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Thursday, March 10, 2011

Do Saudis have spare capacity? And why your standard of living hinges on it.

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The conventional response to a supply disruption like from Libya is -- no worries, the Saudis have heaps of oil and can immediately pump more to take up the slack. But do they? And what happens to oil prices if they can't?

Many astute oil experts have grave doubts about the Saudis much vaunted spare capacity. This is vital because Saudi Arabia is the world's largest producer, and up till now has been able to influence the world price by opening the oil taps.

1. Jeff Rubin -- Canadian economist and author is convinced the Saudi spare capacity is the "fictional variety”. He says reports that producers in OPEC, particularly Saudi Arabia, will able to cover a shortfall in oil production from Libya are greatly exaggerated.
“The four million barrels-a-day of excess capacity that Saudi Aramco claims is of the fictional variety. I think that we’re going to find they’re hard pressed to make up even the Libyan shortfall because what they’re supplying isn’t the same quality of oil that Libya was supplying to European refineries."
Thise interview with Rubin should be compulsory viewing for every economist, business writer and politician

2. Chris Skrebowski, editor of Petroleum Review, said the long-denied oil crunch is starting to bite.
"We cling to the comfort blanket that spare capacity exists, but it is mostly fictional, or inoperable. If you take 2m bpd off the figure, the whole dynamic of global oil supply changes,"
3. Jeff Currie, Goldman Sachs oil guru, said
“assumptions that OPEC has added 1.9m bpd over the last two years are wishful thinking. These new fields have been "largely offset" by attrition in old fields. "We believe that OPEC spare capacity has already dropped below 2m bpd. The question therefore arises how much spare capacity is left to absorb potential supply disruptions in other countries,".
If this picture is broadly correct, spare capacity is already close to the wafer-thin levels that led to wild price moves in mid-2008. The flow of Libyan oil has so far fallen by 1m bpd. This may not sound much against global supply of 88m, but oil prices are determined by levels of spare capacity once supply tightens.

4. Kent Moors, said
“soaring international requirements for oil may effectively reduce the Saudi surplus to about 2 million barrels a day. That reduces the effective Saudi surplus after Libyan replacement to about 400,000 barrels a day. Period.  As stunning as it may seem to investors, Saudi Arabia might not have enough oil to go around.”
Recent Histoy Lessons
Recent past history also tells us the Saudis are pumping flat out. At the height of the 2008 oil price spike George Bush II flew to Riyadh to beg the Saudis to increase production. Result: just a pitiful 300,000 barrels a day extra. Our own Energy Minister Gerry Brownlee was in Riyadh the day of the Christchurch earthquake. Maybe he was also pleading for greater production too?

Why it matters to every Kiwi.

If Rubin and others are right and the Saudi spare capacity proves to be fictional, the oil markets will freak out big-time and the oil price will go ballistic. The penny will have finally dropped that Saudi Arabia has reached peak oil (as WikiLeaks cables confirm) and with it the world has also reached its peak production.

As Richard Heinberg put it so well "the party is over"

I told you so.....

Peak Oilist Colin Campbell wrote this in 2000..
"An oil crisis is bad for politicians.
• Blaming OPEC or the oil companies will not wash much longer.
• It would be better to make a proper analysis of the true position and inform people.
No one blames the government for an earthquake. So they wouldn't blame it for an oil crisis either if they realised it was a natural phenomenon
"If you don't deal with reality, reality will deal with you"


Patrick said...

Good stuff Denis. Keep it flowing.
Like you, I am disturbed by the lack of intelligent commentary on this crucial issue.

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