How Would You Manage Saudi's Reserves?
Posted by Robert Rapier on November 15, 2007 - 11:00am
My impression is that we spend a lot of time trying 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 won't simply look at the price and dismiss those comments as lies. 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 pick up the phone and offer to purchase more crude, yet nobody came out and suggested that they had been unable to secure Saudi crude, then I concluded that those comments were consistent with the evidence available to us. (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?
Contact
- Content: editors at theoildrum dot com
- Tech support: support at theoildrum dot com
License
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.
http://science.reddit.com/info/60ns3/comments/
thanks for your support...
Robert- good post
some numbers to consider.. it is amazing how time marches on.
It is not hard to quantify the loss of 1 MMBOPD of capacity since they were making 9.5 MMBOPD.
I certainly don't know where that leaves them... but 130 billion in PDP reserves is a stretch I think.
Since Saleri's dated was presented at CSIS.
Ain Dar Shedgum area of Ghawar
1/1/04- Saleri's Numbers
Cumulative Recovery 26.9 Bbbls
Remaining Reserves 13.9 Bbbls
Annual Production 0.73 Bbbls
Annual Depletion Rate 5.25%
Saleri= "Probably be producing 2 MMBOPD at modest water cuts for decades to come".
Exponential Decline Definition
Np= (qi-qf)*365/D
Np= remaining reserves
qi= initial rate, BOPD
qf= Final rate, BOPD
D= annual percent decline
Give them a qf of 0 (no economic limit)- just to make it fair.
11/13/07- 2004 2005 2006 plus .86 years of 2007 so 3.86 years later
Possibility 1 - Area was maintained at 2 MMBOPD with acceleration projects
Cum Recovery 29.7
Rem Reserves 11.1
Ann Depletion Rate on Remainder 6.6%
Current No work annual exponential decline= 128,000 barrels per day per year.
Possibility 2- Area was allowed to decline at reserve indicated rate
qf=qi*exp(-Dt)
Current production = 2,000,000* exp(-.0525*3.86)= 1,633,128 MMBOPD, Decline= -367,000 BOPD
I think Uthmaniyah (was 2.5 MMBOPD by some accounts) isn't in any better shape.
I also think that the ADS ultimate recovery north of 60% is aggressive
There is also a factor of falling dollar. The price of $60 per barrel have to rise 50% to $90 just to compensate one third loss in value of dollar in past two years.
Second important factor is the mass availability of capital in today's world. Two centuries of industralization and accumuluation of weath in few hands have gave the world a large amount of excess capital that have to be invested somewhere to feed an interest-based growth-dependent economy. First is find way in dot net bubble, then housing bubble and now oil companies.
Third is the instability of middle east since 2003. Even if world had a thousand trillion barrels of oil when the most productive oil region is in political instability and war there would be a significant rise in oil price.
I think the bidding war for oil has not started yet. It would when for america, europe and asia would be bidding against each other, for now they are bidding against african countries. The real peak oil would start after world capacity fall down 5% of its peak and would be clearly visible even to a blind when that reach 10%.
Robert,
Excellent post. I think I would manage Saudi oil in a manner very similar to yours. If I had plenty of oil, I would only increase output when there was clear evidence that global stocks were being depleted to 10 % below the 5 year average. If I had plenty of oil however (say 260 GB of proven reserves), I would start publishing field by field data on oil output and in essence open my books on oil reserves as this would reduce market volatility. If I didn't have as much oil as I claim, and I was at or very close to maximum sustainable output, I would try to hide this for as long as possible knowing that people will be quite upset and the world would likely fall apart pretty quickly. I would do this differently if I thought I could maintain a plateau for 5 years or so, rather than being close to a more rapid(say 4.5 %) decline. In that case, it would be better to let people know the truth so the world could move quickly to reduce dependence on oil (even though 5 years would not be enough time.) If the whole world comes crashing down around them, KSA will not be a wonderful place to be.
Dennis
I would do everything I could to maintain the belief that we have excess production capacity that we aren't using, for whatever plausible reason I could think of. Being the world's only swing producing confers enormous importance on them and the stability of their regime. Without the excess capacity they are important, but they are just another exporter. As you implied, if it is true that they have this excess capacity and want to prove that the high prices are due to speculators and other irrational forces, they would have the ability to prove this at any point in time. Such proof would cement their status as swing producers and be worth much more than the temporary drop in crude prices that would result. At some point they need to "put up or shut up" The status of swing producer is too powerful to confer on a regime simply on their word.
SW
I'm not sure I'm qualified to play this game, not being a greedy bastard out to screw the world.
However, despite the logic laid out here, two things come to mind:
1)I'm not sure I could distinguish your two strategies. It's easily argued that we're seeing both, so I'm not sure of the value of this exercise.
2) Something changed around 2000-2003 that caused the Saudi's to dramatically change "strategies" (quoted because the change may not have been voluntary). Prior to that, they were happy to keep oil in a permanent price range of <$30/barrel. After, they seem to want an ever rising price.
I think the sentiment is basically correct here, but would like to make a comment on both of these points.
Regardless of the Saudi position, they have an interest in adopting a position they may be confused with the other. In other words, if they really do have a great deal of oil production capacity available, then they have every interest maintaining ambiguity about that, to encourage speculators to keep the price high. If they are really running short, they have every interest in maintaining ambiguity about that to keep the global economic system as stable as possible.
The implication is that whatever their position, the management strategy I would adopt would be to try to increase the ambiguity about my true position.
I therefore agree with you that the exercise as outlined is of questionable value from one perspective. However, a slightly different perspective which may be of value is to consider things that you certainly wouldn't do if you were in either of these situations. This is somewhat analogous to falsifying possible hypotheses.
If I had spare capacity and plentiful reserves, I wouldn't let prices stay at explosive levels whilst the world drifts into recession. As the gloabal economy drifts toward recession I'd try to lock into long term contracts, before flooding the world with oil.
It seems reasonable to imagine that around this time, the combined rest of world spare capacity hit, for all intents and purposes, zero. It doesn't seem to have any necessary implication for the specific saudi situation.
Suppose KSA has indeed a lot of oil left.
Would you like the rest of the world to know?
Well it is quite obvious that Saudi wants the world to think that they have enough oil to last for hundreds of years. Dr. Nansen G. Saleri, head of Aramco's reservoir management, says Aramco's reserves are larger than anyone else imagines. He says they have 900 billion barrels of reserves.
See bottom sidebar in this New York Times article for Saleri's estimates:
So Richard, Saudi Arabia obviously wants the world to think they have an enermous amount of oil left. And Saleri's estimate should prove to everyone that they are wildly exaggerating their reserves.
Why are they doing that Richard? I put the question back to you.
Ron Patterson
I was never happy with this argument:
"any of saudis customers could pick up the phone and offer to purchase more crude"
OK Robert- Whats the phone number?
Lets try a little thought experiment ourselves. If its so easy, you`re in the oil business, you must know the number. Tell us or try the following yourself:
Call the number and offer to buy loads more oil. There are only two possibilities:
If the Saudis say "Sorry no, we can`t", you have your answer right there.
If the saudis say "No problem, where do you want it", you say "only kidding" and slam the phone down- no harm done. Either way we will know the true situation.
Of course nobody "just picks up the phone " and calls the saudis for more oil! If you want oil you buy it on the spot market like everybody else. You say "I want 100,000 barrels" and the broker says "I can do that at the current price of xx.xx" If you agree the deal is done.
Of course, every time a deal like that is done,(buy), the price creeps up a little for everybody else. Thats what determines the price.
TB
Telephone: 966-3 872-0115
Fax: 966-3 873-8190
Telex: 801220 A SAO SJ
Cable: ARAMCO DAMMAM
E-mail: webmaster@aramco.com
OK Robert- Whats the phone number?
Believe me, our crude traders are in contact with Aramco constantly. If they need crude, they call. Simple as that.
If you want oil you buy it on the spot market like everybody else.
False. Saudi doesn't sell on the spot market. They have customers. If they go out and say "We have crude, but no buyers" and somebody actually needs crude, they are going to call. And if Saudi says "You know what, we really don't have it" or "Well, what we have is this tarry crap", it is going to leak to the press just like it did when they cut allocations to Asian refiners. A number of them reported this "off the record."
Has anyone ever put together a compelling case that they were actually lying? Shouldn't someone, if they are going to make that charge? I have detailed exactly why I don't think they were lying over that particular incident. Believe me or not, but their claim would have been verified or falsified the next day.
But there I go. I said I wasn't going to debate this again, and there I go. No more from me on that. Think they were lying if you wish. But don't feel compelled, by any means, to actually build a case.
RR-Thanks for responding! Actually a very robust response - and you called my bluff on the spot market thing, obviously you know a lot more than I about it. (and I learnt something).
However, I am not making a case that they are lying. (Notice I said Either way we will know the true situation).Its the logic behind the argument I am questioning.
If someone does make that phone call, you have it that if they "really don`t have it" that information would leak to the press, but if the DO really have it that information would not leak to the press? That is illogical! Surely the information would leak either way.
No need to respond, I understand your reluctance to debate this, But the logic is flawed, without taking sides.
TB
the big hole in your argument is that a few million bbls either way of Saudi production makes that much difference in the short run. And yes, the info either way would bleed into the press. There are just too many people who spend their lives talking to each other re nominations, price formula, etc. You gotta do something to fill the day.
If no Saudi customer wishes to expand their nominations or load at the upper range of their month's allocation, Saudi isn't just going to over produce to knock the price down. Unless they are trying to send a message to the rest of OPEC not to cheat on quotas or to knock out non OPEC investment. The need to do that is over as everyone else is pretty much maxed out and non OPEC can barely keep production stable in the face of field declines. This ain't the 80's anymore.
tennisball,
I like your logic though....
Let's get the same kind of openness going in all energy industries.
Example: I go to dozens of websites of advanced battery companies that claim they build these miracle batteries, 15,000 cycles with no loss of output, half the size and weight of lead acid batteries or ni cad...recharge in minutes, etc, etc....
O.K., where's the phone number, what's the price, what's the minimum order to get them?
So many of them make claims, but what they don't tell you on the pretty web site is that the public cannot buy these batteries, and in fact, some of them have never been sold to an outside customer at all....:-(
If folks say "we have it" let's have them price it, and sell it....and give us the connection to buy it. It is only in the last few decades that enterprises can survive for decades without ever selling a thing!
RC
Oh yes we have oil, but if you want some now it will have to be this heavy sour stuff. the API of imports from KSA has been going up.
I have been thinking that sour oil is behind this "market is well supplied" line that the Saudis have been using. After all, it's not their fault if they're offering crap and no one is buying, right?
I've raised this issue a couple of times here and it never seems to get answered. If they have crummy oil and no one can refine it, then both sides are right:
1. They have oil but no buyers
2. They don't have oil for people who want it.
These high prices are for light sweet crude. What is the spread today between WTI and the worst Saudi tar?
ROTFLMAO. Cheers Robert, you have just made my day! :)
Ron,
Well, I mean: Nobody really knows how much oil KSA has. They claim to have a lot, but nobody is fooled with the trick they pulled back in the '80.
So is it in the interest of KSA to clear up the question how much oil they really have (i.e. have it audited etc)?
I don't think so.
Suppose they really do have all this oil. Then oil would drop back to 20 US$ a barrel
Well then they are behaving like mad men. They want no one to know how much oil they have yet they are screaming to the world, and to the New York Times, "we have 900 billion barrels of reserves!"
And no, oil would not drop to $20 a barrel if people believed that absurd claim. The cornucopians are saying we have over 3 trillion barrels of oil left. The financial news networks have been repeating that line. Yet oil is over $90 a barrel.
It matters not one whit how much oil is in the ground, and it matters even less how much oil people think is in the ground. What matters is how much oil is extracted! That, Richard, is what determins the price of oil, not what people think may be in the ground.
Ron Patterson
I agree with Ron. The conventional wisdom is that the Saudis have hundreds of billions of barrels of oil left. Ron and I are in the tiny minority that disputes this position.
Actor Robert Wuhl has a great HBO program on historical myths and legends. He quotes a great line from the American Western "The man who shot Liberty Valance." To wit, "When the legend becomes fact, print the legend."
Almost everyone has been "printing the legend" about Saudi reserves, until Matt Simmons started questioning the numbers.
Good analysis!! I reached a similar conclusion about "what should be done to mitigate peak oil". I asked myself that question a while back. I figured the worst economic effects of peak oil would occur in the years of realization of peak oil, when the paradigm shifts from oil burning for daily activity to oil burning for necessity. The best course for the world would be to forestall current production in favor of dragging out future production, thereby decreasing the sharpness of the decline immediately following peak. Of course, as you pointed out, this is exactly what Saudi Arabia seems to be doing, not in the name of peak oil but in the name of profits. But nevertheless the end effect is the same: more oil for later when we need it, which is good.
Robert,
I think you've pretty well got it right. I've made the same point before, that we need to look at things from a Saudi perspective.
(vulgar sarcanol alert) My daddy, an oil and gas title attorney always said that perspective was extremely important in everything you do, except oral sex.
The other thing I'd do is keep 'em guessing. The Saudi family has immense reserves of currency in Dollars and Euros plus huge US refining assets, they can't afford to crash the currency. They have a big population who mostly aren't related to them and have no share in the families income except the various subsidies, and many of whom are religeous nuts-Mecca and Medina are Saudi cities-and are prone to fundementalism themselves, the royal family is Wahabi. If the real end of the Gravy Train is in sight, the local natives will become restless. So just like the multinationals and the peak of production, Aramco will wish to keep everything quiet as it give them even more time on the fat hind teat.
Break a leg on your bet! I thought you'd lost it last week, now I'm not so sure.
The oil and gas psychic formerly known as Bob Ebersole
Actually I think your on the right track. We focus on Saudi oil but in reality they manage a complex financial empire that has a broad range of investments and large cash hoard.
Next regardless of how much oil they have I'm pretty sure they are interested in diversifying their economy and probably more important the assets of the royal family.
So if you really want to know whats going on in KSA you follow the money.
So what are they doing ?
Diversifying and moving into upstream refining but we have to see how they plan on handling peak oil from a investment perspective.
This really boils down to how they plan to transition Saudi Arabia itself which is interesting.
Obviously if they really want KSA to continue post peak the would have to throw the doors open to investment from foreign companies. But this opens a whole Pandora box of problems for Saudi's strict religious society and large population of young people. Even if you have not taken Revolution 101 you would be leery of taking these actions a large influx of foreigners and reforming the society so it can really industrialize would eventually lead to the downfall of the Kingdom. So for social reasons it safe to assume they won't be aggressive about diversifying their economy.
Next outside of Saudi Arabia we are fairly certain the rest of the world is in decline or at best can only grow production slowly. Next we know that the economies of China and India are heating up and that the US is heavily reliant on oil and will be for some time. I'm sure they can do the same analysis we have done about transitioning economies off of oil and realize that even if the world suddenly decided that wanted to be less reliant on oil it would take a long time to change and given that the rest of the world is probably declining a ready market will exist for a long time for Saudi oil.
So they are diversifying and we have no reason to believe that they believe the oil markets will collapse.
So again looking at the overall picture what do we see.
Nothing.
They are already well diversified on the financial front so its impossible to interpret any change in investment strategy. I'm sure the Royal family long ago developed fallback strategies to protects its wealth in the case of a coup or external attack. On the oil front they are not ramping up to take on a increasing share of the world oil markets as the rest of the world declines. Given the lead time for projects and projected demand KSA should be ramping up production. Regardless of how much oil KSA has they cannot easily carry the world if they don't start ramping production and more important exports by 1-2 mbd.
But the evidence simply points to the fact that nothing much is really happening. Which says to me whatever the current state of affairs are inside Saudi Arabia they are not coming as a surprise to the royal family and they are not ramping production to handle the obvious shortfalls from the rest of the world and growing demand.
So one of the biggest events in the last 100 years is developing and the world largest oil exporter is effectively doing nothing.
Interesting.
Wait...what? :) It seems like it'd be important in that activity as well.
Go ye forth, practice a little, and come back with a story about your findings. :)
Good, Robert, we need these strategic games. You should add here:
4) Actions taken must not reveal the true position of reserves, production capacities and real motivations
BTW, do we know Saudi Arabian storage capacities? A 100 kb/d increase over 1 month would be 3 mb.
And how about if the Saudis themselves don't know what their reserves are and future production capacities will be? Aramco may have the same problems like Shell had. Unchanged reserve figures over many years suggest no-one could decide on updating them.
You therefore have to consider that they would be playing both games at the same time.
If I were a Saudi Arabia near the limit of production capacity, I would want a tiny portion of production to be secretly pumped into storage that no one knows about. Then I could fake a production increase when needed to prove I have the capacity, and fall back a month later giving some excuse that the increase did not have the desired effect.
What would I do if I were managing Saudi reserves?
[click for a bigger image]
Well, first of all I'd be careful about what I promised. In a world where nobody is quite certain you can be trusted, its important to not over promise hard delivery numbers. That means if you say 12Mbpd by 2012, then you need a way to deliver.
Equally, I'd realise that those reserves were finite and the high quality fields were limited. I'd want to conserve my capability, not waste it on profligate american SUVs. I'd want my lifestyle to continue as long as possible, not to go back to just desert and religion.
So I'd look to haul back on my production as much as possible, conserve my best fields, and at the same time not kill the golden goose by promoting alternatives and losing my position as world swing producer.
What I would do is manage the tail end of production at my best fields (eg Ghawar, Abqaiq) so that its doesn't run out with a whimper and show everyone I was past my best.
Specifically:
With that kind of careful management I could maintain my position and swing capability as a potent force out till 2020. Then it's my son's problem, but in the meantime I've invested in petrochemicals etc. to ensure Saudi Arabia can export more than just raw crude.
The above is my explanation for what's happened, what will happen, and how KSA can claim high capacities when the evidence in reserves looks shaky. I've taken Euan's prediction of KSA as a basis, re-analysing the numbers to show how a surge can be created. My numbers suggest that out at 2012 KSA would have a circa 2-3Mbpd surge capability for 2-3 years. At this timeframe, that kind of rapid onset boost will be worth much more than it is today, where it would only depress the world price and reduce KSA incomes.
You're the only one to bring up a point I consider central but yet to be addressed-if KSA has the reserves they claim, a big fear should be alternative energy getting established. Solar and cheap electricity would be fear number one. The near doubling in price this year is a big no no.
KSA is a special case ... it has a population of 23 million or so, that is growing like 'Topsy', living in the middle of millions of square miles of exceedingly hot sand ... there isn't enough water to drink, let alone grow crops ... without energy for desalination and foreign exchange to buy food they will nearly all die, or have to move somewhere else. This is clearly an unsustainable situation in the long term.
My country comes first. If I was sure that there is a long term future for selling my oil (pretty much the only thing I have to exhange for the things my country needs), then, in order to make the unthinkable end-game as far in the future as possible (so somebody else has to worry about it) I would only export enough oil to balance my trade budget.
I would limit the economic growth of my country and would not build up a huge, risky, pile of foreign IOUs which may never be exchangable for anything useful in the future.
I would obtain short range defensive nuclear weapons to protect myself, my country and my resources from other 'bully-boy' nuclear armed nations that have no intention of giving their bombs up, but who may well want to steal my oil. I would not waste any resources on a 'blue water' navy or armed forces capable of offensive use threatening everybody and anybody around the world.
Xeroid.
Robert, you say:
Well hell, for over two years now Mike Lynch and a lot of others are saying that the funds are the reason for the price rise. The hedge funds and other funds were all long and are, as a result driving up the prices. Of course the speculators would have to be on the opposite side of the funds since for every long there must be a short.
Well, now I suppose the funds are all short and the speculators are driving up the price. Well I don't believe a damn word of it. You can't have it both ways. Either the hedge funds are long and the speculators are short, or vise versa. Either way it is a wash!
The reason prices are so high is because in the last 30 months, since the peak of crude oil, demand has continued to increase and supply has not followed suit. Therefore the price rose until demand equaled supply.
Ron Patterson
I agree with that. The historical analysis of trader change in positions versus changes in spot prices is showing that traders positions do not lead the market and that they are mostly trend followers (see my post).
I think the myth of price manipulation by speculators is poorly supported by the data and has been refuted by most economists.
Hedge funds aren't speculators?
Speek, I certainly did not mean to imply that hedge funds are not speculators. Perhaps I should have chosen my words more carefully. Below is a paragraph on futures which I wrote to post tomorrow.
-------------
The term Hedge Fund is a misnomer and is a historical carry over from the days when hedge funds actually reduced risk. To “hedge” means to reduce risk. Today commodity funds do not hedge, they are high risk funds and the actual hedgers are not funds but producers and corporate consumers.
---------------
As I worte there, to hedge is the opposite of speculation. Speculation is high risk, to hedge means to reduce risk. But there is really no such thing as commodity hedge funds today. I know, they call themselves that but they are not hedge funds at all, they are commodity funds with high priced managers and complicated computer programs that try to take your twenty thousand and make you a million. They are speculators prue and simple and hedge funds in name only.
There may be actual hedge funds in equities (stocks) or bonds, funds that reduce risk rather than increase it. But that is another subject.
Ron Patterson
A key point to keep in mind is that Saudi Arabia is going to show two consecutive years of net export declines. In the following estimates, I assumed a fourth quarter C+C production rate of 9.0 mbpd, which seems somewhat optimistic based on the most recent OPEC report. The higher consumption rate for 2007 is based on reports of shortfalls in natural gas production, requiring more liquids production to be diverted to domestic consumption (Rembrandt estimates that liquids consumption is up at about +9% over 2006).
For the sake of argument, if Saudi Arabia were able to produce 11 mbpd (Total Liquids) indefinitely, at their 2005 to 2006 rate of increase in consumption, they would cease being a net exporter in 2036. This would be an overall long term net export decline rate of about -10%/year (2005 to 2030). Note that net export decline rates tend to accelerate with time.
http://www.theoildrum.com/node/2975?nocomments
Declining Net Oil Exports Versus “Near Record High” Crude Oil Inventories: What is going on?
September 14, 2007
Note that to maintain their 2005 total liquids net exports of about 9 mbpd, they would have had to increase their total liquids production at about +1.7%/year, so that they would be producing 20 mbpd in 2036--based on their 2005 to 2006 rate of increase in consumption.
What doesn't make sense to me though is you say they will cease to be a net exporter in 2036? As someone pointed out earlier Saudi Arabia can't grow its own food, and oil is a large majority of its income. How do you expect saudi arabia to make money, let alone feed itself with no exports?
Indeed.
That's why a lot of members from the royal family are moving away from S. Arabia.
Well hell, that's what this whole Peak Oil debate is all about. How will America, or especially Japan, feed itself when they have no oil to import.
As for Saudi Arabia, they managed quite well befor the age of oil. They were mostly nomadic herders or merchants. Of course the population of Saudi Arabia in those days was only a couple of million. Now the population is about 27 million and when they have no more oil to export they will be in one hell of a mess.
Ron Patterson
The world industrial economy will be in deep trouble long before Saudi Arabia hits zero net exports. In any case, the 2036 date was a "What If" scenario based on flat production and their current rate of increase in consumption. Following is an excerpt from the draft of our written report on net exports by the top five net exporters:
BTW, Ace sent me the following link:
http://tonto.eia.doe.gov/country/index.cfm
It has production, consumption and net export/net import graphs for most countries. Check out the Saudi consumption graph.
Sure doesn't look flat to me! ... exponential? ... maybe! ... at what stage will it even level off? ... problems ahead for KSA supplying exponentially more water and food? ... to say nothing of their oil!
Xeroid.
Reportedly, Midland, Texas in the Seventies had the largest Rolls Royce dealership outside the UK, as oil prices increased faster than Texas oil production was falling.
http://www.alertnet.org/thenews/newsdesk/L15410473.htm
Riyadh is boom town as Saudis enjoy oil bonanza
16 Nov 2007 10:37:34 GMT
Source: Reuters
By Andrew Hammond
"My country comes first."
I think that this is where your argument begins to unravel. You are thinking like a westerner steeped in national sentiment. Nationalism is relatively new and shallow in the Arab world.
Actually I would say the dead opposite. Democratic Western leaders are concerned with getting elected and staying elected. This creates a significant skew away from doing what's best for the country.
On the flip side, Arab royalty also want to stay in power but don't have to go through the election cycle. They are allowed to think more long term. They are literally preserving wealth for their children, unlike Western leaders.
I see a lot of projection from Westerners cynical with their leadership who are in bed with large multinationals, who then assume that Arab leaders are likely to act the same way.
I am not passing judgement on who has the better system, nor am I saying the Arab would is not rife with corruption, but we should be careful not to make assumptions based on Western governments.
I think the House of Saud is quite practical on the matter its obvious that governments like the Saudi's can and have collapsed for a number of external and internal reasons. So I'm sure they have prepared for the worst and on the same hand are not super tied to the long term future of the Kingdom when it diverges from the needs of the House of Saud. Ruling a pile of sand filled with angry teenagers is not a exciting future but it is eventually what Saudi Arabia will become.
So yet again my conclusion is the same whatever direction KSA is taking the decision was probably made well in the past and has not changed. We are reading way to much into the Saudi moves today. To be honest my opinion is that they hit peak production a long time ago back in the 1980's and have been managing production ever since. Peak or not KSA has managed their production effectively since Aramco took control of the oil fields.
Look at the production graph.
http://www.theoildrum.com/tag/hubbert_linearization
In general since 1980 we see they have managed production.
At best I think they where caught by surprise probably by unexpected water break through in Ghawar and they pretty much have admitted to having a water problem with Ghawar that they have "solved".
Outside of that I don't see anything in particular about Saudi Arabian production that would point to any dramatic events surrounding production over the last few years. And I see no indication of them ramping up production to overcome declines in the rest of the world.
So overall what ever management strategy KSA is using for their oil production it seems that its consistent with the same one they have been using for the last 40 years.
I really think we are using the fact that we became concerned about Saudi Arabia to expect that something has happened recently. I just don't see it. At best for a brief period of time a small hiccup happened.
But we do have one more piece of information that modern methods seem to have allowed us to double the production rate for a given reserve vs what could be achieved with 1970's technology and that KSA has taken full advantage of advances in technology yet has not dramatically increased production from 1980.
So since 1980 it seems to me outside of lowering production a they have been using technology to ensure that they have certain production levels.
So to finish if they did have a peak production or better a 50% URR event its probably well in the past and they have used technical innovations to manage production rates.
If they have ample reserves we have no indication that they are in a hurry to ramp production regardless of world events.
So whatever is happening in KSA its nothing new either they are well past 50% URR or they plan to manage production well into the coming decades.
Note the big ramp up in production in the Seventies, in response to higher oil prices. The decline in production in the early Eighties was in response to lower oil prices. And in 1986, they said to hell with it (perhaps with some encouragement from the Reagan Administration), and increased production.
They then started ramping up production again in 2003, in response to higher oil prices. But in 2006, they started producing less oil, in response to higher oil prices. Of course someone argued, based on data through 2005, that the Saudis were at about the same stage of depletion at which the prior swing producer peaked.
A long post in order to state the obvious.
I vote b).
Either way the point is the situation in KSA has been known by KSA for a long time.
Now you vote B but I'd say looking at the graph I don't see a country that has made large new discoveries over time and adjusted as the extent of the fields became understood. I see a country that made a decision based of production in 1980 and reserve estimates in 1980. I agree with WT the absolute production amounts where decided at various times in the past but the plan if you will shows no indication of any real change based on reserve data at all.
So all that time they were making these reserve additions never once did they decide to up baseline production ?
I'm confident that its fairly easy to come up with a plausible plan starting with 1980 being close to peak production and with reserve information fairly well known at that point and that this information has not changed significantly since. I could easily come up with the sort of production profile KSA has employed and in fact its effectively the same strategy used in Texas but for obvious reasons from a more informed perspective given that Texas had peaked.
Trying to match the production profile to Plan B is tough the decisions are pretty arbitrary and the choices of production levels given that probably peak production would be in the 20 mpd range don't make a huge amount of sense.
Today we have seen claim of reserves approaching 400 GB so what the heck are they doing producing at the rate they are ?
Surely in 150 years they know that the rest of the world will be out of oil and we will probably not allow KSA to be the world only oil producer. Your in effect claiming they are happy and planning on being the last whaling ship.
I'd like to see a serious and reasonable proposal for why KSA is producing at the level they are if they have such huge reserves. And I don't believe for a minute that the Kingdom is full of farsighted souls that have planned 100's of years into the future.
That is all just speculation.
I assure you the future of Saudi Arabia was pretty well known in 1980. Wonder what drove the Saudi's to finish takeover that
year ? And then begin a very conservative production policy ?
Hmm by 1980 it was clear that US production had peaked and would not recover. KSA ....
So again we see ample evidence that a decision was made in 1980 based on information available before 1980 and nothing since has caused any material change in this decision.
The concept that KSA had 240 GB of oil was not considered before 1980. And we actually have a lot of information from before 1980.
Hubbert died in 1989 btw ten years after Aramco's takeover.
My reading of history indicates that peak oil was taken very seriously in the 1970-1980's it was not considered a crack pot theory. The argument was not that peak oil was false but that new discoveries where still possible.
Hubbert worked for Shell but Shell and Aramco
Read this.
http://globalpublicmedia.com/transcripts/675
And this is good reading.
http://www.virginia.edu/igpr/APAG/apagoilhistory.html
http://www.answers.com/topic/saudi-arabian-oil-company?cat=biz-fin
Now you are drifting off to fantasy land.
I think he really means that the geology of the country was fully known (more or less), that the extent of the oil reserves were established, and that the production profiles on a field by field basis were logged out. By the future of the country being known, of course, he really means that the geologic past was understood. By referring to the next forty years, he was relying upon the occurences in the past forty million.
Partially correct the geology was well understood. It also looks like production may have been peaking right before KSA cut it in half. Also Al-Naimi was in a position to know the details of the production and reserves inside Aramaco.
Next he was fast tracked starting in 1979 with a stint at Havard for the chairmans position. See my posts below it looks like he was at Standford the same time as Hubbert and the areas they worked in overlapped heavily. Outside of potentially overlapping with Hubbert potentially multiple times I see no reason for Al-Naimi to have been effectively vaulted into his position. Including the Harvard stint to make up for his deficiencies.
As of right now my working hypothesis is Al-Naimi did a Hubbert like analysis of Saudi Arabia probably in 1978 and he may have had access to earlier versions of Hubbert's work .
And it looks like someone believed him.
The man himself seems to be a true believer in using technology to overcome problems. But the flip side of this is that he would have been aware of problems that needed technology to overcome. He comes off later in his life as someone who successfully won a war.
So see my posts below lets see if Dr M. King Hubbert signed his thesis.
1980 was a very interesting year.
Aramco was taken over completely in 1980
and something else happened that year.
http://www.hubbertpeak.com/hubbert/nehring.pdf
Hmm ....
http://en.wikipedia.org/wiki/M._King_Hubbert
http://www.kaust.edu.sa/about/bio-al-naimi.aspx?nav=gb
Do we see Stanford university in two different places ??
And who are these two people you may ask yourself.
Did this young grad student meet the famous Dr. Hubbert ?
So it seems some interesting things took place in 1963
then again in 1980.
Would someone at Standford be willing to go grab Al-Naimi's masters thesis I've very interested in finding out who was on his committee. And of course what it was about.
Also his biography mentions he studied or worked with some famous American geologist's but the names of these people are not mentioned.
If you want to understand KSA production esp since 1980 you need to understand the man that orchestrated it.
No offense intended, but I don't think you have an historical perspective on what nationalism is, how it works, its origins in western culture and it's spread to non-western societies over the last century.
None taken.
The question is who does the House of Saud owe its allegiance to?
Exactly. To answer that question we must know something about perceptions within the House of Saud about where their authority to rule comes from. To understand the legitimacy of their rule we must understand if that source of authority is generally recognized within that society. And to understand what their likely future actions will be with regard to the nation (as distinct from the state) of Saudi Arabia, we must know to what extent that nation has become a part of that authority to rule.
In western societies we moved from a "divine right of kings" to a sovereignty based in "the people." It was in that move that "nationalism" developed. Nationalism in the middle east comes much later and is an "import" from the west, often through the administrative fiat of the British Empire.
So basically you have no clue and are just messing with us.
It looks like Robert's assumption is reasonable.
I'm sorry, but I don't understand that response. I'm trying to lead you to a different way of thinking about this and you conclude that because the answer isn't clear that you'll just fall back on your original uninformed assumption that others are just like you?
Aye, Shaman,
To manage the fields the way the Kingdom does. I think you need to put yourself in the place of the King, what does the King desire, and what does the King think will work for the benefit of his family and to remain the head of his tribe.
The Arab mind from what I have heard and observed does not think anything like a Westerner. Their objectives and purpose are not like ours.
The King (and his family) wish to remain on top, whatever it takes for him to hold that position, I say, that is what they will do. Which means a Malcom X type of philosophy,..."whatever it takes".
even on the deep slide down, if they end up on top of the end, that will be victory for them.
example of how the Arab mind differs from the western (not counting bush neocon torture advocates ;) )
http://www.breitbart.com/article.php?id=071115145104.rykb7bub&show_artic...
200 lashes for the female VICTIM of a gang rape.
when you can begin to understand how their culture and "government" legal system work. Please point us to that info Bob C.
Or Guantanamo, or death penalty...
Yes, let's play the double standard game. "Our record on Human Rights is crap, but let's ignore that and assume they are all ruthless money-grabbing primitives who will sell their mother for a profit".
Did we also forget the people in the US demanding the ME give them "our oil?" It is the West who have squandered their oil, and our now demanding that the ME who have carefully managed reserves sell them off cheap. It becomes quite easy to see how people in the ME hate the US. The US is the source of so much bullshit and double standards.
I still haven't seen anyone explain why the Saudi royal family would squander their oil reserves, apart from borderline racism.
Is that a good explanation of why the US sent its industry to cheaper soils?
Plain old personal profit seems to work for me. And I don't know anybody who isn't somehow borderline racist if you delve deeply enough.
"Iran said essentially the same thing at the same time, that any of Saudi's customers could pick up the phone and offer to purchase more crude, yet nobody came out and suggested that they had been unable to secure Saudi crude"
Robert, IIRC the Saudi's said that they were not willing to discount, in order to sell more.
The market cleared at a high price, and at that price there were no additional buyers. That's not too surprising - it's almost a tautology.
This is, of course is consistent with either scenario. OTOH, it definitely indicates a willingness to deceive, to the point of flat out dishonesty, when they say that they have more than enough crude, but they're not responsible for prices.
If I were KSA, I would want estimates of:
1) Long-term price elasticity of demand. How much will people conserve as the price rises?
2) Income elasticity of demand. How much more will people want as global GDP grows?
3) Effect of oil price on GDP growth.
4) Long-term price elasticity of supply. If the price rises, will other countries scale up their production? This includes oil alternatives, CTL, etc.
5) Expected changes in supply and its elasticity in the future, due to depletion and technological innovation.
Given estimates of those functions, it should be possible to project a [price,quantity] trajectory that would maximize profits. Unfortunately, quantitatively estimating those functions is not easy, so you end up playing by heuristics and a sense of balance. Prices should be high enough to make money, not so high that demand breaks down (either through price elasticity or a big hit to world GDP), and not so high that other suppliers scale up. It may be possible to get some estimates by playing with the price -- cut production to drive the price up, and see how the world responds -- but you're hampered by needing long-term estimates, changes that occur when prices stay high for years.
My guess is that KSA now believes that the rest of the world is maxed out, and depletion (5) will outpace both supply growth due to high prices (4) and demand elasticity (1), and therefore high prices are not a threat on those fronts. That leaves GDP growth (3) as the main factor to watch, and that should be relatively self-balancing. If prices rise so high that GDP growth slows, demand will slack, and prices will come back down.
RR:
Your analysis is brilliant - as far as it goes.
One must understand, though, that there are big geopolitical realities that TPTB in KSA must certainly take into account:
1) The country is ruled by a large family. Who knows what sorts of internal family political games are being played?
2) This elite family rules over a mixed bag of subjects, some of whom are very hostile and restive. Preventing domestic disturbances must rank at the very top of their list of priorities. The rulers know full well that if they don't keep the lid on so that they can stay on top, there will be no future generations of their own family to have to worry about.
3) The KSA is located in the middle of very dangerous territory. They do have to consider how their actions might contribute to greater or lesser regional instability, and how they might enhance or weaken their own strategic position.
4) Finally, the KSA is for all practical purposes a protectorate of the USA -- the 1000 lb gorilla that has come charging into their neighborhood. When it comes to the economic impact of price changes among OECD members, not all OECD members are created equal. The KSA is quite aware that they have got to pay special attention to how their actions impact the US, and proceed with an even greater level of caution WRT that relationship. The bottom line is that the KSA does have to pay a form of "tribute" to the US empire in the form of exercising quite a bit of restraint from maximizing their own gains at America's expense.
My guess is that while they might start out with something along the lines of your analysis, that is just the baseline which is then adjusted as needed to accomodate these geopolitical realities.
Thus, it is possible that the KSA might do something that doesn't seem quite rational or optimal from a purely economic perspective. Whenever that happens, it is a good bet that one or more of the above geopolitical factors is operating to override purely economic considerations.
This in turn illustrates why predictions can be such an "iffy" business - especially when they involve the future!
In the USA we are not officially in recession until at least 6 months after it starts. Don't know how the rest of the world makes that call but for your theory to work the Saudis would need reliable indicators of the onset of recession which are much faster than those of American economists. I think they only watch how fast dollars/euros/yen/whatever are coming in. If they cut output and the amount of money coming in increases then they cut output again until the amount of money starts to drop. Same thing with increasing output. Either way they would make small changes in output perhaps quarterly. What is most omportant to the Saudis is not how much oil goes out but how much money comes in. What's a king to do if a prince has a bigger flying palace than he does?
Hello R-squared,
Thxs for this keypost--well done. I believe the Hirsch report on the globe needing twenty years of mitigation to shift from FF-detritovore to biosolar lifestyles should take primacy; ye ole Precautionary Principle.
I also echo the upthread poster's comments on the MidEast's Overshoot and dire dependency on desalination and food imports. Thus, as posted many times before:
-------------------------
An exporter of one-time use FFs should only trade for long-term biosolar goods to build a long-term advantage.
-------------------------
IMO, this combined with massive Peak Outreach [which includes wise family planning], and Asimov's Foundation concepts is the best way for them to prepare for the shift from FF-MPP to Biosolar-MPP [or Eco-Technic: nod to Kyle's recent keypost on TOD/ANZ].
Standard Disclaimer: I am no expert!
IF I was the KSA topdog: I would gladly accept a fully independent oilfield audit [as suggested by Matt Simmons] in exchange for some guaranteed large amount of biosolar goods for some specified period of time. Throw in a global promise to not attack KSA in a stupid resource-grab war as an additional kicker to sweeten the deal.
I have no idea what the $$$ dollar value would be, but the quid pro quo allows KSA to peacefully ELP-transition with the minimal, internal machete' moshpit, maximize long-term FF-exports to help blunt the importers' ELM problems, and clearly informs the world that mitigation is underway.
The FF-info is clearly more globally important than the FFs themselves so that the global community can wisely plan the best way to Overshoot transition from FF-MPP to biosolar-MPP. The global FF-paranoia has already caused WW1, WW2, the Iraqi Wars, and numerous other energy & political skirmishes--all non-productive, stupid wastes of treasure and lives.
Call me a dreamer if you wish. I am just a fast-crash realist working to avoid the worst with my speculative proposals. Time will tell.
Bob Shaw in Phx,Az Are Humans Smarter than Yeast?
Good work Robert!
They should be looking out for themselves, the US would.
While it is obvious (to me at least) KSAs surge capacity isn't close to what they say, but they may have some capacity in reserve. Also, it is fair to say that the remaining OPEC 10 members do NOT have ANY significant reserve capacity.
Now, here is one of the wrenches in the whole mess - currency.
KSA lost 261 Billion in its treasury on USD holdings over the last 4 months or so. That is a BIG NUT!
So, if there is any reason NOT to ramp up capacity in the short term it is currency troubles.
BUT, that virtually guarantees torpedoing the US economy.
The decision may have been made already.
Since I think even OPEC knows that reducing the price of OIL will not stop the slump in the US economy or its shame spiral.
So one tidbit to think about -
If KSA knows that lower prices of crude will not stop the US economic shame spiral of doom,
AND,
USA (and/or world) recession/depression would be BAD for OIL prices...
UNLESS
They know we are AT or very NEAR PEAK OIL production (which is the only scenario where oil prices would not necessarily retreat)
My read is that they know we are VERY CLOSE!
More important its seems they have been aware of the real state of affairs for a LOOOONG time.
I'm not saying they are perfect I think they expected some increases in Non-OPEC production for another few years.
My best guess is that the plan was the would ramp up and then we would see a surge of non-opec production a few years later and they would cut again. Two unexpected events happened some production troubles in Ghawar and no Non-Opec surge to cover a drop. So I think the early peak of Non-Opec production was a bit surprising for them.
This is a complex subject, how one would manage Saudi's oil reserves?
There's a joke about Ireland, where an Englishman gets lost while out walking over the moors, he wanders around in circles, and he finally meets a wizened old man, and he naturally asks for directions back to his hotel and his warm bed. The old man looks up at him and sighs, replying, "Well, I wouldn't start from here, Sir!"
That's sort of how I feel about this question. That doesn't mean it's not a vitally important question, which has taxed people for a long time. How much oil do the Saudi's really have? We do know that Dick Cheney thinks Iraq has vast, untapped, reserves. How does he know that? Does he know more than the rest of us? Would he have sent an army to invade and occupy Iraq if they didn't have massive, under-exploited reserves?
Before the invasion of Iraq, Cheney held a number of secret meetings with top oil executives, I wonder what they were discussing? Evidently it wasn't connected to the wisdom of invading Iraq, as they were, publically at least, against it. Were they debating reserves and how best to exploit them?
What we can be sure of is that Cheney knows a lot more than we do, why do I think this? Well, Cheney has access to far more information than we do - I hope - otherwise nothing they've done makes any sense, and the US is being run into the ground by a gang of irrational gangsters! Heaven help us if that's true!
There's an interesting website run by someone who calls himself Fabius Maximus. One can just Google Fabius Maximus and find it. The real Fabius Maximus was a Roman general who fought in the Punic Wars against Hanibal the Great. Fabius in slow, defensive war, and attrition. He wanted to wear Hanibal down. Fabius was know as the Delayer.
Anyway, the modern Fabius Maximus appears to be an serving officer in the US military who writes about warfare and grand strategy - and recently Peak Oil. He's rather sceptical and he reads the Oil Drum, though I'm not sure if he posts on the Drum, but I've got an idea who he might be.
He's been looking at Saudi Arabia, and concludes that the US government must, or should know, pretty much how much oil Saudi has left, because we have spies in Saudi and detailed intelligence about their oil-fields and reserves. He argues that this has to be true, because, given the vital importance Saudi's oil reserves have for the world's economic well-being, Washington must know the truth. Anything else would be extraordinary!
He argues that we must be years away from a Saudi peak, ten or twenty years, because if it were now, or in a few years, the US government would already be taking substantial and very visible steps to mitigate the consequences of this historic and potentially world shattering event! And as they are not doing this, it follows that the Saudi peak must be decades away, because the US government has to know more than these irritating doomsters by God!
So, if we follow Fabius' arguments and logic, we have to conclude that Saudi's peak won't happen for a long time and we can all relax! But a lot does rest on how rational, intelligent, and competent, one judges the Bush/Cheney team to be.
What if the Saudis mostly believe (or believed) that they have large remaining proven, probable and possible reserves?
I have frequently used the example of Shell having to reduce their own proven reserves by about 20% or so, and the Yibal Field production decline was a principal reason, where Shell was shocked by a steep increase in water production after they had boosted the oil production rate with horizontal wells. They were gearing up for higher oil production when they got less oil and a lot more water.
Note the significant change in Sadad al-Huseini's comments, before 2006 versus after 2006. (Remember the Saudi stock market crash at the same time that Saudi oil production started declining?)
I believe your right Westexas, the Suadis probably do believe they have substantial reserves. But I suppose it depends of who we mean by "the Saudis"?
Saudi society is very complicated. It's a very young nation. One could argue it's a very "artificial" nation as well. It was created in war. First the British more of less carved it out of the remains of the Ottoman Empire, then it became an American "protectorate". It's also the home to a very conservative and highly influential branch of Islam, which, financed by the Saudi Royal Family, has spread around the world.
It's doubtful and debatable whether Saudi is a nation as we'd understand the term at all. It has a very unusual social structure. It resembles a fuedal monarchy pressing down on a foundation of "peasants" and "slaves". At the same time as parts of society are ultra-modern and sophisticated. And of course there's it's position as the guardian of Islam's holy sites, it's vast wealth, and massive political, economic and social inequalities.
It's a place bursting with contradictions and contrasts, and an exploding population who want jobs and reforms and not hand-outs designed to passify them.
So, if the Saudi elite have really squandered their only resource - oil - and sold it far too cheaply for decades, in return for US protection of the monarchy, and the masses find out about this, the country will explode in a revolution. Therefore, the elite who have disproportionately benefitted from their cosy relationship with the US for the last fifty years, have to believe and act as if they have enormous reserves. Whether they can maintain the charade for much longer, if it is a charade, is a difficult and unnerving question.
While it seems to make sense that the Saudis would want to manipulate price to maximize total income over time, I'm not quite convinced. Huge stockpiles of U.S. dollars may not fulfill the second goal of serving future generations. Foreign currency is only useful for what it can buy from the country of origin, right? The Saudis only need enough dollars to buy weapons and some U.S. oil services. What else is there to buy? Any excess dollars can only buy U.S. securities, storing the money to buy future weapons.
Maybe there is a point where they say enough is enough and allow demand to collapse due to sky high prices, preserving future oil for their people. Gotta admit though, that really doesn't sound like House of Saud behavior. But I still get this nagging feeling that they have calculated how much income they need, and are seeking the lowest possible production level that achieves that income.
Good article but I think you miss the internal angle
Consider that SA is ruled by a relatively small elite, who benefit enormously from the oil wealth while the great majority benefit (relatively) much less, why does the majority put up with it?
Consider an average citizen a soldier or policeman perhaps. Why does this person put up with earning a meager salary while the rich can’t seem to spend the money fast enough?
First consider the case where it is believed the oil will last forever. This average person is doing OK, he is feeding his family. His kids are getting an education he has every reason to hope they will lead a good life, maybe even be better off than him. Under these circumstances even retched excess like buying an A380 for use as a flying place can be written off as a well earned perk of a leader and no skin off his nose.
Now consider if it becomes well known that the end of the oil gravy train in near say 10 years. Now this person has no security for the future, will he be able to feed his family? Ten years, little Akmed won’t even be out of school by then! Now the purchase of an A380 is seen in entirely different light, he is stealing the future of this man’s family how can he do anything but resist.
This is the calculus, Saudi leaders consider, and why they will NEVER admit to a peak even way into the decline they will be making excuses and dismissing the most obvious of evidence.
The Saudi's never have to withhold oil, all they have to do is withhold investment. Remember, we have been expecting them to make the massive investment to assure "spare capacity".
http://www.theoildrum.com/node/2978
If I were Saudi Arabia, I would say, "Look, it is time to (a) demonstrate your trust in us as a supplier (b)help shoulder the cost of the oil you "say" you need (c) have the opportunity to share in your willingness to take some risk and share the load for the oil you "say" you need and thus share in the reward.
Thus, we will sell, through a respected agency, development bonds, backed by the full faith and credit of Aramco, and if we find ourselves unable to pay off the bonds in cash, we will pay them off in oil (payment in kind) of said quality, or if reduced quality, a greater quantity of oil of lower quantity, using standards agreed to by API, Aramco and outside auditors. These bonds will be market competitive will other world class investments.
You ask us to "assure" we have the oil. We are asking you to "assure" that you have the demand. We can share the cost of investment, and if either turns out not to be true (either we don't have the oil or the money, and cannot deliver it, we default) or you do not have the demand (you shared in the cost of developing the new oil you say you needed, and will be awash in cheap oil you do not
need, thus, you share the risk), then, frankly, we are in this mess together!
Roger Conner Jr.
RC
Maybe we can't get a clear idea of how much oil the KSA has because they don't know themselves—and possibly they don't know because they are nuts. Perhaps the Saudi oil sheiks see themselves as benevolent trustees of the world's energy. Maybe they believe Allah has entrusted them with taking on this vital humanitarian job for the world. And look--they have kept the world economies mostly stable and growing since 1980-1. And as we all know big organizations— governments and corporations alike are bureaucracies full of fumbling ineptitude and incompetence. Isn't Aramco a giant government corporation? Why would the giant bureaucracy of Aramco know any better about their situation than the Texas oil tycoons did in 1970 about what they have? Suppose some intelligent Aramco official goes to have a talk with a high ranking sheik. “Sir, I believe that our oil resources are declining and we need to take account of our resources.”
“Nonsense. Where did you get this crazy idea? We have always had oil! We have half the world's oil—everyone knows that!”
“Sir, last week several of our Asian customers ordered shipments and we are having trouble to increase the flow to supply them.”
“What? I'll tell you what. Don't give them any if they think we don't enough! We have been supplying them with cheap oil for years and now they are complaining we can't ship it? The nerve!”
“No Sir. They were not complaining at all. It is just that we couldn't get it.....”
“You listen here. The KSA will not tolerate this kind of incompetence. The world is depending on us. I want to you to give 50 lashes to the workers responsible for this screw up. Then get that oil to Asia. No excuses.”
“But Sir...”
“I said no excuses.”
Some days later:
High ranking Aramco official to underling: “What is this I hear about oil not getting shipped to clients in Asia?”
“Sir, They questioned our ability to supply it. So we said, “All right. If you think we don't have it then just eat shit. How dare you doubt us! Maybe we will just hold it back for real and then see how you like it! Why don't you just order some oil from Matt Simmons if you don't like it?”
“I bet that taught them a lesson!”
We are discussing logical reasons why the Saudis are not forthright with their oil reserve information, but perhaps there is no logic behind it all. All this above is a wild speculation—but perhaps it is closer to the truth than the Royal family secretly conniving for some mysterious motive. And it explains the interview posted yesterday with Aramco's chief who blamed oil high prices on the oil reserve negative naysayers.
"We are discussing logical reasons"
You are trying to get Me and Stuart and Westexas to write a novel for you.
Good Luck.
"All this above is a wild speculation"
Really? Shit. Well I fucked that one up... Cindy...Cindy....Cindy!
That little bitch from LA says he wuz just trying to make a movie.
I think we put way too much emphasis on "logic" and "rationality" in relation to trying to understand the way the market functions, and how, and why decisions are taken. Of course it's part of classical economic theory that the market is fundamentally rational, but I doubt it's a true or even half-way adequate explanation.
Saudi is a pretty strange place, yet not that different, it's only that power relationships there are so obvious. They have a ruling elite, the House of Saud. They've not introduced the trappings of democracy and probably never will. In lots of ways Saudi resembles a form of state that existed in medieval europe before the enlightenment and the rise of the urban, middle-class, who challanged the aristocracy for power.
The Saudi Royal Family are in a bind. They have balance on a knife-edge. How do they stop a social revolution sweeping them away, yet give up enough power, in controlled doses, to satisfy the demands and aspirations of the masses, and especially the discontented middle-class?
It's a dilemma, how to evectively keep power, whilst at the same time appearing to give it up. Retaining absolute power by force is a risky business, but loosening the reins could start a process which gathers momentum and becomes unstoppable.
As long as the country appears fabulously wealthy and powerful, the ruling elite can buy-off the oposition and ride things out, but, if suddenly the news leaks out that the source of the countries wealth is drying up, and it's been grossly mismanaged by the elite who've only thought about enriching themselves and not the longterm prosperity of the country, then this news would be dynamite under the system. Therefore, one probably doesn't really want to know the bad news, and puts off the day of reckoning for as long as possible, like a gambler that's in debt way over his head.
Hello Robert,
thank you for another great chain of thoughts mostly agreed
by me. Thoughtful and interesting comments again, too
(where Fabius Maximus I consider a fen fire..).
To me, all things are in place now, with ELM and other
outstanding contributions of the last months, including the
fact of Ghawar's massive watering out, but not knowing
the exact date of the peak, because the satellite pictures'
dates are secrets.
I've learnt now, why all the things happened and continue
to happen - mostly by TOD and other outstanding resources
like Paul Chefurka & WOCAP -
and most interesting, that my projects of the last years were
- enough PV power to drive the heat pumps for solar heating
and deliver battery charging
- cistern for rain/water
- localize as much as possible
- last project planned for next year 6.5 inch additional
hemp insulation
all in sync with TOD readers recommendations :)
and last but not least, I concentrate on permaculture -
best start for Europe/Austria
http://krameterhof.at/Englisch/anzeige.htm
So, I'll stay tuned vor most valuable information
from TOD's contributors and readers.
Have a nice weekend,
kind regards
BTW - if there are doubts whether large series of numbers
are rigged (oil ... numbers), a computerized check with
http://en.wikipedia.org/wiki/Benford's_law
might help; as far as I know, it's done with US tax declarations automatically..
Here is the article discussed above:
"When will global oil production peak? Here is the answer!"
http://www.defense-and-society.org/fabius/peak_oil_I.htm
I believe you will find this relevant to your discussion.