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Reflections on the Saudi Wars

Meet the Doomers

It was early 2007, and I was riding high at The Oil Drum. I had written a number of articles on energy policy, and a consistent theme of mine was that biofuels weren’t going to replace our current level of fossil fuel usage.  For the most part these essays were very well-received, until I turned my attention toward the topic of oil production in Saudi Arabia.

Realize that while there is a diverse readership at TOD, there are quite a few very vocal contributors who are ‘doomers.’ What exactly is a doomer? Doomers believe that peak oil will inevitably lead to a Malthusian collapse of society. Many cheer for stories that support their idea of doom (e.g., “biofuels will not save us”), but they can be downright vicious if what you are writing implies that things may not be exactly as bad as they think. The latter was the case with my Saudi essays.

Matt Simmons and Saudi

I have been highly interested in what is going on with Saudi oil production for a long time. Saudi has a tremendous amount of economic leverage because of their oil production, and if their production declined sharply, then a lot of doomer points would start to look more plausible. Thus, I am keenly interested in understanding the true situation in Saudi. This was one of my primary motivations for reading Twilight in the Desert.

Twilight was published in 2005, and argued for a near-term collapse in Saudi oil production, with an inevitable price shock to follow. Following publication of the book, Matt Simmons made a $10,000 bet with New York Times columnist John Tierney that oil prices in 2010 would average over $200/bbl (see the Simmons-Tierney bet). This bet is useful for understanding the time frame Simmons had in mind for a Saudi collapse; certainly by now we would be in the midst of a full-fledged Saudi production collapse.

Given his message, it should come as no surprise that Simmons has gained quite a following among the doomers. He is held in very high regard by many at TOD, and a number of people have used his work as a jumping off point for their own claims of a Saudi collapse. And in late 2005 when Saudi production began to fall, it seemed to many that Simmons’ analysis had been spot on and very timely. The bandwagon began to fill up; the decline had begun and Simmons’ star was on the rise.

The Saudis maintained that the declines were voluntary because the world oil markets were oversupplied. But they would say that, wouldn’t they? Or would they? I went back and forth on that point; I could see pros and cons either way. But the doomer contingent had decided: The Saudis were bald-faced liars. I lost count of how many times I saw the Saudi Oil Minister accused of lying when he maintained that the declines were voluntary, because the doomers “knew” good and well they weren’t.

I Had My Doubts

I was especially curious to get to the bottom of whether Saudi was on the brink of a production collapse. Saudi production fell from the end of 2005 through the end of 2006 by one million bpd even as oil prices were rising. But I started really trying to get my head around this issue, and the more I looked, the more I was convinced that the Saudis were not lying. The declines did appear to be voluntary.

I laid out much of my reasoning in When Will Saudi Arabian Oil Production Peak? My position had three major points. First, worldwide crude inventories were at record highs and rising when the Saudi cuts began. We had this information directly from the OECD, but I also found news accounts of this coming from important non-OECD consumers like China and India.

Second, I took a long hard look at one of the major tools being used to project that Saudi had peaked. The tool was called Hubbert Linearization (HL), and I tested it first by plugging in historical data to see if it would have predicted previous peaks. In the case that was being used as a proxy for Saudi – Texas – it would have predicted peak production 16 years too early (as shown in the previous link). It would have also had a large degree of uncertainty until about 5 years after the peak. So for 21 straight years, one could have made the argument that Texas had peaked in that particular year on the basis of the HL.

Worse, I found that it would always predict a peak even if I fed the model an infinite series of constant, or even mildly rising production rates. And as more data was fed to the model, it predicted higher and higher recoverable reserves. In the case of Texas, what was predicted to be recovered in 1960 was far lower than what has been produced to date.

HL was the mathematical version of a dowsing rod. There was so much wiggle room that you could predict peak based on very liberal criteria. For many doomers, 2005 was that year, and I received a great deal of verbal abuse and hate mail for pointing out that the technique didn’t really work. I documented some of that in Peak Oil and the Lunatic Fringe, and that led to me taking an extended leave from TOD. (I had to block two regular TOD contributors because they bombarded me with e-mails over this).

There was one final point that convinced me that Saudi production declines were probably voluntary. First, it is true that Saudi reserves are not an open book to outsiders. They have withheld detailed data on their reserves since 1982. They raised their reserve estimates by 90 billion barrels in 1990, once again leading to chants of “Liar, Liar” about their reserve numbers. Presently their reserves are estimated to be 267 billion barrels. Doomers will tell you that this is laughable. The HL technique was pointing at a remaining reserve number of only 70 billion barrels.

However, I did a little sanity check on this number (a more detailed analysis than what follows is here). It is true that Saudi stopped publishing detailed data in 1982, but prior to that their reserves were an open book. In 1982, their reserves were estimated to be 164.6 billion barrels. Even if I assumed no new discoveries and just subtracted subsequent production, I came up with 95 billion remaining barrels – already well above the HL prediction.

But of course they would have had new discoveries as well and technology has increased the amount of oil that can be recovered. Look at what happened in the U.S over that same period of time. In 1982, U.S. reserves were estimated at 27.9 billion barrels. Over the next 24 years U.S. production was 56.9 billion barrels. Yet in 2005, U.S. reserves were still 21.8 billion barrels. So over that 24 year-period the U.S. produced 57 billion barrels of oil and pulled reserves down by only 6 billion barrels. To me this was another piece of evidence that the HL technique had to be wrong about Saudi.

I also tried to put myself in the shoes of the Saudi Oil Minister. How would I manage their oil? Pretty much just as he was doing it. I wouldn’t manage oil just so American consumers could have cheap gas. I would try to maintain prices at the highest possible level that could be tolerated by the economy. That oil endowment would have to serve future generations, so I would want to maximize the value. That’s a fine line, and if you are too aggressive you can cause economic havoc. But if I saw that global inventories were rising, I would begin to cut production as well to avert a future price collapse.

So my conclusion – which I stated numerous times starting in 2006 was: The Saudi production decline was voluntary, and if global crude inventories starting dropping they would raise production.

The Critics Emerge

If you want to get a real flavor for the kind of trollish commentary I had to deal with over this issue, see the comments following Stuart Staniford’s TOD essay A Nosedive Toward the Desert (…Or, Why the Decline in Saudi Oil Production is Not Voluntary). (By the way, none of this is meant to pick on Stuart. Reasonable people can disagree about the data, and that’s how I would characterize my debate with Stuart. I think his analysis was data-based, unlike many of the others. He was not using the HL as the basis for his analysis, and he did come around to the view that the HL wasn’t useful for predicting a peak).

Stuart called me out in that essay, suggesting that my arguments for why the Saudi decline was voluntary were “completely implausible.” His argument was the polar opposite of mine. He wrote “Declines are rather unlikely to be arrested, and may well accelerate.”

But people really went after me in the comments section. I was dealing with one attack after another not only on TOD, but they even spilled over to other sites. There was this great thread as well at the Peak Oil message board. One commenter who belonged to the “I love HL” and “Saudi has peaked” fan clubs had this to say (among other snarky comments):

Robert Rapier was among the more optimistic (David Cohen being another) regulars at the Oildrum. Those two are in decendence as the very convincing argument for SA decline by Westexas, Stuart, Euran (and tons of others) continue to gain validity.

And then this one, by the same poster (responding to a comment from someone else):

“Robert is way too optimistic regarding SA. I always side with west texas on those debates.”

and so do I, and it appears the majority at the Oildrum agrees that Mr. Rapier is no longer a major player. The ball is definitely in Stuart’s court. I understand Stuart has submitted his analysis to Science magazine for publication.

I was no longer a “major player” because I took the view that Saudi was not on the verge of terminal decline, which a lot of doomers didn’t like. A major player can’t give them an opinion contrary to what they “know.” If they do, they are by definition not a major player. Well, I would just have to settle for the consolation prize of being correct.

Saudi Production Turns Around

Look at what has happened since Stuart’s post. When Stuart wrote Nosedive in March 2007, production (C+C) in Saudi was 8.6 million bpd (Data from the EIA). I predicted that the declines would stop by summer, and little did we know that when Stuart published that essay, declines had just stopped and would be stable until late summer before beginning to rise.

The Saudis had production back above 9 million bpd by December 2007, and by July 2008 they had production at 9.7 million bpd – the highest level in almost 30 years (and without the aid of some of the major new projects that were expected to bump production a little). Their production then pulled back after prices collapsed. Just the fact that production flat-lined for 7 months with no new major projects coming on says without a doubt they were sitting on spare production when I was arguing that they were. If they hadn’t been, they would have declined a bit each month and could have only reversed that by bringing new projects online.

One argument that many people made for a permanent decline was that if Saudi had spare production they would have brought it online in 2006-2007 as prices climbed. As I replied at the time “Not if inventories are full.” (Of course Saudi production rose with the price of oil in 2008, and hit 9.7 million bpd in the same month that oil prices hit $147). This argument (and I am not naming names, but many of you will know who I am talking about) goes like this: “If Saudi had just kept producing at their 2005 levels, they would have produced X billion more barrels and made XX billion more dollars. Thus, it is implausible that their declines are voluntary.”

Later, a friend sent me a paper explaining that Saudi often cuts production in the face of rising prices. That’s because they are looking at data besides prices. See Saudi Production Management.

Motivation

So what’s the point of this post? Am I just gloating? Not really, but after some of the treatment I received as a result of my arguments, I think readers could forgive me for doing so. I have to admit that it wasn’t all bad; I always had supporters as well. It is just that the kind words of a supporter have less impact than a bitter diatribe and volley of e-mails from someone whose world view you are threatening.

Anyway, three things motivated me to write this post. First, a reader commented after the previous post that they had appreciated the critiques of the HL. That planted the idea for maybe taking a look back at how Saudi production played out following the predictions of imminent doom and my counter-predictions of a production rise.

Second, I have observed that the amnesia and selective memory have really gotten bad on this point. People who made dire predictions seem to have completely forgotten about them, or they rationalize them away by saying that the declines are right around the corner. Or, they say that they knew all along that the decline would really be the plateau we have seen instead of a steep drop – and that the financial crisis would be the real story.

The level of rationalizing has been impressive; I have seen none of the vocal predictors own up to being wrong about this issue. Some people have simply stopped talking or writing about it, but others are still out there making the same sorts of predictions (some even insisting that their predictions of steep declines were correct; that the Saudis are lying about their production).

Finally, today I saw a post over at The Oil Drum by Leanan, the Drumbeat editor who really captured the mass amnesia in a nutshell:

Back then, it was a topic of much debate here. Was Saudi heading for “a nosedive into the desert”? Or would they “turn on the taps” later in the year, proving they were not yet at peak oil?

In reality…neither happened. Production did not crash, nor did it sharply increase.

I did respond by saying I disagreed; that in fact Saudi had increased production by 1.1 million bpd in the 15 months following Stuart’s essay. If over that same time period production had fallen by that amount (which was the magnitude of many predictions), I think we would have agreed that this would have been a crash. So it is hard to argue that a 1.1 million bpd swing in the opposite direction was anything but a sharp increase. But I also thought to myself “I should go ahead and write up my historical perspective on this, which I have never done.”

Conclusion

Something that was repeatedly misrepresented was that this was a debate over the actual peak date of Saudi oil production. It was not. It was a debate over a faulty methodology used to come up with a date that was being heavily promoted.

One thing is clear now in hindsight: Saudi did not go into terminal decline in 2005. Proponents of that theory have now shifted their position to “I will give up the idea that 2005 was the peak when the January-December average production exceeds that of 2005.” That’s wrong on two counts. First, production in 2008 rose hand in hand with oil prices, and by July when prices hit record levels the production rate was at the highest level in almost 30 years. If 2005 was the peak, no way would that have been possible.

Second, they seem to forget their argument. Assume for a moment that Saudi produces at only 90% of the 2005 rate, but do it for the next 40 years. Will the 2005 peakists maintain that 2005 was the geological peak? As I pointed out recently to someone who made that argument (“I am correct that 2005 was the peak until production for a calendar year exceeds 2005 production”) – Saudi production in 1980 and 1981 were both higher than for 2005. By their logic, I must conclude that 1980 was the Saudi peak.

I think ridicule and loss of credibility is inevitable if you are out making predictions based on shoddy analysis – which I felt was the basis for many of the imminent Saudi decline predictions. I believe when you are wrong about something, you try to learn from it so that future projections are better. If you simply rationalize away wrong predictions, you will likely continue to make them. But I have also learned that people using shoddy analyses to make predictions are also unlikely to own up to failed predictions. There appears to be a strong correlation between them embracing shoddy analyses that gives them the “right” answers – and rationalizing when the “right” answers turn out to be wrong.

Finally, while I feel like we won’t see the sharp declines in Saudi production right away, I still don’t like being dependent upon Saudi (or Venezuela) for U.S. crude supplies. I would rather see us proceeding with a plan that discounts their future production. Even if production doesn’t decline sharply, I think Chinese demand will keep pressure on prices, and therefore it would be a good idea if we seriously try to wean ourselves away from oil.

January 3, 2010 Posted by | hubbert linearization, hubbert peak, Matt Simmons, Saudi Arabia | Comments Off on Reflections on the Saudi Wars

Slow Squeeze

I have been thinking a lot lately about the impact of $100+ oil prices on the world economy. Like many others, I am trying to work out the probable implications – for the overall economy, for the U.S. economy, for the energy sector, for my personal finances, and for the average person. I believe we have entered an era of permanently higher oil prices, because 1). Supply and demand are in a very tight balance; and 2). OPEC has been very disciplined about keeping a tight reign on supplies. I just don’t see demanding falling enough, nor supply growing enough, to make a major change in the status quo.

In the course of doing a little research, I ran across a couple of interesting graphs that I want to share. The first comes courtesy of a post by Khebab at Graphoilogy: How Probable is a US Recession if the Oil Supply is Shrinking?


Figure 1. Variations of the per capita GDP per capita and consumed oil barrels.

Note that this data was through 2005, and the trend over the past couple of years has already changed direction. But it shows the difficulty in growing the economy if the oil supply isn’t growing. This is the reason that I recently posed the question of whether peak oil – or even a supply plateau – would cause the U.S. economy to stop growing. I think the trends in the credit and stock markets will continue – at least for a while – if supplies can’t get ahead of demand and oil prices remain extremely high.

The next figure is courtesy of the Wall Street Journal:


Figure 2. The global per capita picture.

This figure shows that per capita consumption growth in the U.S. has slowed to a halt. And while this slowdown has mostly been accompanied by an expanding stock market, I think $100+ oil provides so much headwind that the stock market is going to flounder for a while. I think the U.S. economy is in a slow squeeze (I think Stuart Staniford first coined this phrase) brought on by higher oil prices, which are directly related to stagnant production. As long as oil prices continue to remain at these lofty levels, I don’t see light at the end of the tunnel yet.

On the other hand, based on Figure 1, the global per capita picture may be a good indicator that the markets will continue to fare well in places where global per capita consumption is increasing – especially in net exporting countries like Saudi Arabia and Russia. It may be time for me to start looking at some Russian mutual funds. China has certainly been growing quickly, but high oil prices have the potential to do a lot more damage to the Chinese economy than to the Russian economy – which will likely benefit as long as they remain an exporting country. Brazil would also be an interesting case, as their recent oil discoveries promise to turn them back into an exporting nation.

Of course certain sectors that aren’t especially sensitive to energy prices may fare well. There are lots of companies within the energy sector itself that should provide protection against high oil prices – since they benefit from high oil prices.

March 9, 2008 Posted by | China, investing, oil exports, oil prices, oil production, Russia, Saudi Arabia | 39 Comments

Slow Squeeze

I have been thinking a lot lately about the impact of $100+ oil prices on the world economy. Like many others, I am trying to work out the probable implications – for the overall economy, for the U.S. economy, for the energy sector, for my personal finances, and for the average person. I believe we have entered an era of permanently higher oil prices, because 1). Supply and demand are in a very tight balance; and 2). OPEC has been very disciplined about keeping a tight reign on supplies. I just don’t see demanding falling enough, nor supply growing enough, to make a major change in the status quo.

In the course of doing a little research, I ran across a couple of interesting graphs that I want to share. The first comes courtesy of a post by Khebab at Graphoilogy: How Probable is a US Recession if the Oil Supply is Shrinking?


Figure 1. Variations of the per capita GDP per capita and consumed oil barrels.

Note that this data was through 2005, and the trend over the past couple of years has already changed direction. But it shows the difficulty in growing the economy if the oil supply isn’t growing. This is the reason that I recently posed the question of whether peak oil – or even a supply plateau – would cause the U.S. economy to stop growing. I think the trends in the credit and stock markets will continue – at least for a while – if supplies can’t get ahead of demand and oil prices remain extremely high.

The next figure is courtesy of the Wall Street Journal:


Figure 2. The global per capita picture.

This figure shows that per capita consumption growth in the U.S. has slowed to a halt. And while this slowdown has mostly been accompanied by an expanding stock market, I think $100+ oil provides so much headwind that the stock market is going to flounder for a while. I think the U.S. economy is in a slow squeeze (I think Stuart Staniford first coined this phrase) brought on by higher oil prices, which are directly related to stagnant production. As long as oil prices continue to remain at these lofty levels, I don’t see light at the end of the tunnel yet.

On the other hand, based on Figure 1, the global per capita picture may be a good indicator that the markets will continue to fare well in places where global per capita consumption is increasing – especially in net exporting countries like Saudi Arabia and Russia. It may be time for me to start looking at some Russian mutual funds. China has certainly been growing quickly, but high oil prices have the potential to do a lot more damage to the Chinese economy than to the Russian economy – which will likely benefit as long as they remain an exporting country. Brazil would also be an interesting case, as their recent oil discoveries promise to turn them back into an exporting nation.

Of course certain sectors that aren’t especially sensitive to energy prices may fare well. There are lots of companies within the energy sector itself that should provide protection against high oil prices – since they benefit from high oil prices.

March 9, 2008 Posted by | China, investing, oil exports, oil prices, oil production, Russia, Saudi Arabia | 140 Comments

Slow Squeeze

I have been thinking a lot lately about the impact of $100+ oil prices on the world economy. Like many others, I am trying to work out the probable implications – for the overall economy, for the U.S. economy, for the energy sector, for my personal finances, and for the average person. I believe we have entered an era of permanently higher oil prices, because 1). Supply and demand are in a very tight balance; and 2). OPEC has been very disciplined about keeping a tight reign on supplies. I just don’t see demanding falling enough, nor supply growing enough, to make a major change in the status quo.

In the course of doing a little research, I ran across a couple of interesting graphs that I want to share. The first comes courtesy of a post by Khebab at Graphoilogy: How Probable is a US Recession if the Oil Supply is Shrinking?


Figure 1. Variations of the per capita GDP per capita and consumed oil barrels.

Note that this data was through 2005, and the trend over the past couple of years has already changed direction. But it shows the difficulty in growing the economy if the oil supply isn’t growing. This is the reason that I recently posed the question of whether peak oil – or even a supply plateau – would cause the U.S. economy to stop growing. I think the trends in the credit and stock markets will continue – at least for a while – if supplies can’t get ahead of demand and oil prices remain extremely high.

The next figure is courtesy of the Wall Street Journal:


Figure 2. The global per capita picture.

This figure shows that per capita consumption growth in the U.S. has slowed to a halt. And while this slowdown has mostly been accompanied by an expanding stock market, I think $100+ oil provides so much headwind that the stock market is going to flounder for a while. I think the U.S. economy is in a slow squeeze (I think Stuart Staniford first coined this phrase) brought on by higher oil prices, which are directly related to stagnant production. As long as oil prices continue to remain at these lofty levels, I don’t see light at the end of the tunnel yet.

On the other hand, based on Figure 1, the global per capita picture may be a good indicator that the markets will continue to fare well in places where global per capita consumption is increasing – especially in net exporting countries like Saudi Arabia and Russia. It may be time for me to start looking at some Russian mutual funds. China has certainly been growing quickly, but high oil prices have the potential to do a lot more damage to the Chinese economy than to the Russian economy – which will likely benefit as long as they remain an exporting country. Brazil would also be an interesting case, as their recent oil discoveries promise to turn them back into an exporting nation.

Of course certain sectors that aren’t especially sensitive to energy prices may fare well. There are lots of companies within the energy sector itself that should provide protection against high oil prices – since they benefit from high oil prices.

March 9, 2008 Posted by | China, investing, oil exports, oil prices, oil production, Russia, Saudi Arabia | 20 Comments

Future Reserves

Just going through some files on my hard drive, and I ran across the following story. Unfortunately, I don’t have the source. But it’s an interesting look at where projected future oil reserves are expected to come from. It also reinforces the difficulty that the international oil companies are going to have replacing their reserves – as most of the remaining reserves are in the hands of national oil companies.

Who Will Supply the World?

Africa

The continent has about 10 per cent of proven global oil reserves and 8 per cent of the world’s gas. The biggest oil producers are Nigeria, Algeria, Libya and Angola, which account for roughly three- quarters of Africa’s oil production. West Africa has become a focus for exploration and has attracted huge investment, such as BP’s dollars 900m deal with Tripoli. The US is expected to buy about 25 per cent of its oil from the area within the next 10 years, up from 15 per cent, which accounts partly for an increase in US military cooperation with African states. China is also securing exploration and drilling licences.

Saudi Arabia

The kingdom accounts for 19 per cent of world oil exports. Many analysts expect it to supply a quarter of the world’s added production over the next few years. And as the only producer with significant excess capacity, it has played a crucial role in alleviating temporary supply disruptions. The Saudis won’t say how much oil they are extracting from individual wells, or what reserves remain in individual oil fields. But the total amount that the kingdom produces has been declining, down a million barrels a day over the last two years. Giant oil reserves were discovered six years ago in the vast desert known as the Empty Quarter. According to estimates, the new fields could produce up to 2.2 million barrels a day for another 50 years.

Iran

Less than 10 per cent of its territory has so far been prospected for oil. Given adequate investment and technological modernisation, Iran could more than double its present production levels to eight million barrels a day, a capacity it had in the early 1970s when oil prices hovered around dollars 11 per barrel. In real purchasing power, today’s oil price is cheaper than it was then.

Siberia

The discovery of new fields in Eastern Siberia could provide between two and three billion tons of oil. In the past two to three years the Natural Resources Ministry has offered a significant number of fields in tenders in Sakha Republic (Yakutia) and Irkutsk region.

China

In the next decade, PetroChina plans to increase its proven oil reserves to 100 million metric tons a year at its Daqing oilfield to meet rising energy demand.

Iraq

Important new fields are being prospected all the time, most notably and recently in the Anbar province, where al-Qaeda forces have been making their strongest challenge. Iraq has the third largest oil reserves of any nation, and that’s if you take the lowest estimate of its reserves. Its oil is of purer quality, and nearer to the surface, than that of many of its rivals. Basra could be as rich as Kuwait in five years.

Brazil

A huge offshore oil discovery could help Brazil join the ranks of the world’s major exporters, but full-scale extraction is unlikely until 2013 and will be very expensive. The “ultra-deep” Tupi field off the coast of Rio de Janeiro could hold eight billion barrels of recoverable light crude, and initial production should exceed 100,000 barrels daily.

Brazilian state oil company Petrobras will start pilot pumping in 2010 or 2011, but full production will take several more years. Getting the oil out will be an expensive and formidable challenge because the oil is so deep under the earth’s surface. The lag time before production means that any impact on world oil prices won’t come soon.

January 31, 2008 Posted by | Africa, Brazil, China, Iran, Iraq, Saudi Arabia | 18 Comments

Saudi Aramco Delays Khursaniyah

It never ceases to amaze me just how quickly people can develop amnesia. Take the case with oil production in Saudi Arabia. A year ago, their production was declining. A number of people argued that this was because they were experiencing an irreversible, involuntary, geological decline. My position was always that the evidence looked to me like they were managing their production to keep oil prices high, and that they had spare production.

By March of 2007, their production had stopped declining, which was supportive of my theory. After all, if their decline was involuntary, how can we explain that production suddenly flat-lined, and remained steady for the next 10 months? Furthermore, in March I said that I expected Saudi to raise their production later in the year when demand picked up.

What happened? Saudi did start to increase production in the fall, and those arguing for the geological decline suddenly developed amnesia. “Well, we always knew that they had some spare capacity.” But my favorite was “We knew Khursaniyah was going to come online in the 4th quarter, and that’s where this production is coming from.” I challenged several people on this claim, asking for evidence that the production increase came from the Khursaniyah startup. The best anyone could come up with was that the new production was coming from Khursaniyah, because where else would it come from (since Saudi had no spare capacity)? This is of course just circular logic, and a prime example of failing to think critically and skeptically about the situation.

Well, today Saudi answered the question on Khursaniyah:

Saudi Aramco Delays Production Start From Khursaniyah

Jan. 3 (Bloomberg) — Saudi Aramco, the world’s largest state- owned oil company, delayed the start of production from its 500,000 barrel-a-day Khursaniyah oil-field project and said it will meet market demand with existing spare capacity.

“Saudi Aramco stands ready to meet market demands with ample spare capacity, including 1 million barrels of Arab Light crude,” the company said in an e-mailed statement today.

Khursaniyah will commence “upon completion of commissioning activities,” Saudi Aramco said. The company didn’t say when production would start, after it missed a December deadline.

But amnesia comes in very handy, and I doubt too many will attach much significance to this, conveniently forgetting that this was their explanation for the 4th quarter Saudi production boost.

I do maintain that extra crude capacity is in very short supply, and will remain so as far out as I can see. While I don’t think oil production has quite peaked, I think increasing demand from India and China will eat up any new production that comes online. Thus, I think the evidence continues to favor Peak Lite – where new production can’t come online fast enough to meet demand.

January 3, 2008 Posted by | oil production, Peak Lite, Peak Oil, Saudi Arabia | 23 Comments

The Bet

Background

In December of 2006, there was a lively discussion at The Oil Drum about what would happen with oil prices in 2007. Although almost everyone felt that oil prices would rise, some argued that oil prices would rise to $100 by the end of 2007. A major reason for this belief was that Saudi Arabian oil production was declining at the time – and many felt like this meant that oil production in Saudi Arabia had peaked.

While I felt that IF Saudi production continued to decline, we would certainly see oil prices go to $100, I didn’t think it likely that they were experiencing involuntary decline. Therefore, I offered to bet $1,000 that we would not see oil reach $100 before the end of 2007. I offered this as a single bet of $1,000, or 10 bets at $100, or anything in between. For a couple of weeks I had no takers, but then on 12/21/06 (incidentally my 40th birthday) I received an e-mail from someone offering to take the entire $1,000 bet.

A bit of negotiation ensued to make sure that we were very clear on terms and definitions. The terms of the bet were: If front month WTI reached $100 at any point in 2007, I would immediately pay off $1,000. If not, then I would collect $1,000 on January 1, 2008. We would not complicate the bet by considering a rising or falling dollar. By January 7, 2007 we had each transferred $1,000 into the PayPal account of Super G at The Oil Drum.

My expectation was not that oil prices wouldn’t go higher. I have invested with the expectation of consistently higher oil prices for the past 5 years. In fact, I predicted to my then boss after oil first crossed $50 that this move was due to fundamental reasons that were not likely to subside. So I am long-term bullish on oil prices. While I didn’t feel that we would see $100 oil in 2007, I could definitely see that threshold being reached in 2008 (and as of now that level has been reached). As a result, I have consistently turned down offers to bet against $100 oil for 2008, even during the summer when oil was still trading in the $60’s (about where it started the year). And I wouldn’t bet against $200 oil for 2010.

My Betting History

I have lost two bets in my life. The first time, I was in the 6th grade, and I lost a quarter betting a friend that my elementary school would win a track meet. I can still remember how I felt when I handed him that quarter. The second time was about 10 years later, and cost me a little more money. I bet my best friend that the Broncos would beat the Redskins in Superbowl XXII. We bet $5 a touchdown, and the Broncos scored a touchdown on their first play from scrimmage. I was feeling pretty good at that point. But it was all downhill from there. The Redskins proceeded to score six unanswered touchdowns, at that time a Superbowl record.

It seemed like karma was trying to tell me something: Don’t bet. And that’s the primary reason I haven’t lost more bets. I simply do not bet. But 20 years after I lost that Superbowl bet, I made an exception this year – the $1,000 bet that WTI would not reach $100 this year. Once again, it seemed like karma sent me a warning, as oil came within a whisker of $100.

About My Betting Partner

Many people have asked about my betting partner. He has been silent throughout, but we have exchanged a number of e-mails. So, here are some excerpts about him, in his own words:

I still live, and I still lurk! (I’ve been an Internet lurker for 21 years; my only Usenet posting was about upgrading the audio circuitry of a Sony DVD player!)

I have to confess that when I agreed to the wager I had no idea what the price of oil would do this year, and as recently as a couple months ago I assumed there would be no chance of a run at $100 before December.

I tried to bet John Tierney last year that Natgas would go to $20.00, but he never got back to me. (fortunately, as it turned out).

I’m guessing that between exponentially increasing demand from China/India and exponentially increasing chaos in the Middle East, $100/bbl should be easy even in the absence of peak oil.

Let panic and chaos in the international oil market begin!

Piercing the veil on the mystery man-I’m a document analyst at Chemical Abstracts in Columbus, OH. [RR note: I deleted one sentence here as it may have enabled him to be identified, and I don’t know that he wants that.] If I see a patent from Chevron, Shell, et. al, I transfer it immediately to the petroleum section!

Risk Factors

I identified some risk factors from the start. A continued Saudi production decline would almost certainly lose me the bet. But my belief that the Saudi decline wouldn’t continue was the primary driver behind the bet. But there were other risk factors. Here is what I wrote regarding the risk factors:

There are two scenarios in which I could see myself losing the bet. First, if we really are at peak now, and this becomes obvious as demand picks back up, then I could easily lose the bet. The other way is through a series of unfortunate events. If we have a bad hurricane season in the Gulf of Mexico, combined with terrorist attacks or pipeline problems (or any number of things), then I could lose the bet. But I think the odds of either of these is low enough to warrant the risk.

The Hedge

I also identified areas in which I was hedged. I own oil company stock that generally rises with the price of oil. So that’s a hedge. And in fact, while oil ended the year over $90, my company stock appreciated by more than 25% for the year.

Of course if the money was a big issue, I could have made another hedge. I could buy a contract as oil closed in on $100. If it rose to $100 from there, I lose the bet but earn money on the contract. If it fell, I win the bet but lose money on the contract. This is a sort of spread strategy I would use if I actually had big money on the line. But I didn’t, so I didn’t use it.

Investing versus Gambling

From the outset, I said that I invest, but I don’t gamble. Without a doubt, skill and luck are involved in both gambling and investing, but gambling is weighted more toward luck. Here is an example of the difference to me. If I make a bet that oil prices will be higher or lower a week from now, per my criteria that is gambling. In the short term, oil prices can easily swing either way. But if I make a bet that oil prices won’t rise by $20 in the next month, that would fall more along the lines of what I consider an investment. The biggest difference there is in the probabilities involved. A bet on a $20 rise in a month would suggest a significant shift in fundamentals, whereas a bet on up or down in a week does not require that shift. I would probably have a 95% probability of winning straight-up bet on the $20 rise but only about 50% odds of winning the bet on simply higher or lower prices in a week.

In January of 2007, crude traded at $60. If you look historically, a move to $100 in one calendar year would be a very rare percentage move. Therefore, taking history into account, I deemed such a move unlikely. Of course if oil production has peaked, price history is not a useful guide. But in January, the market placed a low probability on oil reaching $100 in 2007. In a recent e-mail to me, my friend Nate Hagens – who formerly traded for a living – reiterated that point:

I have been very bullish on oil but even I would have made the bet you did – no brainer – the option vol gave that about 1 in 12 chance of happening when you made the bet…

If I went to Vegas, would they give me even odds if I wanted to bet that oil wouldn’t reach $100 in 2007? Would the market give me those odds? Of course not. But I got even odds on the bet. So, I had history behind me, I was getting lopsided odds in my favor, and I felt very strongly that my primary risk factor – continued Saudi declines – would not go against me. To me, that’s a good bet. I don’t consider it gambling, because the odds are stacked in my favor.

Now, look at it from the other side. Let’s say I am convinced oil will rise to $100 in 2007. If I am, and the market is suggesting that there are 12/1 odds against, I buy a futures contract, and I make more than 10 times my $1,000 investment for being correct. Maybe this is why people were reluctant to take the bet – they didn’t prefer to give even odds when they could get much better odds in the market. That did occur to me, and would be a very valid reason not to take my bet, even if you were certain that oil would reach $100 in 2007. Of course my betting partner was aware of the odds, and just saw this as a bit of fun. And if he put a second $1,000 in oil futures, he is way up even after losing the bet.

I am not risk averse, but I stack the odds in my favor whenever I can. I understand probability and I don’t hesitate to put capital at risk if I feel the odds are favorable enough. This is primarily why I don’t invest in commodities. The reward is great, but so is the risk. And the time frames are generally not long enough for my long-term strategy. I try to look at fundamentals over a long period of time. I don’t buy a stock and sell it next year. I did when I was younger, but too many little losses affected my returns. Now, I buy according to how I see the long-term fundamentals, and if the stock goes down 20% in the next 6 months, I don’t sweat it. Exceptions of course being that the long-term outlook has substantially changed.

What Happened

Amazingly enough, none of the risk factors I identified transpired, yet I still nearly lost the bet. Saudi production stopped falling shortly after the bet was made. There were no major attacks on infrastructure, and the hurricane season didn’t affect any production for an extended period of time. Instead, there was a rash of other factors.

Primarily, whether you believe OPEC could produce more or not, their foot-dragging definitely spooked the markets. The fact that they waited until late in the year to start increasing production really fuelled speculation that they were tapped out. Worldwide inventories were pulled down in the 3rd quarter, but for the most part they weren’t unusually low. They were definitely lower than they were, but they were being pulled down from historically high levels.

The general consensus back in August was that oil might reach $80 this year, and perhaps $100 next year. But market sentiment shifted over the next 3 months. I think the ASPO conference in October really raised Peak Oil awareness. There were more references to Peak Oil in the media. It seemed that a critical mass shifted toward the view that we have peaked, or are near peaking. And once widespread realization of Peak Oil hits the markets, $100 oil will be cheap.

As market sentiment was shifting, there were a series of bullish events. For a while, it seemed as if every piece of news favored higher oil prices. Interest rates were cut. Prices spiked. U.S. inventories had some surprising crude draws. Prices spiked. Mexico had to halt production due to a storm. Prices spiked. Each week there was a new event that contributed to another $3-5 spike. OPEC continued to insist that there was nothing they could do, as “the spikes were not based on supply and demand.” Of course if they had the production to spare, it doesn’t take a rocket scientist to see that they could have cooled off the markets by putting more crude out there – whether or not they thought it was needed. Oversupply the market, and prices come down.

The net result, regardless of the cause, was that front month WTI topped out at $99.29 on November 21st. I maintained at that time that I did not believe that price was sustainable in the short term, and even if prices topped $100 I thought they would give up at least $10. Why? Not because I don’t think oil is intrinsically worth $100. No, the reason I think $100 was overextended at that time was that 1). I didn’t believe the fundamentals had dramatically changed enough over 3 months to justify a 30% run-up; 2). I felt that OPEC had some spare capacity that they could bring on in response to higher prices; and 3). The market had not had time to absorb the impact of higher prices on demand. This latter point is important, because we did see signs of demand destruction – which you would expect – at these higher prices.

The IEA started revising their demand projections downward, and at the same time OPEC started pumping more oil. This did impact prices as I had expected – they corrected down to about $88 before making another run at $100 late in the year.

So, while I came within a whisker of losing the bet, and the outcome was still uncertain right up to the end, following the closing on New Year’s Eve my opponent wrote to me and conceded the bet:

Hi Robert,

I hereby concede.

At this point I’m left only with the faint hope of skyrocketing natgas prices to soothe my battered investor’s psyche.

Have a great new year!

What to Expect in 2008

I think there are a lot more uncertainties than there were a year ago. To me, there are a few questions. First, how will oil prices hovering around $100 affect worldwide demand? I don’t think we have had enough time to gauge that. Second, can OPEC bring on more production if demand does continue to grow? Bottom line, I am not making any predictions for 2008 as I think the demand question is a real wild card. I do expect that we will go ahead and crack $100 [I wrote this on New Year’s Day, and we reached $100 the next day], and if demand is not significantly affected by $100 oil, then it will probably advance another 20-40%.

But, no more bets from me. As oil closed in on $100, I was actually waking up during the night and checking on oil prices. I was dreaming about oil prices. But, now that 2007 is over, I say “Bring on $100 oil”, as I think this is the only way we are going to stretch out our oil supplies by getting people to conserve.

Happy New Year to all, and best wishes for 2008.

January 3, 2008 Posted by | investing, oil prices, Saudi Arabia | 2 Comments

The OPEC Showdown

It has been clear for some time that OPEC members are deeply split over whether $100 oil is good for them in the long-term. Saudi Arabia, having been in this game a long time, probably understands better than most the effect that high oil prices will have. While short-term gains will be great, ultimately economies will falter and demand for their product will be destroyed. Iran and Venezuela, on the other hand, probably couldn’t care less whether the U.S. economy chokes on these prices. The Financial Times covers the impending showdown:

Opec rivals in sequel to oil production drama

The Opec summit show is over and the performers have left town. But the preparations for Act Two, the meeting of oil ministers in Abu Dhabi on December 5, are already under way.

The scene is being set for a contest over whether to accept an oil price close to $100 a barrel or try to bring it down by raising production, with Iran and Venezuela on one side and Saudi Arabia on the other. The ministers’ decision will be an important signal of whether the influence of Saudi Arabia, traditionally the group’s most powerful member, is on the wane.

I think that Saudi will win this round and get a compromise production increase, but this disagreement will continue to fester.

“They [Saudi Arabia] have been trying to soothe the market’s worries for two reasons: because they think that the high oil price will hurt the economies of consuming countries, and more importantly, because they think it will hurt demand for oil in the medium to long term,” she said.

Iran and Venezuela have no such concerns. Their priority is to maximise short-term revenues. Their industries probably lack the capacity to pump any more oil, so they would not benefit from any increase in Opec’s production limits. Unlike Saudi Arabia, they take little interest in safeguarding the health of the US economy.

Saudi Arabia demonstrated at the previous Opec meeting, in September, that it could still get its way in spite of strong opposition from other members.

Ali Naimi, the Saudi oil minister, convinced the rest of Opec to agree an output increase of 500,000 barrels a day, as a contribution to the world’s economic stability.

But resistance from even Saudi Arabia’s traditional allies, such as Qatar, highlighted its growing difficulties in managing Opec.

And if Saudi does want a production increase, they may end up shouldering the bulk of the increase:

There are signs that Saudi Arabia has been going it alone in increasing production; analysts estimate that it has accounted for the lion’s share of the Opec production increase agreed in September, and perhaps even more.

Mr Naimi said recently that Saudi Arabia’s output was now 9m barrels per day. Edward Morse, chief energy economist of Lehman Brothers, says that is about 600,000 b/d more than estimates of Saudi production over the summer.

If they don’t (or can’t) start to bump up production faster than they are currently doing so, by next summer we may think $100 oil is cheap.

November 26, 2007 Posted by | Iran, oil prices, oil production, OPEC, Saudi Arabia, Venezuela | 7 Comments

How Would You Manage Saudi’s Reserves?

Too often people try to interpret comments or actions from Saudi Arabia, without attempting to understand the issues from their perspective. I think it is a useful exercise to ask whether their specific actions or comments make sense; 1). From the Saudi perspective, and 2). In the context of the market.

For example, when Saudi said that they were having trouble finding buyers for their crude in the spring of 2006, I don’t simply look at the price and dismiss those comments as lies (as many did). I do a bit of digging. And when I uncovered that OECD crude inventories were high and rising at the time, that Iran said essentially the same thing at the same time, that any of Saudi’s customers could just pick up the phone and call then to confirm – yet nobody came out and suggested that they didn’t really have it – then I concluded that those comments were consistent with the available evidence available. (The final point is significant, because as soon as Saudi started putting Asian refiners on allocation later in the year, a number of Asian refiners leaked that news to the press. Certainly the same would have been true had Saudi falsely announced that they had crude but no buyers).

I have debated this issue multiple times, for example here, and I don’t intend to do so again. But the issue still comes up on a regular basis – and often in a derisive manner – and I wanted to share the thought process I went through. (Of course I would add that when they started increasing prices later in 2006, the argument that there were no buyers was obviously no longer true).

Along the same theme, I frequently consider how I would manage Saudi’s reserves if I was in the position to do so. I think those who feel Saudi should be pumping all the oil they can at these prices haven’t really thought it through from their perspective. So, let’s go through that thought experiment, keeping in mind:

1). The primary allegiance is to Saudi Arabia.
2). This depleting resource must serve future generations.
3). OPEC must be on board with the decisions.

My primary objective would be to extract the most money I could from the rest of the world, but not so much as to cause a worldwide recession that would destroy demand. So, how would I achieve this? Very cautiously. Each time oil prices moved into new territory, I would seek to stabilize the price for a while so I could judge the impact on the world economy. As long as the world economy could cope with the price, I would continue to let it creep higher.

How would I push the price go higher? By restricting supply. How would I soothe the markets? By adding incremental supply back a little at a time. What would I do if prices spiked high in a short span of time? Well, I would first wait a bit to make sure the price rise was sustained. After all, I can’t react every week to price fluctuations. But if the price rise was sustained – and I had the oil available – I would go ahead and increase production to stop the rise. That would give me a chance to evaluate how the world economy had adjusted to the new price levels.

This is what I would do if I did have the oil. I would have no incentive for ramping production back up quickly and risking a price crash – regardless of the price of oil. My moves would be deliberate and conservative. After all, Saudi is reaping an incredible windfall at current oil prices. But greed is human nature. If I determined that the world can live with $90 oil, I would want to see if the world could stand oil at $120. Wash, rinse, repeat, until I saw the world economy dramatically slowing. That’s where I would back off price by trickling in production.

On the other hand, if I was really out of capacity, and my reserves were truly overstated, my behavior would be somewhat different. First, I still don’t want to panic the world and cause a super-price spike that quickly causes a recession. So, I would engage in a series of delaying tactics. I would want to maintain the status quo as long as possible, because when the truth comes out I will enjoy a brief windfall as prices spike much higher, likely followed by a worldwide recession and potentially the end of the world as we know it. To stall, I would point to other factors as the reason for the price rise (fear, speculation, the weather, etc.) I might make token increases in production in an attempt to placate the market, but I would mostly look for other scapegoats.

But the jig would be up when world oil inventories started getting pulled down into uncomfortably-low territory, prices were spiking, and I didn’t respond with more supply. At that point, the cat is out of the bag. Well, I suppose I might have one more card to play, and that is OPEC. I could let news leak out that Saudi wanted a production increase, but the rest of OPEC outvoted us. After all, Venezuela, Nigeria, and Iran are all on record as saying $100 oil is where they like it. So that could then be my final stalling tactic, but stalling tactics that don’t involve putting more oil on the market won’t stop the steady price climb.

So, how then do I read Saudi’s actions? First, I recognize that they won’t necessarily behave as I would. But that’s all I have to go with. In that case, there are elements of both possibilities in their actions. Saudi was reportedly the driving force behind the recently announced 500,000 bpd increase. The increase wasn’t huge, but this is exactly how I would play it even if I had the reserves and spare capacity, but was trying to avoid crashing prices. (Although if I didn’t have spare capacity, I would not have offered to shoulder the bulk of the increase as they reportedly did).

But it also looks like they are engaging in a series of delaying tactics. They could act on prices at this weekend’s meeting, but they have already announced that they won’t discuss it until their December meeting. They blame speculators, and say there is nothing they can do about prices because the rise isn’t being driven by fundamentals. First, speculators are a part of the reason for the price rise. They aren’t the whole reason, but those who say they have nothing to do with it are also wrong. But Saudi can’t be serious when they say they can’t do anything about price spikes due to speculation. If they wanted to crush the speculation, it would be easy. If you have 2 million barrels of spare capacity, show the world. Push production up to 10 million bpd for a while. The price would come crashing down, which would be contrary in the short term to maximizing your revenues, but you would have eliminated the speculation. After all, there would be no more doubt: You can do what you say you can do.

We are certainly very close, IMO, to the truth. While IEA demand projections have been revised downward due to the high prices, they still show a need for more crude than is currently being pumped. Looking forward, inventories are still projected to fall, albeit not as fast as previously projected. But I will note that projections all year long have been for OECD inventories to crash in the near future, and those projections have been mostly incorrect. Inventories have been pulled down recently, but the dire scenarios we heard about all year long were projections for where inventories would be in the future. (See the EIA’s projection for OECD stocks on Page 17 here, and then look at the IEA’s Oil Market Report to see that what transpired was contrary to those EIA projections).

Those are my thoughts on Saudi production management, and I try to interpret their actions from that perspective. So, how would you manage Saudi production; 1). If you were sitting on top of a 100-year crude reserve; and 2). If you were truly tapped out?

November 18, 2007 Posted by | oil production, oil reserves, Saudi Arabia | Comments Off on How Would You Manage Saudi’s Reserves?

How Would You Manage Saudi’s Reserves?

Too often people try to interpret comments or actions from Saudi Arabia, without attempting to understand the issues from their perspective. I think it is a useful exercise to ask whether their specific actions or comments make sense; 1). From the Saudi perspective, and 2). In the context of the market.

For example, when Saudi said that they were having trouble finding buyers for their crude in the spring of 2006, I don’t simply look at the price and dismiss those comments as lies (as many did). I do a bit of digging. And when I uncovered that OECD crude inventories were high and rising at the time, that Iran said essentially the same thing at the same time, that any of Saudi’s customers could just pick up the phone and call then to confirm – yet nobody came out and suggested that they didn’t really have it – then I concluded that those comments were consistent with the available evidence available. (The final point is significant, because as soon as Saudi started putting Asian refiners on allocation later in the year, a number of Asian refiners leaked that news to the press. Certainly the same would have been true had Saudi falsely announced that they had crude but no buyers).

I have debated this issue multiple times, for example here, and I don’t intend to do so again. But the issue still comes up on a regular basis – and often in a derisive manner – and I wanted to share the thought process I went through. (Of course I would add that when they started increasing prices later in 2006, the argument that there were no buyers was obviously no longer true).

Along the same theme, I frequently consider how I would manage Saudi’s reserves if I was in the position to do so. I think those who feel Saudi should be pumping all the oil they can at these prices haven’t really thought it through from their perspective. So, let’s go through that thought experiment, keeping in mind:

1). The primary allegiance is to Saudi Arabia.
2). This depleting resource must serve future generations.
3). OPEC must be on board with the decisions.

My primary objective would be to extract the most money I could from the rest of the world, but not so much as to cause a worldwide recession that would destroy demand. So, how would I achieve this? Very cautiously. Each time oil prices moved into new territory, I would seek to stabilize the price for a while so I could judge the impact on the world economy. As long as the world economy could cope with the price, I would continue to let it creep higher.

How would I push the price go higher? By restricting supply. How would I soothe the markets? By adding incremental supply back a little at a time. What would I do if prices spiked high in a short span of time? Well, I would first wait a bit to make sure the price rise was sustained. After all, I can’t react every week to price fluctuations. But if the price rise was sustained – and I had the oil available – I would go ahead and increase production to stop the rise. That would give me a chance to evaluate how the world economy had adjusted to the new price levels.

This is what I would do if I did have the oil. I would have no incentive for ramping production back up quickly and risking a price crash – regardless of the price of oil. My moves would be deliberate and conservative. After all, Saudi is reaping an incredible windfall at current oil prices. But greed is human nature. If I determined that the world can live with $90 oil, I would want to see if the world could stand oil at $120. Wash, rinse, repeat, until I saw the world economy dramatically slowing. That’s where I would back off price by trickling in production.

On the other hand, if I was really out of capacity, and my reserves were truly overstated, my behavior would be somewhat different. First, I still don’t want to panic the world and cause a super-price spike that quickly causes a recession. So, I would engage in a series of delaying tactics. I would want to maintain the status quo as long as possible, because when the truth comes out I will enjoy a brief windfall as prices spike much higher, likely followed by a worldwide recession and potentially the end of the world as we know it. To stall, I would point to other factors as the reason for the price rise (fear, speculation, the weather, etc.) I might make token increases in production in an attempt to placate the market, but I would mostly look for other scapegoats.

But the jig would be up when world oil inventories started getting pulled down into uncomfortably-low territory, prices were spiking, and I didn’t respond with more supply. At that point, the cat is out of the bag. Well, I suppose I might have one more card to play, and that is OPEC. I could let news leak out that Saudi wanted a production increase, but the rest of OPEC outvoted us. After all, Venezuela, Nigeria, and Iran are all on record as saying $100 oil is where they like it. So that could then be my final stalling tactic, but stalling tactics that don’t involve putting more oil on the market won’t stop the steady price climb.

So, how then do I read Saudi’s actions? First, I recognize that they won’t necessarily behave as I would. But that’s all I have to go with. In that case, there are elements of both possibilities in their actions. Saudi was reportedly the driving force behind the recently announced 500,000 bpd increase. The increase wasn’t huge, but this is exactly how I would play it even if I had the reserves and spare capacity, but was trying to avoid crashing prices. (Although if I didn’t have spare capacity, I would not have offered to shoulder the bulk of the increase as they reportedly did).

But it also looks like they are engaging in a series of delaying tactics. They could act on prices at this weekend’s meeting, but they have already announced that they won’t discuss it until their December meeting. They blame speculators, and say there is nothing they can do about prices because the rise isn’t being driven by fundamentals. First, speculators are a part of the reason for the price rise. They aren’t the whole reason, but those who say they have nothing to do with it are also wrong. But Saudi can’t be serious when they say they can’t do anything about price spikes due to speculation. If they wanted to crush the speculation, it would be easy. If you have 2 million barrels of spare capacity, show the world. Push production up to 10 million bpd for a while. The price would come crashing down, which would be contrary in the short term to maximizing your revenues, but you would have eliminated the speculation. After all, there would be no more doubt: You can do what you say you can do.

We are certainly very close, IMO, to the truth. While IEA demand projections have been revised downward due to the high prices, they still show a need for more crude than is currently being pumped. Looking forward, inventories are still projected to fall, albeit not as fast as previously projected. But I will note that projections all year long have been for OECD inventories to crash in the near future, and those projections have been mostly incorrect. Inventories have been pulled down recently, but the dire scenarios we heard about all year long were projections for where inventories would be in the future. (See the EIA’s projection for OECD stocks on Page 17 here, and then look at the IEA’s Oil Market Report to see that what transpired was contrary to those EIA projections).

Those are my thoughts on Saudi production management, and I try to interpret their actions from that perspective. So, how would you manage Saudi production; 1). If you were sitting on top of a 100-year crude reserve; and 2). If you were truly tapped out?

November 18, 2007 Posted by | oil production, oil reserves, Saudi Arabia | Comments Off on How Would You Manage Saudi’s Reserves?