I said
yesterday that Saudi Arabia is producing the same amount of oil that they were in April of 2005, when Bush and Abdullah met in Crawford - that the only thing that had changed was that all the prices had gone up. In truth they are producing 100,000 barrels per day less now.
The way Saudi oil production changes looks remarkably like how our interest rates move. Although they have produced in what can be considered a very stable, consistent manner, there are different interpretations of what the smooth, flat numbers mean. Various explanations as to cause have been put forth.
One view, as expressed by a reader yesterday, is that they have the world's only true spare capacity and that they are simply selling to long-term customers in a way that reflects the real supply and demand fundamentals that exist globally.
Another is that the Saudis possess a great ability to store oil in their vast production system and are therefore very able to cover up short-term problems by using this storage capacity as a buffer. Much like how the Chinese simply use a pen to keep their growth numbers so uniform.
Some feel that Saudi Arabian production has already "peaked," that they are currently pumping flat out and will not be able to significantly increase their production capacity. I'm sure by now everyone has heard of Matthew Simmons' book 'Twilight in the Desert.'
Recently the Saudi oil ministry has been working hard in its traditional role of assuring the world that it has plenty of oil to last decades, that more is about to be discovered under their desert, and that they have the ability to pump much more oil and will when it becomes necessary.
Very recently the Saudi Oil Minister Naimi has been stating officially that there is more oil on the market than the world demands and that the elevated price is largely the result of geopolitical tension and rampant speculation. There is some merit to this argument, but I remain unconvinced that it accounts for the entire move in prices over the last 3 years. After all, he has been saying much the same thing while the price per barrel has gone from $30 to $70.
Before this period, for years, there was a semi-official policy within OPEC to give at least lip-service to the notion of keeping oil between $23-$28 for a basket of OPEC-type grades (roughly translating to a $30 Nymex futures price). This, it seems, has been completely abandoned. Have the Saudis, supported by other extremely influential producers like Iran and Venezuela, decided to push the envelope - to test the limits of how much the world will tolerate paying per barrel without inducing demand-destructing recession?
As I said yesterday, I believe what is going on in Saudi's oil fields is one of the most intriguing questions of our time. The goal is for them to move past 12 million barrels per day towards 14. We won't know the answer of whether they can until they do.
My goal here is specifically not to come to any conclusions. I simply want to lay out the groundwork for a fact-based discussion. I have specifically avoided even mentioning "peak-oil" theory, not because it is not valid, but because there are certain definitions that we need to clear up before I think it can be adequately addressed.
There has been an economic theory about oil that higher prices act as an incentive to industry to produce more oil. One thing the graph suggests is that we've entered a period where we can test that theory.
Production takes a lot of work. The Saudis have to do a bunch of exploration and drilling to make up for the rapidly decreasing production stamina of their older fields. They have to un-mothball all the wells that they have been claiming to have been mothballing all these years. More on this and the significance of production vs. the insignificance of reserves next time.