June 14, 2005
What is Saudi Arabia up to?
There is a chronic disconnect between what Saudi Arabia says it's going to do and what actually happens. So what's really going on?
I have watched with growing curiosity over the past year as Saudi Arabia has announced time and again and with great fanfare that it intended to increase its oil production in order to stabilize prices. Perhaps you remember this story from June 2004:
Oil prices slide on OPEC hopes. Oil Minister Ali al-Naimi, in Beirut ahead of the OPEC meeting, said Riyadh was "fully ready" to increase its oil production in an effort to trim soaring prices to the cartel's target range of $22-28 a barrel.
Or this story from August 2004:
Making good on a pledge made in May, Saudi Arabia announced Wednesday it is prepared to increase oil output by up to 1.3 million barrels per day -- 14 percent -- to cope with world demand. [Adel al-Jubair, foreign affairs advisor to Saudi Crown Prince Abdullah] said the Saudis had informed all of their customers within the last week of the kingdom's intention to make additional crude oil available to the international market.
It's been interesting to compare these press releases with Saudi Arabia's daily oil production figures as reported by the U.S. Energy Information Administration, displayed in the graph at the right. The EIA claims that Saudi production has not wavered by so much as a single barrel from the 9,500,000 barrels a day that we saw in June of 2004, a rather remarkable engineering accomplishment, if it were true, suggesting that the Saudis have the ability to turn the flow on or off with sufficient precision to achieve whatever production level they wished, and that 9,500,000 happens to be precisely the value they do wish.
My curiosity grew even greater when I learned that some people have been trying to keep track of the total quantity of oil that gets loaded onto tankers from Saudi Arabia, and these numbers suggest that the Saudis may have been producing somewhat less than is officially claimed. The Oil Drum called my attention to this May 24, 2005 account from Rigzone which claimed that "numerous outside sources say the Saudis haven't hit 9.5 million b/d since at least December, if ever."
So why haven't the Saudis increased oil production over the last year? It would seem there are two possible explanations. The first is that they never really wanted to. With the global oil market tight, Saudi revenues have soared, and it's not at all clear that it would have been in their economic interest to increase production.
The other possibility being raised in some quarters is that the Saudis haven't increased production because they can't. Oil analyst Matthew Simmons's book Twilight in the Desert suggests that oil has been drawn out of the big Saudi fields too quickly, as a result of which they now face production declines and have been concealing this from the outside world.
Whether the reason was "don't want to" or "can't", what's the purpose of cultivating the public impression that the Saudis were ready to open the spigots at any minute? The answer must be that openly declaring the truth of the situation would somehow undermine their influence or expose a vulnerability. The Saudi royal family has quite a deal going, indeed, a racket unprecedented in the annals of history. But they're also sitting on a powder keg. Their strategy in most matters seems to be to keep some money in every pot, and if that means doing one thing and saying another, so be it. Maybe if you state publicly that you support the U.S. battle against the terrorists while simultaneously funding the madrassas where the next generation of terrorists are indoctrinated by the thousands, all your bases are covered.
Robert Baer, in a fascinating story in the Atlantic Monthly had this account of the reaction when King Fahd suffered a stroke in 1995:
At this point Fahd's brothers were calling doctors in the United States and Europe. They wanted to know not whether Fahd would ever recover his mental capacities, or what kind of life he would be able to live, but what it would take to keep his heart beating and his body warm. Money, of course, wasn't a problem. They told the doctors they were prepared to lease as many Boeing 747 cargo jets as needed to bring in mobile hospitals and medical teams. The doctors couldn't understand the reasoning behind the questions--but only because they didn't understand the politics of the kingdom. What the family knew and the doctors didn't was that Crown Prince Abdullah had long been eager to take power. The only way to keep him at bay was to keep Fahd alive--God willing, until Abdullah died.
Such was my frame of mind when I learned of this announcement from Saudi Arabia last week:
Top Saudi says kingdom has plenty of oil.Saudi Arabia has plenty of oil --more than the world is likely to need-- along with an increasing ability to refine crude oil into gasoline and other products before selling it overseas, a top Saudi official says. "The world is more likely to run out of uses for oil than Saudi Arabia is going to run out of oil," Adel al-Jubeir, top foreign policy adviser for Saudi Arabia's de facto ruler Crown Prince Abdullah, said Wednesday.
Is this latest story the truth? I don't know. Meanwhile, King Fahd is reportedly still alive. But nobody seems to have heard from him in a while.
Posted by econbrowser at June 14, 2005 09:30 PMdigg this | reddit
"The world is more likely to run out of uses for oil than Saudi Arabia is going to run out of oil,"
This is absolutely the indisputable, incontrovertable truth.
It's a simple question of diminishing returns. As the cheap and easy oil is pumped off, the marginal cost of each additional barrel goes up. At some point, the cost of the oil exceeds the market price of oil substitutes, and at that point, it is exactly as the top Saudi official foretells.
What the top Saudi official does not reveal, however, is whether that point is coming sooner or coming later.
Posted by: Michael Robinson at June 15, 2005 03:47 AM
"...likely to run out of uses for oil"
Saying this statement is true is like a doctor telling the loved ones that a patient, who was in pain, is now doing very well--after the patient has died. "Well" in what sense?
When Saudi Oil peaks, economic growth as we've known it is likely to come to a wrenching hault. Entropy dictates that continued exponential growth is an impossibility. Alternate fuels will be available but will not support the fossil fuel bubble that we've been living in for the past fifty or so years.
The statement, in the large sense, is total BS. Just as most economics is sociology pretending to be a hard science.
Posted by: TRE at June 15, 2005 08:46 AM
plus as my colleague says today in a post over at the Oil Drum, the oil that is left is quite bitter crude or is in fields that are in stark decline...
Posted by: The Oil Drum (profgoose) at June 15, 2005 08:52 AM
Professor - welcome to the blogosphere! I believe this is more than palace intrigue.
It is a common belief among the general populace in Arabia that the West is stealing their oil. I know $55 per barrel doesn't seem like theft, but that is the perception.
Osama Bin Laden has aggressively promoted this idea (the West and Saud family stealing the wealth of Arabs). If the Kingdom announced that oil production was declining, they would probably have open revolt. So they keep saying "no problem", plenty of more oil, etc. to placate the general population.
There was a hilarious announcement last year:
"Officials from Saudi Arabia's oil industry and the international petroleum organizations shocked a gathering of foreign policy experts in Washington yesterday with an announcement that the Kingdom's previous estimate of 261 billion barrels of recoverable petroleum has now more than tripled, to 1.2 trillion barrels."
I agree with your comment that the "truth would expose ... a vulnerability", but I think that vulnerability is revolution.
Welcome and Best Regards!
Posted by: CalculatedRisk at June 15, 2005 01:56 PM
A few observations from an old Saudi hand.
The intra-Sa'udi family dynamic is tribal. The current senior family members are all sons of the founder, Abdul-Aziz (known as Ibn Sa'ud), who had 43 sons with their mothers being from many different tribes. Abdul-Aziz's favorite wife was Asa as-Sudeiri, his first cousin, who had seven of the 43 sons, the very powerful "Sudeiri Seven," who include King Fahd and Defense Minister Sultan, father of the infamous Bandar bin Sultan, Ambassador to the US. They have tended both to be more corrupt and more pro-US than the more fundamentalist Prince Abdullah, who is indeed waiting to take full power. However, since taking effective power, he has become more pro-US.
All this is a warning that there are multiple factions and views within the Sa'udi royal family. It is not at all surprising that there may be apparently internally conflicting policies going on as these various factions jockey and use their sources of power and influence to move things as they want (another major faction are the sons of the late King Faisal, the most influential of Adbul Aziz's sons, who include current Foreign Minister Sa'ud and former intelligence chief, Turki, now Ambassador to the UK, and also Mohammed, founder of the Islamic Development Bank).
Regarding oil reserves, this is murky in the extreme. I have no independent information regarding conditions in the main wells and pools, the most important of these being al Ghawar on the Gulf, the largest single pool of oil in the world. When that one runs out, there will be trouble, no matter what. The bigger mystery, and very closely held, is what is available in the Empty Quarter (ar Rubh al Khali). There is at least one working well there. Nothing has been reported from there. Costs of production are much higher than in the Gulf, but the ultimate condition of supplies in the Kingdom depend on what is or is not out there.
Posted by: Barkley Rosser at June 16, 2005 10:05 AM
The Shaybah oilfield (see http://www.saudiembassy.net/1999News/News/EneDetail.asp?cIndex=1098) is in the Empty Quarter.
Posted by: The Oil Drum (heading out) at June 16, 2005 10:47 AM
Of course nothing any government official says can be taken at face value. That is true for the U.S. government as well as Saudia Arabia. Political calculations mean everything. Lies are commonplace. Economics is as much about mass psychology than any "fundamentals." Anyone on this blog ever word for the Federal Reserve?
Posted by: Jason Bradford at June 16, 2005 05:18 PM
replying to comment Posted by: Michael Robinson at June 15, 2005 03:47 AM..
I am hard pressed to form an opinion on your comment. In other words, what did you say? You cited concepts such as "entropy", "bubble", etc, but these either are too cliche'd to make any contribution to the topic (entropy), or just are not correctly interpreted (bubble). It would benefit other bloggers a great deal if you could clarify your message, using a language and concepts with which you feel more comfortable. In the newest slang, your comment qualifies as totally "modern jack..."
Also, slandering at economics was not a contribution.
Posted by: Ty at August 1, 2005 12:47 PM
Sorry Michael Robinson, my message was intended for TRE. I thought the credit was given at the top of the comment, not the bottom. So TRE, please read my previous comment directed erroneously to Michael Robinson.
Mr. Michael Robinson, please accept my sincerest apology. Your point was very valid.
Posted by: Ty at August 1, 2005 12:50 PM
i am wondering if the oil and the proceeds from oil of saudi arabia are the property of the nation, or of the saudi royal family ? i suspect the latter. is it accurate to say that they own one sixth of the united states stock market, or is it six per cent ? either way - is this private or national property ?
knowing what was in the ground would be important to any incoming revolutionary government, and a major part of their calculations. to deny potential revolutionaries this knowledge is not to be wondered at. in any case - is it rude to enquire about private property ? ?
the most intriguing graph i saw was one that ( at a recent time of rising oil prices and a declining dollar ) showed the oil price dead flat against the euro.
indeed, they are as you suspect, the kings of swing. when they talk about production, do they really mean release from storage tanks ? forget the statistics, and employ cynical common sense.
alternatively, does anyone have a good theory as to why they would not bluff ? i cannot come up with one.
Posted by: gillies at August 1, 2005 01:53 PM