Time to Push the Saudis on Oil Prices
With oil going through the roof, Youssef Ibrahim says the Saudis must be pressured to be responsible world players and not just billion-dollar hogs.
Americans this summer will shell out $4 a gallon at the pump, with those premiums spreading to everything that moves on roads, ships, air, or rails, or is made of hydrocarbons.
That is an awesome cost when affixed to melting confidence in Wall Street, while Washington extends unlimited credit to bad management and leaves U.S. taxpayers holding the bag for the mess these folks created.
To wrap this into a perfect storm, the U.S. dollar, the mother of all reserve currencies, is falling like a rock. Chinese, Japanese, Korean, and Arab big pockets are already abandoning the greenback as a savings vehicle. When more of them do, catastrophe shall truly hit.
We cannot do much about many of these problems, but oil stands out as the one boil in this fever that can be lanced. Indeed this perfect storm can be eased considerably with one instant rescue: more oil right now.
Oil prices are insane and not possible to justify by demand or supply. They zoomed from $10 a barrel in 2001 to $50 a barrel in 2007 and over $110 a barrel in early 2008! By any historic measure, this is breathtakingly unjustified, especially as there is no shortage of the stuff.
The easiest measure of world oil is “proven reserves,” which in industry jargon means oil we know to be immediately available in the ground. The aggregate of these proven reserves stands at 1.2 trillion barrels, according to oil journals data and company statistics. Sixty percent of that lies in the Middle East. A far more astonishing number is that two protectorates of the U.S. — Saudi Arabia and Iraq — own 35% of it.
According to their own figures, Saudis sit atop 260 billion barrels of proven oil. Yet they are only pumping under 9 million barrels a day of that now. Iraq claims to have similar reserves, but given its wars, strife, and absence of exploration, it cannot be relied upon now. This leaves our Saudi allies and two other mini-states of the Gulf who are also U.S. clients — the UAE and Kuwait — with readily available oil to pump.
Indeed, President Bush dispatched Vice President Dick Cheney on a trip to basically ask where is the stuff when we need it? The problem is that Cheney is disposed to plead where he should demand and explain.
The Saudi economy, as well as those of the UAE and Kuwait, depends on a single commodity that in turn relies on U.S. and world economies. The hubris experienced from $110 a barrel oil can evaporate just as quickly as the Bear Sterns share value, which dropped from $170 to $2 a share on Saturday when there was a run on the bank. Inversely, expensive oil has in the past been abandoned by depressed world economies — an occurrence we saw in the 70s when prices collapsed to as low as $8 a barrel.
Here comes the crunch of what the vice president needs to explain to the king. Saudis have for years bragged of their so-called “incremental” capacity, which in oil parlance is tantamount to bragging about size. Saudi oil ministers do not tire of reminding every one else in OPEC that their “sustainable” production is bigger, standing at 11 million barrels a day. So the question is: where is the difference between the nine they are pumping and the 11 they have?
Or put by Cheney to King Abdullah: where is your quid for our quo, your highness?
Mr. Cheney is uniquely positioned to remind King Abdullah that he was defense secretary when George Bush Sr. mobilized 400,000 U.S. troops to save the Saudis’ hide from Saddam Hussein’s claws, when having taken Kuwait in 1990 he was getting ready to swallow Saudi Arabia.
The Saudis have to come clean. Do they prefer hogging billions of dollars without regard to the consequences or do they want to play a responsible role on the world stage? They cannot have it both ways. The same applies to Kuwait, whom the U.S. rescued in 1991, and the UAE, which lives under U.S. defense wings. We need the extra oil — now.
Put ever more simply: we can cut that oil price in half, literally, with a mere statement of intention by these allies that more oil shall be disgorged onto world markets this year. When the oil moves onto tankers, we will be looking at $40 a barrel, or substantially less.
This, unlike wobbly Wall Street, is a sure bet.
Youssef M. Ibrahim, a former Middle East correspondent for the New York Times and Energy Editor of the Wall Street Journal, is a freelance writer and Mideast political risk consultant based in New York.
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12 Comments
1. Craig Hitechew:We are and will remain an oil based economy for decades to come. America has plenty of untapped oil reserves, ANWAR, Gulf Coast, East coast off-shore, and Colorado tar sands, just to name a few sources. We are choosing to be held hostage by the Arabs, and have no one to blame but ourselves for not being oil self-sufficient.
Mar 19, 2008 - 8:09 am 2. Larry:OTOH, the Kingdom may be more tapped out than they’re letting on. I’m somewhat agnostic on the peak oil thing globally, but if KSA were near its peak, it would certainly explain a few things regarding why their behavior is different from how it’s been in the past.
Mar 19, 2008 - 11:24 am 3. Bugler:What’s to prevent them from whipsawing the price at the optimal moment to undercut U.S. investment in additional capacity and alternative fuels?
Mar 19, 2008 - 12:33 pm 4. Larry:Bugler – exactly my point. While alternatives in the US are captive to global warming politics, the Chinese are busy building coal liquefaction plants – exactly what the Saudis don’t want it they have plenty in the ground. It stands to reason that maybe they don’t have as much in the ground as we all think they do, or at least have reached a plateau in production capacity. Otherwise, this is both a deviation from past practice, and not very smart in the long run.
Mar 19, 2008 - 1:40 pm 5. bb:Even though the Saudis may have all those “reserves” in the ground, that doesn’t mean they can just start producing more tomorrow. It doesn’t work that way. The oil is trapped in rock. Only so much can be pumped or flowed at any given time. And time it takes…to produce reserves. Further, the term Reserves in the oil business doesn’t mean that a producer is “holding” back for later. Sure, they might could increase daily output by some incremental measure but only by a small amount. It’s not like a dam whereby opening the floodgates increases flow. Most news writers simply don’t understand the basic concept of how oil is produced.
Mar 19, 2008 - 1:55 pm 6. Bugler:Larry, you may well be right about Saudi reserves. I certainly don’t trust them on that–or on anything else.
Mar 19, 2008 - 2:18 pm 7. Larry:BB is correct. When the wells were newer, they had more ability to crank up flow and control the market. They probably don’t have that ability now, and he’s also correct that peak capacity doesn’t have a direct correlation with how much is in the ground. Those are two separate issues, though they’re both related to the aging of the fields.
The important thing that we do know is that they’ve been poking holes for the past several decades looking for new significant reserves, and haven’t found jack.
Mar 19, 2008 - 2:38 pm 8. colleen:This is a highly misinformed article.
Mar 19, 2008 - 5:50 pm 9. Mitch:Hear, hear Colleen. Why don’t these people just glance at E.I.A. and I.E.A. graphs of production since 2005 before they make such daft comments in their articles? Even G.W. publicly said about S.A. “It’s difficult to ask someone for something they haven’t got”. Surely, at these prices, everyone is selling as much as possible? I’ve never heard of a business cutting back on production because their profits go way up – usually the other way round!
Mar 20, 2008 - 2:03 am 10. Mitch:“Opec member the United Arab Emirates is pumping at full tilt at around 2.5 million barrels per day (bpd) of crude and is powerless to bring down record oil prices, the head of the state oil company said.
‘Nothing can be done,’ Adnoc chief executive Yousef Omair bin Yousef told reporters on the sidelines of an energy event.
‘This is the market situation. We are doing our best to induce stability.’”
What’s this all about then?
Mar 20, 2008 - 2:09 am 11. Tom:We as Americans have the power to control oil prices simply by giving up a tiny bit of our precious freedom. We can do this by not running to Walmart every time we feeled a little bit bored or car pooling once in a while. We could even resort to walking [yes, I said walking] places once in a while instead of driving and improve our health at the same time. Unfortunately it will never happen in our spoiled little corner of the world.
Mar 20, 2008 - 5:02 am 12. Larry:Actually Tom, no we don’t. Making marginal reductions in consumption while demand continues to grow strongly in Asia will have negligible effect. The only thing that can help in the short to medium run is to do what the Chinese are doing and produce motor fuels from non-petroleum feedstocks. Unfortunately, with all of the climate mania out there, no investor in their right mind would ever put money into a plant that requires a 30-year payback, and might be forced to shut down in 10, and quite likely would never even get permitted.
We’re being royally screwed not so much by Saudi royalty, but by all of the NIMBYs and BANANAs out there who resist building anything, regardless of the consequences of inaction. The status quo wins by default.
Mar 20, 2008 - 12:00 pm