June 23, 2008
Saudi oil production increases
The recently announced Saudi oil production increases are more modest than had been suggested in some of the earlier rumors. The Oil Drum (,) is your source for the meaning of the latest announcements.
Posted by James Hamilton at June 23, 2008 06:37 AMdigg this | reddit
Only modest increases? We're doomed! Gawd, and I need to drive my 5,500lb. SUV to buy some bottled water. What is the world coming to?
Posted by: fixed carbon at June 23, 2008 07:18 AM
The announcement is of more modest increases; one of the links James provides shows how many times in the past they've promised, but failed, to increase production at all.
Healthy skepticism on anything the Saudis say is the wisest policy at this point.
Posted by: M1EK at June 23, 2008 07:28 AM
What I find interesting is that we expect a small increase in production by the Saudis to drive prices down but an large increase of domestic production is reported to have little effect if any. Hmmmmmmmm........
Posted by: DickF at June 23, 2008 08:18 AM
Saudi Arabia has already boosted its production by 300,000 barrels a day, or about 3 percent, to 9.45 million barrels a day last month. But that has had little impact on soaring prices. Oil futures in New York have gained more than 40 percent this year. They rose 2 percent to $134.62 a barrel before the meeting on Friday.
very interesting: Will the market implode or rally??
Posted by: stock market blog at June 23, 2008 09:04 AM
DickF, it's unlikely we could produce more than this hypothetical output from the Saudis on a daily basis from ANWR or offshore even if we went recklessly full-bore.
Posted by: M1EK at June 23, 2008 09:31 AM
He draws a comparison with the situation in 1979-1980. Start with the dollar price of oil, which he calls "one of the two most important prices in the world" (the other being the dollar-euro exchange rate, which we'll get to in a moment).
"If you look at the price level since 1980," he begins, "oil prices would naturally double by the year 2000. So from $34 a barrel in 1980 to $68 a barrel. And then . . . because the inflation rate's about 3.5%, it would double again by 2020. So the natural price . . . would be something like $136 in 2020.
"Now, we [already] got to $130-something, but . . . I really think the price is going to settle down, probably below $100, if not below $90. What I'm saying is we're not so far off track."
American motorists still shocked by $4-a-gallon gasoline might think we're rather more off track than Mr. Mundell suggests. Bolstering his case, he immediately moves on to another commodity often invoked to demonstrate inflation: gold.
"The price of gold in 1980 was $850 an ounce. And the price of gold today is about the same. It's astonishing," he says. "It's true, gold did go up" to more than $1,000 an ounce earlier this year, "but the public doesn't believe that there is inflation. If there was big inflation coming, then you'd see the price of gold going up to $1,500 an ounce very quickly, and that hasn't happened."
Posted by: DickF at June 23, 2008 10:19 AM
Estimates are that about 2 million bbl/day could come from ANWR while off shore could produce up to 50 million bbl/day. Saudis are looking to increase to about 10 million bbl/day. Estimates are notoriously wrong on both the up side and the down side.
Posted by: DickF at June 23, 2008 02:45 PM
DickF, those estimates are ludicrous. The entire current production in the US is around 5 million barrels per day.
Posted by: M1EK at June 23, 2008 02:51 PM
The Saudi crude is a sour crude. Don't expect too much in the way of relief.
Posted by: Babinich at June 23, 2008 06:53 PM
With modern technology, there is no reason not to drill in ANWR & off shore. It may not help tremendously or soon, but with 6.6 billion people, the world needs all the energy it can get.
You can say we don't have an energy policy, but we do. We have the energy policy of the Democratic Party (with the aid of several lame-brained, timid Repulblicans), which is to say, you can't build a nuclear plant, you can' build a refinery, & you can't drill for oil.
Posted by: algernon at June 23, 2008 07:03 PM
1. What company wants to build a nuclear reactor? Or are you proposing government built ones as I imagine exist in France?
2. I think we've discussed the refinery issue here before. If I'm not mistaken, energy companies have been consolidating refineries, closing down older ones, and could have--if they desired--further expanded existing refineries. They chose not to.
3. Rather than sending bills to the future, as we've see with the massive deficits of Reagan and Bush, why not save for the future? And why not save ANWR and off-shore oil for the future, as an example. They might need it.
Conservatives need to start acting as the term implies. Conserving.
Posted by: General Specific at June 23, 2008 11:02 PM
"Conservatives need to start acting as the term implies. Conserving."
There is nothing mutually exclusive about conservation, exploration, and the resuscitation of nuclear power.
Posted by: Babinich at June 24, 2008 02:37 AM
DickF, those estimates are ludicrous. The entire current production in the US is around 5 million barrels per day.
Today we are producing less than 1/3 of what we produced in the 1950s and 1960s. US production is down because of restrictions on new exploration and new production as old sources are depleted and because of regulations on existing production and refining. The US has also significantly reduced consumption through energy efficiency. Those who constantly cry for energy efficiency have usually not even looked at what we have actually done especially since the chronic inflation of the 1970s. The free market is amazing when it is allowed to work.
But it is not very fruitful to argue estimates whose amounts are politically determined depending on the bias of the source.
Posted by: DickF at June 24, 2008 04:47 AM
1. I don't know how old you are but in the 1970s there were many companies who wanted to build nuclear power plants. Some even started work only to be shut down by environmentalists. Others seeing the lost investment scrapped their plans. You have to understand that when regulations remove profit from investments no one will invest. Even the most avid environmentalist would not choose to invest in a losing business, at least not for long.
2. The question of refineries is similar. New refineries have not been built for the same reason that nuclear plants have not been built. Environmental regulations make it more profitable for the oil companies to expand the capacity of their existing plants, use contingency capacity, or import. I am always amazed when environmentalists force businesses out of production then blame them for lack of production.
3. Massive deficits do not really send much to the future especially with inflationists running monetary policy. For example debt from 1970 is running less than $.04 on the dollar today. But what does cost future generations is lack of investment today. It is like the miser who buries his money in the back yard then dies of starvation. And realize it is actual plan and equipment that is needed to bring us production in the future not money. You simply can't eat money. The best gift we can give future generations is to invest in production today so that they will have the finished goods in the future. The mantra about 10 years to realize any production out of ANWR is a good example. If the investment had been made 10 years ago we would be reaping the production now. Why shouldn't we invest so that future generations benefit from our foresight? Don't leave it in the ground. Produce for the future.
Posted by: DickF at June 24, 2008 05:17 AM
DickF, these are starting to sound like Cheney talking points.
1. Nobody would even touch nuclear without the gargantuan liability subsidy. Wind/solar are a bargain in comparison.
2. Nobody's even TRIED to TALK about building a refinery. The refinery owners were very very happy to make a lot of money. If no permits were even applied for, it's disingenuous to claim that environmentalists stopped them all in their tracks. There were no tracks.
3. "We" don't benefit from oil production in this country, unless your "we" is the entire world, and then it's a trivial benefit. To whit, the Bush DOE estimates that drilling ANWR to death might lower oil prices by about a buck a barrel. Oil is fungible now; and in the foreseeable future; but if things get really bad, we'll wish we hadn't drilled our oil to give 6 billion people a trivial price break.
Again I find it incredibly ironic that right-wingers are pushing for domestic oil production on the grounds it will non-trivially benefit US consumers. Newsflash: the only way that benefit could be restricted to US consumers, and thus large enough to be worthwhile, would be if we nationalized our oil companies and required them to sell it locally at a loss. Yes, the Hugo Chavez plan.
Posted by: M1EK at June 24, 2008 07:44 AM
M1EK is in error about a number of things, the most trivial being that I am not a right-winger but a believer in freedom & voluntary interaction of economic participants.
More concretely, he is wrong about refiners. It is bad enough that we have to import such a huge portion of our crude oil, but to IMPORT refined product can be attributed to nothing but the gov't having shot us in the foot.
I'm also intrigued that the putative liberal is only selfishly concerned about the US consumer & not about mankind in general benefiting from more oil being drilled.
Posted by: algernon at June 24, 2008 09:03 AM
algernon, it's a fact that refinery permits were not even applied for. Nobody even asked until fairly recently.
And a cost-benefit analysis must be performed using the same units for each side, and must be rational - taking into account basic concepts like fungibility. Some people who know better (and many who don't) are making it sound like the US would get all the benefits of increased domestic production, when in fact, we'd get a small fraction of that benefit but pay ALL the costs.
Posted by: M1EK at June 24, 2008 10:53 AM
The Saudis lost control of the price of oil to upside sometime ago.
Similarily OPEC declared a Crude Liquid sales cut of close to 25% on paper during the first Arab Oil Embargo oil crisis. But in actual fact, how much oil was withdrawn from the market?
Less than 10%?
The "declared embargo was over in roughly six months, yet prices remained high. Why?
In the meantime, American economists are afraid and scared to directly address geopolitical issues in the ME and the US president goes over and begs for oil from a country of nomadic herders.....
Posted by: GNP at June 24, 2008 12:41 PM
Dick F, according to the EIA,
ANWAR would probably peak at around 836,000 barrels per day, 11 years after production began. (They calculate that as 2024). I didn't look very hard for an authoritative source for offshore estimates, but a few months ago
Daniel Gross at Newsweek suggested it could be as much as 3 million barrels a day in oil and natural gas equivalent, which at least sounds plausible.
It always bears pointing out that offshore oil is not necessarily cheap. We still don't know if reservoirs such as Jack 2 can even be developed for under $100 a barrel. If this turns out to be the case, then it won't matter how much oil is there - it still won't bring prices down much. Or as a geologist put it a couple of years ago, we have all the $150-a-barrel oil we need. We're just running out of $40-a-barrel oil.
Posted by: pianoguy at June 24, 2008 01:55 PM
I'll emphasize that I'm not opposed to nuclear nor drilling. I am opposed to unnecessarily borrowing from the future--consuming today. This is also not about America's children versus the world's children. It's about dealing with the real problems rather than thinking we can drill or radiate our way out of the limits we may be facing.
What I am opposed to are unsubstantiated assertions that seem more ideologically motivated. Ideology may include an obsession with the monetary system or free markets--as well as with the idea that government can fix problems.
My reading of this topic--including a lot of what JDH has written--is that a lot of refining capacity was closed down, centralized, and not a lot of effort put into increasing it much beyond what we have now. Maybe that was a good business decision. No doubt regulations limited some expansion. As well as the fuel mixes that are required.
But gas expensive now because oil is expensive. So let's focus and stop discussing the red herring of refineries--at least for the time being.
Same for nuclear: I don't see many or any companies suggesting they'll put forward the billions that are required to create nuclear power. Perhaps. But the idea that nuclear was regulated into death doesn't ring true for me.
And with the US producing what? 5 million barrels a day now? Maximum production ever was 10 million barrels a day? So the idea that we're going to produce anywhere near what DickF proposes--50 million barrels a day--is ludicrous. Pulled out of a magic hat.
If we're going to discuss stuff, we need to be grounded in reality.
Posted by: General Specific at June 24, 2008 02:54 PM
General Specific wrote:
I am opposed to unnecessarily borrowing from the future--consuming today.
I am with you on much of what you say. I used high estimates of oil production to illustrate the absurd by being absurd. Projections are very unreliable except when someone actually is planning to put his money where his mouth is.
One difference I have with many is that I believe the experts who work with production every day are better at knowing how to make production decisions than members of congress who have spent most of their lives behind a big lawyers desk trying to think of ways to get other people's money.
I agree that we should not engage in "borrowing from the future--consuming today." That is why I am a supply sider rather than a demand side Keynesian or monetarist. And it is also why I am a strong advocate of free markets.
Posted by: DickF at June 25, 2008 06:29 AM
RE: new refinery permits not being applied for...
Perhaps the reason for that is that even refinery expansions are being held up in court for years at costs of millions of dollars?
RE: rising prices despite (relatively small) increased production from Saudi Arabia is because, as was stated by someone else, the extra they are putting on the market is not the light, sweet crude but heavier, sour crude -- of which there is currently a glut, because of the extra processing it takes, increased environmental standards, and the fact that there are fewer refineries world wide capable of using it.
Posted by: RVTurnage at June 25, 2008 09:17 AM
RVTurnage, there are plenty of states where property rights absolutists trump even the most reasonable environmental claims (like the place I live, Texas). If refineries are in that much demand, they'd be building new ones here without much trouble at all.
I would trust Malloy about as much as Limbaugh on this one.
Posted by: M1EK at June 25, 2008 11:53 AM
Like the guy trying to build a wind farm in Texas isn't having any trouble from environmentalist lawsuits?
The threat of lawsuits and delays are everywhere, even in Texas.
Posted by: RVTurnage at June 25, 2008 02:23 PM
RVTurnage, you can build a refinery in Texas. Those who assert otherwise are either woefully misinformed or lying. It's arguably easier to do it than to build a wind plant - and it's easy to build a wind plant here, too (which is why there are so many; the vast majority of which suffered no lawsuits).
Posted by: M1EK at June 25, 2008 03:40 PM
Refineries aren't cheap, and they have a long economic lifetime, and Peak Oil is here/coming soon.
If I were thinking about building a new refinery, about the only place I'd build one is to get access to oil that was otherwise geographically difficult... hence that plan to build one in South Dakota for Canadian oil. It would be protected from competition with Texas, Louisiana, California.
Not building new refineries is akin to not building big new airports, given the likely future trends in air travel. [Yes, I know the UK wants to expand Heathrow for 2020, taking out 700+ homes North of the current airport, but we'll see.]
In general, regardless of speculative jiggles, I'd claim that a key factor in making any decision about investment in any long-term infrastructure assets is whether they make any sense with plausible trajectories of oil & gas prices.
Building something that might be an "instant stranded asset" is really chancy,
Posted by: John Mashey at June 25, 2008 09:13 PM
M1EK, you miss my point. Sure there may be lots of wind farms in Texas...but that didn't doesn't change the fact that environmentalists sued to stop a WIND FARM. Do you really think that group (and others) wouldn't be more likely to sue to stop construction of a new oil refinery?
And I never said they COULDN'T build a new refinery. But the threat of lawsuits certainly add to the risk/cost, and IMO, are a big incentive NOT to build new ones, when existing ones could be upgraded for less hassle and less money.
Further, John Mashey is even more spot on. There was no incentive to build new refineries from the early 80's until the recent spikes began a couple of years ago.
Posted by: RVTurnage at June 26, 2008 06:00 AM
Yes, RVTurnage, they might sue to block a refinery in some parts of the state - but they'd quickly lose. If it weren't for wind being associated incorrectly with killing birds, and thus coming up against the powerful hunting lobby, the relevant lawsuits would be out of court in about three seconds as well.
I repeat again: if you say a refinery that was honestly needed and wanted can't be built in Texas, you are either misleading people or are completely unaware of the political environment in Texas.
Posted by: M1EK at June 26, 2008 06:51 AM