Jeff Rubin: Why Saudi Arabia can no longer temper oil prices

[GliderGuider]

Why Saudi Arabia can no longer temper oil prices

What’s easy to lose sight of in the chaos sweeping through the Middle East is where oil prices were trading before it began. The Brent futures contract, the world’s new benchmark oil price, had already broken $100 (U.S.) a barrel before protesters in Cairo started sweeping into Tahrir Square and demanding Hosni Mubarak’s head. And the price of West Texas Intermediate (CL-FT96.94-0.34-0.35%), laden as it is with record inventories of Bakken oil and Canadian oil sands crude piling up in Cushing, Okla., was trading just shy of $90 per barrel.

The global economy had no sooner put in its first year of solid growth when world oil demand, like a jack in the box, sprang to a new record high. China alone added almost a million barrels a day to global demand, which ended the year at more than 87 million barrels a day. And demand shows no sign of abating this year.

Transcripts of conversations between embassy personnel and Sadad al-Husseini, former executive vice-president in charge of exploration and production at Saudi Aramco, make it clear that neither the country’s oil reserves nor its production capacity can be believed. Instead of the 12 million to 12.5 million barrels a day of official capacity, Saudi Arabia is barely able to pump out between eight million and nine million. Production is still below where it was in the 1970s, and Saudi Arabia has ceded ground to Russia as the world’s largest oil producer. (Curiously, the IEA continues to forecast that the tapped-out Saudi oil sector will pump out 14.6 million barrels a day by 2035.)

But the real danger from the Middle East is not the risk of temporary supply disruptions, or the speculative betting that it will encourage. It is that we lose sight of the levels that oil prices had climbed to even before this latest crisis began, and the basic supply-and-demand forces that pushed them there. We are now living in a world of triple-digit oil prices. The massive changes this will compel won’t be limited to regime change in the Middle East.

Saudi Arabia's "spare capacity" is a chimera. They may be able to pull a bit out of storage to make up for a one or two week shortfall in Libyan production, but anything beyond that is smoke and mirrors.

[phantom power]

1. I can't wait for the tapdancing when they explain why they're reducing output.

Because they'll have really good reasons for that, which have absolutely nothing to do with their totally huge reserves that they absolutely do have, that's why.

[XemaSab]

3. We always ramp down exports 20% for Ramadan

Then we ramp them back up 10% for the Hajj. We do it every year.

You don't remember this? :shrug:

[BeFree]

2. We're getting jacked

The oil companies don't give a squat except that they can screw us at every chance and increase their profits.

It is the same damn oil that has been in the ground for millions of years and they are doing nothing but jacking profits at every chance.

We have another 50 years of oil at present use, and we can increase that to 100 years if we cut consumption in half. 500 years if we cut to 10%.

Do you see the oil companies suggesting anything like that?
Hell NO. They just want to increase profits.

[Terry in Austin]

5. 50 years - that claim needs some backup

>> We have another 50 years of oil at present use

It's a tad unusual, as these things go. Plus, projections that assume "at present use" aren't very realistic -- demand has always changed, usually increased.

It's true what you say about the oil companies, but to imply that they caused our predicament, or that it's under their control, is misleading at best. They can rot in hell, IMO, but the basic problem lies elsewhere.

Oil in the ground, well... what counts is the cost and rate it can be gotten out. The 8 or 9 hundred billion barrels left are the hard ones to get, and it just gets harder. Not only does it cost more money, it comes out slower, and costs more energy per barrel extracted.

At some point not too far down the depletion curve, it will cost a barrel to get a barrel, and then petroleum will cease to be a net energy source. One way or another, there will still be a whole lot of oil left "in the ground" when we're done with it.

[BeFree]

7. How much of the earth is being drilled?

Lets take the DWH drilling. 5 billion barrels at a cost of probably 50 cents a barrel had they not blown it. You are in the biz, IIRC, can you put some hard numbers in place of mine?

Labor price has gone down, Americans are using less and alternatives are slowly being allowed to come to market. Automation is increasing. Things are not looking good for the oil companies except when they jack prices. And that's all they are doing.

[NickB79]

11. Where do you get 50 cents per barrel for deep-water drilling?

Really, that claim is so absurd that you need to provide a source for it.

In everything I've read over the years, deepwater and oil sand production both require oil prices over $60/barrel just to break even.

"Labor price has gone down, Americans are using less and alternatives are slowly being allowed to come to market. Automation is increasing. Things are not looking good for the oil companies except when they jack prices. And that's all they are doing."

America is becoming increasingly irrelevant every day as China and India ramp up their demand. Labor costs are actually INCREASING there, as is demand. Oil demand is also increasing far more rapidly than alternatives are being introduced to reduce oil consumption.

[BeFree]

13. Do some math

5 billion barrels at 60 = 300 billion dollars in costs for DWH? Doubt that.

5 B B at .50 = 2.5 billion. Sounds more reasonable, eh?

Hmmmmm. Hard numbers anyone? Any idea what the budget was for DWH?

Anyway, lets take your $60 a barrel figure. That's for the hardest, right? And a fraction of the out put, lets say 50%. A barrel sells at 100 today, that's at least $40 a barrel profit for the deep stuff and even more for a well that has been producing for years..

Certainly you aren't suggesting that $40+ a barrel profit is making you happy and is fair?

[Statistical]

29. DWH was only part of the cost.

You have the ammortized exploration cost. You have the federal leases. You have the production cost.

[Spider Jerusalem]

8. You don't have any idea what you're talking about, do you?

50 years of use at current levels according to whose estimates? Here, for fun, the International Energy Agency's chart of predicted oil sources through 2035 (less than 25 years):



Notice anything? Demand is predicted to rise, for a start, up to 96 million barrels/day by 2035 (which is optimistic based on recent trends; demand has increased by roughly 20 million barrels a day since 1995). Conventional crude oil production peaked in 2006, has plateaued, and is expected to decline. Look at that graph. See the falloff? Currently producing fields estimated to supply only a bit more than 20 million barrels a day within 25 years; undeveloped fields expected to provide roughly another 30 millon barrels a day (which is also quite optimistic, those currently undeveloped fields represent lower quality crude in smaller concentrations in more geologically challenging areas). And then undiscovered fields are expected to provide another 15 million barrels a day (which is again optimistic since the present rate of discovery isn't enough to make up for production shortfalls expected from decline within this decade).

[XemaSab]

9. This might just be my favorite graphic ever:

[Terry in Austin]

10. Coyote moment -- Acme oil! -nt

[BeFree]

12. Ok

So... oil was at $140... went down to $60(?) now back up to >$100.

Like a yoyo. Nothing else like it, economically speaking.

If what your Big Oil people say is true and we are headed over the cliff, why isn't oil at $200 a barrel and rising? Eh?

If you know what you are speaking about, then you'll have a brilliant answer, eh?
I humbly await your perfect reasoning and explanations.

[Spider Jerusalem]

14. You are aware that there was the worst recession in 70 years?

You don't think that may have had something to do with the fall in prices? (Demand destruction, look it up.) We're back up to OVER $100 a barrel (for Brent crude, not WTI) because of economic recovery and rising demand with supply remaining relatively flat. You clearly not only don't have any idea what you're talking about on the issue of oil, you also clearly don't have any understanding of basic economics.

[BeFree]

15. Well, darn

No brilliant explanation?

Are you saying demand is up at the same percentage of the price rise?
Of course not, you're not stupid.

Like I say, if all the doomsayers were anywhere close, then we'd have $200 a barrel and rising already. As it is, the profiteers have some running around saying 'the sky is falling'.

Still waiting for some brilliance from one who's running around claiming they know it all and anyone who disagrees doesn't know what they are talking about. But, we get that a lot here, eh?

[bhikkhu]

16. self delete

...for pointless snark.

[BeFree]

17. Heh

You need to step up an read some real stuff. Just so you can actually debate, ya know, with at least a little authority.

All yall have is stupid, lame personal attacks?

[GliderGuider]

18. The breakeven price of most conventional oil is $20 to $40 a barrel or so

http://www.oil-price.net/en/articles/profitability-of-USD100-oil.php

From the Bank of Kuwait:

 Oil Break-Even Prices
-----------------------
Nation          US$/Barrel
Bahrain             40
Kuwait              17
Saudi Arabia        30
U.A.E.              25
Oman                40
Qatar               30
Canada's oil sands  33

As you can see, even at $60 the oil producers make a profit. These breakeven prices also explain why the price didn't go below $40 in the 2009 correction after the spike - the majority of sellers had a breakeven price of $30 to $40 a barrel. It also explains why expensive oil like deep-water that has a breakeven price of $60 or so is profitable at a market price of $80. If the price drops below $60 deep-water drilling slows down, though the oil that's already flowing may still be sold depending on the company's financial situation, the short-term market outlook, the need to meet existing contracts and the availability and cost of storage.

In the oil market the price floor is set by the seller's breakeven price, but the actual selling price is generally set by the buyer, not the seller. The seller would be happy to take a very high price, but the buyer doesn't want to pay it. So the price is set by competition among the buyers, and large buyers that are willing to pay higher risk premiums will push the price up. If large buyers see a market devoid of risks, their willingness to pay a premium goes down and so does the price.

That's also why tight supplies can drive up the price - buyers are willing to pay more to secure a supply. That's what is happening to the price at the moment: with oil production is on a six-year plateau, world demand is recovering as we try to come out of the recession, and there is higher than normal risk in the Middle East. It all adds up to $100/bbl oil: call it $40 for breakeven, $40 to secure a supply in a tight market with high demand, and $20 of risk premium.

Of course seller X may not be willing to sell at the offered price and wants a higher price, but if others are willing to sell then the price will be lower than X wants, perhaps even below their breakeven. This will prompt the kind of financial calculus I alluded to in the first paragraph, to decide whether to pump or not. That's what may happen to sellers of expensive oil if there is a glut of cheap oil (i.e. oil with a lower breakeven price) on the market. Consider the relative positions of Bahrain and Kuwait in the $40 market in early 2009 for example. Kuwait would have been happy with a $23/bbl profit. Bahrain, not so much.

It's comforting to think that oil barons are gouging the little guys, but it really isn't that personal. It's just a global oil market, and buyers, not sellers, generally set the price.

[BeFree]

19. Iraq did that...

...back when they were free. They flooded the market with cheaper oil whenever the price rocketed.

Pissed off the Saudis, et al. And then they started selling their oil only in Euros.
That was the straw that broke them and brought the invasion.

How much oil is Iraq dumping now? Not much, I bet.

There are two players in the market, one more than you offered. But the big players can and do go out of their way to make the market fit their ideas, and their ideas are as much as they can get, screw the people.

Like I said, there is not a 'Free' market in oil. More like damned drug dealers who couldn't give a shit for their addicts.

[GliderGuider]

21. "Flooding the market with cheaper oil whenever the price rockets" is also known as

"being a swing producer". There's nothing disreputable in that, it's just making sure the supply matches the demand at the desired price. Saudi Arabia has traditionally been the world's swing producer. A lot of people still think they are, an impression the Saudis are eager to support by promising to increase their production whenever there's a little supply difficulty like a Libyan uprising. the problem is that the Saudis are not a swing producer any more. In fact there are no swing producers left in the world oil market. Everybody's pumping flat out and the buyers are still willing to bid the price up to $100/bbl. There is unmet demand out there, and there has been since the price broke $60 in 2005 - right when world oil production hit the plateau. The price is going to get bid higher and higher over time as that fact sinks in.

[BeFree]

22. Plateau my ass

Made up BS. Made up just to keep the anxiety high so the price will inflate.

Iraq was THE SWING. They got their balls busted and there is a lot of oil just sitting there in Iraq.
Why do you ignore those facts?

There is no unmet demand. You can get all the oil you want and more.
It may become a problem but it isn't now. This inflation is just us getting jacked!!

Not everybody is pumping flat out! Iraq is NOT! So there goes your whole argument.
Try to stick with facts, ok?

[GliderGuider]

23. You need to present some evidence.

The plateau is shown here:



For 6 years the world has been producing oil at 73 mbpd +/- 2%. There was almost no increase in production when the price spiked in 2008. There was a small drop when it crashed, as demand fell due to the recession and high-cost producers held their oil off the markets.

Iraq's recent peak production was in 2000, at an average of 2.5 mbpd, a quarter of SA's peak in 2005. Since 1965 Iraq has managed to exceed 2.5 mbpd for exactly one year in 1979, when they did an extra 1 mbpd. According to the EIA they are producing almost exactly the same amount of oil today (~2.5 mbpd) as they did at their recent peak in 2000, so I really can't see that there's a lot of swing capacity there. They might be able to manage an extra half million bpd for a short while, but given the state of their infrastructure I doubt it.

They have more oil still left in the ground due to the drops in production during the Iran-Iraq War, Gulf War I and Operation Iraqi Liberation, but having oil left in the fields doesn't mean they can pump it out any faster than they are. It just means it will last longer.

If you want to claim that Iraq was once and could again become a major swing producer, you'll have to present some evidence.

[BeFree]

26. Evidence of swinging prices

Just the idea that Libya may not pump as much oil for a few weeks, has caused oil prices to rise about 10% in a few days.

That's some kinda swing. Which shows the market is not free. It is being manipulated.
And being manipulated right now by FEAR, and FEAR alone.

Let me be clear... Oil is infinite. Oil use is bad for the environment.

Were it up to me oil use would be constrained by rationing or other government controls so that the supply is used more efficiently and with less side effects.

However, what I see now is that the capitalists are screwing over the, as BP called us 'the little people', by using our heretofore government condoning of our addiction to oil.

And that fact pisses me off, because there is, at present, NO shortage of oil.

[GliderGuider]

27. OK, you've shown your hand. Thanks.

Oil is infinite?

[BeFree]

28. Typo

Finite would be the correct word. My bad. I will correct it.

Done

Now, can you get back to the points made or do you just want to play around?

[GliderGuider]

31. Thanks, that makes more sense.

First, I'd like to address the question of "manipulation through fear".

Fear on the part of the buyer is a pricing factor for any marketed commodity. It's what prompts runs on toilet paper, bread and milk during natural disasters, and suppliers of those commodities are always happy to take what the market is offering unless they are constrained by law. I don't see a 10% risk premium for oil as manipulation or gouging, especially since the issue is not just Libya. The broader concern that's weighing on the minds of traders is whether the "freedom virus" will spread to countries like Algeria, Iran, Iraq, Angola, Nigeria and Saudi Arabia, with the potential of reducing the world's oil supply by between 10% and 20% for a period of months to years. In the face of a risk like that, a 10% premium seems eminently reasonable to me.

As long as the market has no central authority controlling rapid price changes it's not possible to prevent risk premiums from being introduced. So, given that oil is trading on the markets at 150% over the breakeven price, we have to decide a number of things:

• Is this price a problem?
  
• If it is a problem how could it be controlled?
  
• Who would need to agree before control measures could be introduced?
  
• If we do try to control it would the controls themselves introduce new problems?

My position is as follows:

• The current price of oil is far too low. Oil is a far more precious commodity than is being reflected in the price. It's also a very damaging commodity to the planet due to both the CO2 it emits and the human activity it enables. Any rise in price that helps to reduce its use is fine by me. I think oil should be trading at over $200/bbl right now, as it could be if traders had a true insight into the state of the global oil supply.
  
• If we want to help the situation, we should be forcing up the price of oil to the consumer through carbon taxes, usage taxes and sectoral rationing.
  
• The entire world would have to agree to this. In order for it to work we would probably have to nationalize all oil companies and agree to inflict serious international sanctions on nations that don't participate. Like China.
  
• If we tried to do this it would increase international friction and create major domestic political problems world-wide. the chances of it being successful are slim to none. If it were successful it would crash the world economy. I think this would be a good thing. Others may disagree.

Given that this won't happen, I'm happy to let the market bid the price up to quite stratospheric levels by the mechanisms already in place. I'm certain that we won't be burning any more oil in the future than than we are today because we've hit the peak of the supply flow. I even think we'll be burning less in the future as the shocks of successive global recessions reduce demand and raise the relative price of oil. So I think we're looking at exactly the outcome I hope for, but achieved through the market. I also think this situation will unfold much faster than we could ever get market reforms in place (i.e. within the next 5 years).

What are your thoughts?

[BeFree]

32. I don't disagree

Our problem is we have been lied too.

Maybe you are rich and can afford $200 bbl. I can't. Not at present.
The suffering $200 bbl will cause is my primary concern. See, I f'n care about, ya know, little people.

The tradeoff from the suffering is that that rich get richer. Fuck that.
A few improve while the masses suffer? Can't and will not condone that.

Our problem is we have been lied too. And cheated.
Until everyone accepts that, and acts accordingly, things ain't gonna change.

There is, at present, no shortage of oil, just a shortage of truth.
And frankly, imo, you aren't bringing the whole truth.

[GliderGuider]

34. No, I'm not rich, at least financially. I live very modestly.

Can I afford $200/bbl? Well, that all depends on how I'm prepared to live and what changes I'm prepared to accept in my life, doesn't it? Even if I could afford to do only a quarter as much as I do now I'd still be better off than 90% of the people on the planet. My happiness doesn't come from money or oil, so that puts me ahead of the game. I'm not resentful about other people being rich, and I think that you are only as cheated in life as you believe you are. I don't believe I've been cheated, I believe I've been blessed - at least in all the things that matter for having a happy life.

You feel like you are being cheated and lied to in life. That's a belief you'll have to deal with on your own - no amount of good faith information from me is going to change it. I wish you success with that, because life is a lot easier to bear when you see the world as a place of abundance, community and and truth rather than scarcity, isolation and lies.

[BeFree]

35. Well

I am probably richer and more blessed than you.

Mainly because I have some empathy for those who are made to suffer at the hands of the capitalist pigs.

[GliderGuider]

36. Well, blessings typically make one feel happy, content and peaceful.

The nature and origin of suffering is an interesting topic, perhaps for another day.

[Statistical]

30. It will be $200 a barrel and rising just wait a couple years.

At $200 per barrel oil is still cheap for countries like China.

The US (currently) is simple too inefficient to compete as the price of energy rises.

[BeFree]

33. eh?

And the oil that at present can be produced for $60 a barrel and sold for $200, with the profit margin of $140 a barrel, is something to look forward too?

Am I supposed to be happy that the profit is $140 a barrel?

If not, what is your point?

[GliderGuider]

37. Here's a 5-year projection based on the last 10 years of oil prices

Of course during the next 5 years we should expect to see one more excursion similar to 2008.

[Confusious]

38. Of course, the oil will never runout

But when it goes to $200 a barrel, gas at 6.00 a gallon, things will start to change.

I find it hard to believe 50 years, considering price increases in the last 10. I would hazard a guess that oil will have hit $200 by 2025, at the latest.

[dixiegrrrrl]

4. Crucial info.

Too few people are seeing this, and seeing the implications.

[Terry in Austin]

6. +1000 -nt

[bhikkhu]

20. and don't forget, in June '10 they announced a "no new exploration" policy

http://www.worldoil.com/Saudi_King_calls_for_oil_exploration_to_be_halted.html

"Saudi Arabia's King Abdullah has ordered a halt to oil exploration operations to save the hydrocarbon wealth in the world's top crude exporting nation for future generations.

"I was heading a cabinet meeting and told them to pray to God the Almighty to give it a long life," King Abdullah told Saudi scholars studying in Washington. "I told them that I have ordered a halt to all oil explorations so part of this wealth is left for our sons and successors God willing," he said."


I think its well known in the industry what it is costing them to keep up present production, and if you look at price spikes since '05 (I think) there has been virtually no production response from the Saudi's to supply problems. I don't think anyone still believes they have spare capacity, except for people who are paid to think they have spare capacity, and people who still trust the people who are paid to think they have spare capacity.

[GliderGuider]

24. Here's a graph of Saudi oil production during the price spike.

Singularly unimpressive swinging. The only thing I can say for sure is that they cut their output in late 2008 when world demand fell due to the recession.

[GliderGuider]

25. self delete.

duplicate post.