Or so the Saudis would have us believe. A top Saudi official says the Kingdom has plenty of oil:
Saudi Arabia has plenty of oil – more than the world is likely to need – along with an increasing ability to refine crude oil into gasoline and other products before selling it overseas, a top Saudi official says. “The world is more likely to run out of uses for oil than Saudi Arabia is going to run out of oil,” Adel al-Jubeir, top foreign policy adviser for Saudi Arabia’s de facto ruler Crown Prince Abdullah, said Wednesday … “If we send more oil to the United States and you can’t refine it, it’s not going to become gasoline,” al-Jubeir said. The United States has not built a refinery since the 1970s, and other markets have similarly outmoded or limited refining capacity.
How should we interpret this?
I spoke with a senior oil analyst a couple of weeks ago, and heard the same sentiment from him. What’s actually going on? How much oil do the Saudis really have? Will there really be a world shortage, or Hubbert peak, as all of us round here have come to accept? Could we be wrong?
[Jerome a Paris: I’m asking you, specifically!]
How should you interpret this?
As the self-serving, loan-grabbing, price-sustaining, investment-begging lie that it is.
The earth is finite.
Therefore everything in or on the earth is finite, and in lesser volume.
But how about the next 50 years, or the supposed Hubbert’s peak, even sooner?
Hubbert’s peak is not about running out of oil.
Hubbert’s peak is about the point in any given reservoir or group of reservoirs when the extraction of oil begins to rise in terms of energy expenditure and cost.
Hubbert’s peak occurs at 50% depletion, and the “unity point” when the energy required to extract hydrocarbon is the SAME as the energy that is extracted and you start to lose net energy no matter the price…
Hubbert’s Peak of Oil Production worldwide should occur sometime between now and 2020.
50 years is a pipe dream.
I’m interested in how things play out over the 50 year time scale — not the “infinite” horizon in your first comment. I’ve read way too much already about Hubbert’s peak, inelasticity, etc etc. (I really ought to stop devouring the stuff… it’s not my day job.)
All these estimates are based on assumptions.
How do we know our assumptions about reserves and extraction costs are correct?
Are you 90% sure the Saudis don’t have the stuff? Or 99%? Or 99.9%? I’m trying to glean some kind of probability that we’re not all being taken for a ride in our scarcity assumption. (An assumption we all love around here, especially given our pro-environment bent…) Would you bet your life on the Saudis not having oodles of oil hidden away? Or are you open to the idea that possibly, just possibly, things may not be as they seem?
I am a structural geologist with years of experience in drilling and exploration, with stints at Exxon and Schlumberger under my belt.
Our assumptions about reserves are based on extensive 3D seismic, gravity, magnetic, drilling and logging operations covering the last 40 years of exploration.
Our assumptions about extraction costs are based on real-life experience and detailed knowledge about the behavior of viscous fluids in porous and fractured media.
Those assumptions are borne out by the data relating to exploration equipment usage, the trend of discovery over time, and the ratio of production to exploration and the ration of production to energy investment.
If that is not enough for you, then nothing will be.
The next 20 years are going to be rough, and the next 50 are going to be rougher.
Thanks for the excellent info. I appreciate you bothering to take the time to lay things out for a simpleton like me!
I completely agree with your general sentiments. (In fact, I’ve owned a portfolio of oil extraction/technology stocks for 6 months now, so I put my money where my mouth is.)
The only thing I worry about is: can we be sure we’ve got this right for Saudi Arabia, which is not an open capitalist society?
I mean, surely even the most expert of experts outside Saudi Arabia can only guess as to the extent of their reserves, right? For a country as closed as Saudi Arabia, how can experts be so certain? And the Saudi reserve is so vast that an error here could make a huge difference in the short term, viz. 50 years.
Dominic
…oil in 2105. But that does bupkis for us.
Worldwide petroleum reserves now stand at 1.277 trillion barrels, according to the U.S. Geological Survey. “Reserves” have a specific meaning: oil that geologists know is in the ground, that nobody disputes: proven oil. Then there’s undiscovered oil. Undiscovered oil plus proven reserves together are called Estimated Ultimately Recoverable oil (EUR in the jargon).
EUR predictions range widely, from about 1.8 trillion barrels to about 3.8 trillion barrels. Super-optimists like to cite the 3.8 trillion level, but the USGS World Petroleum Assessment 2000 team, which actually made this high-end forecast, give it only a 5% chance of actually being true.)
USGS said there is a 95% chance of 2.1 trillion barrels remaining outside the U.S. Add in U.S. reserves and undiscovered oil here, and you get a global EUR total in the 2.4 trillion-barrel range. The team also cites a 50-50 chance of there being 3 trillion EUR barrels worldwide.
But let’s be super-duper optimists for the moment. Let’s say that even the 5 per-centers have underestimated. Let’s assume there are 5 trillion barrels of recoverable oil still in the ground. Ample enough, surely?
Until you do the math. Worldwide consumption in 2005 is just short of 84.5 million barrels a day – 31 billion barrels a year – with the consumption rate rising 2% annually. In 1995, the world only consumed 25.6 billion barrels.
This means, that between now and 2055, at the current rate of increase in consumption, the world will gobble 2.664 trillion barrels of oil – more than what the USGS gives as the amount of oil we can definitely count on. And that super-optimistic vision of 5 trillion barrels? All of it gone by 2078.
Decades before then, of course, oil will be hugely expensive, and that alone will reduce consumption. People who today worry about the potential economic effects of $50 per barrel oil will be praying for a drop to $150 per barrel long before I’m dead.
It’s one thing “inspecting the books” of an open society like the US. [Make that formerly open… 🙁 ]
Saudi Arabia is a closed book. How do we see inside? Suppose we were dead on with our estimates of the reserves in every single country on the planet — except for Saudi Arabia. Since their reserves are so huge, a significant error in our estimate for Saudi Arabia could have drastic differences in how things pan out in the short-term (50 years, say).
I can understand how we know how much there might be in the North Sea. Did the Saudis let our geologists wander around their country and drill wherever they like? Or are we depending on internal Saudi information which may have been manipulated?
…have tried to keep the books closed on how much oil they have. For instance, Shell recently admitted its estimates were hugely overstated. Over the past several years, there have been unaccountable leaps in what some countries claim to have.
It’s true that the Saudi kingdom is about as closed as can be, with oil stats a closely held secret. But for the country to have made significant new finds about which zero information has trickled out stretches credibility.
Indeed, Matthew Simmons, an oil investment banker who has been in the business for 30 years, believes that Saudi Arabia may already have passed peak oil or be close to it. He makes a compelling case in his book, Twilight in the Desert. Among other things, he says, speeding up production – as the Saudis have been urged to do – will reduce the ultimately recoverable amount.
Announced oil reserves in Saudi Arabia are 261 billion barrels. Some super-optimists have claimed that the Saudis may have as much as a trillion barrels of oil in the ground. But that fantastic amount is included in the optimistic estimate of 3.8 trillion barrels I’ve noted above. And it’s highly unlikely.
At the moment, the world uses 84 million barrels of oil a day, with Saudi supplying around 9.5 million, 11%.
By 2025, with demand rising in China, India and a few other places, global demand will hit 120 million barrels a day. U.S. officials say the Saudis will supply 22 million barrels of that total, nearly 20%.
But Sadad Al-Husseini, who not so long ago retired as Head of Exploration at the Saudi-owned Aramco, believes the US government has wildly overestimated both Saudi Arabia’s and global reserves.
Bush was doing some jawboning about the price of oil, and the Saudis said they were going to increase production, only they never did. That led one geologist who posts on line to conclude that they couldn’t: That essentially they have peaked. Why? because the alternative is that they were putting the knife in Dubya’s back while keeping a smile on their face, which though possible, seemed harder to believe.
Is this more happy-talk to puff Bush up (and help him sell more US debt), or the prelude to betrayal?
The Saudis can increase production a little bit, I think…but only by steam injecting, hydrofracturing, sand-propping, and otherwise forcing the system out of balance.
That increase in production over the short term generally leads to lost production overall…hence they are probably trying to calm the markets with talk until they have no choice but to renege on their promise or damage their reserves.
That and wring the last drop of investment money out of the credulous bankers and hedge fund managers.
Demand for oil is increasing every day because of greater demand from industrializing nations, particularly India and China.
Within 20 years, maybe sooner, the demand from those countries will skyrocket, as supply is plateauing or beginning to drop.
The gap between demand and supply will grow dramatically, and the price will rise so quickly, that we will nostalgically yearn for the days when crude oil was only $55 per barrel.
Sure, that’s already understood: demand skyrockets. All I’m asking is: could our estimates of the Saudi reserve be off far enough that the point where demand outstrips supply is delayed, by say 20 years?
Given how huge the Saudi reserve is at a minimum, if we were off by a large factor in estimating their reserve, it could have huge repercussions in the market in the short-term.
Crude oil consumption is driven (pun intended) by the use of fuel for transportation — cars, trucks, airplanes, etc.
Even with an all-out program to improve fuel efficiency with higher-MPG vehicles or hybrids or alternative fuel vehicles will take several years to reach full effectiveness in the U.S., because people won’t stop using their current vehicles overnight; it takes years to phase the older vehicles out of use.
That goes double or triple or quadruple for places like India and China, where the phase-in on any new vehicle technologies will be 10 to 20 years behind the widespread U.S. use of those same technologies.
As for the Saudis, I would guess that they are overestimating their reserves by quite a bit, but that we are underestimating them at least somewhat.
They have a good point about refinery capacity — but still, if they ramped up production like they claim they can do, the per-barrel price would drop. The Saudis choose not to increase production, either because they want to maintain the current price levels, or because their production capacity and/or reserves are limited.
The Saudi press release that you cited is really a pre-emptive strike against a new book that should be in the bookstores any day now. It is called Twilight in the Desert, and it was written by Matthew Simmons. He is an investment banker and a former advisor to President Bush, and he has been one of the leaders in pointing out the impending dangers of Hubbert’s Peak. In the book, he analyzed Saudi production, and concluded that they don’t have nearly as much oil as they claim.
Another book you might like is Beyond Oil, by Kenneth Deffeyes. He is a geology professor at Princeton, and his book considers our options for the next 50 years, as oil production declines.
What’s the basic gist of how we know the Saudis have less than they claim?
Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy
In 2004, Houston “energy banker” Matthew R. Simmons made headlines (and the cover of Business Week) when he told an elite audience that the Saudi “miracle” of effortless, cheap oil production was nearing its end. “The entire world,” he said, “assumes Saudi Arabia can carry everyone’s energy needs on its back cheaply. If this turns out not to work, there is no Plan B.” In this provocative book, the industry’s most vocal skeptic lays out the reasons for his pessimism. Drawing on personal observation and more than 200 technical papers, he explains Saudi secrecy, policies, and technological ineptness have put the entire world in danger.
FROM THE PUBLISHER
The most critical question facing the world energy market is whether Saudi Arabia can substantially increase its oil production to meet rising world demand in the years ahead. Sparked by personal observations of Saudi oil wells which led him to suspect that some Saudi fields were in decline, Matt Simmons has created a compelling case that Saudi Arabia production will soon reach an apex, after which its production will decline and the world will be confronted with an immense and potentially catastrophic oil shortage. The factual basis of the book is over 200 technical papers published over the last 20 years which individually detail problems with particular wells or particular fields, but which collectively demonstrate that the entire Saudi oil system is “old and fraying.” Based on his analysis, Mr. Simmons asserts that sudden and sharp oil production declines could happen at any time. Even under the most optimistic scenario, Saudi Arabia may be able to maintain current rates of production for several years, but will not be able to increase production enough to meet the expected increase in world demand. Eventually, the reckoning day will come and the world economy will be confronted with a major shock that will stunt economic growth, increase inflation, and potentially destabilize the Middle East.
The book is written in a concise and engaging style, providing background on Saudi Arabia, the oil industry, world oil market, and the management of the Saudi oil resources. Mr. Simmons addresses technical issues about oil production in a clear, interesting style, providing documentation but not losing the reader in details The book is written with a strong focus and passion, and theoverall sense is of a behind-the-scenes expose, akin to a 60 minutes investigative piece.
They are trying to deflect attention, methinks.
My understanding is that the reason we haven’t built refineries is that we have outsourced the job. We import refined fuel rather than refine it ourselves.
Secondly, if the problem were a shortage of refining capacity, you wouldn’t see crude prices spiking, now would you? There would in fact be a backlog of crude with no refineries to process it.
The amount that they really have is a huge question. Many analysts don’t find the Saudi statements in this regard as credible.
I should also add that each oil producing country in the world has published estimates of proven reserves. In the late 1980’s, production quotas were tied to proven reserves. One country – don’t know which – decided that they wanted to pump more oil, so what they did was to arbitrarily restate the size of their proven reserves. All other OPEC countries quickly followed suit. If you look at a graph of reserves as a function of time, you see flat lines with a sudden jump in the late 1980s. This essentially leads many to believe that the published figures for reserves are essentially useless.
Some of the analysts are calling for an audit if you will that openly tries to estimate the true reserves for what is left in the world. Without that, the only way that we could tell that the Saudis are running low is when they start missing production targets.
There is a new book out which goes into this quite a bit:
http://www.amazon.com/exec/obidos/tg/detail/-/047173876X/ref=wl_it_dp/104-3190798-6941508?%5Fencodin
g=UTF8&coliid=I1CEY6ZYY3YHO0&v=glance&colid=3JVM8E8JJ3R5W
The author is a financial analyst who has studied the oil industry. He is also a Republican, and an advisor to presidents. The things he is saying have been said to the President.