Getting Paid

Saudi Arabia has a plan to boost their oil production in the near future. According to the NYT's Jad Mouawad that "was seen as a sign that the Saudis are becoming increasingly nervous about both the political and economic effect of high oil prices." But couldn't we just see it as a sign that you can make more money than ever selling oil these days so it became worth the Saudis' while to find ways to boost production? That's the market in action. The days of OPEC seriously enforcing production quotas on its members seem to be long gone in these days of rising prices and still steady demand.

Note, however, that though this kind of measure may well bring the price of oil down, it seems to cut against the notion that there's a speculative bubble in oil prices. The Saudis wouldn't be doing this if they thought an oil price crash was in the works.

Comments

Good points. US demand has slowed markedly but international demand has picked up the slack.

Posted by carsick | June 14, 2008 6:02 PM

It depends. Do you think oil is going back down to $40/barrel? Even at $85/barrel they could still make a tidy sum.

Posted by Joe Klein's conscience | June 14, 2008 6:23 PM

I agree with Joe Klein's conscience (that's a weird sentence to type). There are lots of ways to interpret this, some depending on facts I just don't know.

1) The new price is real. Oil is over $120 for good.

2) Part of the new price is real. Oil is over $80/barrel for good, but $140 is due to a price bubble.

3) The increased price is almost entirely due to a bubble. However, it's relatively cheap for the Saudis to scale their production up. They figure they should sell as much as they can before the price crash, since the stuff's so much more valuable now than it ought to be.

4) The Saudis are worried someone's going to find a good oil substitute soon, because of high prices, and want to sell while the selling is good.

5) The Saudis have completely misjudged the situation and are making a financial blunder.

I have no way of knowing which of these is actually the case.

Posted by Jadagul | June 14, 2008 6:57 PM

The Saudis wouldn't be doing this if they thought an oil price crash was in the works.

Actually, it says the opposite. If they thought prices were going up, they'd keep production steady and sell at high prices. You sell when you think the market is at a peak. You make a shit load more money selling at $135 than you do at $100.

Ever hear the adage, "Buy low, sell high"? They're selling more now to cash in on the high prices. If prices drop, they can always cut back production.

Posted by Mo | June 14, 2008 7:20 PM

Actually, there's another possibility. Tracking real production amounts is notoriously difficult.

Given that, the Saudis may simply be saying they intend to boost production to curry favor on the cheap with various western powers, with no actual intention of so doing.

Posted by drinkof | June 14, 2008 8:32 PM

Pay attention supply and capacity of delivery of WTI (light sweet) crude. That's what most refineries are set up to use in order to make gasoline and other derivatives. My understanding is that the Saudi's spare capacity is mostly of a heavier (greater sulphur content) crude that, while it may impact oil prices, may not have quite the price-lowering effect that some are expecting.

Posted by Quiddity | June 14, 2008 8:38 PM

I disagree completely - econ 101 says they are doing this because they expect that prices in the future will not be higher than what they can get now.

To me this is decidedly bearish news for oil, at least to the extent that you think SA knows anything about the fundamentals of their chief export (and I would wager that they know more about this than most).

Posted by JT | June 14, 2008 8:57 PM

I also think the explanation for this could be as much political as economic. Specifically, I suspect they are concerned that there is growing political will for making the sorts of public sunk cost investments that would lead to a long term reduction in future oil demand. So, this may not be profit maximizing for the Saudis in the short term, and instead may be more of a long term strategy designed to protect the entire market from substitution.

Posted by DTM | June 14, 2008 10:08 PM

I think Mouawad is very probably right and that Matt's alternative theory is wrong. It seems to me that the Saudis have concluded that super high oil prices are now threatening to tilt global economies into recession, which will lower the demand for oil and end the high price bonanza anyway. The very high profile nature of their public statements of concern, including their recent call for an oil summit, suggest to me that they have concluded that the time is right to use their enormous market power to help engineer a price decrease, which will in turn stimulate the economies of oil consuming nations and thus stimulate flagging demand for oil. And if the high price is seen as substantially due to a speculative bubble, then merely by spreading the news that they are planning to increase production, they can generate the expectation among speculators that the price will be going down, which will then help to burst the bubble.

It's not necessarily true that a producer would not ramp up production if they expect prices to fall. The drop in prices can be expected to increase demand.

Posted by Dan Kervick | June 14, 2008 10:37 PM

It seems to me that, with a nonrenewable resource, you'd keep production down and try to sell it at the highest price possible.

You might be inclined to sell three times as many widgets at half the price because you still make more money.

However, with oil, you can't make more of it. If Saudi Arabia thought prices would continue to rise, they'd hold onto their oil and sell it later at higher prices.

I think they're getting nervous about something. Whether it be political pressure, increased supply from other sources, energy conservation, or alternative fuels. They probably suspect prices won't keep going up at current production levels.

Posted by Doug | June 14, 2008 11:13 PM

Even Soros is on record as saying we're in a price bubble, for one thing.

That point aside You're forgetting the history of the thing...

There's one other factor that has always motivated OPEC; Maintaining their monopoly.

I've been saying for months that the way to get OPEC off the dime and to secure our own energy future at the same time was to make the commitment to drill our own oil. The reaction of OPEC in the past to any sizable field coming online that would put a dent in that monopoly, was to increase production to the point of making any new Domestic Fields unprofitable. That for example, was their reaction to Prudhoe Bay... an idea they eventally gave up on, once the place was online for a while.

I've no reason to expect that ANWR would be any different.

There's another point here, too; That they're even talking about raising output sorta kills off the meme that they can't raise their output because they're running out.

Posted by Bithead | June 14, 2008 11:17 PM

The Saudis say that their plan is to boost production. What they are doing is increasing drilling for new oil field development. I've seen an increase of 400% mentioned.

Their problem, and ours, is that they are trying to replace several of the richest oil fields on earth with fields of much lower quality. Several of the fields they are working are problem fields that were shut-in during the 80's oil glut. They maybe able to stay in the same place for some time by continually increasing their production effort. The twelve million barrels a day that has been talked about for the Saudis fields for the last thirty years will most likely remain a mirage in the desert.

Posted by Bill D | June 14, 2008 11:20 PM

In other news, Indonesia, an industrializing nation of 300 (200?) million people or so, recently left OPEC because it just became a net oil importer (wonder if this is somehow related to this Saudi announcement?).

Random fact: One of bin Laden's stated grievances against the House of Saud is that they sell oil too cheaply to Western powers instead of letting the price be set by market mechanisms.

Posted by Reality Man | June 14, 2008 11:28 PM

Reality Man:
You do realize that Bin Laden's overall goal was to bring down America by economic means, right? Oil was just a part in that. In fact, Bush has been a boon to Bin Laden. Bin Laden would never have thought in a million years that the subprime/banking crisis would help the American economy unravel.

Posted by Joe Klein's conscience | June 14, 2008 11:48 PM

"That they're even talking about raising output sorta kills off the meme that they can't raise their output because they're running out."

Not so. Talking about it (and wanting the world to believe it) doesn't mean they can actually do it. Not at all.

Posted by drinkof | June 15, 2008 12:00 AM

Matt, you hear of a thing called Peak Oil?

Posted by SocraticGadfly | June 15, 2008 12:02 AM

Fuck Saudi Arabia.

Posted by web design company | June 15, 2008 12:14 AM

The Saudis pissed away most of their more easily obtainable oil from the megafields at low prices, and did so through extraction methods that now limit the amount they'll get cheaply from those fields as they decline.

If they don't say 'oh, yeah, we can ramp production, no problem', the price goes up another $20/bl. Instead, my guess is that, as Bill D said, they're going to go back to problem fields where the cost of production is $70-80/bl.

Posted by pseudonymous in nc | June 15, 2008 12:27 AM

OPEC learned the lessons of the 80s well--a bubble does them harm in the long wrong because the crash lasts much longer.

Their stated (and actual) policy of the last 10 or 20 years is to stabilize prices at a sustainable level. Do they want high prices? Of course. Do they want overvalued oil? Of course not--their long-term interests lie in not crossing the world affordbility threshold (where the price is high enough to cripple world economies and trigger economic decline).

So boosting production reflects both a normal market-driven response to demand (and price), but also a an attempt to stabilize prices.

Posted by Geoff | June 15, 2008 12:52 AM

Here's an email I recently sent to Jonah Goldberg in response to his commentary on drilling in ANWR. (BTW - he postulates total ANWR potential at between 5.7 and 16 Billion barrels - I used the 16 billion figure in my email):

"According to the government Energy Information Administration, the US consumes ~ 20 million barrels of petroleum products per day. That means that the estimated 16 billion barrels (maximum) of recoverable oil from ANWR would last the US ~ 800 days or some 2+ years.

"One can argue about how large an area of ANWR would be spoiled, and for how long, but given that, in the future, we will have to adapt to a life-style based on very different sources of energy, it doesn't seem to me that the long-term spoiling of some significant portion of ANWR is worth the 2+ year gain.

"I imagine the same argument can be made for the shale-oil deposits and the oil available from currently-taboo offshore fields. I haven't looked at the specific numbers in those cases so it is definitely possible that the amount of oil available in specific areas is worth the risk of local damage. But it seems to me that it might be interesting to establish some kind of damage vs oil-availability measure - and for that, the ANWR case makes for a good discussion of what that measure might be.

"To put it differently - if we combine the very human tendency to procrastinate with the enormous difficulty of making big social changes and the inability of governments to see clearly, it seems to me that it would behoove us to, say, force the pace of developing alternate energy sources by not suggesting short-term stop-gap measures which simply prolong the crisis."

Posted by skip | June 15, 2008 12:58 AM

I do think that the price of oil is overvalued by a speculative bubble because the current price of oil is properly valued based on proven reserves. I cannot remember where I read this analysis, but it was compelling.

As for the issue of political problems, in case you have not noticed, Spain is in turmoil at the moment, they are rioting in the streets. The truckers are on strike and the city of Barcelona is running out of food.

Conditions are deteriorating in England as well.

There are very serious political problems arising and government could fall. If the Saudi's cannot figure out a way to reduce the prices of oil, it could create a lot of political problems for them in terms of lost international goodwill and the potential that they could lose total relevancy.

Posted by debrazza | June 15, 2008 1:33 AM

At some point - 140? 200? - the support for restrictions on drilling will collapse. ANWR, you bet, offshore Cali, yup, west coast BC, yup.

As will the resistance to nuclear and to oil shale and to whatever keeps us warm. Wind, you bet.

We are watching the last days of the enviro hostage syndrome. We are perfectly capable of supplying our energy needs into the indefinite future. But we have to be prepared to laugh in the faces of the enviro nitwits. We are almost there, another buck on the gas price and the politics of energy changes forever. Bye Green bastards, you're done.

Posted by Jay Currie | June 15, 2008 2:26 AM

A post about energy

Posted by Swan | June 15, 2008 3:05 AM

Bye Green bastards, you're done.

I bet your kids love you, Jay. Do you read them bedtime stories about the world they're going to grow up in? Hard Times is a good place to start.

You're probably right, but that's because greedy, selfish cunts like you are ten a penny. They'll dig up ANWR and throw money at shale and mortgage their assholes to nukemen and -- heck, a fix is a fix -- might even promote whale oil as a renewable resource.

Funny thing is, those 'green bastards' might take offense at the idea of being part of your cuntish schemes, and chuck you on the bonfire first.

Posted by pseudonymous in nc | June 15, 2008 3:23 AM

The Saudis expect an attack by the US on Iran, since various administration scum have been over there trying to get them on board with it. So they'll have to take up the slack on production when the Iranian oil is offline.

And they know the Israelis will do it if the US doesn't - probably this fall when the Russian reactor comes on line. That will be the perfect time for the Israelis to make their strike, scattering radioactive materials all over hell. That would be like them.

The US of course will give their aircraft the overflight permission, which will make the Iranians retaliate against the US, thus starting the war Cheney has been lusting for.

Failing that, Bush will launch air strikes against either alleged "insurgent training camps" or the Quds Force HQ. The former might not immediately lead to an all-out Iranian response, but the latter probably will.

Oil price will spike to $250 and stay there for the next ten years as the war grinds on.

Posted by Richard Steven Hack | June 15, 2008 6:20 AM

Quiddity is right. The Saudis regularly put their heavy sour up for sale, note that nobody wants to buy it, and then take it back down again. While more and more refineries are making the capital investment to handle these grades, that's not what the market wants right now.

Posted by Halfdan | June 15, 2008 7:51 AM

Oil reserves are state secrets. All the debate here is simply proof that Rational Economic Decisions are fairy tales.

Posted by Jeffrey Davis | June 15, 2008 9:30 AM

Oil at these prices commands around 5% of GDP. Who thinks we're going to continue at this level? With or without breadlines?

Posted by Jeffrey Davis | June 15, 2008 9:33 AM

But couldn't we just see it as a sign that you can make more money than ever selling oil these days so it became worth the Saudis' while to find ways to boost production?

This would assume the Saudi decision-makers are rational economic actors in the classical sense. They're a bunch of uber-rich despots more interested in control than marginal increases in wealth.

Note, however, that though this kind of measure may well bring the price of oil down

This is likely their intention. By helping to bring oil prices back in line they will keep others from investing in non-Saudi petroleum and energy sources, keeping the Saudis in the catbird seat.

Posted by right | June 15, 2008 10:52 AM

Not so. Talking about it (and wanting the world to believe it) doesn't mean they can actually do it

OPEC doesn't have true believers like the Democrats do. Thereby, unlike the Democrats, they're limited to lying like that, exactly once. Somehow, pulling that rabbit at any time, doesn't strike me as a long-term play.
No, I'm inclined to think they're telling the truth. Their monopoly is being threatened because they see there's a increasing number of Americans who consider Domestic Drilling a good idea. They need to make that economically unfeasible.

Posted by Bithead | June 15, 2008 10:55 AM

I think Matt either misspoke or misunderstood with the phrase "find ways to boost production."

The Saudis produce both below their capacity and the quota allowed by OPEC. They are the one party that can greatly increase production at any time (though, as some have mentioned, it may be at a higher price or of a heavier grade). So they don't need to "find ways to boost production" they just need to decide to do so.

As mentioned above, their goal is a sustained price of oil that is high but not too high. They obviously want the revenue from higher prices. But my understanding is that they also don't want the price to get too high because:

- Of political pressure and backlash
- They don't want a long downturn in the economy which could lower demand and price.
- They don't want a long downturn in the economy which would hurt the value of their investments in the world (which are considerable).
- They don't want to make oil so high that research into alternatives becomes a much more viable option (this is key and I don't think anyone has mentioned it yet.). If oil is $100 a barrel then maybe there is some pressure to find alternative. If it is $200 then investments in finding alternatives start to make a lot more sense and the golden goose (oil) may get killed that much sooner.

Posted by bjh | June 15, 2008 1:14 PM

According to an article in this month's Atlantic, an electric car doesn't make sense with oil at $3 or $4 a gallon. I think the Saudis want to keep oil at the $3-4 a gallon range long term precisely to stay away from the specter of a mass-produced electric car. Meanwhile, GM is betting that oil will go over $4 a gallon and stay there. In four years we will know whether GM's bet pays off.

Posted by stonetools | June 15, 2008 1:26 PM

"What's good for GM is good for America", some say.

Oil will definitely go over $4 a gallon and stay there for the foreseeable future. The Iran war will insure that - that's one reason the Iran war is a certainty.

The interesting thing will be Venezuela. I've heard that by some estimates they have five times the reserves of Saudi Arabia - but it's oil that isn't economical to get at current prices.

If the oil price goes up high enough, we may be seeing the next "oil war" in Venezuela, as the US tries to overthrow Chavez. I think the Iran war will put the kibosh on that for the next ten years, but after that, who knows?

Posted by Richard Steven Hack | June 15, 2008 8:30 PM

Before expounding on what Saudia Arabia or Venezuala may or may not do, it might behoove one to review a reality based oil blog, such as The Oil Drum.

Posted by Peter VE | June 15, 2008 9:14 PM