stewart remained bullish, however, telling investors to keep buying, setting a price target of 350p.
DUBLIN - Rising oil prices are hurting Ryanair (RYA.I: Quote, Profile, Research), Chief Executive Michael O'Leary said on Wednesday, but Europe's biggest low-cost airline can still avoid making a loss with oil prices at $125 a barrel.
"With oil at $125 (a barrel) ... we certainly won't make a lot of money," O'Leary told reporters. "I don't think we will lose money."
Ryanair warned in February that high oil prices, a faltering UK economy and weak sterling could halve profits in the coming year. But O'Leary still expects Ryanair to do much better in the current environment than most competitors.
"If yields (average ticket prices) fall by 5 percent this year and I think the oil price rises above $135 a barrel, then we would be at break even," he said.
O'Leary said the carrier (RYA.L: Quote, Profile, Research) had been "calling the oil market wrong" and would certainly resume hedging future fuel needs at below $100 a barrel, possibly even around $100-$110.
"Oil is really hurting us now," he said.
Investors have remained wary over the company's lack of protection against record oil prices.
O'Leary said the airline had hedged 2.5 percent of its total fuel needs for the next 12 months, around the "mid 70s" in dollar terms.
"There will be a deep recession unless oil prices fall," O'Leary said.
Kuwaiti budget carrier Jazeera Airways expects to post revenues of at least 52.05 million Kuwaiti dinars ($195.4 million) this year, its chairman and CEO told magazine Arabian Business on Monday.
“We expect revenue growth of at least 50% this year," Marwan Boodai said, speaking on the sidelines of the World Economic Forum (WEF) on the Middle East in Sharm El-Sheikh, Egypt.
The airline, which is listed Kuwait Stock Exchange, saw operating revenues rise 61.2% to 34.7 million dinars in 2007, while net profit for the year was 2.29 million dinars.
Revenues last year were boosted by doubling of passengers year-on-year and a 12% rise in load factors over the same period.
Jazeera said on Sunday first quarter rose 42% over the year-ago period to 745,815 dinars, while operating revenues increased 46% to 10.8 million dinars over the same period.
Jazeera Airways operates a fleet of six Airbus A320s from hubs in Kuwait and Dubai to destinations across the Middle East, Europe, Iran, North Africa, and the Indian Subcontinent.
The airline has a firm order for 34 additional aircraft to be delivered over the coming years with the last fleet installment scheduled for delivery in 2014.
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