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TMFDeej (99.47)

Saudi Arabia Said WHAT?!?!

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April 21, 2008 – Comments (16)

It is an indisputable fact that global oil demand has been steadily rusing since the early 1980s.  If this trend continues, and I strongly suspect that it will, who will supply the necessary oil to meet this rising demand?  Let's take a look at some of top oil producing countries in the world to see if they are up to the task:

#5 Mexico

Not likely.  Mexican oil production seems to have peaked (see chart below).  Production at the country's largest oil field, Cantarell is slowing.  Huge debates have been raging in Mexico lately because Pemex lacks the funding and expertise to replenish its reserves. As the fight about what to do with Pemex rages on unresolved, the company's production continues to fall (see article: President, oil giant want to ink deals with outsidersbut face fierce protests).  Just today Pemex, Mexico's state oil company announced that its oil production slipped 7.8% during the first quarter (see article: Mexican oil output falls 7.8 pct in first quarter.  In 2007, its oil output dropped 5.3%  and it is down 9.4% from its peak in 2004.  The company currently only has enough proven oil reserves to last nine years at its current rate of production.

#4 Iran

Nope.  Not only is Iran not exactly our friend, but three days ago the country's President Mahmoud Ahmadinejad was quoted as saying "The oil price of $115 a barrel in today's global markets is a deceiving figure. Oil is a strategic commodity that needs to discover its real value."  This doesn't exactly sound like someone who wants to increase the supply of oil so that its price can drop.  For good measure, Ahmadinejad later added "The dollar is not money any longer but a handful of paper distributed in the world without commodity support."

 
#2 Russia

I doubt it.  Last week brought news that oil production in Russia declined for the first time in a decade (see article: Russian oil production has dropped this year for the firs......).  Russian government officials have actually acknowledged that oil supply growth in their country appears to have hit a ceiling for now.  A vice-president at Lukoil said "The period of intense oil production is over."

#1 Saudi Arabia

Probably not.  Huh?  What's that you say, Saudi Arabia has increased its oil production when prices have risen dramatically a number of times in the past.  Well, not this time my friends.  Whether or not you believe that Saudi oil production has peaked, as Matt Simmons outlined in his book Twilight in the Desert (and I personally believe), the country's oil minister, Ali Naimi, recently went on the record stating that his country has no plans to raise its oil production after its scheduled 11% increase in 2008 (see article: Saudis Wary of New Oil Projects).

With the lack of new supply coming on-line, I just don't see how the price of oil won't continue to rise in the long-run, despite what all the bears like Barron's and Gary Schilling say.  Don't believe me?  Check out what Jim Jubek had to say on the subject today: Why oil could hit $80 a barrel

Deej 

16 Comments – Post Your Own

#1) On April 21, 2008 at 10:53 PM, a1japb (< 20) wrote:

Google...Peak Oil Myth... Just for balance,

Here is another link, they all come across as wacky but heck it is an alternative

 http://www.vialls.com/wecontrolamerica/peakoil.html

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#2) On April 21, 2008 at 10:55 PM, wolfhounds (29.21) wrote:

You make an excellent case for investment in nat gas producers and pipelines.

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#3) On April 21, 2008 at 10:59 PM, Tastylunch (29.93) wrote:

what's number 3?

Venezuela? 

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#4) On April 21, 2008 at 11:49 PM, mandrake66 (95.26) wrote:

Probably Venezuela, if measured by current output, or Iraq, if measured by reserves.

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#5) On April 22, 2008 at 1:06 AM, Hezakiah (91.68) wrote:

I agree that the long term trend is up.  Some possibilities that might make it come down a little in the short run:

1) A bounce in the dollar

2) Major world recession

3) The U.S. stops adding to its strategic reserves

4) New government (U.S. and E.U.) regulations aimed to limit speculative investment

5) World Peace

 

I would not bank on any of the above happening.  Though I would like to see oil come down a bit so that I can put some fresh money to work.

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#6) On April 22, 2008 at 6:37 AM, TMFDeej (99.47) wrote:

These rankings were based on 2006 total output...a little old I know but the exact order of the top producers doesn't really matter.  At the time we were the number three producer.  Other producers that are in the top ten include Nigeria, Iraq, Venezuela, and Canada. 

Nigeria is one of the least stable places in the world and they keep getting their pipelines blown up.

Iraq isn't exactly a very stable place either, despite our best efforts to take it over. 

Venezuela hates us and the way Chavez keeps nationalizing everything oil companies are not going to be beating down the door with money to help them boost their production.

In my opinion, Canada is by far the best of the large oil producing countries.  They are close to us.  They are our friend.  And they have tons of oil and natural gas.

Deej

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#7) On April 22, 2008 at 6:45 AM, TMFDeej (99.47) wrote:

Thanks for the link, aijapb.  Unfortunately, that article is from 2004.  Russia's oil production has been stadily slowing since then. 

I'm not a "peak oil" purist who is saying that we are just going to run out of the stuff and run around in some Mad Max-like primitive state.  There's a lot of oil out there.  The problem is that a lot of the easy to get at oil has already been used.  That leaves us with more expensive souces like deepwater, oil sands, oil shale, etc...

Furthermore, the countries that do have the ability to get at cheaper oil are either our enemies or are underinivesting in their infrastructure.  Russia, Venezuela, Nigeria, Mexico are all poorly run and are not spending enough money to replenish their reserves.

I love Jubek's description about why Russia's absurd tax policy.  "When oil rises above $27 a barrel, the Russian government takes 80% of any additional revenue in taxes. That means at $67 a barrel, an oil company gets just $8 more a barrel in revenue than at $27. If the price climbs to $107 a barrel, the oil company's revenue increases by just $16 a barrel from what it was at $27 a barrel."  Why on Earth would any major oil company want to invest money to recover oil in Russia with a tax system like that.  No wonder Russian oil production is slowing.

I don't think that we are in eminent danger of running out of oil like a lot of the nut jobs out there, just that it is going to become much more expensive in the long run. 

Deej

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#8) On April 22, 2008 at 7:37 AM, a1japb (< 20) wrote:

Your welcome,

Do I agree with unlimited reserves?..... I have no idea what the truth is, who really does, but compelling arguments for both sides.

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#9) On April 22, 2008 at 9:26 AM, abitare (99.42) wrote:

Good post. Great replies. 

I am aligned on the money moving from the nominial / consumption economy - to the real economy. I am not buying gold or oil at these levels. It is a very crowded trade and hyped trade. But they can go much, much much higher.

I have no idea, but I know the cure to high prices is more high prices. There is a car that Tata motors is going to produce that runs on air pressure.

America uses an estimated 50% of the worlds oil. But I think the average American is going on a food and oil diet, as the F.I.R.E. economy retracts..... 

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#10) On April 22, 2008 at 10:58 AM, FoolishChemist (98.15) wrote:

You had a typo on today's Jubak article.  It's "Why oil could hit $180 a barrel"  We just aren't used to it.  My father said last week that gas cost $1.73, he actually meant $3.73.  Remember the good 'ol days when gas was just $3/gallon.

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#11) On April 22, 2008 at 11:12 AM, TMFDeej (99.47) wrote:

Oh thanks for catching that, FoolishChemist.  Saying that oil is going to hit $180 is definitely a lot different than saying $80. 

Ha the good old days when gas was $3 per gallon.  The lowest that I remember seeing gas prices in my driving lifetime was around $0.89 and that was a long time ago.

Deej

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#12) On April 22, 2008 at 11:40 AM, mandrake66 (95.26) wrote:

I don't think that we are in eminent danger of running out of oil like a lot of the nut jobs out there, just that it is going to become much more expensive in the long run.

No one is saying we're going to run out. They're saying that peak output will be hit, and production will slowly tail off from there. That this will undoubtedly happen at some point is not even slightly controversial among sentient beings. The controversial point is 'when?'.

Many add, on top of this, that no even remotely competitive alternative will be found to replace petroleum. This is slightly more controversial, but not very. Petroleum gives an enormous energy payback over its extraction, refining, and transportation costs. Nothing else with the same availability even comes close. Scams like ethanol actual have a negative payback.

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#13) On April 22, 2008 at 1:04 PM, floridabuilder2 (99.65) wrote:

every decade has some crisis... and they all are supposed to be the endo fo the world in some fashion.....  personally, a mad max world sounds better than the global nuclear warfare scenario i grew up with in the 80s...

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#14) On April 22, 2008 at 2:40 PM, Bupp (29.31) wrote:

Floridabuilder:  Mad Max was the result of global nuclear war caused by shortage in oil supplies.

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#15) On May 01, 2008 at 4:08 AM, TheGarcipian (87.68) wrote:

Excellent post, TMFDeej! Good info and great links.

The biggest missing bloc, though, would have to be Canada. Last time I did any research here (about a year ago?), Canada was our favorite choice of imported oil. See my very short writeup here for EWC.

But you were talking about the Top Five oil-producers in the world. So maybe that's different than our #1 import source?  Just curious where Canada fell in your poll. Thanks,

--Gar 

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#16) On May 01, 2008 at 6:25 PM, TMFDeej (99.47) wrote:

Thanks Gar.  For all of 2006, the last data that I have seen, Canada was the world's number seven producer of oil behind Saudi Arabia, Russia, the U.S., Iran, China, and Mexico.  It is much more important than that to the United States though.  Over 99% of Canadian oil exports are sent to the United States, making Canada our largest supplier of oil.  I personally own shares in PWE, a Canadian oil and gas Royalty Trust.

Deej

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