Dude, Where's My Oil?

Via Kevin Drum, Business Week says they've got the goods on Saudi oil reserves and there's not as much goo down there as the Saudis want us to believe:

The detailed document, obtained from a person with access to Saudi oil officials, suggests that Saudi Aramco will be limited to sustained production of just 12 million barrels a day in 2010, and will be able to maintain that volume only for short, temporary periods such as emergencies. Then it will scale back to a sustainable production level of about 10.4 million barrels a day, according to the data.

Now I imagine there's some uncertainty about this and other documents that back up the Saudis' official line that they can go up to 15 million barrels. But this reporting is hardly the first slice of evidence to suggest the Saudis are exaggerating and it indicates that we should really expect the price of oil to keep going up over the long haul.

Comments

Now we get to find out if the current price of oil is due to this being the state of knowledge among oil traders, or will this raise the price of oil further if it becomes accepted.

Posted by Njorl | July 16, 2008 9:30 AM

Of course they have exaggerated their oil reserves. I expect its true for the whole region. The biggest 'tell' has been the recent Mid East interest in foreign infrastructure investment and the development of playgrounds for the rich, like Dubai.

We are going to see more deals like Dubai Ports (scandal!) or Chrysler building investments. Why? Because they know their oil is finite and they have all our money to spend.

Posted by TDE | July 16, 2008 9:35 AM

The US needs to start making a shift from oil based energy in a massive way as soon as possible; for reasons of national security, economic growth & global warning. Big oil wants to keep us hooked as long as they can- regardless of the ultimate fate of the country. This cry to open up more areas for drilling is nothing more than an attempt to give big oil another windfall on top of their record profits & the millions of acres of cheaply leased land they already have & aren't drilling. & it's a way of delaying a true national effort to create the alternate green energy infrastructure this country needs to be working on now for the good of the average American.

Posted by Eric | July 16, 2008 9:38 AM

But according to Mr. Robertson, Craig Venter is going to solve the problem of depleted oil supplies by using algee/microbes to manufacture oil from atmospheric CO(2). If so, who cares about off shore drilling or Saudi oil reserves?

Posted by SLC | July 16, 2008 9:43 AM

Look, if we could just drill in more of Alaska's parks, this would all be instantly cleared up, and it would put the damn hippies in their place.

Posted by El Cid | July 16, 2008 9:44 AM

Is it just a matter of time before people start saying that the U.S. has an even larger share of the world's oil reserves than previously estimated?

Posted by mark | July 16, 2008 9:50 AM

According to Nancy Pelosi the solution is to draw down the Strategic Petroleum Reserve so as to drive down gas prices.

Proof once again that when the chips are down global warming, the environment, etc., ALWAYS take a back seat to political pandering. My prediction: the "democratic" Congress will cave in to BushCo/Cheneyburton on offshore and ANWR drilling.

Posted by kafka | July 16, 2008 9:55 AM

Why would they over-estimate their reserves? If they want more $ per barrel, they'd underestimate the reserves to drive up prices.

Anyway, the current price of oil has less to do with supply/demand then it does with Bernanke's monetary policy and Bush's warmongering.

If you think it's a supply issue like the 70s or 80s, one question, where are the lines?

Posted by hankest | July 16, 2008 10:05 AM

But Megan said just the other day we're in a commodities bubble. You should bet her $20 or a bottle of Blue Goose that it won't dip below $100 again.

Posted by lampwick | July 16, 2008 10:06 AM

kafka: the way that American politics works -- in particular, the two-year cycle of the House -- it's not that cynical to believe that either party would happily support drilling their grandmothers if it knocked ten cents off a gallon. That's what addiction does.

Posted by pseudonymous in nc | July 16, 2008 10:07 AM

"But Megan said just the other day we're in a commodities bubble. You should bet her $20 or a bottle of Blue Goose that it won't dip below $100 again."
Posted by lampwick

The thing is, it is almost certainly both a bubbble and a supply crunch. If oil dropped to $90 a barrel tomorrow, that would look like a bubble bursting, but would also represent a huge price increase over historic adjusted prices, even adjusting for the deflated doller.

Posted by Njorl | July 16, 2008 10:19 AM

No shit, Eric!

Posted by SqueakyRat | July 16, 2008 10:27 AM

"Why would they over-estimate their reserves? If they want more $ per barrel, they'd underestimate the reserves to drive up prices."

Their geopolitical status is dependent on their capacity to deliver large amounts of oil for years to come. If people find out that they don't have much left, their oil will gain economic value, but they will lose geopolitical leverage.

Posted by Njorl | July 16, 2008 10:28 AM

If oil dropped to $90 a barrel tomorrow, that would look like a bubble bursting...

The problem here is that a large worldwide recession could send oil prices down considerably by reducing demand sharply. The price bubble would burst, but the underlying fact that there's just not enough of the black stuff around to sustain our current economic system in the style we'd like would remain.

Why would they over-estimate their reserves? If they want more $ per barrel, they'd underestimate the reserves to drive up prices.

Two reasons. OPEC production quotas are set according to reserve estimates. Increases in reserves allows for increases in production under OPEC rules. Look at OPEC reserve estimate growth in the mid-eighties. Most of their estimates grew magically overnight by 50% or more. Typically, reserve estimate growth is a slow steady change as geological surveys slowly and continuously add new finds to the total over time, so to say that these mid eighties additions to stated reserves are suspicious is understating the case.

Also, Saudi Arabia learned from the 70's that western economies can make significant downward adjustments in their consumption if they become convinced that shortages will become a long term phenomenon. It is worth a lot of money to them to keep everyone convinced that what we're witnessing here is a temporary phenomenon caused by speculation.

Posted by DMonteith | July 16, 2008 10:47 AM

There was a book about this called "twilight in the desert" if anyone is seriously interested. People have speculated about the decline of Saudi oil for some time now. I think a lot of interest in the subject is hampered by peak oil doom and gloom (I'm looking at you Kunstler).

Posted by freddiemac | July 16, 2008 1:57 PM

We've got decades before realistic alternatives to petroleum are available on the scale necessary. In the mean time, we'll get a lot more oil on the market cheaper and faster by focusing on rehabilitating Iraq's production infrastructure and opening new fields there as is currently being negotiated.

There is no supply problem, it's just a matter of investing in a way that's been avoided for years by the majors. Production costs in the Persian Gulf are a fraction of that for deep water, ANWAR, Russia, etc. so that's where the bubble will be burst.

Oil has always described a boom-and-bust cycle, and probably will continue to. When Clinton took office it was about $10/bbl, and global demand certainly hasn't increased 1500% since 1992.

Posted by robert powell | July 16, 2008 2:34 PM

Why would they over-estimate their reserves? If they want more $ per barrel, they'd underestimate the reserves to drive up prices.

A large part of this stems back to when there was still capacity to increase production within OPEC. OPEC production quotas were dependent on total oil reserves, so everyone in OPEC had a huge incentive to exaggerate their reserves so as to get themselves a larger quota allotment.

With that in place, I think the issue is now inertia and in part related to what Njorl said. It would cause a huge backlash in the Saudis were to admit their estimated reserves were hugely inflated.

Posted by McKingford | July 16, 2008 4:08 PM

There is no supply problem...

Well, since random dude on the intertubes says so, I'm now feeling very reassured!

Seriously, do you know anything about oil discovery rates, demand growth, declining net exports, the production plateau we've been on for nearly four years now in spite of astronomical economic incentives to increase production, or the proportion of global supplies that our supposedly avoidance-enhanced majors have access to due to rapid nationalization of oil resources? In short, do you know anything at all about the topic at hand? Did you see an industry flack on CNBC recently and feel the need to parrot his talking points to us?

Production costs have absolutely nothing to do with current prices. There's not a field on the planet that's producing oil that costs over $100/barrel to produce. All fields in production now were developed at least 5-10 years ago under price assumptions of $30/barrel or less. The fact that there's an $80-$100 spread between production costs and current prices is the very definition of a supply problem. You can check your Econ 101 text for further explanation.

Posted by DMonteith | July 16, 2008 8:51 PM

Does anyone know how much oil there is in the world?

Short answer: No, not even roughly

Posted by Mixner | July 16, 2008 9:01 PM

Gee, I bet the dummy they have covering the oil supply situation at People magazine doesn't know "even roughly" how much oil there is either. But for those with a rudimentary understanding of calculus there's this technique called Hubbert Linearization that provides very good rough estimates for ultimately recoverable reserves and correlates quite closely with production data from older declining regions (i.e. Texas, Lower 48, North Sea, etc.).

Short answer: about 1 trillion barrels.

The actual number, of course, doesn't really matter. What matters is how fast we can get whatever's left out of the ground and at what price. And so far the past five years haven't been so reassuring on that front. Looking ahead to estimated volumes for projects scheduled for the next five years isn't looking much better.

But hey, Mixner can't be bothered to find out any more about the question, and his complacency, much like Colbert's gut, is something you can take to the bank! I'm suitably chastened.

Posted by DMonteith | July 16, 2008 10:45 PM

But for those with a rudimentary understanding of calculus there's this technique called Hubbert Linearization that provides very good rough estimates for ultimately recoverable reserves and correlates quite closely with production data from older declining regions (i.e. Texas, Lower 48, North Sea, etc.).

Yes, that must be why, as the Slate piece notes, expert opinion about the amount of oil is all over the map, and there isn't anything remotely resembling a consensus about how large the world's reserves of oil really are.

Short answer: about 1 trillion barrels.

Ha ha ha ha ha! Short answer: nobody knows, least of all "peak oil" nutjobs.

The actual number, of course, doesn't really matter. What matters is how fast we can get whatever's left out of the ground and at what price.

Since how much (and how "fast") we can get oil out of the ground and at what price depends crucially on how much oil there is in the ground to begin with this comment is stupid beyond belief.

Posted by Mixner | July 16, 2008 11:24 PM

If the earth's core had a creamy nougat center consisting of 200 trillion barrels of oil, HOW MUCH OIL IS IN THE GROUND TO BEGIN WITH would have absolutely nothing to do with how "fast" we could get it because it would be hundreds of miles under ground.

I'm not actually suggesting, by the way, that there's oil in the center of the earth you literalist buffoon.

Let me explain this real slow for you. Imagine a huge, porous, contiguous oil field, like Gawar. To get vast quantities of oil requires only a few holes in the ground because the reservoir is like a single underground ocean of oil. Now imagine an equivalent amount of oil, but distributed in thousands of smaller isolated deposits. Each deposit must be drilled separately and each deposit reaches peak production and decline much faster than the giant field.

Now, because of the work and lead times involved in exploiting the latter fields, the oil will last longer than the giant field's supply even though the overall amount of oil is the same, because the rate of extraction is lower. I know this little gedankenexperiment is taxing for you, but I hope you're with me so far.

The problem is that we've been heavily reliant on giant fields in the past and our future production is going to come from increasingly smaller deposits. This means that our current rate of consumption is going to be more and more difficult to sustain no matter how much oil is in the ground to begin with.

Let me dumb it down for you a bit more. If you eat a bag of chips, the first half of the bag is a smorgasbord of big, unbroken chips, each time you dip your hand in--Bonanza! The second half of the bag is broken pieces, smaller bits, and finally crumbs. Many more reach ins with diminishing returns. One can infer that when you start getting smaller chips with each attempt that the rest of the bag is all downhill. What we're arguing about here is whether this bag originally got the crap beaten out of it in shipping or if it was treated with kid gloves and unusually full of big unbroken chips. That's obviously not a trivial question, but it doesn't change the fact that it's all downhill from here.

Obviously, if we find another Gawar or three then you'll have been proven totally right, but it's not as if the oil geology of the planet is a complete mystery anymore, so I wouldn't bet on it. We're on the far end of the bell shaped curve of oil discovery, and your ignorance doesn't change that fact.

...nobody knows, least of all "peak oil" nutjobs...

An absolute claim of uncertainty, followed immediately by an absolute claim of certainty concerning the same subject certainly cleared that up! Thanks! And bonus points for not even mentioning HL in your response. Its good to know that you know that what you don't know is in a known category of unknown. Really, it is!

Posted by DMonteith | July 17, 2008 1:15 AM

Since how much (and how "fast") we can get oil out of the ground and at what price depends crucially on how much oil there is in the ground to begin with this comment is stupid beyond belief.

Mixner, given that this is the second time today you have said something profoundly idiotic, I think it's time we made it official: you are one of the single most stupid people on the whole internet.

You predictably traipse into adult conversations and make pronouncements with all the certainty in the world, but with the conceptual grasp of a child. You really have no clue that virtually everyone around you simply rolls their eyes at just how fucking dumb your contributions are, and because you have all the grace of a toddler, you needlessly get in the way.

We get it: you don't want to change a thing about your lifestyle, and want to keep driving your Airstream to the corner store. And you seem to think that because actual facts will get in the way of that wish, much like a child, if you simply wish it, the facts will go your way.

You obviously have no clue about Peak Oil - either what it means, or how it is calculated. DMonteith quite neatly explains why extraction rates are not necessarily dependent on what's left in the ground. The best evidence that even the most sanguine believe in peak oil is that the oil companies haven't increased refinery capacity in decades - not because of environmental regulations, but because they recognize it isn't needed.

Now go back to wishing facts fit your pipedream and playing with Legos, you fucking child...in traffic.

Posted by McKingford | July 17, 2008 3:24 AM

I'm obviously not an expert in petroleum engineering, and appreciate DMonteith's informative post, if not it's gratuitous nastiness.

I do try to pay attention, though, and I know that for very many years the experts have been predicting that we have about thirty years of oil left. So far, they're still wrong. Every boom from tulips to internet stocks to housing is always pumped by experts who insist that this time history doesn't mean anything--we are in a New World because of this or that innovation or condition. But still, booms continue to end up in busts, and the oil market has been characterized by this cycle a lot more than most others.

Production costs don't mean much when oil is over $100/bbl, but if history is of any use here, and I think it is, every boom has its bust. I don't think we'll see the $10 oil we had when Clinton took office, but the ease and cheapness of production in the Persian Gulf is great insurance Russia and others are keen to have.

I believe we haven't seen sufficient investment in refining because the big companies have been making money hand over fist, and saw no reason to get involved in risky and expensive litigation, huge infrastructure capital costs, etc. when they could just take the money and run.

Posted by robert powell | July 18, 2008 1:04 PM

I'm obviously not an expert in petroleum engineering, and appreciate DMonteith's informative post, if not it's gratuitous nastiness.

I do try to pay attention, though, and I know that for very many years the experts have been predicting that we have about thirty years of oil left. So far, they're still wrong. Every boom from tulips to internet stocks to housing is always pumped by experts who insist that this time history doesn't mean anything--we are in a New World because of this or that innovation or condition. But still, booms continue to end up in busts, and the oil market has been characterized by this cycle a lot more than most others.

Production costs don't mean much when oil is over $100/bbl, but if history is of any use here, and I think it is, every boom has its bust. I don't think we'll see the $10 oil we had when Clinton took office, but the ease and cheapness of production in the Persian Gulf is great insurance Russia and others are keen to have.

I believe we haven't seen sufficient investment in refining because the big companies have been making money hand over fist, and saw no reason to get involved in risky and expensive litigation, huge infrastructure capital costs, etc. when they could just take the money and run.

Posted by robert powell | July 18, 2008 1:07 PM

Mr. Powell,

Like Will Ferrell I sometimes feel like I'm taking crazy pills. We've just been through decades of debate over global warming and finally, finally, come to the point that those who deny it's reality are regarded as loons, but the concept of peak oil, which is considerably more intuitive, is resisted with just as much fervor. It's really not that hard. There's a finite supply and eventually production will level off and start declining.

Even people who accept this will claim that what we're experiencing now is not the peak, which lies far in the future, but just a temporary pause before production begins increasing again. Invariably I find that those who do so show no understanding of oil production fundamentals and instead wave their hands in the direction of the 1970's and fail to appreciate the differences between then and now.

The little boy who cried wolf problem is a real one, but that doesn't mean that wolves don't exist and there is no reason to think that the peak won't look exactly like what we're seeing now. Those who could convince me that oil is not peaking would be pointing to new discoveries of oil that are very large compared to current consumption. They would also reveal an understanding of typical patterns of reserve growth due to more complete exploration of old discoveries and how OPEC reserve "estimates" differ wildly from this pattern. Furthermore, this convincing cornucopian will understand that from 1972 to 1982 increasing the number of wells drilled in Texas by fifteen percent accompanied a thirty percent decrease in production and will be able to explain how the current global mad rush to drill more and more will have different results. More drilling is not a solution, but an indicator that we're reaching the crumby side of the bag of chips.

As for a lowering of oil prices, a large world wide recession would obviously decrease demand to such an extent that the oil "bubble" would burst, but that's a cure that's as bad as the disease and the lower price would not signal a solution to the supply problem but rather a change on the demand side. Moreover, the current rapid increase in price, rather than signaling a bubble, is more likely an indicator of the relative inelasticity of oil consumption. The head of the department of energy (not exactly a "peak oil nutjob") recently said that under current market conditions oil prices must rise 20% or more to compensate for a demand increase of just one percent in order to balance the market.

Also, unlike tulips, we can't just grow more oil. Oil is not a widget and the abstractions (many of them useful--I'm not a hater) so beloved by economists often ignore this fact.

As for the Persian Gulf bonanza, I recommend that you look up "oil megaprojects" on Wikipedia. All significant planned near future production is accounted for there and the 3-5 million barrels/day annual new production forecast for the next 4-5 years will only cover declines in existing fields with a bit to spare, so overall production increases are likely to small at best. I've also already been round with Mixner concerning recent declines in net oil exports that are independent of production levels (but have a direct impact on price and supply available for import) and will fill you in more on that if you're curious.

And finally, even if peak oil is not here anything we do now to lessen its impact when it does arrive will be cheaper and easier to do than when confronted with sustained year on year declines in oil production. In such a scenario, energy priorities will emphasize putting food on the table, not developing alternatives and building the infrastructure they will require. And any changes undertaken now will also help mitigate climate change, which needs to be addressed regardless of how much oil is left.

In short, your objections and observations do not address these issues and I have no reason to think that you have considered them in any depth. I am therefore unconvinced by your arguments. I should, however reserve my nastiness for the likes of Mixner because your ignorance, at least, appears not to be accompanied by an absolute lack of humility.

Posted by DMonteith | July 18, 2008 5:30 PM