Why Is Saudi Arabia’s Oil Production Down?


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


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