"President Bush Questions Saudi Ability to Raise Oil Supply"

Doing a bit of weekend catch-up, and this news item on Saudi reserves, or more accurately, lack thereof seemed to miss the attention it deserved with the market upheavals, Bernanke testimony before Congress, and stimulus plan announcements.

A quick review: one of the arguments the peak oil types, Matthew Simmonds in particular, is that the official OPEC reserves need to be taken with a fistful of salt. The cartels’ rules allocate production quotas among members based on their published reserves. Look through the history of reserves by country and, lo and behold, each member has had considerable and sudden increases in their reserves in the absence of new oil discoveries. Similarly, Saudi Arabia, far and away the biggest producer, will not permit either its production or reserve data to be audited.

It isn’t news that Saudi production is declining (we are hardly active on this beat, and we’ve posted on it a couple of time, this being the most recent), but it is quite another thing for Bush to admit the Saudis may not have much more to give.

How this nets out in terms of oil prices near term is not at all certain. Many experts feel current prices are in excess of the underlying demand/supply equation, in part due to speculation, in part due to aggressive buying by the US Strategic Petroleum Reserve, which some argue has boosted spot prices by 10%. The Baltic Dry Index, which captures commodities shipping ex oil and gas, has plummeted since November. However, the Bespoke Investment Group notes that it has fallen as steeply as it just has nine times before, with only two recessions resulting.

Nevertheless, while the demand is uncertain and may be due for short-term relief, the supply side looks more and more in question. From PRWeb:

In an ABC Nightline interview, President Bush recently said of Saudi Arabia, “If they don’t have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do.” According to TheOilDrum.com, this statement seems to indicate that George W. Bush, like many others, is skeptical of Saudi oil production claims. Forecasts of future world oil production by official organization like the IEA and the EIA assume OPEC can increase production by any desired amount; if OPEC’s capability is limited, official production forecasts are optimistic because they are based on false assumptions.

On January 15, Terry Moran interviewed President Bush in Saudi Arabia on ABC’s Nightline. When asked what he might say to the King of Saudi Arabia to lower oil prices, George Bush responded, “If they don’t have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do.” Nightline Presidential Interview

According to Gail Tverberg, writing as Gail the Actuary of TheOilDrum.com, “If Saudi Arabia doesn’t have that much additional oil to put on the market, the veracity of what Saudi Arabia has been saying about extra capacity is brought into question.” More importantly, it starts raising questions about Saudi Arabia’s true long-term oil production capability. Can Saudi Arabia really ramp up oil production in the future? Are the high reserves posted by Saudi Arabia and other Middle-Eastern countries really indicative of high future production capability? The Oil Drum Article

Dependence of Official World Oil Production Forecasts on Future OPEC Oil Production

One would think that future oil production forecasts by the US Energy Information Administration (EIA) and the International Information Agency (IEA) would be based on something fairly solid — perhaps a detailed analysis of reservoir capabilities, or at least some type of audited reserve estimates of the different countries.

According to TheOilDrum.com, “Unfortunately, future oil production forecasts by these organizations are really forecasts of how much oil the world is likely to need, not how much can be pulled from the ground. The assumption is made that somehow OPEC will be able to cover any shortfall.” The International Energy Association determines how much will be needed in total, then assigns the remainder to OPEC as an IEA Call on OPEC.

Until recently, the EIA used a similar approach. The approach now has been modified a bit, to include a new exogenous oil supply model, Generate World Oil Balances (GWOB). Even with the incorporation of this model, the result is very similar to IEA’s Call on OPEC.

The EIA’s 2007 Annual Energy Outlook’s Key Assumptions section states the following: EIA OPEC Assumptions

“OPEC oil production is assumed to increase throughout the reference case forecast, making OPEC the primary source for satisfying the worldwide increase in oil consumption expected over the forecast period. OPEC is assumed to be the source of additional production because its member nations hold a major portion of the world’s total reserves–exceeding 902 billion barrels, over 70 percent of the world’s estimated total, at the end of 2006.”

The 2007 EIA Oil Reference Case Forecasts are shown in the graph above. This same data is also shown in EIA Graph of OPEC Production.

According to TheOilDrum.com, “The problem with the above assumption is that OPEC’s reserves are not audited. In fact, OPEC’s reserves are seriously in question.” If what President Bush is saying is true — that Saudi Arabia really can’t increase production much — President Bush’s statement should start to raise questions about the reasonableness of future world oil production estimates by EIA and IEA. Without the ability to Call on OPEC, demand quickly outpaces supply. Peak oil in the next few years is likely as well, if we cannot rely on the Middle-East to ramp up production.

George Bush Is Not Alone In Mentioning Oil Supply Problems

If George Bush were the only one making statements about oil production problems, one might attribute his statement to a misunderstanding, or a slip of the tongue. We find, however, that the Wall Street Journal quoted Alan Greenspan on December 15, 2007, as saying that global oil supply peaked earlier and lower than previously contemplated. Greenspan WSJ Peak Oil Quote Jeff Rubin, chief economist of CIBC World Markets, was quoted by the Toronto Star as saying that he thinks peak oil is here. Jeff Rubin Peak Oil Quote. The Economist, in a recent edition writes that Christophe de Margerie, the boss of Total, thinks that the world’s oil production may be nearing its peak. Margerie Peak Oil Quote

According to TheOilDrum.com, it almost begins to sound as if peak oil is so widely known and acknowledged that George Bush has a hard time not mentioning one of the related issues–the inability of Saudi Arabia to raise production. It is just such a normal part of conversation and thinking that it slips into a major interview on ABC’s Nightline. With this background, what can one expect in the next interview?