The puzzle of oil production

Jun 19th 2008 | CAIRO
From The Economist print edition

Why the Saudis are worried about the high price of crude

WITH oil prices nudging $140 a barrel, Saudi Arabia stands to receive a windfall this year of up to $400 billion, double what it earned from selling oil last year. Gloom at the world's petrol pumps, it may be assumed, can only mean hand-rubbing glee for their biggest supplier. Such is the case with some of the kingdom's rivals in the Organisation of the Petroleum Exporting Countries (OPEC), the cartel that supplies over one-third of the world's crude. Iran, for instance, has consistently argued against doing anything to bring down prices. Why, then, have the Saudis mounted a risky bid to do just that, by boosting oil output and summoning the world's top energy officials to an emergency meeting in Jeddah on June 22nd?

The reasons span history, economics and geopolitics. No one in the Saudi oil ministry has forgotten what happened after the oil shock in the 1970s. The Arab boycott called in 1973 to protest against Western backing for Israel tripled oil prices. But it also prompted oil exploration in tricky places such as the North Sea and conservation measures that reduced demand. The result was a long-term slump in crude prices and a drop in the Saudis' market share.

The Saudis fear that the intensified search by the West for alternative energy will result in the same thing happening again. But the more immediate worry is that high oil prices may slow not just America's but the whole world's economy. That would trigger a sharp fall in demand for Saudi oil. Just as bad, a sharp global slowdown would slash the value of the kingdom's hundreds of billions of dollars in overseas holdings. No wonder Ali al-Nuaimi, like his predecessors as Saudi oil minister, often cites “customer satisfaction” and “market stability”.

Saudis retain another nasty memory from the 1970s. Branded as gluttons, they became a stock figure of ridicule in Western cartoons. And sudden wealth brought social strains at home that helped create a fundamentalist backlash that produced, among other things, al-Qaeda. The Saudi desire not to be stigmatised for the world's woes, this time, may be gauged by their donation, last month, of a generous $500m to the UN's World Food Programme.

Today's sky-high oil price carries another political risk. It empowers Iran, the revolutionary Shia state that the conservative Sunni Saudis view as their main rival for regional influence. Even as the world has ratcheted up sanctions to punish Iran for its suspected nuclear ambitions, the Islamic Republic has cashed in the rewards from soaring fuel prices. The tightness of the oil market has become, in effect, a line of defence for Iran, letting its radical leadership hint, truthfully, that any hostile act that may impede the flow of Iranian oil would risk a global economic decline.

So Saudi Arabia's motives for wanting to lower prices are clear. The trouble is that it cannot manipulate markets as before. The kingdom has a fifth of known reserves. It supplies an eighth of the world's oil and remains, crucially, the only producer with at least some spare capacity. A huge investment plan under way should raise its capacity from 11.3m barrels a day in 2007 to 12.5m by next year. Noting pleas from George Bush and Ban Ki-moon, the UN's secretary-general, the Saudis have upped actual production twice in the past month, raising it by 500,000 barrels a day to its present level of 9.5m.

But much of that new output, and most of the reserve capacity, is in the form of heavier oils that are costlier to refine and for which there is less thirst. The Saudis are unlikely to bring new, lighter crude, or bigger refining capacity for their heavier oils, onto world markets until next year. Even then the incremental rise may not offset demand. So energy watchers hope the Jeddah conference will reveal something bolder than promises of more oil.

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The conventional assumption is that oil is causing the countries of the Middle East to have a distorted social, economic and political structure in place. Yet, casual observation suggests that other countries with similar oil endowments are/may not be the same with Middle Eastern countries. Among such countries are Norway, Russia, United States or Canada. What is your take on this issue?

"When fascism comes to America, it will be wrapped in the flag and carrying the cross." - Sinclair Lewis

RonPaul2008!!!

Quote, originally posted by tjbizzo »

Still waiting to see you either try to back up your statements in the DOJ thread, or retract them. Your choice.

I'm begining to think you have

1. an academic job
2. a government job

both of which ........ you know what I mean.

"When fascism comes to America, it will be wrapped in the flag and carrying the cross." - Sinclair Lewis

RonPaul2008!!!

Proof of this was last week when Saudi said they would raise oil production by 200K barrels, and Nigeria dropped theirs by 200K, sighting fears of violence. You don't over milk a cash cow...and I think the Saudis will do everything they can to keep us spending money at the pumps while still making record profits.

Not only is the high price of oil defining what we buy, it's changing our habits.......as it should. Now the question now is.......is the price artificially inflated or is it truly based on market conditions. More than likely it's a little bit of both.

As the price of oil goes higher, searching for newer sources of oil becomes much more likely and much more profitable. The volatility of the short term could supress the prices for the longer term even further. If the US could "support" it's need through higher extraction and higher refining capactities, much of the stability would return to the US.

There is a lag between cause and effect. The lag from high prices to people reacting and actually getting some results.......ie getting more oil and refining more oil, in combination with consumers using it more efficiently.

DRILL HERE, DRILL NOW!

DUUUUUUUUUUUUUUUUUUUR GO BUSH