Why Is Saudi Arabia’s Oil Production Down?

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We still have three years and nine and a half months to learn who will win the bet between energy investment banker Matthew R. Simmons and New York Times columnist John Tierney over whether oil prices would be above or below $200 a barrel in 2010. Tierney bet "below" because he believes that over the long term, the prices of natural resources always tend to decline, and he cited a 1980-1990 precious metals bet that favored that outcome. Simmons has looked deeply into the extraction of oil from underneath the sands of Saudi Arabia, and has concluded that their oil production will most likely decrease or flatline in the coming years. Saudi Arabia claims 25% of the world’s proven oil reserves, by far the largest share claimed by any country. Those who have watched The End of Suburbia: Oil Depletion and the Collapse of the American Dream have heard Simmons say, "If it turns out that Saudi Arabia has peaked, then, categorically, the world has peaked."

With oil prices having fallen into the $50 range and now trading in the $60 range, for the moment it looks like Tierney’s ahead in the bet. But the more important question for the worldwide economy is whether Saudi Arabia can increase its oil output in the years ahead or not. The Oil Drum has hosted a spirited debate on that question recently.

First, on March 2, Stuart Staniford noted that Saudi Arabian oil production has declined 8% during 2006, from about 9.3 million barrels a day in January ’06 to about 8.45 million barrels a day in January ’07. Simultaneously, the number of drilling rigs looking for oil in that country has surged – a parallel with the situation in the United States of 1970, then the world’s leading oil producer, when rising rig count failed to stanch the fall of oil production.

Staniford notes that either the Saudis are voluntarily withholding production or they are pumping as much as they can and falling victims to the same inevitable geological constraints that have caused oil prices to fall in many of the world’s once robust oil reservoirs. Staniford wonders why the Saudis would voluntarily withhold hundreds of thousands of barrels a day when prices are at levels that just a couple of years ago would have seemed incredibly high.

On March 7, Euan Mearns of The Oil Drum: Europe, responded that the oil price declined in 2006, that the Saudis have voluntarily cut production seven times in the past, and that they would want to give some of their older, water-saturated wells a breather.

And the next day, Staniford responded to Mearns with a detailed look at the Saudi production history going back to 2002, noting the effects of new megaprojects that have come online and the war in neighboring oil-rich Iraq. He suggests that Saudi oil production has been maxed out since 2005, and ties bumps in supply to particular megaprojects that have been activated. He notes that oil prices permanently left OPEC’s desired price band of $22 to $28 dollars a barrel, and rather than increase supply to bring prices back down into that range, OPEC raised its desired price band. 

Meanwhile, The New York Times reported that some oil fields in California, Indonesia and Texas are being revived after periods of dormancy and casts  those like Staniford and Simmons who predict oil production declines as holding "a minority view, held largely by retired petroleum geologists and some members of Congress." (Indonesia is now a net oil importer, and as the Times reports in the same article, the share of world output coming from places like California and Texas is expected to decline overall, despite rising production in some fields.)

What’s the upshot of this debate about world oil supply on the New York City Livable Streets movement? Ninety-seven percent of transportation energy is provided directly by oil (versus less than 1% from electricity), and 96% of that is used for gasoline, diesel and jet fuel. Alternative fuel vehicles at this point are not commercially successful and if they ever are, will proably be less affordable to the middle class than vehicles propelled by the internal combustion engine. One has to conclude from this that urban planners and policy makers must begin to look at more vigorously promoting walkable communities, cycling and rail and bus transportation as ways to conserve energy.

Whether one welcomes, dreads, or refuses to acknowledge a potential decline in world oil supply, such a decline would makes more difficult the prospect of maintaining energy-hungry suburbia. I think higher oil prices encourage more people living in New York City. Perhaps the estimates of a million more people in the city by 2030 are on the low end.

Photo: Richard Seaman

  • Gizler

    I think it is a mistake to get to closely associated with the Savinar/Simmons/Kunstler peak oil apocalypse crowd.

  • Gizler, I don’t understand your comment at all.

    First of all, AD doesn’t even mention Savinar and Kunstler in this piece so even if we were to debate their contributions to the energy debate, it’s not relevant to criticize AD here or even claim that he is associating Streetsblog with them. (personally I think they both make some good points but go too far in some of their rhetoric).

    He does quote Simmons, but he is a very credible alternative viewpoint to the mainstream on peak oil. He is a energy investment banker who wrote a whole book on the subject. Streetsblog is about debating issues that affect our streets and the cheap supply of oil over the last 60 years has been a main contributor to the rise of the automobile on our streets.

    There are many scenarios around peak oil, some of them pretty dire. Even the disagreement is merely about whether we will hit the peak very soon or out in 2030 and how steep the decline would be after the peak – no one is really arguing that we will never peak, even Daniel Yergin.

    Thanks for a nice reminder about future cheap oil supply being in doubt AD.

  • There was a NY Times article about a year ago that quoted Yergin saying there would be a series of plateaus for oil rather than a peak. At each plateau, there would be short supply, prices would go up, and oil producers would make the investments needed to increase supply. Yergin has always denied peak oil, and I believe this plateauing theory was the first time he admitted that there would be ongoing economic disruptions because of limited oil supply.

    I think the greatest danger of peak oil is that we would substitute liquified coal, which generates about twice as much co2 per gallon as oil. The coal industry has just begun saying that they could create liquified coal plants that sequester co2 within 10 years – but liquified coal would obviously still emit more co2 than gasoline, because they can’t sequester the co2 generated in mining the coal. It must take a significant amount of energy to remove a mountain top and dump it in a nearby valley.

    I agree that many people in the peak oil movement are in the long tradition of apocalyptic thinking. They are wrong to think that peak oil will necessarily mean peak production of all fossil fuel (or even of all energy), creating a sort of end of history that forces the world to move back to labor-intensive local economies.

    I recall that Aaron Naparstek once wrote that the peak oil movement is to the environmental left as the rapture is to the Christian right, and I think that sums it up very well.

  • Gizler

    Charles, that is just what I was getting at. Glenn, yes AD’s article was pretty mild, but so was my caution, I think.

  • Damian

    If you want a realistic assessment of what is known about oil prices, just look to the markets. Like any other commodity, oil is priced with future risk in mind. If you really think oil is about to dry up, do yourself a favor and lock some in at $65/barrel. If you’re right, you’ll make a fortune. But remember, there are thousands of professionals out there with access to much more information that you have, and all of them are working as hard as they can to predict every element of risk in the market. The price of oil represents their consensus — when that shoots up over $100/barrel, you know something’s up.

  • Buzz

    What the real problem here is the fact the US is so highly dependent on foreign oil that without it, we become dysfunctional. We import 60-70% of our needs from countries who do not like us and we are doing very little to quench our appetite at home. Nobody in this country wants to build the necessary power infrastructure in their own backyard and be responsible for their own energy needs. It takes decades to build new energy sources such as nuclear power plants, LNG terminals, etc, always tied up in environmental litigation and the American people who some how feel entitled to the fact that others supply us with their energy. Superpowers never remain that way when they rely on the existence of others for their power.

    Peak Oil is coming soon. Why? Because we have found no major new sources of supply in over 25 years while half the worlds population (China,India) is now just starting to use oil in their rapidly growing societies.

    All the major oil fields are remarkably old. Yes, we do have the tar sand. Yes, we do have the possibility of oil shale. But both involve a lot of energy to get productive oil out. These methods will take decades to solve and bring online meanwhile nobody in this country is really looking at the dire consequences of what Peak Oil really means if we do not prepare. Think of it this way. Our growing economy only grows if more cheap oil is readily available to expand. We will have to rethink how we are going to run our economy when we enter into a time where cheap oil is no longer available.

    Bottom line is now is the time to be working hard at finding real solutions for our long term energy needs. Whether peak is going to hit now or a decade from now, I am afraid the consequences of decades without solving our energy needs is going to bite us in the rear.

  • Gizler

    Buzz, you may have missed Charles’s earlier post. As he pointed out, we’re just going to gasify coal if necessary, that’s all. This is the option that the Cassaundras always gloss over. Sure, it’s going to further destroy the planet, but that’s never stopped us before. Not to mention, battery technology has evolved so much just in the last few months even that electric cars are looking up again, and transportation fuel is the big problem.

    No one dislikes car-based culture more than I do, but the peak oil rapture is not going to beam us out of it.

  • max patton

    What about the idea of the Saudi’s just setting the price of oil. If they are the main supplier of oil, in theory, cant they pick some price which makes them happy and sell to the open market at that price?

  • max patton

    I wrote an incorrect fact: The Saudi’s dont sell to the spot market. They sell directly to refineries. So they can basically sell at whatever price they want. And since the Saudi’s control so much of the oil, the spot open market has to catch up to it.

  • Next chapter in this debate:

    Saudi production laid bare

    Summary

    1. Cross checking OPEC production and rig count data with International Energy Agency (IEA) and Baker Hughes data shows excellent agreement suggesting there is no reason to doubt the reliability of the OPEC data source.

    2. In 2005, Saudi Arabia had 1923 producing wells that on average produced 5740 barrels oil per day per well. This is astonishing high well productivity for an area that has been producing oil for over 50 years.

    3. The average well productivity has drifted down from just above 6000 bpd in 1991 to just below 6000 bpd in 2005 (Figure 1). There is no sign of a looming productivity crisis in these data and it would appear that increasing production may be achieved quite simply by drilling more wells.

    4. The data provide insight into Saudi Aramco reservoir and resource management in relation to their roll as swing producer. In the past, production has been reduced by retiring production wells and raised again by bringing wells out of retirement. All the while, Aramco have a rolling program of drilling new wells thereby increasing the total number of wells that are available for production.

    5. In my post of 7th March I suggested that the most likely explanation for falling Saudi production since April 2006 was voluntary restraint executed through a program of resting wells with high water cut or low pressure. The data presented here contain no evidence of a pending production crisis and voluntary restraint is still considered to be the most likely explanation for recent falls in Saudi production.

    Saudi Arabia looks healthy.

  • Evanel L.

    Apparently, many people still prefer to think that there’s nothing systemically wrong with our economy & civilization, and nothing systemically faulty with our infrastructure, or our mentality.

    Ours is an oil-based economy. Transportation, Agriculture, Plastics, Hi-Tech, … the majority of our industries & our economy are heavily dependent on oil… EVEN alternative energy sources depend on oil for their production (solar cells, biofuels, ethanol).

    The only way to avoid economic collapse is to quickly move towards zero or negative growth, and abstain from the use of all oil-related products/services (which unfortunately, is nearly everything).

    Also unfortunately, it is the great flaw of the capitalist system to prioritize “growth”, “cost,” and the “short-term”… and associating these things as “positive”, “beneficial,” and “right”. This accounts for many people refusing to accept the validity of alternative information. A case in point is the above poster, who actually believes in the accuracy of OPEC’s “official figures” and that OPEC wouldn’t lie… conveniently forgetting that there are probably NO instances in which OPEC would say that they are running out of reserves & have no spare capacity.

    In my opinion, we have just past Peak Oil. (No government is ever going to admit that either, until it is 100% completely obvious.)

    Be prepared.

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