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Saudi's Oil Promises

*Correction Appended*

What sort of commitment did Saudi Arabia really make to ultimately expand oil output to 15 million barrels a day – and is that even possible?

That’s been a major subject of debate since last Sunday’s big oil consumer-producer pow-wow in Jeddah , Saudi Arabia. And thus the Saudi pronouncement has had hardly any discernable calming effect on oil markets, especially since it would take several years to reach that 15 million barrel a day level in any case. Meanwhile, the kingdom has talked of nudging production up by 200,000 barrels a day from current levels next month -- and current prices remain as high as they’ve ever been.

Right now the kingdom, which generally plays the role of swing producer in oil markets, is still in the midst of expanding its production capacity to 12.5 million barrels a day by 2009 with the goal of retaining roughly 2 million barrels a day of spare capacity in normal times.

Chevron’s chief executive Dave O’Reilly went to the Jeddah meeting and I caught up with him on Wednesday. “I don’t think they made a final decision yet on going beyond 12.5, but they certainly seem prepared to,” he said. “And to say that so publicly in the presence of lots of people, lots of press with the king in attendance himself is a pretty strong indication that they’re committed.”

He said that he had little doubt that Saudi Arabia can do it if it wants to. “Saudi Arabia has a lot of resources. When they say they’re going to do something, they’ll do it,” he said.

Not all oil analysts have as sanguine a view about Saudi reserves or intentions. Some ask why the oil-rich kingdom doesn’t use the excess production capacity it has now when prices are flirting with $140 a barrel. What are they saving that excess capacity for, many wonder. (Sen. Chuck Schumer’s take: “Nice try, but no cigar.”)

But the Saudis say a cushion of extra oil production capacity should be kept aside in case there’s a substantial supply disruption from war or the like. And they say that they have trouble finding buyers for their heavier crude oils, which are harder to refine and make up a rising portion of overall Saudi production.

I contacted Youssef Ibrahim, who covered OPEC at the Wall Street Journal when I was there also covering oil and gas issues many years ago. He takes a critical view of Saudi production policies, and says that’s more important than physical capacity. Here’s what he said to me by e-mail today:

“Saudi Arabia periodically asserts it is planning to increase production which, over the past years, has proven to be more promise than plan. Very little money has been invested in developing infrastructure for more oil certainly in proportion to the vast new income in the past three years from higher prices.

“Still, as it stands, Saudi Arabia does have incremental capacity now to boost output by anywhere from a million to 1.5 barrels a day, which they also have chosen not to do. What it has proposed is a meager 200,000 barrels a day, not enough to soften prices nor demand.

“The fundamental philosophy of the Saudi oil establishment is that of OPEC, which is to maximize prices not output. This sometimes contradicts the political will, but in Saudi Arabia the oil establishment has time and again proven to be far more assertive.”

P.S. - Saudi intentions weren’t the only thing I was wondering about after the Saudi meeting. I was also thinking about how the meeting played politically in consuming countries like Britain. British Prime Minister Gordon Brown, whose poll ratings have been pretty dismal, attended the meeting. (Energy Secretary Samuel Bodman represented the Bush administration.) Brown went because he’s striving to show British consumers, who are chafing at fuel prices of roughly $10 a gallon, that he cares and is trying to do something. But I wonder whether it just looked like he was going on bended knee to the Saudi king to ask for more oil output.

The original post incorrectly stated Britain's fuel prices at $10 a barrel. The correct figure is $10 a gallon.

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Comments (28)

Bob Miller:

The Saudis are just doing what America has taught them.

They are capitalists to the extreme. Why in the world would they want to see the price of oil DECREASE. They are making billions of dollars weekly?? Supposedly they have over 3 trillion dollars in surplus CASH.

They are using that money for guess what.. BUYING companies throughout the world. They are smart enough to buy farm land in less developed countries. This is with the intent to be able to FEED their people.

The American people have sat on their hands while the politicians in Washington have run up a 3 trillion dollar deficit in the last 7.5 years. They have voted and voted again for the lame brained politicians in Washington. They have allowed these same politicians to ONLY BE CONCERNED ABOUT the party instead of the American People. They have allowed these politicians to SPEND, SPEND, SPEND more and more for 'pork barrel' projects. These politicians have failed to impeach the worst president in the history of the United States.

And we as a people want to blame the Saudis for our internal problems.

So like one of the posters said.. LOOK IN THE MIRROR and see who is to blame for the economy in the United States. WE THE PEOPLE ARE RESPONSIBLE for the oil situation in the United States.

William Jorgensen:

Amen, Dimitry, Amen.

Dimitry:

==As the news of financial and energy collapse reverberates around the globe the more attention will be gained and hopefully some drastic but empathetic action will result.==

I hope you are right. The only way we can get out of this predicament as a species is through cooperation. Competition did not really work.

It is a really big, decisive test of our claim to be "kings of creation". Lets hope we pass.

William Jorgensen:

Dimitry, economic theory has always relied on infinite expansion, and, as there has always been newer resources to exploit we have assumed no limits on growth. Globalization of national economies was only possible with cheap and plentiful energy for transportation of essential goods from surplus laden other states. It is now a death-trap for many who rely entirely on imported necessities, primarily food. But, this also applies to many developed nations as well, and so we are all included in the miasma that now approaches. A new economics needs to be implemented as we draw down our remaining resource stocks. Using the economics of gradual reduction and the forgiveness of debt we may be able to ride the storm. There are already published works by several prominent and informed individuals that could help dramatically, such as Richard Heinberg's; The Oil Depletion Protocol: A Plan to Avert Oil Wars, though only through a consensus of national agreements will these policies have achance and this is where I and others such as yourself can make a difference. I intend to bombard the news services and a broad variety of forums with The Emergency Declaration. As the news of financial and energy collapse reverberates around the globe the more attention will be gained and hopefully some drastic but empathetic action will result.

Dimitry:

==saudi arabia is a great country with great people and i believe they will save the people of the earth and further commit to the future of affordable energy==

So can you start selling your oil for $70, instead of $140 you can get for it now?

We have protected your rotten royal family with its disgusting minions of sub-royal hipocrites from you just fate for decades now. With our blood and treasure.

Ahh, just kidding, do what you always do - sell at the highest price you can get, sponsor anti-American madrassas world-wide and drink alcohol/hire prostitutes in private.

Dimitry:

==second draft==

I like it. So what do we do?

Remember, Global Capitalism, with its axiom of continuous growth forever is the main religion of the world. We won all the hot and cold wars! It's party time!

China, India, Russia and several other countries are just beginning to enjoy "the good life" - eating lots of meat, driving cars and having air conditioning. Weapons are proliferating world-wide, into both private and state hands.

And, by the way, most people "in charge" would have a terrible time with an 8th grade math test. They have shown a remarkable capacity to blame "the speculators" for our obvious problems with natural resources. I expect the "Jews" are not far behind.

It really, really doens't look good.

William Jorgensen:

As the Saudi reserves are a state held secret, along with nearly every other producer, I understand the "reluctance" to increase the flow rate - there is NO spare capacity or if there is the amount is negligible compared too the overall world decline in supply. Peak -Oil is here NOW!

Here is a second draft of an Emergency Declaration I've begun to circulate on behalf of us all.


THE GREAT TRANSITION

Our species has reached the limits of expansion and we are about to enter into a permanent decline as we end an age of plentiful energy and begin the Great Transition, or, the Great Collapse, depending entirely upon the unity of our kind!

We now face changes unprecented in human history. The time to act decisively and cooperatively to avert an apocalyptic crisis is here now!

As tribes grew to nations and as the tyranny of distance receded with each new energy source, we finally became entirely reliant on the ancient and limited stored sunlight in fossil fuels while we selfishly destroyed the health and wealth of our planet in its rapacious use.

Like a plague species we have consumed all that lay before us without thought for the lesser species or our own, no matter the importance of the ecology of the Earth. We will soon die of starvation for the gluttonous consumption of all that was within our reach -just as every other plague specie has done - unless we return the world to sympathetic order and reduce our demands for sustenance; to do that we must share wisely that which is left. We have fought for our valleys, mountains and plains, and our towns, states and nations, it is time to make the final consolidation and fight for our world.

We have been separated by language, race and religion, but we are all the children our mother Earth and our father the Sun. We all share the same deep desire to belong to a family and a tribe, and we all care for our young as best we know how. That which separates us is of little consequence against our mutual and most possible fates.

There are two choices before us. We can turn against each other in a cannibalistic battle of tribes over the remaining resources and decline rapidly to fringe-dwelling remnants unto even total annihilation in a battle of the last civilisations standing, or, we can unite in our assured paucity of resources and decline slowly toward equilibrium with a shared common goal, the survival of civilisation itself.

The days of kings and queens and presidents and prime ministers are coming to a close, no matter the final ending; it is time for the voiceless to speak and the deaf to hear, our leaders must know WE WILL NOT GO INTO THE NIGHT QUIETLY!

AMviennaVA:

Lonewolf, that was sheer poetry (and accurate to boot).

lonewolf:

what the saudis commited to was this: 1. what colin powell said was true;"if you break it, you own it". bush screwed it up and the oil welfare program is over. 2. we bailed out your energy companies in texas that were losers. this happened three times. now it is payback time. again the the oil welfare program is over. 3. quit sending your thug friends from the carlyle group over here to try to scare into giving our oil to you at bargain basement prices. 4. please send bill clinton to talk with us, intelligent lifeforms are important to us. 5. quit threatening us or we will unleash the dogs of sunni extremist hell upon your souls. and finally 6. again, the oil welfare program is over; until you leave office. then we may chat with obama.

matola:

saudi arabia is a great country with great people and i believe they will save the people of the earth and further commit to the future of affordable energy

George Robertson:

Let's be nice to the Saudis, Chinese and Indians. After all, when our government goes bankrupt in about 10 more years, they will be making the decisions then that our politicians refuse to make now.

Joe:

Since we still don't know what VP Cheney promoised back in 2000-01 how do we know that the dual pair in the White House haven't orchestrated this & its helps their Saudi buddies too.

If anybody remembers all efforts to push reductions in energy consumption were thwarted by the dynamic duo and their Republican buddies.

Why always the wrong question:

It seems more than obvious. A few years ago 1 dollar = 1 euro. Today $1.57 = 1 euro. If they were still equal, then a gallon of gas would less than $2.60 and we would be unhappy but not devastated. It seems the real question is not what happened to crude but what happened to the dollar. Or does that get into unfortunate political questions like tax policy and foreign wars?

Anonymous:

Jeff: Abu Ghraib, Guantanamo, etc., and the killing of hundreds of thousands in Iraq and elsewhere has been the work of an elected (and re-elected) government. Most unfortunately, this being a democracy, it makes ALL of us complicit in the mayhem. It also makes us supporters of the torture.

Jeff:

Desert Moslem said: "WHY IS IT THAT SAUDIS HAVE TO PAY FROM THEIR HEALTH AND THEIR FUTURE TO THE PEOPLE OF ABU GHRAIB CULTURE AND THE KILLERS OF THE MOSLEM PEOPLE?"
---------------------------
Referring to people in the U.S. generally as "people of Abu Ghraib culture and the killers of the Moslem people" is just like referring to Islamic people generally as terrorists, etc. How can you live with your own hypocrisy?

How would it harm the Saudi's health to slightly increase their oil production?


sena:

Read Carters addrees in 1977 on energy( http://www.mnforsustain.org/energy_speec
h_president_carter.ht ) Instead we embarced Reganomics (spending on military and realestate for quick economic gains. Apparently "family value" package does not incude caring for future

ANON:

The author meant $10 a gallon, I presume.

@ DESERT MOSELM:

Nice "blame the West" mentality. As if the Saudi gov't would be this environmentally concerned Islamic paradise on earth if it weren't for those meddling Westerners. Nice.

ANON:

The author meant $10 a gallon, I presume.

Desert Moslem:

WHY DON'T YOU EXPLORE YOUR OWN OIL IN ALASKA AND OTHER PARTS OF YOUR COUNTRY? WHY DO YOU WANT TO DESTROY THE SAUDI ENVIRONMENT AND DESTROY THE HEALTH OF THEIR CHLIDREN? WHY IS THERE SO MUCH EVIL IN WHAT YOU WRITE. AS IF SAUDIS HAVE THE ABILITY TO MAKE THE PRICE GOES DOWN TO $10!!

WHY DON'T YOU TELL YOUR COUSINS, WHO MADE TRILLIONS AFTER THE MORGAGE CRISIS AND STARTED BETTING THEM ON OIL PRICES, TO STOP DESTROYING THE LIVES OF THE AMERICAN PEOPLE AT LEAST.

WHY IS IT THAT SAUDIS HAVE TO PAY FROM THEIR HEALTH AND THEIR FUTURE TO THE PEOPLE OF ABU GHRAIB CULTURE AND THE KILLERS OF THE MOSLEM PEOPLE?

GoBucks:

In a free society, we get the government we deserve. Collectively, we elected our leaders. So if we don't have enough alternative fuels, not enough of the regular oil & gas, all we have to do is look in the mirror - and we know who to blame. Also, I don't think anyone put a gun to our heads when we bought our cars or our homes.

greenpeace oiler:

When oil price touched $8 fifteen years ago every body was happy. Big car became a popular toy for American adults. C02 and global warming was a tiny little problem, and the ice was not melting in the south pole. Oil hits $100 and suddenly the north and south poles will turn to a dry desert, and see level will rise so third of the land will be under water.

Cleareyed:

Why should we expect the Saudis to do for us what we can, but refuse to do, for ourselves?

Amazed:

Why should we expect the Saudis to do for us what we can do, but refuse to do, for outselves?

scepticus:

It is seller's market. No use of fretting and fuming.

vkguptan:

It has to be $10 a gallon I presume.

Playa:

"Brown went because he’s striving to show British consumers, who are chafing at fuel prices of roughly $10 a barrel, that he cares and is trying to do something"

$10 a barrel...what are those brits complaining about?

AMviennaVA:

The producer of any commodity is concerned with optimum return (the highest possible price over the longest period). That is basic economics.

The consumer is concerned with (1) reducing reliance on any one producer AND (2) reducing reliance on any one commodity, if possible. This is also basic economics.

So, much though we complain that the Saudis (actually ALL petroleum produces, including non-OPEC members) are doing what they are expected to do, why don't we consumers do what we are expected to do. Primarily on item 2 (reducing reliance on one commodity, that is.

AL:

Its really foolish to imagine any country that would allow its finances and security to be driven by the decisions made the Saudis, Hugo Chavez, Vlad Putin, etc.

Good thing our politicians saw the risks of oil dependency and have spent the last several decades insuring that alternative energy sources are there.

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