Saudi Output Growth Can Help Forestall Peak Oil, Bernstein Says (numbers in brackets refer to my comments following the quote box):
Saudi Arabian oil output has the potential to rise, helping avoid a peak in world crude production [1], according to Sanford C. Bernstein & Co.
Oil prices may fall toward the end of this year as worsening economic conditions reduce demand [2], analysts Neil McMahon and Ben Dell forecast in a report today. Prices will probably rise later, beyond 2010, and reach $114 a barrel by 2015 as spare capacity declines [3], they wrote.
“Saudi and global oil production has the potential to grow slowly going forward,” the authors wrote. “We do not believe world oil production supply is peaking today.” [4]
Proponents of peak-oil, the theory that global production has or is about to reach its zenith [5], say booming demand and dwindling supply are responsible for the rising price of oil. Analysts debate the extent and timing of a drop in crude production in Saudi Arabia, the world’s biggest oil exporter. Some argue Saudi Arabian Oil Co., known as Saudi Aramco, is downplaying reservoir declines and that the country may be forced to reduce output.
Sanford Bernstein commissioned a survey by GeoVille Information Systems to use satellites to monitor drilling at Ghawar, Saudi Arabia’s biggest oil field. The analysis “concludes that the Saudi peak oil production conspiracy theories, based on little or incomplete current field data, do not fit with our findings.” [6]
The study processed field data from recent years to try to detect subsidence, or sinking, in the reservoir. Rapidly depleting reservoirs tend to collapse slowly in small “micro-earthquakes” if oil and gas are extracted too rapidly for water or other substances to fill the gaps, McMahon told Bloomberg News in December. [7]
Taking the details according to the numbers…
[1] Huh? We will not “avoid a peak in world crude production”. It has to happen simply because oil is a non-renewable resource. Period.
[2] Something I agree with–the possibility that oil prices could retreat in the short term. No one knows how much the US recession will reduce world oil demand, or how far the recession could spread. If the US consumers spend significantly much less money, Chinese manufacturers will be hit pretty hard. Is that enough to tip them into a recession, or at least greatly slow down their economic growth? I doubt anyone knows; we’re in uncharted waters thanks to globalization and the housing sector bubble continuing to deflate in the US.
[3] Spare capacity “declines” by 2015, leading to $114 oil? This sounds wildly optimistic to me, or wildly pessimistic, if you consider the economic conditions that would have to prevail to keep oil that low. (Yes, I’m assuming that neither a significant strengthening of the US dollar nor a major shift away from oil use will happen in that time frame, so it would take a drastic slowdown of the economy to restrain demand enough to keep prices in check.)
[4] It’s kind of hard to argue with anyone who talks about “world oil production supply” peaking.
[5] Wrong. Peak oil proponents do not believe that oil production has or will very soon peak. For a complete discussion of this issue, see my prior post, The peak oil infowar continues.
[6] Conspiracy theories? Calling something like Matt Simmons’ book, Twilight in the Desert, a “conspiracy theory” (eve if only by implication) is the rhetorical equivalent of a cowboy in a gun fight running out of bullets and throwing his empty pistol.
[7] Seriously–we’re going to rely on satellite observations to detect subsidence and micro-earthquakes as a way to determine the state of the Saudi oil fields, and then reach conclusions about production years from now based on that data? Our friends in Saudi Arabia must be laughing themselves hoarse over this one.
The larger issue here, of course, is the thing that Matt Simmons has been on his soap box and yelling about for years, the utter lack of data transparency regarding oil reserves and production in various exporting countries, most notably Saudi Arabia. As I like to say, the easiest prediction in the entire energy field is what Saudi oil reserves will be next year: Roughly 260 billion barrels, the same figure they’ve reported for years, even though they’ve pumped millions of barrels per day, every day, during that entire time.
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April 27th, 2008 at 11:01 pm
On point [2]:-
I don’t imagine China’s economy is going to decline even if the US economy goes entirely arse-up. They’ve been restraining growth by banking their foreign currency, so if their export market declines, they can draw on those reserves to keep growth going.
At the end of 2007:- The nominal GDP of China is $3,356 billion. They have currency and bond reserves of $1,474 billion. By segments, their economy is,
Private consumption $1,245 bn
Government consumption $469 bn
Gross fixed investment $1,399 bn
Exports of goods/services $1,334 bn, about $300 bn of these are to the United States
Imports of goods/services $1,091 bn, about $130bn of these from from the USA
Thus, each year China takes $243bn from the world, $70bn of it from the USA. But aside from the USA, none of China’s export destinations has more than Japan’s 9.5% share of China’s exports. So their export market is relatively distributed. A single country’s economy going into recession can’t hurt China much, it’d need to be a truly global recession.
At worst, the US bans all Chinese imports tomorrow, and China bans all US products in response. And so we get that the flow of money into China drops from $243bn annually to $173bn. China could use its foreign money reserves to make up for that lack for about twenty years, without adding in any way to their debts. Obviously if it’s the US economy going under, then those reserves, which are at least one-third US Treasury bonds and currency, are going to be worth a bit less. Nonetheless, they can keep themselves going for some time yet without trouble.
Previous US recessions have dropped consumption of oil 0-5% annually, or effectively 1 million barrels of oil a day in each year, as you can see from this graph of US consumption, production and imports. Obviously recessions affect imports far more than domestic production, and thus affect world prices out of proportion to their total share of production. Nonetheless, it seems fair to have as a guesstimate that each year of recession will remove 1Mbbl/day of US demand from the world market.
This will instantly be snapped up by China and India, and of course the Third World, currently being priced out of the market.
April 28th, 2008 at 8:56 am
Excellent set of numbers and analysis, in my opinion. (Source for the numbers?)
I think this question of how much non-US countries will take up the oil demand slack if the US has a deep recession is a classic case of a lot of analysts (the oil price bears) failing to pick up on a paradigm shift, if you’ll pardon my cliche. If it does play out that we have the combination of a bad recession in the US coupled with galloping oil demand worldwide, it could be a very rough ride.
April 28th, 2008 at 7:25 pm
The source for the numbers on the Chinese and US economies and their trade is simply wikipedia, but I checked them other public domain sources.
There’s quite a bit of variation in the figures given, and in many cases the numbers don’t add up, which makes a difference of tens of billions of dollars, but no difference to the overall picture - essentially, China’s economy is a third exports, a third imports, and a third domestic consumption. This sounds like a huge amount for exports, but actually isn’t. Germany has a GDP of $2,585 bn, with exports/imports of $1,333/$916bn; France is $1,871bn, and $490/$529bn; Japan is $4,220bn, and $590/$524bn, a lower ratio - before the crash in the 1990s it was higher.
What’s remarkable about China is not the large part of its economy devoted to exports, but that domestic consumption is growing so much. Consider that about half their population - 650 million people - are living on less than $2 a day. In many respects, China is like two countries - an eastern manufacturing China, and a western rural China. The west is moving east, the eastern manufacturing region is getting migrants. A manufacturing country with an open immigration policy to attract cheap labour, then the cheap labour buying stuff with their wages which pumped up demand further - this is the route that the US took to economic growth from 1850-1950, and it was very effective. The US had to get impoverished people from other countries, but China is so large it can do it domestically.
650 million people on less than $2 a day, most of them keen to improve their standard of living - that a huge amount of domestic demand to be fulfilled. And even without a trade surplus, there’s $1,474bn sitting around to do it.
Thinking of oil, the US uses 25bbl per person each annually; most developed countries use 7-15 (efficient and greenish countries like Denmark on the lower end, inefficient countries like Australia on the upper end), developing countries use 2-7, and impoverished countries 0-2.
Currently China consumes something like 7.3Mbbl/day, or 2,665Mbbl annually. That’s about 2bbl each. In practice of course it’s not spread evenly around, it’d be more like (for example) 10bbl each for 100 million people, 5bbl each for 200 million, 1bbl each for 600 million, and nothing for 400 million people.
If just 73 million of the 200 million 5bbl Chinese move up into the 10bbl range, or 91 million of the 600 million 1bbl people move into the 5bbl range, to say nothing of the 400 million zero oil getting even 1bbl each, this would use 1Mbbl/day of the world’s oil consumption.
So the US can have a recession, it could even have a depression - it can have abandoned suburbs with stripped houses, empty factories, it can pull out of Iraq and Afghanistan and mothball its carrier fleets, and go to the World Bank for a handout - but that oil is going to get consumed.
The only thing that’ll stop oil consumption in the world is a decision to stop. Hoping for peak oil, gas and coal to reduce resource depletion and mitigate climate change is like hoping that if the bar runs short of booze it’ll cure my alcoholism. It won’t. The only cure is a decision to stop.
May 8th, 2008 at 3:06 pm
It seems this study was even dodgier than I implied: Saudi Arabia’s Ghawar Isn’t Sinking (but has apparently moved)