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Saudis officially happy with $100 oil
Posted by Jerome a Paris on November 13, 2007 - 7:30pm in The Oil Drum: Europe
In an interview with the Financial Times, the Saudi oil minister, Ali Naimi, admits he is powerless in today's market:
We have nothing to do [with] where the price is today. (...) We work very hard and consciously to be sure that whatever actions we take that we are responsible do not dampen economic growth. (...) We are today not producing all our capacity because it is not needed. The demand is not there, the customers are not there.
This was initially posted as Opus 53 of my "Countdown to $100 oil" series on European Tribune.
So, he's claiming that oil prices today are not a threat to overall growth, that they are not caused by a lack of supply in the market, and that Saudi Arabia would be willing to step in with more production if needed (in this separate article, the FT notes that he mentions available capacity of 11.3mb/d vs 9mb/d current production).
In fact, he specifically blames speculators and rebuffs the IEA, pointing that scaremongering pushes prices up and helps some make money.
These pessimists about the adequacy of supply and adequacy of reserves in the future, I think they are doing a lot of damage to the stability on the market.
And logically, he specifically states that OPEC has no intention to discuss any production increases at their coming Summit, being satisfied with the overall market balance, and available stocks.
The question is - is this credible, or is he trying to find excuses for not being able to increase production? Saudi Arabia has always been worried, to a much larger extent than other OPEC members, by the risk of a slowdown of the global economy, and has had an explicit policy to bring in capacity in order to avoid price levels that would encourage the development of alternative fuels and energy savings. Indeed, the minister repeats these goals in the interview, but states that current prices are not a threat to the economy.
So - either he's trying to hide his country' inability to increase volumes, or he's right, and he's confident that such prices are indeed not sufficient to cut demand for oil. Either way, oil prices are not going down...
:: ::
An article that summarises the interview: Saudi oil minister rejects Opec raise
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I note also the intrinsic contradiction of saying on the one hand that the world economy is doing fine and on the other that "the demand is not here"...
Jerome - 2 mmbpd spare capacity seems feasible, concentrated in the Arabian Heavy Sour fields of Safaniyah, Zuluf, Marjan etc. So this crude is not marketable at present. But the Saudis are building refinery capacity to deal with this crude - that's a few years away yet.
I suspect for the first time they are having to confront decline in parts of N Ghawar, Abqaiq and Berri - and finding that this decline eats into new capacity that is brought on making it difficult for them to build production from here.
If they do not plan to boost production from current circa 8.6 mmbpd C+C then there will be interesting times ahead.
I've said for a while that $100+ / bbl will suit OPEC and KSA - why on Earth should they invest billions to try and get the oil price down?
The only question for them is if higher prices lead to lower consumption by the use of alternatives, or energy savings, which reduce demand durably and not just punctually.
If they think that demand is dynamic enough to justify current prices, then they can decide to not fight them and enjoy them instead. But they are using the exact opposite argument.
Which makes for good diplomacy, of course, and allows the real issues to remain undiscussed...
The key problem is that the argument keeps changing yet oil production remains stagnant. From memory at first it was fear that prices could drop then refineries where maxed out then ...
Anyone with a teenager should be able to easily see this sort of reasoning.
My next guess is they are concerned about global warming and want to encourage the world to wean itself off of oil.
Being such nice guys and all.
Of the 65 largest oil producing countries in the world, 54 are past their “Peak Oil” production and are now in decline, including the USA, down 11% since 1971, and the UK’s North Sea oil reserves are down 27% since peaking in 1999. Other big oil producers (more than 500,000 bpd) that are in decline include Australia, down 26% since 2001, and Norway, down 13% since 2001. The Cantarell oil field, Mexico’s largest has also peaked with its output falling to 1.7 million bpd in 2007, down from its peak output of 2.1 million bpd.
Global Oil Shock
I would have to disagree the demand is there.
Remember, there's no transparency in Aramco's business. Take on faith or not at all.
"past their “Peak Oil” production and are now in decline, including the USA, down 11% since 1971"
No, the USA is down about 50% since 1971. It's declining at an average 2% per year. At this rate, the USA will be at 25% of peak by 2030, producing 2mb/d - about 10% of today's consumption. The extra 90% will need to be imported, assuming consumption does not increase.
Consumption in the USA has increased at about 2% per year since 1971, so it too should double by 2030, meaning that the USA will at that time produce 5% the oil it consumes, thus requiring imports to cover the remaining 95%.
If the Saudi's think that their productive capacity is dropping as fast or faster than permanent demand distruction, then they lose nothing by demand distruction and only gain by high prices .Since their family gains by their merchandise (oil) being worth more money rather than usury (dividends on stocks and interest on bonds) , and high prices encourages their customers to change as the oil is used up, this policy looks like an expression of the will of Allah too.
Bob Ebersole
Let's be honest here. There are no viable alternatives for oil today. There are a few that work, but not scale, and there are a lots that fail to even work. They can't be very afraid of alternatives.
Lower consuption also isn't that scary. People will lower its consuption because the price is too hight, consequently, they won't make it so low that the price starts to fall, at best, it stops increasing.
Saudi Arabia simply has no motivation to inrease production. Peaked or not. (Well, that is still a peak, isn't it?)
My guess is that the Saudis think the world can sustain $100+ per barrel prices for years. My guess is the Saudis are right.
Oil prices above $100 per barrel will cause demand destruction in some areas. But demand in China and India will continue to grow rapidly and that demand will keep prices high.
At the same time, I do not believe the Saudis have the capacity to boost production by much. So they really have two reasons to take the position they are taking.
Let's assume that by "the economy" they mean "the production and distribution of goods and services".
Let's also say that, theoretically, we live in a world where said production, distribution, goods, and services are significantly systemically dependent on plastic, lubricants, ships, trucks, pesticides, and pharmaceuticals that are made with or are powered by oil.
Now let's pretend that if we keep the production of oil constant while the population grows, and that the population has needs that must be filled by a petroleum dependent infrastructure, that economic activity will be adversely impacted.
Now fantasize that impeded economic activity could be represented by an oil price that was rapidly increasing in relation to all other prices, while oil production remained constant.
We could then posit that the Saudis are blowing sunshine up our collective asses because they can't admit they can't increase production.
Hypothetically speaking, of course.
Hmm the could tentatively increase oil production for a few months to see if demand exists.
If prices fall then cut back again. This is not hard to do.
If prices remain high increase again.
Close to 100 dollar oil indicates a lot of pent up demand may exist at slightly lower prices. If the price falls to 80 but your selling twice as much I can't see the problem.
The problem I have is trying to not be pessimistic and take what they are saying at face value and believing them.
I tried to do that with the subprime is contained message and I just couldn't do it. The same for this I cannot even figure out a reasonable way to treat these statements as something close to realistic.
Memmel,
prices have trippled in the last two years, and some pretty good prognosticators are suggesting they will tripple again in the next two years, while other oil prophets are suggesting that prices will return to the $30-$40 level. Meanwhile, people like you or I attempt to rationally interpret the effects of supply and demand when we have no effect on either or even real time data on supply and consumption. We're attempting palmistry on the Invisible Hand!
LOL. great line.
So is the Moped Army :-))
If production goes up 1% in a GOOD month, that really doesn't matter when China's economy is growing @ 10%. In fact, it is utterly trivial.
Secondly, the whole talk about 'demand destruction' is highly speculative and dubious. Again, China's demand hasn't dropped and grows like a Behemoth. It is irrelevant if the US demand is flat or falls ever-so-slightly.
So debating about the 'peak' is rather bogus. We can all agree that world oil production has PLATEAUED. And meanwhile, the global economy, particularly China, continues to see enormous growth.
The price of oil will continue to rise in a volatile fashion. One disruption of supply at this point and the joke will be on those old timers who rest on the convenient assumptions of the past. They got through this month, but now the story is finally out of the bag. Even so, Pelosi et al just cut any support for alternative energy; we can see the writing on the wall: Bring it on!
Disaster capitalism is like being drunk and playing high-stakes poker! You only feel sorry the next day.
IMHO, debating the evidence for the date of crude + condensate production is very important. Government policy makers will likely take decisive action only after the peak is obvious. Likewise for consumers worldwide.
Well perhaps that is a concensus on this board, but there are arguments that due to enhanced oil recovery technology, especially in offshore fields, the decline may accelerate after the peak, and its effects magnified for importing countries by the Export Land Model.
IMHO SA has sufficient financial assets invested in world equity markets. They have to play off the interests of the world economy, and the intests in maximizing return from the oil. The former would be best served, by moderate, but not severe price increases, which prepre the world for post peak. The later is likely optimized, but holding back oil exports somewhat, selling more of the oil several years later at a higher price. If we take their statements at face value, they want oil production to stay on the fifteen year plateau. If this is achievable, that would be good news, as it would leave the world reasonable fair warning about the need to move away from oil.
Unlike most of the people who comment here, I don't think oil is indispensible to the economy. Substitutes in the form of bio-feedstocks, and bio-oil, will be available in the future, although likely at considerably lower volume than current oil. If oil decline can be managed, so the falloff is not too rapid, and is ameliorated by increasing production of biofeedstocks and greater efficiency of usage, then we have time to continually hone the oil-efficiency of the economy. The key is a gradual decline, and aggressive investment in alternatives/efficiency. A slowly increasing cost of oil would help this process along. Maximizing production so the world can pretend there is no problem for a little longer does not.
Here's another view. As stated at the start of this comment stream the Saudis are being honest buy not forthright. They have excess capacity and no one is buying: true. What remains unsaid is that no one is buying because there is not the refining capacity for the nasty stuff they are peddling. That's the simple part.
The messy part is that they can do the math on the world wide economy. We are now experiencing demand destruction on the least efficient parts of world economy. As Bangladesh and sub-Sahara Africa starve with oil shortages China continues to build factories and produce the crap that the west of the World (Accidental pun) wants. So they win, their equities are relatively safe and their income increases. We get to live in our fantasy world a little while longer. But for how long?
jjhman,
"produce the crap that the west of the World...wants"
Would that not be an "Occidental" pun?
sorry, couldn't resist
In short, the chinese have lots of wested interest.
Sorry, I couldn't west the opportunity either
China has its own iron triangle its still very much a command economy. I think they are buffs of Reagan's trickle down economy. The problem is very little has trickled down. A lot of the boom is smoke and mirrors thousands of inefficient factories massive over capacity etc etc. Serious environmental issues that are coming to a head. The point is that the growth in China is just as fragile as the 500k home in America.
The Saudi's know damned well that when things slow down China is in for some very rough times. They are also aware that one of the best ways to deal with a crashing economy is to start a war. If not they can ask their buddy Bush. And considering oil is the resource of interest starting a war to control oil kills two birds with one stone.
Government spending is probably the only thing keeping the US out of a deep recession right now.
So if this is the game the Saudi's want to play and the really have significant capacity left its a very very dangerous game.
jjhman,
Its really not difficult to add catalytic crackers to refine the "nasty crap" that the Saudi's have to sell. Because shallow oil is generally heavier than deeper oil, we've always had a surplus of heavier oil compared to light, sweet crude. But because we use more of the higher fractions of oil in our transportation fuels, refining lighter oils makes more money for the refiner than the higher gravity and more viscuous crudes
And, that's the liquid fuel crisis. According to Hubbert's curves, we've got as much oil left to be produced as we have produced to date. If we broaden the definition of oil to what the cornucopians wish to call oil, we have at least 6 or 8 times as much oil as we have produced already. But it costs progressively more money snd much will never be economicially produced or produced at a fast enough to satisfy humanity's needs.Bob Ebersole
At some point, it takes more energy to refine low quality oil than is returned. So not all oil will be taken out of the ground Mitigation of the disaster should begin now.
We need global awareness and a plan to transiition to renewables, and a more agrarian-based, localized economic paradigm.
Presently we are headed for a train wreck.
The 'wested interests' are drunk and have locked themselves in engineer's locomotive.
oilmanbob and stiv, thanks for this point. I had assumed it was a lack of refining capacity. You're saying that would be easy to fix, but the price incentive is still not there (and may never be there)?
I like that explanation because it seems to answer the most questions the most reasonably. The Saudis aren't lying--they're just not being forthcoming, as somebody posted above.
Four years ago OPEC estimated that 45% of refineries could handle the heavy sour:
http://www.gasandoil.com/goc/news/ntn44964.htm
Surely this percentage has risen by now. Is an early peak merely the product of refinery upgrades playing catchup? If this one inefficiency is addressed, could the CERA scenario still hold true? But at what cost to the consumer?
The price of oil is not a problem for the Saudis or the U.S. oil companies. Even now oil is being added to the SPR. The Saudis know that oil reserves are better than money in the bank, no way they are in any kind of hurry to pump it any faster. If there is anywhere that there is a rush to increase oil production, it is Iraq. God only knows the shenanigans going on over there right now. The major players in the M.E. would all be happy as clams right now if it weren't for the Iran situation.
I am still waiting for the Saudis to say that their concerns over climate change are leading them to restrain oil production, for the good of the planet.
And imagine how that excuse would play out - it could even buy the Saudis a bit more time, and create a lot of confusion in the U.S., at least.
Hey I beat to that one your WAY to slow.
http://europe.theoildrum.com/node/3234#comment-263387
7:28 pm
What where you doing wasting time eating dinner instead of reading the oil drum :)
And what are the Saudi's going to do if we don't figure out their next excuse for them.
We should be nice and run a poll on what the next reason KSA will use to not increase production so at least they can discuss the issue.
1.) Uncertainty over the US economy.
2.) Help avert global warming.
3.) Problems getting rigs/parts/equipment
4.) The Kings birthday is coming in six months.
5.) The Kings birthday is just past we want to wait for six months.
6.) Goto 4
Well, at least this time, no one will seriously argue with me that the Saudis have said no such thing, or point out that bio-fuels are much worse than oil.
My bet would be #2. They planted the idea in the press releases about the upcoming summit.
Let's assume that the Saudis are unable to boost their (C+C) oil production back to 9.6 mbpd, or at least unable to boost their light/sweet production.
Would they announce that fact and thereby encourage emergency long term conservation efforts worldwide, or would they assert that they are unwilling to produce at their maximum capacity?
Maybe KSA is tightening the vise on W's nuts. All of a sudden the israelis are forced to the table and to make concessions to the Palestinians.
http://www.debka.com/headline.php?hid=4772
http://www.debka.com/headline.php?hid=4767
What makes you think Russia is going to pump more then they have to?
Traders make the money and Russia depletes natural resources? Yea, right.
Interestingly, everyone skipped right over the veiled reference to TOD US, Europe and otherwise...
"These pessimists about the adequacy of supply and adequacy of reserves in the future, I think they are doing a lot of damage to the stability on the market."
That's YOU GUYS they are talking about! :-)
But, more interestingly, why does pessimistic talk about supply and reserves bother them at all if they want to keep oil at $100 plus per barrel? Pessimistic talk should simply play into the Saudi's hands, wouldn't you think?
What are they afraid of? (I know, I have already answered that question on at least a dozen posts, but I want to let you guys play it out this time...;-)
RC
Thats right... so no more of this "waaaaaaa the MSM doesn't pay any attention to us.... boooo hoooo muuuummmmyyyy make the big mean media people take us seriously"
I mean, come on, if the government of a key global totalitarian regime is apparently paying close attention, how much more do you really want? :-)
--
Jaymax (cornucomer-doomopian)
Hope this link works, I was afraid to quote the line text, out of fear of copyright issues...what it basically shows is that growth in Chinese oil consumption is starting to get wobbly, even dropping year on year for the same period. Is this a sign the Chinese bubble may actually be running out of steam? If so, what are the implications for the billions of dollars of investment poured in to China by banks, corporations, and individuals, as well as hedge funds, pension funds and brokerages? It could make the little faked up real estate crisis look like a tea party...
http://www.nytimes.com/2005/07/14/business/worldbusiness/14oil.html?_r=1...
RC
The link is from 2005.
Xeroid.
Which just goes to show that nobody should read too much into the current decline in Chinese consumption. For some reason they're prone to blips.
--
Jaymax (cornucomer-doomopian)
OPPS, my bad....the link was a whole list of links I was looking at studying Chinese consumption, and the other links I had were relatively up to date, so I was not paying enough attention to datelines....I would love to try to excuse out of it, and say I was simply taking the long view, but not this time....I just missed the dateline date and thought the story was relatively new....
As Rosanna Danna used to say, "neveeer miiind..." :-)
RC
By the way, I was studying Chinese consumption (still am) for a reason.
It seems that much of the projections of massive oil demand is based around one deciding premise, that being the continuation of very fast Chinese growth.
Thus, OPEC and the other producers must try to read the tea leaves and decide whether to accept that premise, because if the Chinese economy were to flatten, or heaven forbid, that bubble collapse in a large way, the oil producers could be caught with huge volumes of oil to sell and projections of a large customer that no longer needed nearly as much.
The Chinese bubble is starting to take on the same dynamics as the dot com bubble and the more recent housing bubble. People in the know are saying be cautious, this thing has to be getting near a top, while the investment promoters are saying, "don't worry, it has YEARS to go before there is a chance of it slowing, maybe even decades, maybe forever!" Sounds just like the situation the housing bubble was in about 2 to 3 years ago...
My bet: The Chinese growth curve will slow, and possibly very rapidly. The question is, exactly when. There is some big Western money out on a limb in there (no one has any way of knowing how much hedge fund money may be hung out in China, and many U.S. companies are betting on that market to bail them out).
I think OPEC is playing a smart game.
RC
Meantime, this green dreamer dreams of the time when we have all publically admitted that endless economic growth was always an insane idea, a false god, and junked it, finally.
None of the allegedly-august talking faces in the FT and elsewhere are adequate even to entertain and discuss this urgent idea. Not yet, anyway. I suspect that many of them are so enslaved by the growth-forever paradigm that they'll never be able to think seriously beyond it.
But to do so isn't just urgent for the sake of the biosphere in crisis (our universal life-support system, without which no poker-game of any description). It's also necessary now because -- probably -- peak oil, closely followed over the next few years by peak eveything else, means the end, probably for ever, of any global growth-capable economy, and the onset of scarcity economics, and a general forced adoption of shrinkage lifestyles for all.
If it weren't for the mass misery and outright die-off that this will likely entail, I'd be cheering-on the easing of our idiot pressures on Gaia's life-support, enforced by the dawning of the age of shrinkage.
Are humans cleverer than yeast? No, of course not.
I would like to see a graph of US Gas prices as a percentage of average US income going back a hundred years. This will remove any dollar devaluation affects.
-This would give us a clear indication / yardstick as to the affordability of energy currently. I suspect that during the last 20 years we have been living through a dip below the average and that now we are back to $100 we are nearer the average. The reason this is causing concern is that many have grown so used to such historically low outlays.
As a result innefiencies have crept in throughout the usage chain -from SUVs to plastic throwaway bin-bags for landfill. In addition this period has enabled profligate energy usage on a scale never before dreamt of -the £30 weekend trip to Barcelona for example.
My point is that from a historical perspective prices nearer $100 are probably 'the norm' and should not be cause for concern.
Regards, Nick.
Okay. So you are saying that average gasoline prices are now "near the norm". Then please give a rational and sound explanation for U.S. gasoline prices of $.96.9 per gallon in 1998 and early 1999 versus $3.15.9 average in 2007. In 8 years, the cost has gone up more than 200%, yet, the cost of getting the product out of the ground and to the market has increased by less than 30%? Something smells, BADLY.
If you are going to analyse these things to death, you must realise there is no single "oil price". The spot price of WIT/Nymex does not represent the whole market. The majority of oil contracts do not go through these exchanges.
Frankly, doomers predicting prices will rise and then whining about when it does are pretty pathetic. For God's sake people, move on.
High oil prices are good. We don't need oil.
All the talking of how "happy" the Saudis are with high oil and what games they might be playing can simply be tested against what they are doing. What they are doing, geophysically speaking, was nicely explained at Econbrowser in a very good article about the Saudi work done here at TOD published back in April of this year. Just read this and see if it is necessary to agonize over how much vast unused capacity the Saudis are witholding from this "well supplied" market with "no customers".
OF COURSE the Saudis are happy with $100 oil. It only costs them $9/bbl to get it out of the ground and another $6 or $7/bbl to ship it to market. Folks, we are being had by wealthy investors and large hedge funds that are bidding up the cost of oil at the expense of the U.S. economy. At MOST, oil should be trading in the neighborhood of $35 or $40/bbl, and that's AFTER adjusting to the falling value of the USD. Pure greed has taken over the NYMEX and other world oil futures markets, and it's time to close the "gambling" markets and let the producers and refiners determine the value of their product based on what CONSUMERS are willing to pay.