Can oil production satisfy rising demand?

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WASHINGTON — Energy Secretary Samuel Bodman has asked a high-level advisory board to answer one of the toughest questions dogging the U.S. economy: Can world oil production meet steadily rising demand?

In a previously unreleased Oct. 5 letter to ExxonMobil CEO Lee Raymond, chairman of the National Petroleum Council, Bodman asked for a study of the industry's ability to produce enough oil and natural gas at prices that won't cripple the economy.

"He's asked them to take a big-picture look out several years. ... He wants to get some definitive information," says Craig Stevens, an Energy Department spokesman.

The most noteworthy aspect of Bodman's request is a reference to the "peak oil" debate. At issue: the claim by a vocal minority of energy experts that the world is at, or near, maximum oil production.

That doesn't mean the world is running out of oil. But as booming economies in China and India boost demand, and production levels off, prices will rise. "Oil isn't a concept. It needs to be discovered and produced," says Matthew Simmons, author of a recent book questioning the extent of Saudi Arabia's oil reserves.

Avoiding economic turmoil will require more than a decade of "intense, expensive effort," according to a February study by Science Applications International for the Energy Department. The U.S. would need to build alternative fuel plants and greatly increase vehicle fuel efficiency.

"If peaking is imminent, failure to initiate timely mitigation could be extremely damaging," the report warned.

Many oil industry figures scoff at the peak oil theory, saying rising prices will spur exploration. The International Energy Agency last month agreed, saying oil reserves in the Middle East are "relatively underexploited and are sufficient to meet rising global demand for the next quarter-century and beyond."

Some also doubt that consumption will rise in line with current forecasts of 2% annual growth. China's economy could stumble and American consumers could ditch their gas-guzzlers for more-efficient vehicles. "People will react. They're not going to keep doing what they're doing," says Jim Parkman, an investment banker at Petrie Parkman in Houston.

But the debate is affecting oil company marketing. A Chevron ad asks: "The world consumes two barrels of oil for every barrel discovered. So is this something you should be worried about?"

The NPC study is intended to answer that question. The roster of the 175-member body, created in 1947 by President Truman, reads like a "who's who" of the petroleum industry. The council is chaired by Raymond, CEO of the nation's largest oil company.

That causes Simmons to doubt whether the NPC will endorse the peak oil camp. But Rep. Roscoe Bartlett, R-Md., who met with President Bush this summer to urge government action, says: "Any thinking person has to recognize at some point the world is going to face a crisis."

Nov. 28 (Bloomberg) -- Platinum in New York rose above $1,000 an ounce for the first time since 1980 amid speculation that demand for the metal used in pollution-control devices will keep rising.

Production will fall short of demand this year by 120,000 ounces, forcing manufacturers and jewelers to dig deeper into inventories, Johnson Matthey Plc, the largest platinum-group metals distributor, said Nov. 15. Fuel-emission regulations are being tightened in both the U.S. and Europe.

“Platinum is likely to remain in deficit over the next few years” because of demand from carmakers, Robin Bahr, an analyst at UBS AG in London, said in an e-mail today.

Platinum futures for January delivery rose $16.80, or 1.7 percent, to $1,001.10 an ounce on the New York Mercantile Exchange. Prices earlier reached $1,011 an ounce, the highest for a most- active contract since March 12, 1980, according to the exchange. Platinum, up 16 percent this year, reached $1,189.50 on March 5, 1980, the highest since trading started in 1956.

Use of platinum, which is used as a catalyst to reduce air pollution from exhaust, will grow 8.4 percent to a record 3.86 million ounces this year as clean-air laws boost demand, Johnson Matthey said. European demand for diesel cars, which can only use platinum in catalytic converters, has surged because the fuel is cheaper than gasoline. Almost 50 percent of new cars bought in Europe this year will be diesel-fueled, Johnson Matthey said.

“Diesel demand in Europe is still very healthy, with diesel- fueled cars now making up almost half of all new cars in Europe,” Wolfgang Wrzesniok-Rossbach, the head of marketing and sales at Heraeus Holding GmbH, a precious-metals processor based in Hanau, Germany, said.

Mack Trucks Inc., based in Allentown, Pennsylvania, and Gothenburg, Sweden-based Volvo AB are among companies planning to install catalysts in diesel-powered commercial vehicles to meet U.S. regulations that come into force in 2007.

Platinum output is growing slower than expected after an explosion at Anglo Platinum Ltd.’s Polokwane smelter in South Africa. Anglo Platinum, the world’s biggest producer of the metal, said in September production this year will be 2.45 million ounces, down from a July forecast of 2.6 million ounces.

Prices for palladium, which is also used in some auto catalysts, have plunged as platinum has gained. Palladium rose to a record $1,125 an ounce in 2001, encouraging carmakers to switch to platinum. Platinum traded at $632 an ounce in 2001.

The surplus in palladium will narrow to 650,000 ounces from 1.4 million ounces in 2004 because of reduced shipments from Russia, according to Johnson Matthey.

Palladium futures for March delivery rose $1.20, or 0.5 percent, to $266.90 an ounce on the Nymex. Prices have gained 44 percent this year.

To contact the reporter on this story:
Danielle Rossingh in London at drossingh@bloomberg.net

Massachusetts in energy deal with Venezuela

Deal provides discounted oil to needy in state

QUINCY, Mass. - Venezuelan officials signed a deal Tuesday to ship 12 million gallons (45 million liters) of discounted home heating oil to poor Americans in Massachusetts as part of plan by Venezuelan leader Hugo Chavez to help needy U.S. communities.

The fuel is being offered by Citgo Petroleum Corp., a subsidiary of Venezuela's state-owned oil company which runs roughly 16,000 gas stations in the U.S.

U.S. Rep. William Delahunt, who helped broker the deal, called the agreement "an expression of humanitarianism at its very best," and rejected criticism that the move was motivated by politics. Chavez often blames the plight of the poor on unbridled capitalism and had criticized U.S. President George W. Bush's government for failing to reduce poverty.

Delahunt said the agreement could set an example for U.S. oil companies. Congressional leaders have asked the companies to use some of their profits to fund heating fuel assistance programs for low-income residents.

"I just hope that this sends a message, and that other oil companies will step and help also," Delahunt said.

Reducing costs?
Chavez announced the idea of offering fuel directly to poor U.S. communities during a visit to Cuba in August. He has said the aim is to bypass middlemen to reduce costs for the American poor.

The plan to provide low-cost heating oil to poor communities in Massachusetts and also the Bronx in New York City is "eminently a political move," said Patrick Esteruelas, an analyst with the New York-based Eurasia Group.

He said it is a way for Venezuela to "compromise the White House position within the U.S." and emphasize what Chavez has long cited as the failings of U.S. policy.

The initiative is part of a larger effort by Chavez to use Venezuela's surging oil wealth to extend the country's influence and create an alternative to what he calls U.S. "imperialism" in the region.

Chavez says he is leading a socialist "revolution" and has become one Bush's strongest critics in Latin America.

Close ally with Castro
The Venezuelan president has sought to strengthen alliances by offering oil deals to countries across Latin America and the Caribbean, shipping fuel on preferential terms while offering low-interest loans and accepting partial payment in goods ranging from bananas to sugar.

Chavez, a close ally of Cuban leader Fidel Castro, has repeatedly accused the U.S. government of plotting to overthrow him -- allegations firmly denied by Washington.

At the same time, Venezuela remains a major supplier of fuel to the United States and provided about 12 percent of U.S. crude imports in September, the last month for which U.S. figures are available.

Chavez has sought to decrease that dependency, seeking new markets in China and elsewhere for Venezuelan oil.

The South American country, which has the largest conventional oil reserves outside the Middle East, is the world's No. 5 oil exporter and a founding member of the Organization of Petroleum Exporting Countries.

Rising mortgage rates and skyrocketing prices put home-buying out of reach for more Americans in October, a new report showed.

Sales of previously owned U.S. homes fell a greater-than- expected 2.7 percent last month to a 7.09 million annual rate, the slowest since March, the National Association of Realtors said today in Washington. The number of unsold homes was the highest since April 1986.

Housing affordability, already at a 14-year low last quarter, will continue to drop and deprive the economy of a source of strength in coming months, economists said. Today’s report showed the median price rose about 17 percent over the past year to $218,000, the biggest jump in 26 years. The average 30-year fixed mortgage rate exceeded 6 percent in October and has kept rising since then.

“The peak in home sales activity is behind us,” said Richard DeKaser, chief economist at National City Corp. in Cleveland. “So far, it’s a gentle trek down.” Housing ``will present a drag for the economy,” DeKaser said.

Existing home sales fell from September’s 7.29 million annual rate. Economists surveyed by Bloomberg News forecast home resales would fall to a 7.2 million annual pace from September’s previously reported 7.28 million pace, according the median of 54 estimates. The pace reached a record 7.35 million in June.

The housing industry accounts for only about 5 percent of the U.S. economy and yet generated half of the growth in this year’s first six months and more than half of the private jobs added since 2001, Merrill Lynch & Co. said in an August report.

Resales, which account for about 85 percent of the residential real estate market, are tabulated at contract closings and reflect buying decisions made a month or two earlier. New-home sales are counted when a contract is signed, making them a better gauge of current activity, economists said.

The report on new home purchases is due tomorrow from the Commerce Department. Sales are forecast to fall to a 1.2 million annual pace, from 1.222 million in September, according to the median estimate of economists surveyed by Bloomberg News.

Homebuilder shares fell today. A Standard & Poor’s index of 16 builders including Centex Corp. and D.R. Horton Inc. dropped 29.5 points, or 3.2 percent, as of 2:35 p.m. in New York.

Sales of previously owned homes would have been even weaker last month had it not been for gains the areas of Baton Rouge, Louisiana, and Houston, reflecting demand from people displaced by Hurricane Katrina. The Realtors group said sales would have declined 3.2 percent in October to a 7.06 million pace excluding sales in response to the hurricane.

``The housing sector has likely passed its peak,” said David Lereah, chief economist at the National Association of Realtors, during a press conference. ``The boom is winding down to an expansion. Housing activity is still healthy.”

The median price rose to $218,000 last month from $187,000 in October 2004, the Realtors’ group said. The year-over-year increase was the biggest since July 1979. The median price was $213,000 in September.

Sales of single-family homes fell 2.5 percent to a 6.23 million annual pace in October. Sales of condos and co-ops fell 4.4 percent to an 862,000 annual pace.

``The evidence keeps piling up that the housing market is slowing moderately,” said Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, Minnesota, in an interview. ``We certainly think housing will weigh on GDP growth next year.”

Sales were lower in all four regions. They dropped 7.4 percent in the Northeast to a 1.12 million-unit pace, 1.9 percent in the Midwest to a rate of 1.58 million units, 1.8 percent in the South to 2.76 million units, and 1.2 percent in the West to 1.64 million units.

The supply of homes available for sale, another gauge of housing demand, rose to 2.87 million in October from 2.77 million. Supply represented 4.9 months’ worth at the current sales pace, up from 4.6 months’ worth the previous month.

The rate on a 30-year fixed mortgage averaged 6.07 percent in October, the highest monthly average since June 2004, from 5.77 percent a month earlier, according to Freddie Mac, the No. 2 purchaser of home loans behind Fannie Mae. The rate reached a two-year high of 6.37 percent two weeks ago.

Rising rates and higher prices caused the Realtors’ group affordability index to drop to 117.8 in the third quarter, the lowest since the third quarter of 1991. Still, figures greater than 100 suggest households have the income needed to purchase a property at the median home price.

``The housing market had remained robust, although a slowing in house price gains in some areas and recent declines in home equity lending at banks could be indicating that the long-expected cooling in the housing market was near,” Federal Reserve policy makers said in the minutes of their Nov. 1 meeting released last week.

A more pronounced slowing in housing than most economists expect could be the catalyst for the central bank to lower their interest rate target in early 2007, according to economists at Goldman, Sachs & Co. in New York. The Fed targets the rate at which banks lend money to each other overnight, also called the federal funds rate.

A slowdown in housing could slice as much as 1.5 percentage points from economic growth in the next couple of years, according to a Nov. 18 report by Goldman Sachs economists Jan Hatzius and Monica Fuentes. ``This would probably be enough to persuade Fed officials to cut their federal funds target” in 2007, said Hatzius and Fuentes.

The risks to the economy posed by the housing market aren’t lost on Ben Bernanke, the White House nominee to succeed Alan Greenspan as Fed chairman.

A slowdown in housing prices that isn’t ``too sharp,” ``should be consistent with the modest cooling of growth that many forecasters expect over the next year or so,” Bernanke said last week in written responses to questions posed by Senator Jim Bunning, the lone Banking Committee member to vote against his nomination. A sharper slowdown, which he said is less likely, ``would have a larger effect on the growth of real output.”

``It’s not the beginning of the end as we see it,” said Joel Rassman, chief financial officer of Toll Brothers Inc., the largest U.S. builder of luxury homes, in a Nov. 14 interview. ``Most of our markets are strong. They’re just not as strong as last year.”

Earlier this month Toll lowered its forecast of the number of homes it will sell in fiscal 2006 to 9,500 to 10,200, from the 10,200 to 10,600 it projected on Aug. 25.

To contact the report on this story:
Carlos Torres in Washington at ctorres2@bloomberg.net

House and Senate negotiators reached a tentative agreement yesterday on revisions to the USA Patriot Act that would limit some of the government's powers while requiring the Justice Department to provide a better accounting of its secret requests for information on ordinary citizens.

But the agreement would leave intact some of the most controversial provisions of the anti-terrorism law, such as government access to library and bookstore records in terrorism probes, and would extend only limited new rights to the targets of such searches.

For President Bush, renewal of the act would provide a boost as he looks to restore his image as a strong commander in chief in combating terrorism. And Democrats said yesterday that the administration largely got what it wanted -- a major break after lawmakers challenged the White House in recent days on the conduct of the Iraq war, budget policies and tax cuts.

The deal would make permanent 14 Patriot Act provisions that were set to expire at the end of the year. Three other measures -- including one allowing law enforcement agents access to bookstore and public library records -- would be extended for seven years, or three years longer than the Senate had agreed to. The House initially extended the provisions for 10 years but later voted to accept the Senate's four-year extension.

Also extended for seven years is a provision allowing roving wiretaps that follow an individual who may use multiple means of communication, rather than targeting a single phone line. The agreement also extends for seven years a provision of a separate intelligence law passed last year that allows federal investigators to track an individual not connected to a foreign government but suspected of operating as a "lone wolf" terrorist.

The compromise would weaken a block of House-approved death penalty provisions that had elicited concern in the Senate and in legal circles. In the event that a jury could not agree to impose the death penalty on a convicted terrorist, House Judiciary Committee Chairman F. James Sensenbrenner (R-Wis.) had hoped to empower prosecutors to impanel a new jury. The deal also excludes a House proposal to allow a death penalty for terrorist offenses that "create grave risk of death."

The agreement does extend the federal death penalty to those who knowingly transport materials used in a deadly terrorist attack, those who help plot a deadly attack on a mass-transit system, and those who participate in a deadly attack on ships and maritime facilities.

Republicans and Democrats said the agreement is a victory for Sensenbrenner, who defended the expanded government powers enacted after the Sept. 11, 2001, attacks. Civil libertarians and liberal Democrats lamented the deal as another blow to individual rights. And three Democratic senators and three GOP senators declared the agreement unacceptable last night.

"Is Congress standing up to the president? No, not on this one," said Rep. Jerrold Nadler (N.Y.), a House Judiciary Committee Democrat.

The agreement, which could go to final votes in the House and Senate before the end of the week, is Congress's first effort to revise the national security measure that became law just weeks after the Sept. 11 attacks. During last year's presidential campaign, the Patriot Act was elevated to a major political issue, showcased by Bush as a sign of strength in the face of terrorism but maligned by many Democrats as an abuse of power. Hundreds of local governments have passed resolutions decrying the law as an infringement of civil liberties.

When Congress turned to reauthorizing the measure this year, there were bipartisan calls for major changes. House and Senate negotiators have agreed to limit the government's powers in some areas, while rebuffing Bush administration requests for new subpoena powers.

But on balance, the compromise sides with a stronger government hand when terrorism investigations clash with civil liberties concerns.

But Congress does not look ready to hand Bush all of the sweeping powers it was willing to grant in 2001. Negotiators refused to back the administration's request for administrative subpoenas, which would have expanded the government's power to subpoena records without the approval of a judge or grand jury in terrorism investigations. Senate Intelligence Committee Chairman Pat Roberts (R-Kan.) called that "a serious mistake," saying the government already has such powers to investigate non-security issues such as Medicare fraud.

While the government would retain access to library, bookstore and business records, the FBI would face new limits on the retention and dissemination of such information.

The compromise also places new controls on the FBI's use of "national security letters," which require companies to provide private information about their customers and to keep the request secret. The Patriot Act allowed the FBI to use such letters on any citizen it deemed relevant to a national security investigation, even if the target is not suspected of any wrong-doing.

A Nov. 6 article in The Washington Post revealed that loosened restrictions in the Patriot Act helped boost the annual use of such letters 100-fold, to more than 30,000 a year from about 300 before the Sept. 11 attacks.

Under the compromise, the Justice Department would have to disclose the number of requests it made for information concerning different targeted people in the United States, but not including the communications subscriber information that makes up the bulk of such requests.

Those who receive such letters would be allowed to consult a lawyer and challenge the requests under a new judicial review process.

But critics said those controls were more cosmetic than real. A recipient wishing to reveal only the receipt of a security letter would have to prove that disclosure would not harm national security or diplomatic relations or endanger any lives or public safety, while the government can merely assert disclosure would have those effects.

A White House document shows that executives from big oil companies met with Vice President Cheney's energy task force in 2001 -- something long suspected by environmentalists but denied as recently as last week by industry officials testifying before Congress.

The document, obtained this week by The Washington Post, shows that officials from Exxon Mobil Corp., Conoco (before its merger with Phillips), Shell Oil Co. and BP America Inc. met in the White House complex with the Cheney aides who were developing a national energy policy, parts of which became law and parts of which are still being debated.

In a joint hearing last week of the Senate Energy and Commerce committees, the chief executives of Exxon Mobil Corp., Chevron Corp. and ConocoPhillips said their firms did not participate in the 2001 task force. The president of Shell Oil said his company did not participate "to my knowledge," and the chief of BP America Inc. said he did not know.

Chevron was not named in the White House document, but the Government Accountability Office has found that Chevron was one of several companies that "gave detailed energy policy recommendations" to the task force. In addition, Cheney had a separate meeting with John Browne, BP's chief executive, according to a person familiar with the task force's work; that meeting is not noted in the document.

The task force's activities attracted complaints from environmentalists, who said they were shut out of the task force discussions while corporate interests were present. The meetings were held in secret and the White House refused to release a list of participants. The task force was made up primarily of Cabinet-level officials. Judicial Watch and the Sierra Club unsuccessfully sued to obtain the records.

Sen. Frank Lautenberg (D-N.J.), who posed the question about the task force, said he will ask the Justice Department today to investigate. "The White House went to great lengths to keep these meetings secret, and now oil executives may be lying to Congress about their role in the Cheney task force," Lautenberg said.

Lea Anne McBride, a spokeswoman for Cheney, declined to comment on the document. She said that the courts have upheld "the constitutional right of the president and vice president to obtain information in confidentiality."

The executives were not under oath when they testified, so they are not vulnerable to charges of perjury; committee Democrats had protested the decision by Commerce Chairman Ted Stevens (R-Alaska) not to swear in the executives. But a person can be fined or imprisoned for up to five years for making "any materially false, fictitious or fraudulent statement or representation" to Congress.

Alan Huffman, who was a Conoco manager until the 2002 merger with Phillips, confirmed meeting with the task force staff. "We met in the Executive Office Building, if I remember correctly," he said.

A spokesman for ConocoPhillips said the chief executive, James J. Mulva, had been unaware that Conoco officials met with task force staff when he testified at the hearing. The spokesman said that Mulva was chief executive of Phillips in 2001 before the merger and that nobody from Phillips met with the task force.

Exxon spokesman Russ Roberts said the company stood by chief executive Lee R. Raymond's statement in the hearing. In a brief phone interview, former Exxon vice president James Rouse, the official named in the White House document, denied the meeting took place. "That must be inaccurate and I don't have any comment beyond that," said Rouse, now retired.

Ronnie Chappell, a spokesman for BP, declined to comment on the task force meetings. Darci Sinclair, a spokeswoman for Shell, said she did not know whether Shell officials met with the task force, but they often meet members of the administration. Chevron said its executives did not meet with the task force but confirmed that it sent President Bush recommendations in a letter.

The person familiar with the task force's work, who requested anonymity out of concern about retribution, said the document was based on records kept by the Secret Service of people admitted to the White House complex. This person said most meetings were with Andrew Lundquist, the task force's executive director, and Cheney aide Karen Y. Knutson.

According to the White House document, Rouse met with task force staff members on Feb. 14, 2001. On March 21, they met with Archie Dunham, who was chairman of Conoco. On April 12, according to the document, task force staff members met with Conoco official Huffman and two officials from the U.S. Oil and Gas Association, Wayne Gibbens and Alby Modiano.

On April 17, task force staff members met with Royal Dutch/Shell Group's chairman, Sir Mark Moody-Stuart, Shell Oil chairman Steven Miller and two others. On March 22, staff members met with BP regional president Bob Malone, chief economist Peter Davies and company employees Graham Barr and Deb Beaubien.

Toward the end of the hearing, Lautenberg asked the five executives: "Did your company or any representatives of your companies participate in Vice President Cheney's energy task force in 2001?" When there was no response, Lautenberg added: "The meeting . . . "

"To be honest, I don't know," said BP America chief executive Ross Pillari, who came to the job in August 2001. "I wasn't here then."

Shell Oil president John Hofmeister, who has held his job since earlier this year, answered last. "Not to my knowledge," he said.

[New homes sales in October reached their lowest level in 19 years. Platinum, crucial for today’s generation of fuel cells, hit a 25 year high this week, and now gold is at an 18 year high. An Iranian oil bourse is set to open in March, and will trade petroleum commodities in Euros. GM is cutting 30,000 jobs. Time to buy up a few more bags of dried lentils and another sack of rice, and a dig a root cellar. –JAH]

LONDON, Nov 25 (Reuters) - Gold hit fresh 18-year peaks on Friday as buying picked up in Japan after a holiday, but traders may have to wait until next week to take out the $500 an ounce target when U.S. markets reopen.

Gold peaked at $496.75 a troy ounce in early trade, its firmest since December 15, 1987. By 1513 GMT, it was quoted at $495.50/496.30 an ounce, up from the previous day's late quoted $493.10/493.90.

Most dealers expected the metal to stall just below $500. U.S. markets, closed on Thursday and Friday for the Thanksgiving holidays, are due to reopen on Monday.

"The funds are still happy to play around at these levels," said Darren Heathcote, head of trading at N M Rothschild in Sydney. "They expect us to look to test the upside a little bit but I don't necessarily at this stage think we are going to do $500."

Few doubted the metal would fail to test this psychologically important level soon, as more and more investors diversify into precious metals amid worries about inflation and geopolitics.

"The $500 level continues to look achievable soon, but we think this has become more of a self-fulfilling prophecy," Ingrid Sternby of Barclays Capital said.

A breach of that level could trigger some profit-taking by investors who bought into the rally early on, but gold could spend a longer time above $500 this time round.

In December 1987, bullion held above $500 for just one day, while in early February 1983 it managed a few attempts, peaking at $509 before subsiding to around $340 by the end of that year.

The higher prices levels have nevertheless taken their toll on key Asian consumption, with holders of the metal dishoarding gold bars, jewellery and scrap.

Jewellery shops in India, the world's top gold consumer, were reported to be sitting on piles of unsold stocks. Imports into Ajhmedabad, a leading bullion importing centre in western India, have fallen to about 150 kg a day compared with 1,200 kg usually sold at this time of the year -- an auspicious period for marriages.

Other precious metals were firm, with platinum group metals aided by gains in Japanese futures.