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Saudi Arabia did not make up for Libyan oil
Posted by Stuart Staniford on April 15, 2011 - 10:43am
The OPEC Monthly Oil Market Report and IEA Oil Market Report both came out on Tuesday and allow us to see how events in the Middle East are starting to play out in global oil production statistics.
NB: This is a lightly edited crosspost from Early Warning
In particular, here's the last three years of global total liquid fuels (not zero scaled):
Note that the rise that's been going in since last fall has now been abruptly interrupted by the Libyan situation, and total oil production has fallen by about 0.5mbd. This is about 0.6% of global production, but given that the world economy has been growing rapidly and needing about another 0.5mbd/month, the shortfall over what would have happened in a counterfactual world with no Middle Eastern unrest is more like 1.2% of global production.
In terms of the price production picture, this has put us much more into territory akin to the 2005-2008 oil shock:
We can put the situation almost entirely down to two things: the fact that Libyan production has plummeted, and that Saudi Arabia has made no significant move to compensate. In fact, Saudi Arabia slowed down production increases that it had been making in prior months. First, here's all the Libyan data currently available:
So the world has abruptly lost something like 1.3mbd of oil production between mid February and March. Now there were a lot of news reports in the business press at the time this was first happening that Saudi Arabia was going to make up the difference. For example, according to Reuters at the time:
Saudi Arabia has increased its oil production to more than 9 million barrels per day (bpd) to compensate for disruption to Libyan output, an industry source familiar with the kingdom's production told Reuters on Friday.
"We have started producing over 9 million barrels per day (bpd). We have a lot of production capacity," the source said, but said he could not say when the change had taken place.
Oil prices spiked to a 2-1/2 year peak of nearly $120 a barrel on Thursday, stoked by concern the wave of revolutionary unrest gripping world No.12 oil exporter Libya could spread to big oil producing countries in the Middle East.
A report out of Washington by industry publication Energy Intelligence late on Thursday said Saudi Arabia had made the change quietly to try to avoid stoking regional tensions.
"The Saudi move has not been announced publicly, most likely because of the political sensitivities in the region and the internal dynamics of OPEC," Energy Intelligence wrote.
Now that the stats are out, we can see that this was, well, let's just say "less than accurate". Here's all the Saudi production data I have (not zero scaled to better show changes):
Indeed Saudi production has increased to around 9mbd, but the timing makes it clear this has nothing to do with Libya. For better comparison, I have put both the Libyan and Saudi averages on the same graph (only since 2005), with the scales adjusted to allow easy comparison. In particular, note that the size of the units on both scales is the same, so similar vertical moves in both curves mean the same amount of oil, but the Saudi scale (left hand scale) has been shifted to put the Saudi curve next to the Libyan one (right scale):
I have circled the March data in each case. You can see what was going on. The Saudis were slowly increasing their production from last fall through February, presumably in response to growing global demand and rising prices. But then, in March, when Libyan production went into freefall, they put on the brakes and did almost nothing to make up for the shortage.
The burning question is: why? Back in 2006, when their production started to gradually decline from 9.5mbd even as global oil prices were in the worst spike since the 1970s, I was an advocate of the view that the decline was largely involuntary: they'd never produced more than 9.5mbd, they'd underinvested for decades, and some of their big fields were getting very tired (particular northern Ghawar and Abqaiq) and they were starting a big rash of new projects and ramping up their rig counts at the same time.
I see current events differently. The reduction in late 2008 was clearly voluntary to support prices in the face of the great recession. There's no new projects announced, and the rig count hasn't taken off. So my take is that the failure to increase production to compensate for Libya is deliberate. We can only speculate, but my guess is that, having watched how the west has helped to ease Mubarak and Ben-Ali out of power and is intervening in Libya to the same end, the Saudi regime is in no mood to care about our desire for more oil. Instead, they are very much in the mood to build as large a war chest as possible with which to appease their own population, strengthen their defense measures, etc.
So, instead of Saudi production increasing to compensate for Libya, total world production decreased, and oil prices went up sharply to enforce the necessary conservation on the world's oil consumers.
If you want further evidence, I note that on February 24th, I wrote a post suggesting, based on my reading of press coverage, that perhaps the Saudis were not planning on increasing production. Looking at the spread of Saudi grades of oil to Brent prices. I said:
The real tell will come in a couple of weeks when we see what happens to these discounts once the Libyan situation comes out in the data. Will Brent spike while the prices of these Saudi grades languish, since after all, it's only the light sweet stuff that's in short supply?
Here's my guess. When multiple major news sources run apparently independent stories at the same time, all propagating the same plausible but completely false line, I get suspicious and cynical. I think we are seeing the effect of someone's (rather successful) P.R. push. Someone, probably the Saudis, wants us to think that Saudi production can't be substituted for Libyan, and it isn't their fault. If that's true, then I hypothesize:
- Saudi production is not going to increase in response to the Libyan cutoff, or not enough, anyway
- Prices for Saudi grades of oil are going to spike in a very similar manner to Brent
So, here's the latest data on the discount of the three Saudi grades of oil, to Brent (with a seven week moving average applied to reduce noise):
You can see that these discounts have actually fallen to levels usually seen only in the depths of recessions when the Saudis are trying to raise prices. So rather than trying to flood the market with their oil to help supplies post-Libya, the Saudis are ramping back and taking profits.
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Very interesting Stuart. Any chance you can run off a rig count chart for KSA v oil price (I'm away from my desk). Looking at the data it seems that UAE and Egypt are up a little Feb and March but that KSA have not really responded. May be a number of reasons for this:
1. Foreign contractors view the situation as too unstable
2. Rigs not available
3. KSA really does have 2 to 5 mmbpd spare capacity in reserve.
4. They can't be bothered. Its worth noting that in 2008 they bust a gut trying to build capacity and were rewarded with $40 / bbl.
As you point out maybe they prefer to spend their cash on other things.
On your price v volume cross plot its clear we have a new peak and world has built some new capacity in excess of declines - there is a fairly long delay from price signal to new capacity materialising.
For a long while I thought that new price spike would peak at lower price than 2008. Now I think it may go a bit higher (in devalued $) with world adapting to higher price environment. Recovery seems to have a little momentum driven by QE steroids.
I understand the statement, but do not understand how the world has adapted to a higher price - can you elaborate?
It simply has. Here in the UK for example, we had truckers striking at 80p litre. Now it's £1.30 and I don't see the protests. In fact I would tentatively say there appears to be no less traffic on the road than 5 years ago.
Oil was too cheap in the first place. Peoples expendable income was starting from a baseline that was historically very high so there was plenty of slack in the system to cut back on luxury items and non-core spending in order to absorb rising costs asscociated with increasing opil price, eg food, fuel, utility bills etc...
Marco.
It has been widely reported in the UK that there is less traffic on the roads. There is less congestion at peak times. Road casualty rates have fallen. Total fuel sales are down.
People are adapting their behaviour, driving more slowly, and less often.
For now the effect is small but it will become more evident soon.
Ralph i'm going to call BS on your statement.
Natioanl statistics data:
(BVMI) in billion vehicle miles
1999 111.6 124.0 116.0 116.8 113.2
2000 * 111.4 125.8 116.4 116.0 113.3
2001 ** 113.2 129.0 115.7 118.9 115.1
2002 116.2 132.2 116.8 122.6 118.0
2003 116.3 139.1 117.5 131.1 118.9
2004 117.7 146.2 121.0 123.8 120.9
2005 117.5 150.4 119.7 126.5 121.1
2006 119.1 156.6 120.2 126.2 123.1
2007 119.5 164.4 121.1 132.6 124.4
2008 118.8 163.7 118.5 123.1 123.4
2009 118.5 160.1 108.7 123.8 122.2
like I said there appears to be no appreciable change in 5 years.
If anythink peak hour is now spread out more.
http://www.dft.gov.uk/pgr/statistics/datatablespublications/roadstraffic...
Marco.
Those figures are for the second quarter of 2010, before the latest series of price rises hit the consumers. We'll know for sure next year.
Actually these figures are for 2009. Q2 figures are available but not in Marco's post.
Latest Q2 2010 All Vehicles 121.1. In Q1 2008 we peaked at 125.4.
That's a decline of 3.4%.
Even in Marco's posted annual figures total increased every year from 113.2 in 1999 to 124.4 in 2007 then dropped in both 2008 and 2009. The decline continues
I did state up top ""there appears to be no less traffic on the road than 5 years ago."" and that is the case 2006 vs 2010 and were about flush. Price increase over the lst 5 years must be close to 80+ % so even if I accept the 'from peak' fall after 2008 of 3.4% rather than over the 5 years I stated it still comes no where near the level demand destruction relative to the price increase!
Ergo it has been very well absorbed.
You guys are really putting ap a wafer thin argument here.
Marco.
Marco,
But RalphW's post never mentioned anything about "compared to 5 years ago". That was you. Based on historical trends we should be well above the level of 5 years ago anyway. Yes we carried on increasing with rising prices for a time but that's over and the fact remains that latest quarterly traffic for all vehicles is well down from the peak and the very latest data you linked still shows a "decrease of 1.2 per cent in overall traffic levels in Quarter 2 2010 compared to Quarter 2 2009." With the recent price jump I think I can pretty much guarantee Q2 2011 will be well down on Q2 2010 as well.
What's wafer thin about me quoting official stats?
Edit: I should add fuel consumption is down even more than mileage thanks to the cash for clunkers scheme removing old vehicles and generally more careful driving by many as the price goes up.
Well if you ignore the fact that the country is on its knees. I don't know anyone who thinks they have personally "well absorbed" increasing fuel costs but perhaps you just know much richer people than me.
What is wafer thin is trying picking a peak that lasted only a few months, using this as a bench for 'demand/usage/miles...whatever.' How many times have we had to lecture people here that you can't use transient peaks as proof of a sustained x/y/z?.
My central tennent remains intact - road miles (give or take a few %) have been generally flat IN THE FACE of an 80+% increase in the price of fuel.
The country being on it's knees clearly hasn't had a great effect on road miles. I'll conceed that if it dips another 2% through Q3-4 2010 and another 3.4% in 2011 then yes we would have fallen about 8-9% - but in the face of what, 80-100% rise in fuel cost? To put it another way by the end of 2011 91% of drivers/road miles will still be present despite an almost doubling of fuel cost.
I picked 5 years arbitrarlity. It doesn't seem right to judge across a 2 year spell. And also we had the big oil price peak in 2008 so I wanted to go back further than that.
This kind of leads onto my second statement up top - that theres plenty more to cut back on before you prise 'his/her cold dead hands' from the steering wheel. LOL loved that phrase. Sums it up to a tee.
As another piece of possible evidence for the world being able to absorb that higher cost. Does China not have about $2,000,000,000,000 in reserve currency and annual GDP 8+%? That's 13 billion barrels of oil (years worth) at $150 a barrel and a huge amount of growth leeway = a lot of absorbtion power!
Marco.
Well I can think of several people who've given up on a car and not by choice. But yes, of course the numbers don't plunge in double digit percentages immediately Supply/demand response has never meant that an x% increase in price results in an x% decrease in consumption.
As to China, I think their monthly statistical reports are more a work of fiction with every release. We'll see how it goes.
Who wants to wade through this document?
http://people.virginia.edu/~yo3t/wp/cars.pdf
Chindia will be more that happy to use up some of our 'surplus miles'!!
Hi Marco,
I like this conversation you are having w/ Undertow as it will no doubt be repeated regarding the U.S.- good points all around.
I think "adaptation" includes conservation and reduced miles is not necessarily a result of demand destruction. Many people who cut back their driving perhaps can afford to continue to drive to the corner store but for good reason, choose not to. Even where commutes are longer her in the U.S, more sensible driving strategies will result in reduced miles. Is this demand destruction or adaptation?
I think adaptation.
regards, Gab
Marco,
I was just reading Mish Shedlock today and found China actually has $3 tril in currency reserves. Wow. So, yes, they can afford to buy a whole lot of oil. The OECD countries are going to use less oil while Chinese consumption continues to rise. It is a Zero Sum world and we are going to increasingly be on the losing side of the summing.
Road miles: Down some due to the recession but also down some due to prices. Plus, there's probably been a shift toward using smaller vehicles. So someone who owns a Focus and a Land Rover is driving the Focus more and the Land Rover less.
My guess is in Western countries we've already hit Peak Miles. But that remains to be seen. If oil prices keep going up this year then, yes, we've already hit Peak Miles.
What do these 5 columns of numbers represent, and why does col. 2 rise out of step with the others?
Cars, Vans, HGV, other, total.
It's this chart from this PDF http://www.dft.gov.uk/adobepdf/162469/221412/221546/224925/224965/625360...
Thx, both Marco, & Undertow. Always good to have legends/labels to provide meaning to numbers. Much more informative with this context. Interesting divergent trends of late betwixt light vans and heavy goods vehicles...
I'd like to be labelled a legend thanks;-/
My 2c (or, in this case, 2p): In the short term, oil consumption is very inelastic in response to price. People have jobs they need to get to, shopping they need to do, etc. Businesses have goods they need delivered to customers at specific locations, people they need on the road in order to perform the service they're employed for. So they shell out, whatever the price. They might scream, but they pay. So total km travelled does not respond much in the short term to price. Therefore, the decrease in the figures in the tables above can be put down to the recession. The US has also had a recession, so the decreases there are explained by the same factor.
Beyond the short term, however, there is a more substantial response to price signals. If people think high oil prices are here to stay, they take it into consideration when buying a vehicle, when moving house, and when switching jobs. Businesses take it into consideration when deciding on their own location and their relationship to their customers. Because the average vehicle consumes far more oil per unit of distance than the best available vehicles for given needs, I expect that for the next 10 years or so, the medium-term response to higher oil prices will be expressed far more in a shift to higher fuel efficiency than in changes of transport mode or changes in geographical location. These latter responses will be present, but very much minor ones.
It is when large numbers of people are already using the most fuel-efficient vehicles suitable for the needs that you'll see fundamental changes start occurring in response to further price rises. Increasing the capacity of the public transport network and changing town planning, however, both take ages, so it would be a major mistake to leave them till the long-term crunch comes. In order to avoid large scale dislocation and suffering, preparation has to begin now.
It is when large numbers of people are already using the most fuel-efficient vehicles suitable for the needs that you'll see fundamental changes
The most fuel efficient vehicles are EVs, which don't use any fuel at all.
Your chart shows total miles increasing EVERY YEAR until 2007 and then actually declining for two years running (and I'll bet 2010 data will show a decline too). This is remarkable, and your five-year window seems a bit disingenuous.
Hi Colburn, in statistics we are very interested in the MAGNITUE of an integer or 'how much relative to a total' it has changed. Say little Johnny's sweetie ration is 120 m&m's per month and his mom allows him to have one less or takes one away from him per month. In the grand scheme of things it doesn't affect little Jonnys position much however he may percieve that loss or gain. As I said in statistics, magnitude is of utmost importance.
OK lets say little Johnny's m&m ration fluctates on a year to year basis but over a 5 year rolling period we work out that average for him.
Do you see the advantage in working this out? Yes thats right - it's because we are looking for long terms statistical significance.
Like I said above it could become (statistically) significant through 2011 ie we get a drop in road miles that 'Johnny might start to notice'
Marco.
Here's the data charted using preliminary official seasonally adjusted figures for the first half of 2010 as estimate for year.
UK Vehicle Miles (1993=100 or 256.2 billion vehicle miles)
Now I notice it but maybe I'm not "Johnny"
Undertow, please.....zero scaled graph...otherwise you're completely missing my point about it being 'significant'!!! LOL.
You really think Johnny's goint to mind whether he has 118 or 124 m&m's!
Jeez this is basic stuff.
I just knew you were going to say that. Just about every graph posted on TOD isn't zero scaled (including the oil price charts on every screen) or we'd need a screen a mile high to see anything. However if you can't see anything significant in the above chart then there's nothing I can say really. Your "lols" and "m&m" comparisons and references to a fall as "BS" (in earlier post) not withstanding.
If your "Johnny" sees petrol at 124p per litre or 118p per litre (not that long ago) where will he likely fill up? I know where I would but maybe you've got cash to burn unlike us "Johnnies".
To add to this, one can simply do the following math:
Total Fuel allotted * Average MPG = TOTAL MILES
Well the fuel allotted is basically set by supply. Well high prices mark when supplies stopped growing.
THEREFORE, Undertow has to be correct.
You violate the 1st law of thermodynamics unless you think that Average MPG was on a rapid exponential increase to counteract the lack of increases in fuel supplies.
Oct, you've made so many erronius assumptions there that I'm not even going to begin and counter. Sorry.
Erroneous. LOL. How do you drive further with less supply? Are you trying to tell me efficiency is outpacing the stagnation in supplies.
Please show evidence of that theory, cause the simplest model is: less money, less gas means less miles.
Of course, we are arguing as if the data is wrong here, when the data is telling us miles are contracting in lock step with the contraction in crude oil supplies which coincided in the same exact time.
While my argument may have assumptions, it is far simpler than arguing complex car insurance things.
Simple generally is closer to the truth.
This is why all your posts can be disregarded. Be privelidged i'm indugling you just this once.
Really 'lock step'?: lets show that statement for the nonsense it is.
From 2000 to 2007 the price of fuel in the UK increased by about 80%. Driving miles as seen on the graph here we are debating clearly incraese 7 years straigt. Lock step? ARe miles contracting in lock step? Of course not. You clearly have a severe case of tunnel vision here.
Next lets look at hte period 2007 onwards where the miles driven goes down again. Compare that to this graph of fuel costs:
http://www.whatgas.com/petrol-prices/unleaded-prices.html
The price of fuel ROSE staedily from Jan 2007 to Jun 2008: As you can see this is the part of the graph that as you put it is in lock step. That window of 18 months in 10 years that you have decided is in lock step regardless of what the rest of the graph is doing WRT fuel cost.
Lets continue.
From Jun 2008 to Jan 09 the price dropped for 6 months but the graph of fuel miles shows a yearly decrease.
From Jan 09 to present in shows an increase and driving decreases.
In all then it's only in 'lock step' as you put it for about 2-3 years of the 9 years of data we are looking at here.
So really you have chosen the bit of the fuel price graph that is in 'lock step' and decided it's all in 'lock step'. I've never seen such sloppy analysis.
Marco.
I will plot it for you OK.
http://blogs.wsj.com/economics/2008/10/24/us-driving-miles-down-56-in-re...
Why dont you read the articles first?
Here is the US data (COL1 1990-2009) for price of gasoline ratio relative to 1990 (COL2) and Driving miles ratio relative to 1990 miles (COL3)
The absolute 1990 price was $1.30.
The absolute 1990 miles was 13823458.
1990 1.00 1.00
1991 0.84 1.01
1992 0.84 1.04
1993 0.82 1.06
1994 0.83 1.09
1995 0.85 1.13
1996 0.92 1.15
1997 0.91 1.19
1998 0.78 1.21
1999 0.86 1.23
2000 1.13 1.28
2001 1.06 1.29
2002 1.02 1.32
2003 1.17 1.34
2004 1.40 1.38
2005 1.74 1.39
2006 1.96 1.40
2007 2.15 1.41
2008 2.48 1.39
2009 1.80 1.39
Appears to make a hyperbolic curve where high gasoline prices have neutered mileage growth. I'll leave the legwork to you to show similar data for the UK. I bet they are the same thing more or less. These data are not random noise. That would be a shotgun plot.
Their has been essentially zero growth in the face of high gasoline prices, comparing 2004 to 2009.
My wife just traded up from a car that does 28mpg to a car that does 48mpg. Thats evidence enough for me that you can see huge gains in efficiency.
OK Undertow you've forced my hand! I can see I've not fully convinced you. So here it is...my trump card...the sledgehammer blow!! In the past few years particularly from 2008 onwards there have been very significant rises in both road tax and insurance premiums. The former due to gov. policy on carbon emisions, the latter due to significant changes in the balance of insurance claims in recent years. Both of these rises (I will hopefully show) are significant. They are also well documented in the public press.
The reason I didn't want to use my trump card is it is not central to the debate here - however in the face of this data it has a place amongst the evidence presented to the jury!! That is it will demonstrate that your downward tick in the graph could be (partly/mostly) atributed to these mentioned factors rather than the price of fuel - hence winning me this debate.
Lets say the average UK car in a year does 10000 miles at 37mpg. Then at £1.20 per litre any 10p movement in price will cost them about £120/year (4.5litres = 1Gallon at 270 gallons in 10000miles).
Road taxes have seen 0-£1000 increases depending on the type of car. Insurance premiums, especially in the under 25's has rocketed over 60% in the last 3 years alone, with very little downward price on any othe age group. Off the top of my head premiums that were running at £800-£1000 for under 25's are no upwards of £1700 of late.
Both of these increases alone dwarf the increase in fuel cost and could well explain the dip in the graphs you are seeing in 'road miles'
Like I said this is my trump card so I doubt i'l beable to counter if you come back at this.
Marco.
What was the true change in fuel prices over the period? What was the actual supply of liquid fuel over the period?
The rest is noise. You cannot drive without fuel.
Of course, the same exact thing happened in the US, and none of these taxes and insurance schemes were in play.
So you lose the debate.
Oct, I wonder if I'm the only one who has utterly lost track of what the debate was that Marco might or might not have lost...
From what I gather Marco opened by saying that road miles were not down, but Undertow shows in the UK they are trending downward as seen in the graph. Then Marco says it is due to taxes and insurance costs, but the same trend occurred in the United States (which did not have any new taxes, insurance costs or greenhouse gas laws).
So from my standpoint since road miles have not grown at the pace of 3% per year which they historically did in the US, then the whole road mile stagnation and decline likely reveals a larger systemic factor in common between UK and US.
My bet is high fuel/oil prices in the West.
But he poo pooed me. So I wanted to say, "I win." LOL.
Paul it's quite simple. Driving miles showed an inflection around 2007-2008. They say that was cause of fuel costs - I think not. I think other factors. I also think it's not significant enough yet to witness on the road. I also made the point earlier that the peak hour seems more spread out -possibly giving the impression of less traffic.
Marco.
I think Marco's point was that the fuel price increase of 80% had been remarkably well absorbed by the road user, there has been a very small drop in the number of miles travelled given the increase in fuel price. I cant really argue with that, 80% cost increase, ~4% drop in miles. However, I am aware of people who claim they are driving less because of the fuel price in the UK. These claims dont necessarily square with the figures, but then if the majority of miles travelled are work related (unknown) then people may have little choice in reducing them. Rail is far too expensive in this country, and buses are too slow and unreliable.
I think that one of the main issues of this discussion is trying to discriminate between necessary miles travelled as in going to work etc and discressionary miles. Personally, discressionary travel has been cut back to almost nothing in recent years and necessary journeys have been combined whenever possible.
When was the last time you heard of someone saying they were going out for a spin on Sunday afternoon.
I don't think there's a qualitative difference between necessary miles and unnecessary miles - there is just a continuum of degrees of importance between very important and very unimportant miles.
The point you are at along that continuum depends on the price, and as the price changes, so will the miles traveled.
Just throwing out numbers for estimating reduction in usage is problematic. Say somebody suggests that doubling the price per gallon from $2.50 to $5.00 would reduce the mileage by 1/2. Does then doubling this again drop the mileage to 0? Or does it drop it by 1/4 of the original?
The point is that these are continuous functions and people adjust their driving habits iteratively and continuously as the price increases. The fact that a large increase in price only affects the mileage a small percentage is perfectly acceptable since no one actually knows what it should do. All we know is that the mileage will go to zero as the price goes to infinity.
It is more than a 4% drop. Miles were growing at 3% per year.
So you are moving the bar to a flat line instead of the prior exponential curve from say 1980 to 2004.
But the argument style of Macro is so foul and obnoxious. LOL. He is really stumbling around the real data here.
The phenomenon happened in the US and UK -- no UK fees and taxes in the US. LOL. Nice argument though.
Rail is far too expensive in this country, and buses are too slow and unreliable.
Britain needs to do a lot of work to improve its public transportation systems.
The Toronto Board of Trade recently published a scorecard comparing a number of global cities on various criteria. London had the most expensive public transportation costs at 25 cents (CDN) per passenger-kilometre. Toronto was somewhat better at 16 cents/p-km, but still not good. Madrid was the cheapest city at 7 cents, and a number of cities, including Calgary where I rode the transit system for years, only charged 8 cents.
When I was riding the London systems (I did some consulting in England) I kept comparing it to Calgary and thinking, "There are huge opportunities for improvement in this system. They have all the trackage they need, but they just aren't using it efficiently at all."
London has a very large and extensive rail and bus system, but it is very, very inefficient, and consequently very expensive to operate. Calgary is utterly different - its transit system is small, but it is run very, very efficiently and moves an awful lot of people at very low cost. And the speeds are higher, too.
I mentioned this to my father, who was in London in WW2, and he reminisced about riding the trains into London from the base. He said, "It used to take half an hour to get to London on the steam train. It's probably a lot faster on the electric trains." I checked the schedule, and it now takes an hour to make the same trip. They are about the slowest electric trains I've ever been on.
I have a section on analyzing the London area train system in The Oil ConunDrum.
I agree that the trains are very slow when they depart the station and they just creep along, but take a look at the statistics and the actual schedule. I analyzed this system because the variability can be modeled with a technique known as superstatistics.
But I wasn't talking about the US was I - I specifically mention the UK. I also made the point earlier that you have chosen to ignore that Chindia have seen exponential rises in car ownership and fuel usage more than making up for our 'fall'.
The US had the same drop at the same time as the UK and well ... no taxes or fees in the US like the UK -- so that argument does not hold an ounce of water. Thanks for playing though.
"Road taxes have seen 0-£1000 increases depending on the type of car. Insurance premiums, especially in the under 25's has rocketed over 60% in the last 3 years alone, with very little downward price on any other age group. Off the top of my head premiums that were running at £800-£1000 for under 25's are now upwards of £1700 of late."
Unless I'm misunderstanding again, these items are both fixed per annum? If so, then we wouldn't expect them to decrease driving directly - only indirectly - because you pay the same whether you drive a lot or not at all. That may help explain why the decrease, even from trend, is actually quite small in the face of large increases, consistent in spirit with the elasticities Hamilton gives.
In that respect, a fixed per-annum tax, even graded according to kg/km, seems like a rather silly, inefficient way to discourage carbon emissions. If you want to discourage consumption, all-you-can-eat pricing is certainly not the most efficacious way to do so. Then again, what can you expect from government? (Sigh.)
RE road taxes:
http://news.bbc.co.uk/1/hi/uk_politics/7498884.stm
Re insurance:
http://www.guardian.co.uk/money/2010/nov/14/car-insurance-premiums-up
There have been definite increases in insurance which i'm fairly confident became quite steep round about 2008.
MArco.
Undertow/Paul
RE road Tax
Rates since April 2005All rates are in pounds sterling.
http://en.wikipedia.org/wiki/Vehicle_Excise_Duty#Rates_since_April_2005
2005–06[21] 2006–07[21] 2007–08[22] 2008–09[23] 2009–10[24] 2010–11[24]
Petrol Diesel
Engine size of vehicles registered before 1 March 2001
<=1549cc 110 110 110 115 120 125 125
>1549cc 170 175 175 180 185 190 205
CO2 emissions of vehicles registered on or after 1 March 2001
Band A (up to 100g/km) 65 0 0 0 0 0 0
Band B (101–110g/km) 75 40 50 35 35 35 20
Band C (111–120g/km) 75 40 50 35 35 35 30
Band D (121–130g/km) 105 100 110 115 120 120 90
Band E (131–140g/km) 105 100 110 115 120 120 110
Band F (141–150g/km) 100 100 110 115 120 125 125
Band G (151–165g/km) 125 125 135 140 145 150 155
Band H (166–175g/km) 150 150 160 165 170 175 180
Band I (176–185g/km) 150 150 160 165 170 175 200
Band J (186–200g/km) 165 190 195 205 210 215 235
Band K∞ (201–225g/km) 165 190 195 205 210 215 245
Band L (226–255g/km) 165 210 215 300 400 405 425
Band M (over 255g/km) 165 210 215 300 400 405 435
∞Band K includes cars that have a CO2 figure over 225g/km but were registered before 23 March 2006.
The 5 columns represent 2005 through 2010. Those represent some fairly sharp incresase in magnitude or greater than the cost of fuel increase I would say. But I think this is a smaller story than insurance below.
RE: insurance Look at the fourth graph down
http://www.theaa.com/services/insuranceandfinance/insuranceindex/insins0...
very strong compelling evidence there was a sharp increase in premiums around end of 2008.
Marco.
Marco,
I'm pointing out that VMT in the UK is clearly on a downwards trend recently, after a decades long upwards trend. You can put that down to whatever you want - oil cost, recession, insurance, aliens beaming cars off the road.
As to insurance and tax, I pay less road tax than 5 years ago because I drive a lower rated, small-engine old car (but not so old it gets bumped into a higher emissions band - and that's quite common. As your chart shows tax rates have come down for some small vehicles) and I only drive a few thousand miles per year . My insurance is about the same (approx £170 per year) but then I do have a maximum no claims discount and have never had a single penalty point on my license ever. Other people (especially newly qualified drivers) get hammered I know. Actually were it not for extended family related reasons (including illness) I would probably not have a car at all now.
The simple fact is that as net exports decrease (and the UK production continues to plunge) all importing countries need to reduce oil use or outbid everyone else for more of a smaller pot. Exactly how all the interlinking economic factors work together to achieve this is a more detailed topic but the end result is roughly the same. Oil use overall in OECD countries is now several million barrels per day lower that it was at peak.
Incidentally insurance premiums tend to increase during recessions as more people are willing to risk faked claims and staged accidents because they are desperate for money. The insurance companies only catch a small proportion of these false claims and so put up premiums to cover.
Long lerm i've no argument with anything you say here. Short term though I think up 10 £1.50/litre will be absorbed quite well without a huge dip in driver miles.
Insurance & Tax - i'm almost identical to you low insurance many years no claims, £170-£200 tax. but it's not me thats whinging. You want to hear complaints I get from young cousins/nephews about how their insurance has rocketed, or the moans from well off relatives with big engined cars!
heres one for you - i've got mates at work that buy old Beamers/Jags and 4x4's very cheaply - huge tax, moderate insurance gas guzzlers. They don't care as they got the cars for pennies. They would have to drive a ridiculous amount of miles before it was worth their while to buy a newish efficient car.
It does point to one thing though and that is quite often fuel cost is only a small part of total motoring costs. Anohter thing I find amusing is that lately new cars have been becoming 'dealer only repairs' as they become more computer/ECU controlled - and I don't just mean the engine. This is meaing much higher repair costs when things go wrong.
Quite frankly I would love to see driver miles reduced. I stopped cycling to work as the roads are just like whacky races in my city.
I'm going to say something more controversial now!! Shock horror. 10+ years ago all the pensioners used to take the bus, and very few students had cars. These 2 groups are a nightmare on the road, the former doddle along and piss everyone off the latter can't drive. I'll be glad when they are priced off the road.
Everyones got used to luxuries they now take for granted.
Marco.
Even though the graph is expanded quite a lot, there's really not much year-on-year noise visible in it at the expanded scale. An eyeball test is possibly not quite conclusive, but it does suggest strongly that something happened to make the latest number 120 instead of the roughly 130 suggested by the trend. Unless there was a huge tax rise, a huge change in driver license regulations, or a sudden huge rail buildout, a recession comes to mind.
Hamilton gives some short-run price elastcities (PDF) ranging from 0.25 down to 0.05, which suggest - along with the graph in question - that driving is somewhat insensitive to price. Apparently Johnny does mind about the 118 or 124, since he's willing to pay a lot more rather than cut down any more than that. Which is of course perfectly plausible considering how absurdly time-consuming his alternatives are, especially if he doesn't live in a (hugely expensive) mega-city, but sometimes even if he does.
See my post just now above - my last play!
I think the bigger factor here is whether Johnny has a job.
Marco's main point, which I agree with, is that steadily increasing fuel prices over the last decade did not, in and of themselves, change vehicle miles to any significant amount. What did change is the onset of a recession, and many people going into "economising mode". That event clearly coincides with the vehicle miles peak, as shallow as it is.
Up until then, everyone thought the good times would keep going, and they would keep their job, and their house value would keep going up, so they could afford fuel, driving crosstown for dinner, weekends in the country etc. Today I expect a lot more people. especially those without a job, are eating in, and doing anything else to reduce fuel (and any other) spending.
High fuel prices are no problem if you have the capacity to pay for them, and for most people that capacity isn't what it was.
"Marco's main point, which I agree with, is that steadily increasing fuel prices over the last decade did not, in and of themselves, change vehicle miles to any significant amount. What did change is the onset of a recession, and many people going into "economising mode". That event clearly coincides with the vehicle miles peak, as shallow as it is."
In the end considerable agreement all the way round. I think some of the points got a bit lost in all the verbiage. Maybe I got confused by "You really think Johnny's going to mind whether he has 118 or 124 m&m's!"
Passed the peak vehicle miles.
NAOM
Cumulative vehicle miles has no equivalent of an ultimate non-renewable resource constraint. Identifying a yearly peak is therefore very sketchy. A pet peeve of mine is seeing "peak blank" for something that can't be proven. We have a hard enough time getting the point across for peak oil.
Still, it will be interesting to see if these years represent a peak in mileage and if the trend will be on down from here. Some sort of signal that peak oil has been reached perhaps?
NAOM
The latests stats suggest that VMT is flat. With rising gas prices, I think we can expect it to stay flat or decline slowly in the medium term.
@ Peak Earl: - Via a variety of processs:
1. Energy efficiency, many but not all will be trying to become more energy efficient slowly making us more tolerant of higher price.
2. Adaptation of economy - we are I believe flying less, maybe spending more time doing less energy intensive activities - tweeting and watching movies?
3. Shift of power away from OECD toward developing world that does not have to adapt to higher oil prices since many of them are new entrants to the oil consuming world
Euan:
I must confess I hadn't actually checked the rig count since January, when was falling very sharply, but in response to your question I went and updated my graph:
Quite a sharp increase in Feb/Mar! So this probably lends a bit of support to the idea that they are production constrained, rather than jacking up prices to enhance the regime slush fund (though I guess the two things are not mutually exclusive). I wouldn't draw strong conclusions until there's a few more months data, however.
Stuart, tks. I sometimes wonder if the Saudis know what is going on. Up tick in rig count seems inconsistent with having 2 to 5 mmbpd spare capacity and with them not having a market for their crude. Amazing thing is that until Jan, rig count was still falling. Its possible they believe their own propaganda until actually required to perform, then panic.
Since we are now into the sixth year of declining Saudi net oil exports, relative to their 2005 rate, the endless wait for higher Saudi net oil exports is beginning to remind me of "Waiting for Godot." Sesame Street's take on Waiting for Godot:
http://www.youtube.com/watch?v=ksL_7WrhWOc
Love it!
"Its possible they believe their own propaganda until actually required to perform, then panic."
Sounds like how we do things here in the US!
Godot is coming. He'll be here. just wait it out. lol. Maybe this shows how stupid humans are. We re so easily fooled by the media and the King of Oil. LOL.
"But that is not the question. Why are we here, that is the question. And we are blessed in this, that we happen to know the answer. Yes, in this immense confusion one thing alone is clear. We are waiting for [OIL] to come."
- Average Joe, Waiting for the Oil to Flow
I guess today KSA said Godot is cutting back appearances in public. He is not in demand anymore despite the fact that we never saw Godot in the first place.
Don't forget the obligatory GWB
"MISSION ACCOMPLISHED"
banner in the background.
That chart will look a bit different in the next few months when those new rigs get there.
Saudi scrambles to maintain spare oil capacity
Ron P.
Excellent link Ron - that definitely makes it seem more like 2005 all over again.
So this is spare capacity if we drill baby drill. Can't help feeling super spike in making. It will take many months to drill, complete and connect new wells.
Why does the news Ron is quoting
give quite another number of Saudi rigs compared to BakerHughes as seen from Stuarts diagram above?
Even if you would include rigs drilling for natural gas the B&H number would be just 65 rigs.
Elm, I cannot explain the difference but this news comes from Baker Hughes.
Saudi Arabia Increasing Rig Count 28%, Baker Hughes CEO Says
But Saudi did double its rig count between 2004 and 2008. This was posted in July of 2008.
Hot money, rampant oil
And there is a very good reason that they must continue to increase drilling rigs. That is because their production per well is dropping dramatically!
What statistics can tell us about future world crude oil production rates
This article by Michael E. Lynch, (not cornucopian Michael C. Lynch) explains that this is a worldwide phenomenon, not just a Saudi event.
Ron P.
Theoreticaly, the numbers in bold means an exponential growth in rig count to maintain production. They can't be far off before they hit the wall of limitations; rig supply, crew supply, economy, whatever comes first. Anyone care to guess when we will se an actuall saudi production decline, North Sea style, kick in? Can't be far off.
No, it can't be far off. They have already cut production by 833,000 barrels per day in March!
Saudi oil minister says market oversupplied and cuts output
That cut is a bit higher than reported by others but it comes from their Oil Minister whom I believe would be inclined to exaggerate, not minimize their production numbers. Anyway this is the biggest news to come out of the Middle East in years, nobody seems to realize it yet however.
Ron P.
Ron,
Nice find. They're starting to look like a horse that has been run hard and put away wet.
It's reminiscent of what happened when US oil production peaked and started to decline 40 years ago. The US oil companies seriously thought that they had reserve capacity, and after the Arabs embargoed the US in 1973, and oil prices quadrupled almost overnight, they called in the drilling rigs and frantically drilled up their best prospects.
And they found very little new oil. Despite all the panic drilling of oil wells, US oil production continued to decline, and many of the oil investors lost their shirts. It was a learning experience for all concerned. I was there when it happened, and I found it highly educational to watch.
Unfortunately, the American public and politicians didn't learn much from it. They thought the oil companies were making windfall profits, but didn't realize they were only profits if the companies stopped drilling new oil wells, laid off their staff, and just lived off their old wells until they ran out. That's a logical business plan, but not one that most oil companies like to adopt.
I think Saudi Arabia is at that point now. They can't increase production, no matter how hard they try, and it is unprofitable for them to develop new oil fields even at current high prices. The logical business plan would be to just ride the decline curve down. Unfortunately, by the time they run out of oil to export, they will have more people than California, and they don't have any other business than oil to support them.
Ironically, they do have another industry to fallback on, but it is heavily oil dependent as well; tourism. With islam as an unparallelled tourism endorser they get tourists to Mecca and Medina in hughe swats every year. This will not stop when oil runs out. But to move all those people aroud, you need a lot of transport. Wich runs on oil.
I see one problem when interpreting the statement by Ali al-Naimi as indicating that Saudis actually can not produce more oil.
One might ask what's the use of this statement if it is meant to mislead the market. All else being equal it can hardly be long before the "bluff" will be called by the market. Given the present situation I would guess it will hardly be more than weeks before it will be clear that they can not produce more (if that's the way it is).
What's the point of being caught with a lie if the truth will come out in a couple of weeks. (A bluff of course would be useful if they can achieve higher production in a couple of weeks. But any significant increase in production can hardly be expected in a couple of week!?)
Another question regarding Saudi oil rigs. Whether we take a figure of 35 rigs (Baker and Hughes) or 92 rigs this number is very small compared to the number of oil rigs operating in the US. In that perspective one might argue that even a large increase in Saudi rigs would not indicate that much effort in trying to increase production. (I think someone else alluded to this above.)
Anyone care to comment?
Elm, as I point out above the production per well in Saudi is dropping like a rock. They must keep drilling more and more wells just to stay even. The below chart is from 2003. I cannot find an article that tells the number of current wells in Saudi but I would suppose that number is quite a bit higher than it was in 2003.
Number of Wells Producing Oil (2003)
That production number for US wells has dropped quite a bit since 2003. But the point is that it is very obvious that Saudi is trying desperately to keep production at current levels. Their production per well is dropping like a rock so they just keep drilling more and more wells in an effort to stay in the same place.
Obviously there is a difference of opinions as to how many producing wells Saudi Arabia has. That is because of the deep secrecy that Saudi has concerning anything about oil production. Also we do not know how many wells Saudi has shut down because of high water cut. But one thing we do know is that they keep drilling more and more wells and their production does not rise one whit. Their production has actually dropped since 2008. So we know that their production per well is dropping dramatically regardless of the number of wells they had in 2000 or 2003.
Ron P.
Ron,
Thank you for comments.
As already said one might seriously doubt if the Saudis actually have much spare capacity.
I doubt the Libyan drama will come to a end in the near time. It was some talk about a negotiation solution, but that seems unlikely. The struggle for power will most likely be decided on the battle field. The Ghaddafi clan does not seem inclined to step down. The resurgents can hardly be expected to accept any deal with the Ghaddafi clan in power since they must clearly consider their lives in jeopardy in such case. Thus it is hard to see Libyan production return to something like previous levels any time soon.
It seems likely that we will get some measure of Saudi spare capacity in the not to distant future.
From Drumbeat Apr 11:
Every time the Saudis try to ramp up prod from the re-worked fields the water rushes in, and they have to choke back.
This is why they have to drill more wells as they can not sustain production from the individual MRC wells.
Hence, the call for more rigs.
Looks like they are on a treadmill.
9.5 is prob their sustained capacity.
12-12.5 is the nameplate cap.ie their facilities are made to handle that much crude.
I think the problem is geological.
But, I love the spin the Saudis are coming out with!
In any event,demand exceeds supply and price will explode.
Product prices are leading the way.
One issue that has always confused me is demand. What is demand and how do we know that demand exceeds supply? What I want and what I demand are, of course, two different things. Economist can draw a demand curve but how do they know what the demand actually is. Are you referring to the futures market? The Saudis say we are fully supplied? What the hell does that mean and how will we know when we are not fully supplied?
Well you should not be so confused. Demand is what is bought and consumed. Demand changes as the price changes. Demand is much lower at high prices than it is at low prices. Some people confuse desire with demand. This is a serious mistake. What people want and what they are willing to purchase at the current market price is two entirely different things. The former is desire the latter is demand.
Yes the market is fully supplied with $120 oil. There is a serious dearth of $80, $90, or even $100 oil.
Ron P.
I knew someone was going to say that demand is consumption. However, that does not explain the statement we see often that demand exceeds supply. Yes, it is well known that demand decreases when prices go up. Anyone with a smidgeon of Economics knows that. But once prices go up, demand equals supply. The confusion occurs when it is said that demand exceeds supply. My point is that the Saudis can always say the market is fully supplied since demand equals consumption. But it is a meaningless statement since people could be dying in the streets in India but the market would be fully supplied.
Now it might make sense to say that, at today's price, tomorrow's demand will exceed current supply if the price does not change because tomorrow is the start of the summer season. In that case, if the market does not respond, demand will literally exceed supply because people will show up at the gas station and there won't be any gas left.
As I see it, to say that demand equals consumption is not really very meaningful or helpful.
Now that I have thought this through, it is even more clear to me how absurd the Saudi statements are. As absurd as they are, it appears that many people who should know better are swallowing these absurd statements.
Of course it does. And when it does the price rises until demand no longer exceeds supply.
Yes there is some confusion for a very short time. Then the price rises until demand no longer exceeds supply. Then there is no confusion anymore.
Hell, that's my point also! And it is so stupid but that is exactly what they are saying. And people are just buying it. The Saudis are saying it and they are getting away with it. Because the general public is too stupid to realize that the game is rigged. Demand will always be met because the price will just rise until it is.
Exactly! But that's just the way it is. And the damn fools are getting away with it. Demand is always met because the price is so high that whatever is produced is all that is demanded. And if they produce less then the price will go up until that is all that is demanded. Yes it is so stupid. But if you try to deny that this is just the way it is then you are beating a dead horse. Because that is exactly how it is.
The EIA, the IEA, and everyone else uses demand and consumption interchangeably. No, they should not do this but they do! If you say that is wrong then you may be correct, but you are making a moral argument, not a factual argument, because that is the way it is.
So I suppose you wish to come up with a new definition for "demand". I wish you all the luck in the world but... but... lotsa luck buddy because I just don't think it is going to happen.
Ron P.
Ron – And that follows the point I’ve made before. Folks argue about how much excess capacity the KSA may or may not have and how a large surplus could drive prices down. So let’s make an obvious incorrect assumption: the KSA could bring an additional 20 million bopd to the market within 30 days. But even if it were true it wouldn’t necessarily bring down the price of oil. The KSA doesn’t price its oil based on some magical formula that relates supply to demand. The KSA sets the price of oil it sells based upon what they decide to sell it for. IOW the market doesn’t set the price…speculators don’t set the price. If the KSA wanted to sell its oil for $70/bbl then all they have to do is post that price. But here’s the trick part: how much oil would they offer at that price? Remember not only does the KSA set the price but also the volume they sell. The KSA is under no obligation to sell as much oil as buyers request regardless of the price. If the KSA decided to only sell 1 million bopd at $70/bbl then that’s what would happen. And if the KSA did have that extra 20 million bopd they could offer it all…at $170/bbl. And if no one is willing to buy any of that “excess capacity” then the KSA can honestly say they’ve met all demand.
Bottom line: just like offering future oil reserves from one trend or another, offering production capacity without stipulation the price assumption makes such a statement worthless IMHO. I have no doubt that if someone offered the KSA a fixed 4 year contract for X million bopd at $170/bbl I’m sure the KSA would start pumping a lot of oil stained brine just as fast as possible and then…SHAZAM!!!... a lot of that "excess capacity" will start flowing.
That's why economists treat supply as a curve, rather than as a fixed number... whether some TOD posters like it or not...
Demand and supply are expressed as a quantity AT a price. The supply of crude at 50 is likely going to be different than the supply of crude at 500. Same for demand.
You have to look at both quantity and price.
A statement like “demand exceeds supply” doesn't tell you much. However, if you say ” the quantity demanded at 50 exceeds the quantity supplied at 50” it takes on some meaning.
Rgds
WeekendPeak
See other comment. The statement that demand exceeds supply is empty, without meaning - or more precisely, it is a tautology. Demand always exceeds supply in the intended sense. There are always enough people who would consume a larger quantity (of almost anything, not just oil) at a lower price to guarantee it, and they will always be moaning that the price is not low enough for them to consume as much as they want, which for at least some is quasi-infinite. No use fretting over it.
Hi.
I would like to make some points that I believe, about supply and demand of oil.
It can be argued that demand is a function of price, and supply is a function of price. And in a market equilibrium, supply and demand are equal, and the shape of these curves, to put it a bit inaccurate, give the market price. The crossing point of these curves give the market price. This can be said to be standard economic theory.
But production (or rather “tapping”) of oil is not a function of price directly. It is a function of corporate and political decisions made years before, as well as time, geological and random events. These decisions are probably made partly on assumptions of future price, based on experience and historic prices.
So I will therefore argue that the supply of oil at a specific point in the future. will be a function of the expected price and the actual price at the moment (and of course random events and other unknowables). If the price at the specific time point is low, it will tend to curb production, and if the price is higher than expected, it will be put in extra effort to increase production.
I believe that most people would agree that if the price of oil increases dramatically, you could not produce dramatically more oil. There is a practical ceiling on production of oil. Where this would lie, I won’t speculate in. But say a hypothetical 100 Mb/day, if the price was really high. Another increase in the price (historic and predicted) then would only yield a marginal increase in production. So I argue that the curve of oil production as a function of oil price (historic+at the time) would have a horizontal asymptote. This value of this would probably be practically related to reserves and other economic factors at the time.
Let’s consider the other end of the supply-price curve. If prices at a future point are very low, then production will tend to be lower. But if prices drop to say $10, there will be will probably be a lot of capacity already in place that will still produce flat out to cover as much of their loss as possible, hoping for a recovery. Lets just indulge in some gut feelings, if the price drops to $10 in 5 years, how much will be produced? 50Mb/day? 40?
My point is that oil production is not price elastic as it is often portrayed. And I believe if you look at the correlation between oil prices the last 8-10 years, it shows that oil production is not so sensitive to prices as I believe many people think.
And I also think that many people should be careful when talking about supply and demand. In my opinion it is something that applies to a market. They are by definition equal, whereas consumption and production are not necessarily equal at all times. There is also the point that when a lot of people talk about demand exceeding supply, they talk about different “markets”, or rather transaction points:“Demand” of gasoline exceeds “supply“ of crude oil, so “the price goes up”.
So in a more condensed form, my point is that we are now more in a situation that prices are a function of demand, and not the crossing point between supply and demand.
By the way, I want to make another point, in regards to the statements frequently made by the Saudis. That the market is amply supplied. In my opinion, one of their self-appointed roles is to relieve a supply disruption. Which in my interpretation, a “supply disruption” is a temporary shortfall of oil brought to market. But the markets are now much more efficient, and there is hardly a supply disruption. What we see these days with Libya etc., is merely a production reduction, so therefore stocks would never be drawn down. As a trading company I assume you would never sell your inventory of oil if you believe the price is not going down. Thus always “ample supply and inventory”…
Take care
Thomas
Talking about supply and demand for oil is like talking about supply and demand for generic "food" or for water. The issue with oil is that it is used for so many different applications and is so useful that it has almost an unremitting and gradually increasing demand pressure, and therefore invokes a proportional greediness quotient to the suppliers. So when put in those terms placing demand for oil at the same level as demand for all food and products ties it directly economic growth and therefore to demand destruction and then recession when production falls off. This is not the economics of "name your substitutable product" and any economist that treats it this way is misguided.
M – “If the price at the specific time point is low, it will tend to curb production, and if the price is higher than expected, it will be put in extra effort to increase production. “ I know that seems logical but the market runs on its own logic. Typically when prices fall, especially when the drop is very significant, nearly all operators will pull out the stops to increase production. Even the KSA has followed this course in the past. In 1986, in an effort to regain market share, the KSA flooded the world with oil causing prices to plummet down to $10/bbl. Lower profit for sure but much improved cash flow. Typically cash flow is the driving force…not profitability…for most companies.
And it can work just the opposite when prices rise. Companies will obviously want to max production at such times. But that can often increase operating expenses but that won’t be critical IF there is significant reserve life. And that is the mother of all IFS right now: how does the KSA view their reserve life? If they do in fact see the end coming soon they may chose not to increase production and, possibly, see the logic in decreasing their rate. If they can satisfy their cash flow requirements at current rate/prices then it would make sense for them to withhold more production which they can sell at even higher prices later when PO really kicks in. That’s the unique aspect of the oil biz: eventually the assets cannot replace your sales as reserves decline. Ford can keep their production lines running for ever as long as there is demand for their cars. Obviously not true for the oil patch.
It just occured that you may have meant drilling activity declines when prices drop. That's certainly true. But production is what's coming out of the ground today. Drilling ativity represents future production.
Rockman, thats sort of what I meant. I feel that my argument is not completely developed. But what I meant about prices curbing demand, is that some producers will tend to reduce output when prices drop below a certain level. Here I thought specifically about OPEC and Saudi Arabia. They are probably the only ones who lower output to address low prices voluntarily, IMO. So for them its ultimately profitable to reduce production until prices rise. But my first argument is that since prices have fluctuated wildly the last years (2003->) and production has been relatively constant, production at a "macro" level in the relatively short/medium term run is mostly agnostic to prices, as long they are over a certain level to warrant BAU i production.
Of course I dont have the close connection with physical production like you have, but I believe that many perhaps put too much weight on production (supply) affecting the price. My argument is that production is much more inelastic to price, based among other things on global trends over the last 10 years, and demand is more susceptible to price changes. And then I think about demand as a function of price and time. What I try to put forward is that the curves of the curves of demand/price and supply/price are fundamentally different. $10 oil will (probably?) give us quite a lot of supply medium term, but $1000 per barrel wont give us that much more than $147, for example. At least if producers don't believe prices are temporary due to a acute situation.
So if need and want for oil is increasing more than what is , with which I mean that
If we do a thought experiment: Production will be exactly 75 Mb/day for the next 10 years. Then supply is constant. Demand will set the price, since supply is constant, and the curve for supply will be a horizontal line in the supply-demand plot. Which means that price is a function of demand since supply is constant. And even though supply is constant, i dont think anyone believes that prices will be constant. The demand-function will change over time relating to the global economy, recessions, innovations etc, ant thus gives different prices. This change will include demand destruction, efficiency gains, emerging economies etc.
If we look at the last years (I dont have the time to get the plots and data, but most have seen the numbers from say 2003-2011, where production is fairly 73-75), we see that production has been fairly constant. But prices have varied much more than supply. If we "compensate" for the voluntary reductions by OPEC in 2007, it can be argued that without these reductions, the prices would have fluctuated much more than it did. So when oil brougth to market is constant over time, prices fluctuate according to the demand-side.
So I would like to propose that prices of oil are not so much related to production and supply as it has been or believed to have been. There is demand destruction on every price level, and demand creation at every price level. To put it another way, the price is set by the highest bidder, and if there is more supply, there are more people with the same need and same use and same gain of the oil as the original highest bidder (up to a certain level), and the price will not reduce much. Even the poor people are now paying $100+ per barrel.
So more drilling will at this stage of the oil market and world economy will not lead to greatly reduced prices, but rather a "broader" and bigger total world economy.
I'll perhaps try to rebuild my entire argument better and more substantiated later. Gotta go.
Regs.
T
Edit: Punctuation
But what I meant about prices curbing demand, is that some producers will tend to reduce output when prices drop below a certain level.
One of the problems with the oil industry is that producers have a lot of fixed costs, like bank loans. When prices fall, many producers will increase production to meet their fixed costs. Similarly, when prices rise, they won't necessarily increase production, because they prefer to hold oil in the ground. Their fixed costs are covered and they value oil in the ground more than money in the bank.
The result is the the supply curve may have a backward bend in it - it is "C" shaped, rather than a straight line. That, combined with short-term demand inelasticity, means that there can be TWO equilibrium points in the supply/demand chart - TWO prices at which supply equals demand.
Changes in economic conditions can cause the price to jump back and forth between the two different equilibrium points - It will persist for a period of time at the lower price equilibrium point, then suddenly jump to the higher price equilibrium point. It is unstable at that point, and will soon jump back to the lower price equilibrium point. That is what we are seeing happen in the oil markets. The real question is how many times it will do this before people catch on.
This is getting into graduate-level economics thesis material, not to mention chaos theory, so I'll just leave it there for people to ponder.
Of course supply and demand are always equal. That is price mechanism. When the Saudis say the market is fully suplied, I guess they want to mean that scarcity of supply is not the cause of the high price -they say the cause is speculation.
They mean therefore that for a given amount of production, prices without speculation would be smaller. As they pretend there is no scarcity, demand and supply would therefore adjust at higher production/demand level than at the constrained by speculation level we are facing now.
This is what they say....
If you use economists' jargon, demand is a curve according to price, as is supply. Normally they slope in opposite directions and thus must cross somewhere. A statement that demand exceeds supply then becomes so meaningless that it can't usefully be discussed. They also talk about quantity supplied and quantity demanded at some price. Except to the (usually limited in the overall picture) extent that storage capacity exists, the two quantities must match simply because matter is conserved.
In the 'lay' (i.e. not economist-technical) sense, one can probably assert that demand always exceeds supply. After all, if aircraft fuel were ultra-cheap, we'd have lots more people commuting daily or weekly by plane, and lots more people jetting off to distant places on vacation.
You will know that we are not fully supplied if and when the "no gas" signs appear (and it's not just a local thing or a brief hiccup due to a hurricane.) Until then, the price is what it is, and anyone willing to pay it can have as much gasoline or diesel as he or she wishes. So the Saudi statement means basically nothing.
Both supply and demand are curves, not fixed values, on a price vs. quantity graph. As the price rises, the quantity of supply increases as those producers who have the capability drill more wells and otherwise step up production do so; at the same time the quantity of demand decreases as price-sensitive consumers cut back their consumption. There will be a point on the graph at which the supply and demand curves cross, and that will be the equilibrium market price. In a free market the price will tend to stabilize at or near the equilibrium market price. Thats Economics 101.
However, in a monopoly market, which is what OPEC is trying to achieve, the monopoly sellers will try to maximize their revenues by setting the price above the equilibrium price. At that price, the market will never reach equilibrium and the supply will always be greater than the demand. (Pricing in a monopoly market might be Econ 201.)
This market disequilibrium is what Saudi Arabia is complaining about. If you are trying to be a monopoly marketer and set your price above the equilibrium price, you will always have a surplus of supply. The solution is to be a free marketer and cut the price on the surplus oil and sell it at the equilibrium price. However, that would cut into the Saudi's profits, so they prefer to blame speculators instead.
However, in a monopoly market, which is what OPEC is trying to achieve, the monopoly sellers will try to maximize their revenues by setting the price above the equilibrium price. At that price, the market will never reach equilibrium and the supply will always be greater than the demand. (Pricing in a monopoly market might be Econ 201.)
That's not how the curves work. Both competitive and monopoly markets have equilibrium points - the monopoly equilibrium price point is just higher, that's all.
Either the Saudis are lying, or: they think the market is over supplied and that the market isn't moving efficiently to the equilibrium point, and a price crash is coming - in other words, a bubble.
In February, KSA deceived the world by not only not increasing exports, but reducing them.
My post from February 21 http://www.theoildrum.com/node/7527/768943 :
As I have been saying for two months now, KSA reduced exports slightly from mid-January to mid-March, although they did make a temporary surge in exports starting about March 15 that has already fizzled out. The 'surge' may have at most 300,000 bpd for a week or two.
Going forward I estimate that KSA exports in the second half of April will be about 200,000 bpd below the average level that prevailed from mid-January to mid-March.
I don't claim to know the exact reasons why KSA has not delivered more oil to the market, but it seems likely that at least two reasons are 1) in times of shortages, they can optimize income by withholding supplies and forcing the price higher and 2) they need to withhold adequate supplies for their summer energy needs.
Optimizing income in the short run may be misguided if this causes another recession. So you don't think the reason is inability to provide more supply?
That may very well be true, and it may be even the most important reason. But it's possible they reached a decision based upon more than one factor. Another factor is the willingness of the world to accept most everything they say at face value, without much worry about retribution for incorrect and misleading statements about capacity.
Shouldn't we be comparing volume against the Brent Oil price, rather than WTI? We know WTI has special circumstances at the moment, and if you add on the $14-16 spread between WTI and Brent we've seen since before Christmas, we get a much more predictive curve (eg we are testing the extremes of what the market will bear again.)
Gentlemen: Do you consider this to be a Rubicon moment in how the world will view it's supply of oil?
In that it will be very difficult to look at this information and deny that there is indeed a mis-match between supply and demand (certainly an increase in demand)now?
Thank you
Martin
If this is indeed the maximum that Saudi Arabia and UAE/Kuwait can come up with than yes, this will be looked back at as a major inflection point.
The begining of a horrible new economic era. However, I don't see a global recession straight of the bat, rather a recession in the West (swimming in debt as it is), and a sort of coasting in the emerging countries with the price of oil never dropping below $90 a barrel.
I do not think the Rubicon moment of world realization is here yet. We need at least one more recession caused by an oil spike before the truth becomes acknowledged in the mainstream. We might even need 2 more oil-caused recessions and declining world production before the truth becomes accepted about Peak Oil.
If a political crisis causes another oil spike (say fighting in Nigeria) that will delay the day when the Peak Oil becomes accepted because it will provide an above-ground excuse for why a recession.
As Mr.Kunstler so charmingly put it, I think the public will require a "bitch slap up the side of the head" to fully realise the impending changes.
What form that will take is an interesting question. It certainly will not come from any sane or knowledgeable analysis; there is too much goal post moving in the general media manipulated by the powers that be.
It will probably be an Oprah show. Sigh.
The Saudi's hate Gadhafi and the events in Egypt with the military in charge is the best that could be expected. The US invited the Saudis to go into Barhain and we've done all we can in Yemin. In other words there is nothing the US has done that is against Saudi interests. There might be a strategic political calculation behind the not rising adequately output numbers but as a straight forward slight of America, no way.
I think we should assume that Saudi intelligence knows more about what is going on in the middle east than we do.
From the list of mega projects we know they have built up spare capacity over the last two years.
My view is they feel there is a real risk of another oil producing country losing production.
Iran is still trying to build an atomic bomb and has stated openly it wants to wipe Israel of the face of the map. Israel have bombed an Iraqi nuclear research facility before, so we may be grateful for the Saudi's holding 2/3mbd for a situation far more serious than Gadhafi.
"Iran is still trying to build an atomic bomb and has stated openly it wants to wipe Israel of the face of the map."
How many times do we have to hear this bit of "received wisdom"? Iran has never said it wants to wipe Israel off the map, this is just hysteria whipped up by an inaccurate translation, but yet the meme goes on as it sits nicely with the West's own rhetoric.
Translation controversy
I don't know what "Iran" is saying, but Mahmoud Ahmadinejad is using those words all the time.
Differentiate between Iran and its political leaders. The majority of the people want a change.
Burgundy
Perhaps this is a mistranslation also.
http://www.reuters.com/article/2009/09/18/us-iran-idUSTRE58H17S20090918
The current Iranian regime torture and kill anyone who oppose it.
http://www.telegraph.co.uk/news/worldnews/middleeast/iran/7644313/Fleein...
http://news.bbc.co.uk/1/hi/world/middle_east/6292230.stm
It will do anything to stay in power including starting a war
It really doesn't matter what Saudi intelligence knows it is what Saudi does that matters. They are looking for oil in the seismically tough Red Sea,, they are planning to use C02 on Ghawar to try to stop the rapid decline rate. And their existing fields have a decline rate of 5 to 12 percent.
They have compensated with new production from Khurais and a few other small projects. That is those "megaprojects" you speak about. Also they began, about a decade ago, a massive infield drilling program to try to stem that decline in production, superstraws in other words. That helped stem the decline but increased the depletion of those big fields. Now it appears that the chickens are coming home to roost.
A few months ago I thought, and argued, that Saudi had about 1 million barrels per day of spare capacity. I no longer believe that, I think they are producing flat out. They increased production all they could and it is very likely that the water cut shot up and that is why, in the last few weeks, they have cut production back about half a million barrels per day.
Ron P.
Darwinian
You also said
September 2010 C+C production was 73,596,000 barrels per day. July 2008 was 74,686,000 barrels per day or 1,090,000 barrels above September production. It just ain't blood likely that we are going to surpass that this year. And we will have to get a lot closer to that mark before we can say it has a reasonable chance of breaking it next year.
December 2010 production was in fact 74,795,725
Forgive me if I take your analysis with a big pinch of salt.
You also said China will have major economic problems this year.
I will remind you again of that in the coming year.
Jaz, about future predictions, I, like everyone else in the world, occasionally guess wrong. In this instance I wuz wrong! Of course you have never been wrong. But I am not perfect. Anyway 2010 annual production was still below 2005 annual production. And net oil exports, in 2009 were 3 million barrels per day below 2005 net oil exports. Put a little salt on that if you will. And Saudi net crude exports dropped 1,336,000 barrels per day from 2005 to 2009. That is history! (The EIA has not yet published the 2010 import-export data,)
But all that being said, future predictions are often wrong but past history seldom changes. What I wrote about above was what has been reported that Saudi is already doing! And the quote from a Saudi Vice President on Saudi decline rate was from a 2004 publication. That means that they have been struggling for years to keep production up. And they admit that! From 2006:
Saudi's Energy Initiative
In other words, with a massive infield drilling program, replacing old vertical wells with new horizontal wells, they have gotten that 5 to 12 percent decline rate (average 8 percent) down to almost 2 percent. And that program began about 10 years ago. By sucking the oil out a lot faster they got their decline rate down but common sense would tell you that this would vastly increase their depletion rate.
So yes, I am often wrong about my future predictions. But I am never wrong when I quote history. And if you choose to take history with a grain of salt then... then... well that would say something very profound about you Jaz.
Ron P.
Hit a sore point did I?
I have no problems with historical facts but often with it's interpretation, but it's your future predictions that has me reaching for condiments.
http://investor.shareholder.com/bhi/rig_counts/rc_index.cfm
How many drilling rigs in the US and Canada? How many in Saudi Arabia?
Saudi Arabia oil left in place 240 billion barrels (lowest estimate)
How hard are they trying?
In place, or remaining recoverable? If you are talking about remaining recoverable, there are much lower estimates.
How hard are they trying? You are not paying attention. From my links above:
And:
As I and many others have pointed out, Saudi actions speak much louder than Saudi words. No one who knows anything about the true state of Saudi reserves believes that Saudi has 240 billion barrels of recoverable reserves. Their actual recoverable reserves are likely to have well under 100 billion barrels. As of 2010 they had produced a total 114.5 billion barrels of oil. And if the Aramco Vice President is correct, (quoted above), is correct then they are well past peak. No field not yet peaked would have a 5 to 12 percent decline rate.
Ron P.
For 3 years your president went on air to state government policy was to be energy independent.
This would be done by producing vast amount of ethanol and other bio fuels, also increase efficiency etc.
If you look at it from the Saudi point of view, they would have asked themselves why invest massive amounts more if the world will have 9 million barrels of exports trying to find a home.
http://www.nytimes.com/2007/12/19/washington/19cnd-energy.html
http://www.cbsnews.com/video/watch/?id=1248961n
Remember oil prices fell to $10 in 1999, why invest more when your clients kick you in the kneecaps or slightly higher when it suits them?
Edit, this is the economist take on things at the time
http://www.economist.com/node/188131?story_id=188131
No, for 45 years eight presidents have went on the air to state that we need to get off foreign oil.
What's your point? Saudi is investing massive amounts of money in an attempt to just keep production at it's present level.
Saudi scrambles to maintain spare oil capacity
Yes they are throwing money at this problem but there is a fat chance that it will silence those who really know the story. It is obvious they are drilling more and more in a vain attempt just to stay even. More and more money is being thrown at the problem.
Jaz, see Leiten's post below: What is this and why should you care? This is not only happening in Saudi Arabia, it is happening all over the world. More and more money is just not producing any more oil, not in Saudi Arabia or in the rest of the world.
Ron P.
Borrowed this from Carnot.
Kiou,
I have been having the same thoughts and am waiting for the Aramco 2010 reports.
The additions in the past 10 years include
2001 Ghawar Haradh II (300)
2004 Abu Safah (150 more)
2004 Qatif (500)
2006 Ghawar Haradh III (300)
2007 Nuayyim (100)
2008 Abu Hadriyah, Fadhili and Khursaniyah (500)
2009 Khurais (1200)
2013 Manifa (900)
2008 Shaybah (300) total 550
2010 Shaybah (200) total 250
2014 Shaybah (250) total 1000 Reuters 14/12/2010
http://www.reuters.com/article/2010/12/14/us-saudi-ge-shaybah-idUSTRE6BD...
Something has also happened at Harmaliyah. Reports suggest that it has had a GOSP revamp and is producing at 175 kbd,. This is close to Haradh and Hawiyah and is likely to be tied into one of these facilties. JoulesBurn reported activities in 2008, but news has been scant. There was information on installing a gas lift compressor, for oil recovery. This is a light oil similar to Ghawar other fields.
If you total up the capacity that heas been brought on line and that planned then why is SA putting in even more capacity when it supposedly has 12 million b/d and is only producing 9 million b/d. It costs lot to keep these plants idle and in working order. The new gas projects are also in the mega scale size. If these plants come on line then SA will be able to back off crude oil burning, for a time. But this would add to the capacity.
If you toal up the gas projects
Khurais 420 mcf
AFK 560 mcf
Karan 1800 mcf 2011 non associated
Manifa 120 mcf 2013
Wasit 1750 mcf 2014 non associated
You get 5.2 bcf - a lot of gas. This would take the gas capacity up to about 15 bcf/d and releae the best part of 1 million bbls per day of crude. Ad to the gas about 400 kbd of NGL's.
Tertiary recovery in Ghawar! Interesting. But also puzzling. In your link, the CO2 is described as coming from the Hawiyah and Uthmaniyah gas plants. My initial unstudied reaction is those are not the most depleted parts of the field (at least southern uthmaniyah is not). The rock is much poorer there than in the north, however, so maybe it's an attempt to unlock oil from the less permeable rocks. Also, why do the gas plants produce CO2?
Stuart,
You might check out the Fall 2010 issue of the Saudi Aramco Journal of Technology, available on their website
To to News Room › Publications › Journal of Technology > Back Issues
They have a few articles on Ghawar. Nothing on the CO2 project, but that is one of many efforts. I think it is more PR than anything; they announced it at an environmental conference.
In-Situ Determination of Remaining Oil Saturation and Sweep in a Carbonate Reservoir with Varying Salinities -- An observation well drilled up in the thumb of 'Ain Dar, in the long "watered out" area.
Maximizing Recovery of Attic Oil from a Highly Fractured Crestal Area Using Horizontal Skimmers: A Case Study -- Side-tracking wells on the crest of Shedgum.
Effective Development of Thin Oil Zones with Complex Carbonate Geology -- I also think this one is Ghawar, but haven't located which part.
The basic theme of these is trying to get oil in the top formations that did not get swept by the waterfront. Elsewhere, there is another research effort which suggests that a lot of oil remains trapped in "micropores" and that some change in the chemistry of the injected water will flush it out.
http://www.searchanddiscovery.net/documents/2008/08211clerke/ndx_clerke.pdf
My take is that there is a discrepancy between the state of Ghawar vs. what they would have predicted given the estimate of OOIP and production to date, and they are trying to find out where the missing oil is.
JB
Yes, I don't think Saudi would be holding back any oil at these prices. They, like the rest of us, know how fast oil prices can collapse and would want to maximize their production right now.
We must not forget that KSA and USA are very dependant on each other. USA need KSA to keep pumping oil to keep prices down, KSA need USA to suply them with weapons so the house of Saud can stay in power. I find it very unlikely any of those nations would deliberately push the other down.
WRONG. The US needs the Saudis to keep selling oil in dollars. That is what props up the dollar otherwise it would have collapsed already.
The Saudis need the US, so that the dynasty (House of Saud) can stay in power. But the US has demonstrated several times, that it is quite willing to sacrifice its partners (Mubarak, Saddam). I think the US has lost the trust of the Saudis. The Saudis can always get another defense partner, the US will be hard pressed to find another top oil producer that will do what is asked of them.
Who will defend KSA? It will be attacked from within when the time is right just like Libya and Egypt. If that is what you mean.
The Saudis were mightily pissed at the removal of Mubarak. He is a personal friend of the king.
Bahrain invasion was allowed (by the US) in exchange for support of the Libya mission (by the Saudis)
debka.com
atimes.com
If you only watch and read western mainstream media, you will never understand anything related to geopolitics.
Thank you for this information. I guess we should be thankful for the KSA for
not giving in to the plea for more oil. As matters stand, we are better off
getting used to less oil. The earlier the better while there still is something
left in the ground. I vaguely remember King Abdullah actually saying that it
is in their best interest not to expand production.
Marcus K.
Lets hope Saudi Arabia implemets a program for lowering the oil sales in a controlled manner and thus saves oil for the next generation.
We know that the Saudis have built up new oil capacity in the last couple of years. It is not evident that this is spare capacity. We still do not know what the depletion rates of their existing fields are. North Gharwar in particular has been conjectured to be close to rapid decline, as horizontal drilling has been used to maximise flow between the rising water flood and possibly falling gas cap.
With the reports in the last couple of days that Saudi has now cut exports again by 0.5Mbpd 'because of weak demand'
Saudis Cut Oil Output 0.5M B/D After Weak Demand-Sources
It is not clear if this reduction is in production or exports. They may be holding back oil for their summer peak air con demand.
Either way, it is oil not on the market.
Some people are suggesting that the Feb/March rise in exports was from storage, not increased production, and that SA is now in decline.
Saudi Arabian production and reserves are secret. This interpretation has as much supportive evidence as the 'voluntary withholding' one.
It's becoming clear. Recent shipping reports indicate that KSA exports have declined from the mini-surges around March 15 and April 1. They may be exporting about 250.000 bpd less in the month ending May 5 as compared to the month ending April 5. But they didn't export the full increase in output that started about late January, so exports might stabilize about the level we expect to be seeing in the latter part of April, and not a reduction of the full 500 kbpd.
It seems likely that 2011 will be the sixth year in a row that Saudi (total petroleum liquids) net oil exports will be below their 2005 annual rate of 9.1 mbpd, despite the fact that it appears that annual US spot crude oil prices will have exceeded the $57 level that we saw in 2005 for six straight years, with five of the six years showing year over year increases in annual oil prices. (Soon, the Saudis will have been showing declining net oil exports, relative to 2005, longer than the Second World War, 1939 to 1945).
My standard Saudi comment:
BTW, there were certainly have two stock markets in Saudi Arabia: (1) Through 2005 and (2) Post-2005:
http://www.tradingeconomics.com/Economics/Stock-Market.aspx?symbol=SAR
Interesting coincidence that the Saudi stock market crashed at precisely the same point at which the Saudis started "voluntarily" reducing their net oil exports.
Remember the OPEC price band?
http://www.independent.co.uk/news/business/news/opec-studying-plan-to-bo...
And a look at global net oil exports (BP + Minor EIA Data):
What happens to the argument if you use a representative global price rather than the Cushing price? Is 2005 a change at Cushing rather than in KSA?
Here are annual Brent spot crude oil prices:
What ever the "change" was in Saudi Arabia, i.e., a voluntary or involuntary reduction in net oil exports, something changed five year ago, in early 2006.
The following chart shows Texas crude (C+C) versus annual oil prices for 1962 to 1982, production on horizontal scale, price on vertical scale, and the same chart for the North Sea for 1989 to 2009:
And this chart shows annual Saudi (total liquids) net oil exports, horizontal scale, versus six straight years of year over year increases in annual spot crude oil prices , vertical scale:
At the late end of last year there where rumors circulating that the KSA had been increasing production without telling. When they now claim to have increased production in respond to the situation in Libya, it has been sugested they just say they did increase after, but are realy booking in increases made before.
This post seems to add wight to those suspections.
The EIA STEO has been updated a few days ago, it shows 9.1 mbpd in January (+200 kbpd):
A 500 Kbpd is above the median of previous production ramp-up over the last 30 years, about 60% were smaller since the 80s.
Here's a video from Feb 25th where they talked about Saudi Arabia coming to the rescue to get Brent prices "back down to $100".
http://www.youtube.com/watch?v=gSr6fhxK00A
Of course, that never happened...
With oil again approaching record highs, where does a Saudi Prince choose to invest his billions?
http://www.youtube.com/watch?v=OMBpfTftLA0
Grandiose buildings often mark the end of an era, not the beginning.
IMO it is telling that a Saudi Prince owning 94% of the company chooses real estate over oil. Presumably he is in the know about the oil situation and the future of Saudi oil production.
Another factor may be the Arab Unrest. Higher oil prices may favor stability by enabling current regimes to do more handouts etc so as to placate the mobs. It may be that KSA wants their neighbors weak as a general rule, but does not want total chaos in the region.
For completeness:
2/3/2011
WikiLeaks cable from Riyadh implied Saudis could pump only 9.8 mb/d in 2011
http://www.crudeoilpeak.com/?p=2669
13/8/2010
Saudi Arabia lost production share to Russia
http://www.crudeoilpeak.com/?p=1800
31/7/2010
Saudi Aramco's crude oil exports peaked in 2005
http://www.crudeoilpeak.com/?p=1738
12/7/2010
Saudi King ordered oil exploration to cease. But will it matter?
http://www.crudeoilpeak.com/?p=1710
What is this and why should you care?
It's quite simple, really, the two dark symbols, almost in line horizonatally with each other, is the total amount of investment made two periods of time.
It looks at first as if the left dark symbol is a tiny bit higher, which it is, but that's the total sum invested(about $2.4 trillion dollars) over the timeframe of about 9 years.
The right side, which has the dark symbol dangling in the air, is almost as large in total sum, but now the timeframe is a mere 5 years. So per year, the investment post-2005 is far higher in new exploration and development of oil frields.
Despite this, there was a net decline in the amount of crude oil produced, and mind you, crude oil still stands for about 85 % of the world oil supply, and even that is a bit too low because it has more heating energy than e.g. ethanol, so if you want the same amount of energy from ethanol, you need to produce more(ethanol's heat energy is about 60-70 % of crude oil's) ethanol just to make it up for crude oil's extremely high energy efficiency.
So what does this tell us?
1. The world has never invested more in oil fields as it does now, yet the added extra is either a slight decline or a mere break-even.
2. In other words: we're spending more and more just to stay at the same place.
I differ with the author, whom I respect, of painting a picture of clever little scheming from the Saudis' side. I would instead argue that when looking at investment and their historic exports(because that's what the world cares about), it's unlikely they can produce much more.
Their recent cutback most likely has more to do with the fact that their internal oil consumption peaks in the summer(about 350,000-400,000 bpd extra is needed compared to the winter months), and this makes perfect sense and it's timed perfectly.
Besides, they were never shy using spare capacity before, at much lower oil prices. They are aware of the risks to the global economy when the price of oil(excluding WTI, because that's too U.S-centric, most oil blends around the world are in the $120+ range).
The numbers are staring you in the face. I might speculate that some people might be reluctant to call a spade a spade because they were overtly alarmist before, got fooled, and are now overly cautious to prevent that embarrassment. But we're now entering our sixth year since they had their export peak and they just cut production 0.5 mb/d despite very, very high oil prices. Blaming speculators, 'demand destruction' and all other excuses we all heard in 2008.
Hello? Is anybody home?
(Edit: props to Steven Kopits, I cropped and used his image, originally from Gail's Our Finite World.
I recommend his entire article, You can view it here )
That's a stunning chart for sure, this presentation from Steven Kopits is excellent, thanks for the link.
If, to oversimplify things, you use the capex as a rough indicator for energy invested, the EROEI for all their efforts since 2005 is zero!
Even X's corn ethanol has done better!
No, that is the wrong conclusion. As he explained, the investments made have been producing oil, lots of oil, an abundance of oil, gushing out of the ground - with staggeringly more EROEI then some puny corn ethanol --- BUT --- because the decline rate of existing fields has wiped out all their gains the result is a zero sum.
Its only an oversimplification in that it clears away all the messy details and shows you what the big picture really is. A bit like doing the books and looking at the bottom line at the end of the day.
All the hand waving about the huge production increases in the 'new-online-production'-department won't change the fact that all the other 'depleting-fields'-departments are eating away all the profits.
While the story always goes that Saudi will increase production to offset world production shortfalls for any reason - the facts are that in the last couple of decades it never happens. Why?
Instead of increasing production, in every case, prices rise and knock someone to the curb and demand falls so the increase is not needed. This is not a trend; but is the only way to keep dwindling supply in line in line with increasing demand.I postulate that Saudi cannot and never will increase it's production simply because it can't. That's it - never, nada. What will happen is the same thing that always happens. Prices will rise high enough to expel someone from the oil market which will curb demand to the production plateau of 75mbd. Eventually more and more economic expulsions will have to occur, whether it shows up in food/oil, to compensate for oil production depletion. Saudi Arabia will never produce more that 10 mil. bpd hence forth - period
mrkjp12, I agree with you 100%.
Now we know that Saudi is definitely not making up for the Libyan decline. Oil Movements says deliveries are down to 22.83 mb/d in the four weeks ending April 30. That is down from 24.19 mb/d in the four weeks ending February 12th just before the Libyan crisis started. That is a decline from that recent peak of 1.36 mb/d.
Ron P.
More specifically, recent shipping reports do not indicate any significant changes in shipments out of western and northern Africa, or South America, from other OPEC members. It's fairly clear the sequential fall off in shipments in the Oil Movements report over the last two weeks of 200,000 bpd can be traced to KSA. Since OM is an average of four weeks, KSA exports may have fallen off 400,000 bpd from about the week of April 1 to about the week of May 1.
Clearly SA would have to be painfully aware of their declining oil situation,so in that position wouldnt you expect them to horde for themselves? I mean putting yourself in their position wouldnt the only choice be to stock up on millions/billions of the black gold?
At the same time with oil being a finite source wouldn't SA be investing heavily in renewable energies for the inevitable day when the reserves run out and the wells run dry? I really haven't read anything about SA investing in renewables.
What say you? Thanks.
Saudis are probably close to (or may be beyond?) peak, but they are very far from running out of oil for their own consumption. So why would they invest on solar so early ? To export more oil ? I am pretty sure at this stage the investment on solar would cost them much more than the additional oil export revenues it would allow.
They invest now when they still have export incomes to pay with, and prices are relatively cheap. If they wait till they need it, it will be to late.
Well yea there is a lot of time left before SA runs dry and that is exactly why you would want to install Solar now,while the money is rolling in at great pace and price.Also by powering their Country with Solar that allows em to sell more oil to others vs having to use it for themselves.
Solar has come way down in price and is fast closing in with parity to fossil fuels,especially when you take ALL the cost into consideration of using FF.
Who knows there maybe other renewables that could also be used in SA.
Other parts of the world, such as Spain and California, have already achieved grid parity on the price of solar, but only for large installations rather than small scale ones for homeowners.
It doesn't matter if there is a lot of time from SA's peak to it running dry.
You assume a relatively 'stable' economic and political climate for SA to sell it's increasingly expensive oil in.
I don't think the pre-peak 'rules' of the game are the same as the post peak rules.
You are thinking business as usual which i think is not applicable to the situation we are in.
Let's be honest about this. We didn't want to change to renewables.
Thats's why our main energy still goes into searching for the high EROI type of stuff while we should have been off this path for decades already.
For the change to renewable energy to have (even remotely) worked (with immense amounts of misery and s***t) we first should have -wanted- to change.
Changing because we have to obviously isn't going to cut it.
I wonder how much of the oil production decline in march is due to the japan demand decrease. If Japan crude demand has fallen, that may be a part of the explanation to why the Saudis haven't compensate the Lybian decrease.
K - I read an unsupported claim that China has picked up the contract for ever bbl of oil Japan is no longer importing.
Shipping reports since March 1 indicate that China may have imported a near record amount of oil imports, possibly only exceeded by a wave of imports in November-December 2010 following their widespread diesel shortage.
As far as Japan goes, it's not clear if their total oil consumption is any less than before the disasters, when you consider that their oil product imports have significantly increased.
And it's just a flesh wound!
http://www.youtube.com/watch?v=zKhEw7nD9C4
The most interesting graph Stuart shows is global total liquids
there has been a pretty steady increase in production over the past two years.
If conventional oil is flat, then NGLs and others must be really ramping
How long can this continue?
The pain would obviously be a lot worse without this increase.
poly - No guess on the timing but an FYI on the source of all these NGL's: huge NG fields that never had a sales outlet. Many contain large volumes of NGL. As the market for LNG expanded the NGL yields gave an additional economic incentive to bring these fields online even sooner. Many other NG fields with hugh NGL yields may potentially exist but lacked the value to be pursued in the past. I doubt anyone can offer a fact supported guess but there may well be a very large NGL reserve potential out there.
Rockman,
Can NGL's be refined into petrol/diesel/kerosene?
Is the energy density of NGL comparable to the energy density of oil?
Thanks in advance.
s - Out of my field a bit but I don't think so. I do know some of the NGL's are blended with some fuels but volumeticly I don't think the add much to the liquid fuel supplies.
The heavier NGLs - butane and pentanes plus - can be put into the refinery processes for gasoline. However, if they are adding ethanol to the gasoline as well, they have to back off on the NGLs to keep the vapor pressure of the gasoline down and prevent the fuel systems from vapor locking.
The refineries can also convert isobutane to high-octane gasoline components, but they normally only do that to improve the octane rating of gasoline - it is expensive and has a very poor EROEI. They more commonly just sell the NGLs as camping fuel or petrochemical feedstock.
Converting NGLs into diesel fuel or kerosene is an even more difficult exercise and they seldom do it. It's much more efficient to convert engines to run on NGLs.
The energy density of NGLs is much lower than that of oil. It is misleading to add NGL volumes to crude oil volumes and calling the result "oil" - it is like adding apples and crab apples and calling the total number "apples".
Hey Guy:
http://www.bloomberg.com/news/2011-04-17/oil-market-is-oversupplied-with...
MarketWatch's spin: http://www.marketwatch.com/story/oil-futures-down-even-as-saudis-cut-pro...
Good afternoon,
a time as come to sign in for my first post - i think the netiquette would require a short introduction to say who i am, so...i am a passionate Italian TOD reader for a few months now; i've been working in an oil company for 8 years, first at the refining dept and now in the fuel oil/feedstocks trading one.
Now, the (hopefully) interesting part (i quickly scrolled down the long list of comments, so apologies if what i am saying as already been stated); just a few comments:
- the fact that Arabia did not make up for Lybian oil could be related to unavailability from their side of similar quality oil: as far as i've seen, Arabian production of low sulphur crude (real LS crude, say 0.3/0.6 %S, as Amna) is quite limited, so even a partial replacement seems difficult to get.
- i have "personal evidence" of some of the grades refineries are turning to in place of Lybian ones in the MED area (Azeri Light from Black Sea, Ekofisk from the North Sea)
- it's worth noting that some refineries aren't very flexible on low sulphur crude qualities: not all can process acid crudes like Nigerian grades, for example, and also the yields of the replacement crude may be an issue (if LS crude is processed to produce bottom from the topping to feed an FCC, running on say Sharan blend which has half of Amna yield in resid may be an issue).
- in the MED area, there's strong interest in buying low sulphur straight run feedstocks (as testifyed by the strong increase in their premia on the market), which i'd say have partially replaced Lybian crude processing to feed FCCs.
So, here are my two cents: i think we could (probably? at least partially?) "decouple" the reduced Saudi production from the Lybian issue (of course, thinking about what caused such reduction is another story).
Ciao,
Goyya