Is Saudi Oil production going into decline?

In an earlier post I already mentioned an article by Stuart Staniford that made me think this might be the case. Since then the debate has moved forward. A man by the name of Euan Mearns responded with a well written article of his own that was critical of Staniford’s methodology.

While I appreciated the fact that Euan Mearns took the time present an alternate interpretation of data, I have to say his article only helped highlight how compelling Staniford’s argument is.

As I understand it, the core of Mearns’s argument is this…

High oil prices worked their magic, dampened demand growth and stimulated a global exploration and production effort with the oil industry working flat out, everywhere. There is no shortage of oil throughout the OECD. US and European inventories remain high.

Faced with this scenario, it seems plausible to me that Saudi Arabia and other OPEC countries have cut production in order to support prices at the $60 level which does not seem to present any problem to the developed world economies. That is what the Saudis say they have done and I can see no evidence or reason to doubt it.

When I read Mearns’ argument, the first thing that I wondered was why in Saudis all the suddenly decided that they were happy with the price of oil at $60 dollars a barrel? After all, the data contained in Mearns’s own article shows that the Saudis ramped up production in a big way when oil went over $35 dollars a barrel.

To be more precise, they added 1.5 million barrels of oil per day in new production in 2004 to bring their daily pumping rate up to 9.5 million barrels of oil a day. After they reached about 9.5 million barrels of oil a day they stopped increasing production even though the price of oil kept going up. In late 2006/early 2007 they stated cutting production even though prices were still high.

What I am getting at is that the Saudis thought that oil was too high in 2004 when it started going past 30 dollars a barrel. But if we are to believe Mearns, in 2006 the Saudis decided that they wanted oil 60+ dollars a barrel. So what changed over those two years that caused the Saudis to decide that they wanted Oil to be more expensive?

Or did they decide?

If you look at their production chart, it sure looks like they pegged out at 9.5 million barrels per day and they just could not deliver anymore. After all, before they reached 9.5 million they were responding to rising prices. After they hit 9.5 million prices seem to have no bearing on their production levels.

That was just my ignorant take on Mearns’ attempt at rebutting Staniford. But I felt vindicated when Staniford came out with an article in response to Mearns that made that very point in a more detailed fashion then I could ever hope to do.

In fact, I would say that Staniford’s second article was even better than his first one. It was one of the best argued positions that I have seen in a long time. This quote nicely summarizes his argument………

The headline graph summarizes my conclusions, which are as follows.
• Saudi production can be divided into two eras. In the first, prior to the third quarter of 2004, KSA had spare capacity and acted as the swing producer, making large voluntary changes in their production to stabilize the market. During this era, all major features of the production graph can be well understood based on demand side needs.
• Since late 2004, KSA have entered a new era where they cannot raise production in response to demand side needs, and instead the major features of the production curve correspond to supply side events.
• During 2002, KSA was increasing production to accommodate increasing demand as the world recovered from the recession of 2001.
• In 2003, there was a major spike in oil production immediately preceding and during the US invasion of Iraq: this was a voluntary action to stabilize oil prices in the face of the loss of Iraqi production. As combat wound down, and Iraqi oil production resumed, Saudi production declined back to levels slightly higher than before the war.
• Oil prices increased due to increasing US, Chinese, etc demand in the strong economy of 2003 and early 2004. Once it became clear that oil prices had risen pronouncedly above OPECs desired $22-$28 price band, KSA initiated a large voluntary increase in production in the spring of 2004 in an attempt to bring prices back into the band. They were not able to raise production by more than 1 million barrels per day (mbpd), however, and this was not sufficient to stabilize prices, which have never returned to the price band. The band was abandoned a year later.
• After continuing to increase production very slightly for several more months, Saudi production began to decline in late 2004. This was only arrested by the arrival of the first KSA oil “megaproject”, the 800 thousand barrel/day (kbpd) output from the combined Qatif/Abu Sa’fah fields (690kbpd of new crude and condensate production). This 690kbpd arrested declines during early 2005, but never sufficed to raise production above the peak achieved in 2004. There was no sign of Saudi increases in production in response to the high prices of 2005 and since, nor to the loss of production from the Gulf of Mexico hurricanes in 2005.
• Production began to decline again in 2005, and at greater rates through 2006. This was only arrested briefly by the arrival of oil from the 300kbpd Haradh III development in late spring of 2006.
• If these trends were to continue, Saudi oil production would halve over the next five years. However, it seems more likely that KSA will find ways to bring smaller fields on line and start to mitigate the decline within this time period.
Let me justify each of these points in detail.

And Staniford does go on to justify each of those points in detail. It should be pretty clear in another year or two if he is correct….

2 Responses to “Is Saudi Oil production going into decline?”

  1. […] _uacct = “UA-1202685-1”; urchinTracker(); Map of the Ethereal Land The Ethereal Voice Front Page – Politics – Money – Knowledge – Art – Food – Fun Masthead About Is Saudi Oil production going into decline? By Ape Man | March 11, 2007 – 6:04 pm Posted in Category: Money In an earlier post I already mentioned an article by Stuart Staniford that made me think this might be the case. Since then the debate has moved forward. A man by the name of Euan Mearns responded with a well written article of his own that was critical of Staniford’s methodology. While I appreciated Click Here to continue reading. […]

  2. […] If you have time you might want to familiarize yourself with the context for this essay by readying Staniford’s post called Saudi Arabian oil declines 8% in 2006 and a critique of that post by Euan Mearns called Saudi Arabia and that $1000 bet. It was in response to that critique that Staniford wrote A Nosedive into the Desert. You can also read the Ape Man’s thoughts on the subject here. […]

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