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I've been weighing the figures discussed here and here on my site, and have come up with at least one slightly more positive interpretation of the Saudi numbers -- not enough to avert the main threat if the 14% drop in global output in the month of December is both real and in any way sustained, but enough to perhaps change the options for at least some nations going forward.

King Abdullah of Saudi Arabia has been quoted as saying, in effect, that he has ordered some new finds kept in the ground for the sake of his nation's children and their future.

 While I am not entirely convinced that such a significant Saudi shortfall as 4.9% in one month is simply being "kept in the ground" any more than it was entirely consumed by the Saudi people, the dire global oil situation suggests one strong possibility other than a catastrophic collapse in the nation's production.

First, to be clear, the 14% drop in global oil production in December represented a net drop by producers totaling 90% of world production. The only hopeful news out of that drop is that OPEC only fell 2%, owing to the Saudi reduction in exports, and that the crashing nations, supposedly mostly in Latin America, did not have that far to fall and hence can not reduce net global production much further, no matter how badly their fields may go.

But...

If the Saudis were aware of the international industry's situation (and they very likely were), they might have deliberately and substantially cut back their exports -- "tough love," as it's called in America. In effect, by raising the price of oil now while building reserves in the Kingdom, they can help force a degree of life-saving conservation on the world economy at this point while holding back enough oil to sell later, when the situation becomes really dire.

And matters most likely will become incredibly bad, no matter what. Saudi Arabia has very likely peaked in terms of overall oil production, despite intense efforts within the Kingdom to keep oil flowing. But the Saudis need to feed their people, and major food exporters such as the U.S. are going to need at least some oil. Food for oil looks like a very logical exchange, especially given global food-production issues.

This situation may also explain a number of other national strategies, such as China's decision to keep her rare-earth supplies for internal production. The Chinese may need to trade for both extra food and oil, if only to maintain a safe stockpile, and the U.S. and Saudi Arabia are both apt to be willing to trade in exchange for shiploads of solar cells.

I should add, however, that even if the above possibility proves correct, the conventional food and energy markets are going to be incredibly tough if production continues to collapse. Remember, even if Saudi Arabia might have had a reason to hold back oil and spook the market to a more rational attitude, none of the nations indicated in the JODI data as having their production decimated had any such rationale.

Indeed, many of these countries did not even have data listed for the month of December in the JODI report... just a blank spot for each month.

Which seems almost as ominous as a one-month, 14% crash.

Update: In light of the National Emergency President Obama just declared with regards to Libya, there's a bit more to be said.

First, probably the most responsible thing governments can be doing right now, before all else, is making sure that crops get planted in the Northern Hemisphere before any large agricultural producers can be truly rattled by sharp changes in oil's price or availability. If they are working behind the scenes to do this, well, good for them.

Second, the revolution in Libya is critical because that nation is one area not yet suffering dramatic declines in oil production, and because it produces a great deal of oil that can be processed by refineries in Europe that can not handle heavier, dirtier oils provided by many other sources. Which has no doubt had an effect on the price of oil rising faster than in the U.S. Of course, the fact that the U.S. has fewer people and more oil production than Western Europe, and more waste to cut, has probably also affected those prices.

But overall, that 14% one-month drop bodes ill for us all, even if, hopefully, the nations who lost so much output can not decline much further.

Originally posted to Dry Observer on Sun Feb 27, 2011 at 07:02 PM PST.

Also republished by Foreign Relations.

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Comment Preferences

  •  Tip Jar (13+ / 0-)

    Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

    by Dry Observer on Sun Feb 27, 2011 at 07:02:25 PM PST

  •  Would you please link (1+ / 0-)
    Recommended by:
    papicek

    DIRECTLY to an authoritative source for that 14% figure?

    •  Here's the original Bloomberg article, and JODI's (2+ / 0-)

      report:

      Bloomberg discussion.

      JODI figures.

      On the positive side, as I've noted while discussing this extensively on my blog, there are reasons why the 14% crash might not have gone quite so fast after December, and why the Saudi numbers could be better than they appear.

      Nevertheless, throw in a declaration of a National Emergency and... they probably aren't that good.

      Good luck, everybody.

      Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

      by Dry Observer on Sun Feb 27, 2011 at 08:44:33 PM PST

      [ Parent ]

      •  'Incomplete figures' (0+ / 0-)

        probably a statistical anomaly. Hardly worth a sky is falling diary.

        •  The UN, APEC, IEA and *OPEC* are hardly known (2+ / 0-)
          Recommended by:
          SyntaxFeline, radical simplicity

          for exaggerating problems in the oil industry. Especially OPEC.

          They may not have drawn attention to the situation, but 14% is cataclysmic if it's accurate and it continues for any length of time.

          Our best hope is, if this drop did indeed occur, that it happened in countries that just don't have much further to fall.

          But given the risks in the Middle East right now, seeing a number of lesser oil producers more or less wiped out is a clear concern.

          And probably has a great deal to do with the State of Emergency.

          Then again, the U.S. is apt to hold together, to keep producing food, and to keep importing a reduced-but-significant amount of oil. China will probably pull off the same strategy by swapping solar panels and rare earths for oil and food.

          But this could freeze out an awful lot of other people.

          The really good news? The entire industrialized world, not just America, arguably wastes a great deal of energy and other resources and could become much more efficient and sensible under a crash diet.

          You just don't want to go from "diet" or "fasting" to something more severe.

          Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

          by Dry Observer on Sun Feb 27, 2011 at 09:10:54 PM PST

          [ Parent ]

  •  I've heard it said a few times... (2+ / 0-)
    Recommended by:
    Dry Observer, SyntaxFeline

    that estimates of reserves are always exaggerated. Oil companies have shareholders, governments and financiers to please, after all. Oil companies (and whatever government commissions a survey of their own) are in control of such figures.

    So what are the chances that the Saudis are finding oil more difficult to extract, I wonder? That their reserves (estimated, remember, and hard to verify) are running out?

    That's the first thing that came to mind when I first heard the report that the Saudis would be "unable" to boost production to stabilize prices.

    Maybe they can't.

    "The cure for bullshit is fieldwork."
    Robert H. Bates, Eaton Professor of the Science of Government, Harvard University.

    by papicek on Sun Feb 27, 2011 at 08:49:44 PM PST

    •  Extraction's probably getting harder, but they may (3+ / 0-)

      realize the situation is getting severe, given the December numbers, and decided to cut back early so that they could affect the course of events later.

      Or so that they simply would have more oil for barter, should matters get considerably more difficult.

      Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

      by Dry Observer on Sun Feb 27, 2011 at 09:14:39 PM PST

      [ Parent ]

      •  in other words... (2+ / 0-)
        Recommended by:
        Dry Observer, SyntaxFeline

        the ball's in their court, and they've all the flexibility they need.

        I hadn't thought of that, but you're likely onto something there. Thanks.

        "The cure for bullshit is fieldwork."
        Robert H. Bates, Eaton Professor of the Science of Government, Harvard University.

        by papicek on Sun Feb 27, 2011 at 09:21:28 PM PST

        [ Parent ]

      •  btw, Putin... (3+ / 0-)

        is calling for energy prices to stabilize. A sea change, right there.

        Everyone's domestic political situation will become quite grave if what I'm hearing about rice and wheat production comes to pass. Oil is one thing, weather and fertilizer usage (which is dropping as prices rise) will be another.

        And they thought the Green Revolution(s) took place in the twentieth century.

        "The cure for bullshit is fieldwork."
        Robert H. Bates, Eaton Professor of the Science of Government, Harvard University.

        by papicek on Sun Feb 27, 2011 at 09:29:24 PM PST

        [ Parent ]

        •  I've forgotten the exact time, but Russia reached (1+ / 0-)
          Recommended by:
          papicek

          peak-oil production some time in the last year or two.

          Also, this 2010 heatwave and drought that hit the Russians was absolutely brutal. I think a lot of people assumed that Russia, Canada and other areas closer to the poles could only see a net gain from global warming.

          Instead, we saw what is still a very powerful, advanced nation with considerable energy resources truly suffering under the impact of this event... and we're really only at the beginning of climate change, if it isn't brought under control rather abruptly.

          This was, I think, illuminating to a great many people who thought they could just "ride things out," not just in Russia. Indeed, I think that forced quite a few intelligent people to reconsider their plans, all over the world.

          Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

          by Dry Observer on Mon Feb 28, 2011 at 10:54:13 AM PST

          [ Parent ]

          •  that's a story worth telling... (0+ / 0-)

            the interactions of weather on food security, depending largely on a single export resource, and the human cost.

            India's new budget proposal, which I heard was tabled, had provisions for rural area infrastructure investment and farm subsidies. One thing New Dehli does not want to see are farmers leaving the land.

            Some enterprising leader (Chinese?) will issue a call for an international food summit. and even if it doesn't come off, they'll get the kudos from making the effort.

            "The cure for bullshit is fieldwork."
            Robert H. Bates, Eaton Professor of the Science of Government, Harvard University.

            by papicek on Mon Feb 28, 2011 at 04:04:43 PM PST

            [ Parent ]

  •  it's too early to plant (2+ / 0-)
    Recommended by:
    Dry Observer, nchristine

    We can only produce food as the natural conditions allow. There were poor harvests this past year due to severe flooding in AU, China and Russia both had droughts iirc.  Nature "may" allow a good harvest for the northern hemisphere this coming year.  If we sowed corn now it would be a waste of seed.

    Not to belittle the seriousness of your diary, because these are very serious matters.  The global food supply should not be expected to fully meet demand.  Not only do we have global population growth, climate change has only just begun.

    •  Perhaps I was unclear. Most places can not plant (1+ / 0-)
      Recommended by:
      SyntaxFeline

      anything significant in February -- though some climate zones obviously can, as well as, say, greenhouses.

      Rather, I was suggesting that our various governments probably want things to remain calm for considerably longer -- preferably well into April, at least.

      I suspect they can pull this off, at least in most of the major agricultural powers, especially major agricultural exporters.

      But it seems unlikely that our recent string of agricultural disasters around the world is entirely bad luck. Which suggests the food-production shortfalls anticipated in most global-warming models may already be here.

      Oh, and before everyone panics -- I suspect that one thing leaders are counting on is that the "free-market" aspect of this crisis will drive a lot of ordinary people to garden a lot more, eat simpler foods, and waste a lot less food -- all of which, especially in the industrialized world, would dramatically impact food availability everywhere.

      Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

      by Dry Observer on Mon Feb 28, 2011 at 10:45:57 AM PST

      [ Parent ]

  •  Add in speculators who bet on prices (1+ / 0-)
    Recommended by:
    Dry Observer

    rising, and even more risk.

    I would like to add an eKos tag to your list.

    The last time the price of fuel went up dramatically was before the finance debacle in 2008.  

    Fuel, then food, fertilizers, transportation all went up rather simultaneously. It obviously hits those with the least hardest.

    And, here we are again, but maybe this time, with less resilience and a deeper reason as far as supply.

    Thank you.

    •  Without going into the politics, the declaration (1+ / 0-)
      Recommended by:
      Regina in a Sears Kit House

      of a National Emergency almost certainly gives the President the ability to shut down speculation and to control the export of, say, food. If matters become particularly harsh, the government could swap shipments of food for shipments of oil, solar panels, rare earths or anything else deemed essential.

      What quite a few of the people discussing inflation often miss is that a resource still produced and exported on a large scale by the U.S. -- food -- is apparently the resource whose financial and real value is rising fastest.

      So yes, a lot of people are going to suffer if this situation worsens. The affects in the U.S., however, are apt to be blunted for some time by the fact that a new medium of exchange -- resource barter -- may favor America for the immediate future.

      Having said that, a world driven to the edge of famine will be a terrible proposition for all of us, and should be strenuously avoided.

      Future Imperative Incredible human possibilities, and monumental challenges. Because the future is coming fast...

      by Dry Observer on Mon Feb 28, 2011 at 04:54:55 PM PST

      [ Parent ]

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