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Spare capacity and Saudi Arabia – has it already peaked?

6 May

Saudi Arabia´s crude oil production is at a 30-year high.
Aramco wants to restart production at its oldest field.
Saudi Arabia struggles to increase its export capacity.

It ends where it began: in Dammam. SOCAL (Standard Oil of California) drilled well number seven in Dammam in 1938. They hit oil and propelled Saudi Arabia into the oil game. Some 30 years ago, the Saudis mothballed Dammam. But Dammam is back on the agenda – Aramco wants to bring the kingdom´s oldest oilfield back into production.

As I wrote in “Don´t toil – trade oil”, the Saudis rely upon old oilfields. Decline has already started to lower the kingdom´s production capacity. Aramco, the state-owned oil company, used every available oilfield technology in order to fight decline in its old fields. Furthermore, they reopened production at problematic fields they had once mothballed.
As Libya descended into civil war, the Saudis increased their crude oil production. Global demand continued to grow. While Libya has almost restored its prewar production capacity, the Saudis didn’t scale back production. They currently produce at a 30-year high of 10.0 mb/d. Only the Saudis have spare capacity left, but it may be less than the 12.5 mb/d they advertise publicly.

We get the big picture by collecting the news we get from the kingdom: Continue reading →

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Oil bulls watch out – Obama will release oil from the strategic reserve

20 Apr

The oil market is like a poker table. Hedge funds, investment banks, Big Oil, dictators, sheikhs, speculators and western politicians – everyone tries to get the other players’ money.  

Ali al-Naimi, Saudi oil minister, told journalists that current oil prices are too high. He took measures to bring the prices down. Saudi production is currently at 10 mb/d, the Saudis will ship 22 VLCC (Very Large Crude Carriers) to the US. The usual number of these shipments to the US is one ship every two months. So the FT described this as “a wall of oil” moving towards the US Gulf coast.
So we know what the Saudis are up to.
President Obama is under pressure from the Republicans as prices for gas are surging in the US. The Republicans blame him for that.
Japan has shut down almost its entire nuclear capacity after the Fukushima incident and is currently burning oil and gas to generate enough electricity. Power producer Tepco recently raised its prices by 17 percent.
France and the UK are also suffering, the UK from its austerity and France from a lack of competitiveness and the Eurozone crisis.

Continue reading →

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The End of double-digit oil prices

27 Jan

Saudi Arabia dictates the new minimum oil price: $100 per barrel

January 2012

Saudi Arabia now needs a minimum oil price of $100 to cover its government spending. If the oil price falls below $100, the Saudis will lower their overall oil production in order to push up prices.

In my book “Don´t toil – trade oil”, I introduced the concept of a floor price for crude oil. A floor price is a minimum price for the commodity. I distinguished between a technical floor price and an economic floor price. The technical floor price is the cost of producing the oil, e.g. about $45 for a barrel of crude from deepwater production.
The economic floor price is the minimum oil price Saudi Arabia needs to cover its spending. If the oil price falls below this price, the Saudis will shut down some wells in order to push up the price of oil. As the second biggest oil producer (Russia is still number one) and the only oil producer with some spare capacity, the Saudis can lower their production by 1mb/d or even more if necessary.

Continue reading →

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It’s a book

12 Sep
How to make double digit profits with the new oil price formula

New book out

And it’s called “Don’t toil – trade Oil: How to make double digit profits with the new oil price formula”. Catchy, I know, but I want people to actually read it.

If you’re interested in the fundamental analysis of world oil reserves, Peak Oil theory and how to leverage this knowledge into a lot of money, you should probably read it, too.

Or just click on the link below and go buy it rightaway.

Read more>>
Buy now>>

How OPEC tries to control the market – and fails

22 May

The OPEC cartel is perceived as a powerful organization, which has the ability to dictate oil prices. History shows us a different picture. While OPEC pushed up or lowered oil prices in the past, today it can only push up prices higher while it lost its ability to lower world market prices.

Our modern world is full of myths, and some of them relate to OPEC, a cartel of crude oil exporting countries. There is a myth that OPEC is a powerful organization which determines the price that crude oil consumers have to pay. Implicated in this myth is just another myth, that OPEC can be seen as one unity, something unified by common goals. The myth is that OPEC is one player on the international scene when, in fact, OPEC is, was and most probably will be an agglomeration of rather different players with differing interests that is no longer able to control world crude prices, at least when it comes to increasing prices. To learn more about OPEC, which nowadays consists of the nations of Iraq, Iran, Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Libya, Algeria, Nigeria, Angola, Venezuela and Ecuador, we should have a closer look at its history beginning in 1960, the founding year of OPEC.

The history of OPEC
OPEC was founded in September 1960 as the major oil exporting countries tried to get a greater share of the price for oil for themselves instead of filling the pockets of big oil companies. Alfonso Perez, oil minister of Venezuela and Abdullah Tariki, oil minister of Saudi Arabia, therefore initiated the formation of a cartel of producers in order to achieve this goal. The first secret meeting between these two men happened in Cairo in 1959 at a conference of oil producers. They secretly contacted the Kuwaiti and Iranian representative at the conference. Together with Iraq, those four countries founded OPEC on 14 September 1960 in Bagdad.
More money for the oil producing countries was one goal of Perez and Tariki, as both men had studied the work of the Texas Railroad Commission, an organization watching and limiting crude oil production in Texas. The Texas Railroad Commission practically avoided that too much oil was produced in Texas. Key to the success of this effort were production quotas. This was exactly what Perez and Tariki wanted to achieve through the foundation of OPEC.
Venezuela soon put the quota subject on the table and pressed for agreement, without any success. Iran didn’t want to limit its production of oil; neither was Kuwait willing to restrict itself. Tariki, who was on the side of Venezuela, was in 1962 replaced by Sheikh Ahmed Zaki Yamani. Obviously, Tariki’s oil policy wasn’t the policy of the “Servant of the two holy places”, as the King of Saudi Arabia prefers to be addressed, so he was replaced and the new agenda was to vote against production quotas.
This brings us to another feature of OPEC. Decisions have to be unanimous. If one member doesn’t like a topic, it is off the agenda – just like production quotas in the 1960s.

Continue reading →

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Reserves and Peak Oil

8 Jan

While crude oil prices surged during the first decade of the new millennium, oil reserves increased only slightly, so we may be edging closer to the peak.

Critics of the Peak Oil concept are roughly divided into two camps. They either reject the whole theory and find a lot of reasons why oil will continue to flow, or they criticize the reserve assumptions Peak Oil scientists use. To criticize the underlying oil reserve estimates, you either tell people that we will find more oil – this is what USGS tells us: There are 0.9 trillion barrels of crude on earth we haven’t yet discovered – or that we will get more oil out of our existing fields or – best of all – just claim that both will happen.

This post deals with the assumption that there is a lot of oil and that surging prices will lead to more exploration and hence to more proven reserves, to more oil we can produce. Let’s test this with real-world figures.

Once again, I focus on the period from 2002 until 2007, a period of surging crude oil prices. In 2002, crude was traded for $26.16, while in 2007 the price was up to $72.20. According to the theory, which is nothing more than the classical boom-and-bust theory, higher prices should lead to more crude oil discoveries as more and more money is invested into exploration efforts, which will lead to new discoveries.

This view of the world clearly clashes with Peak Oil theory. As Deffeyes explained, oil is a finite resource and there are good reasons to believe that most of it is already found. Peak Oil claims that we are halfway through, but if there is more oil we can add to our reserves, and with more I mean an awful lot more oil, this will – according to the theory – postpone Peak Oil, the global production peak.

To put it into perspective, the oil price increased from 2002 until 2007 by an astonishing 176%, but what happened to global proven crude oil reserves? According to the boom-and-bust believers, reserves must have kept coming throughout this period. Reality doesn’t support this view, as the following figures show.

Proven oil reserves in 2002 amounted to 1,190.70 bn barrels. Five years later, in 2007, world oil reserves stood at 1,253.00 bn barrels. This is an increase in reserves of 5.23%. So while crude oil prices skyrocketed by 176%, reserves only increased by a meager 5.23%. Either no one wanted to find more oil, or there isn’t anything left to find.

The next table gives us a clearer picture of the regions and their respective reserves in bn barrels over this period.

2002

2007
Asia Pacific

40.6

40.2
Africa

101.7

125.3
Middle East

741.3

754.9
Europe & Eurasia

141.4

138.3
North America

65.5

70.8
South & C. America

100.1

123.5

Two regions (Europe and Asia Pacific) actually reduced their reserves, two regions (Middle East and North America) slightly increased reserves, and only two regions showed real growth rates, namely Africa and South & Central America.

Once again, it is revealing to dig deeper.

Continue reading →

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From Rockefeller to the spot market

12 Dec

A short review of the oil market history takes us from Rockefeller’s Standard Oil to the shift from posted prices towards the spot market, which is dominated by the forces of demand and supply.

The world of oil started back in 1859 in Pennsylvania as a free world where the forces of demand and supply ruled. This kind of market didn’t last for long. John D. Rockefeller entered the business of oil and changed the rules of the game. Rockefeller went to church once a week, and the rest of his time was devoted to the destruction of his competitors. He was extremely successful. He soon ruled the world of oil in America via his company Standard Oil.
Clearly, the government didn’t want a single company to control about 90 percent of any market, so a legal battle followed and ended with the breakup of Standard Oil. Standard Oil gave birth to new companies: Exxon, Mobil, Chevron, Amoco and Conoco.
Texaco emerged as another big player, one of the few that were not an offspring of Standard Oil. Meanwhile, a British company called Shell distributed oil for Rothschild, who ruled the other oil region of the world, Russia. Royal Dutch found oil in Sumatra in 1890 and formed together with Shell what is today known as Royal Dutch Shell.
British Petroleum, known as BP, started back in 1908 as Anglo-Persian as it had discovered oil in Iran.
Those companies entered the oil rich countries like predators. While there was some regulation and government control in the US, the Middle East proved to be a fertile hunting area for Big Oil. They developed the market and they divided the markets. BP ruled Iran, the Americans had Saudi Arabia.

Some of them even made a treaty to ensure that everything went smoothly. They met in the Scottish castle of Achnacarry in order to control the downstream market. The dominating companies became later known as the “Seven Sisters”; some call them Big Oil.
The rule of the Sisters wasn’t so bad; they really cared about keeping the market supplied. If one company faced a problem, another was ready to help out. They controlled production, distribution, production reserves, the prices and the downstream markets.
The governments of oil producing countries were more like children receiving some money for their piggy bank and less like political forces controlling the country. Big Oil told them how much oil was produced and how much money the government received as Big Oil controlled the price of crude oil.

This worked for some time, but states, especially in the Middle East, simply didn’t kick out their colonial rulers just to be ruled economically by an accountant of BP instead of a commander of the British armed forces.
Continue reading →

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Why you shouldn’t trust official oil reserve figures

15 Nov

The correct assessment of global oil reserves would allow us to judge whether we reached global Peak Oil. Unfortunately, while the definitions are clear, oil reserve figures remain ambiguous. There is good reason not to put too much trust into the official “proven reserves” figures.

Oil reserves are the cornerstone of Peak Oil theory. To determine whether global Peak Oil is nowadays a reality, we must focus on oil reserves. Are we halfway through our oil reserves and unable to expand production or is there still more to come?

Unfortunately, the more one researches oil reserves, the less clear the picture becomes. That’s why I’d like to start this chapter with two short stories.

I wrote my diploma about weapons of mass destruction in Arab countries. Iraq was one of the countries I had to focus on. This was back in 2001. As the US war against Iraq in March 2003 loomed, I knew exactly how many medium range SCUD missiles Iraq had. They had purchased 819 SCUDS from the former Soviet Union. UNSCOM, the organization formed by the United Nations to disarm Iraq, reported that two of those 819 missiles were still unaccounted for, so they were either stored at some hidden place inside Iraq or destroyed and the Iraqis were unable or unwilling to show any evidence as to what had happened with those missiles.

This seemed rather vague to me. It amounted to sentences like “they may still have a quantity of x or may still possess a quantity of y, but no one knows for sure”. I used to categorize my sources according to their reliability. This is one thing every intelligence agency does. German Federal Intelligence (known as BND or Bundesnachrichtendienst) for example categorizes its human sources (a pretty nice term for a spy) with grades from A to F. A source with a grade of F is maybe mentally ill, a heavy drug abuser and known to have told outright lies in the past. A source with a grade of A is simply the perfect informer. Of course, there are normally neither grade A sources (this is simply too good to be true) nor grade F sources (who needs unreliable story inventors?).

UNSCOM was a very good source; they didn’t know everything, but what was stated by UNSCOM was proven by facts. When it comes to the world of oil reserves, there is nothing similar to UNSCOM. It is even worse, you have to assume that there are some sources which would get a grade F, but the data they provide on their oil reserves is treated like the word of the mighty Lord, no one really challenges it. Matthew Simmons, the former investment banker who wrote “Twilight in the Desert” once described reserve estimation as “voodoo”.  Coincidentally I know one “voodoo master” personally, as I once had to write an article about him for the newspaper I worked for, and the voodoo guy seemed to me more trustworthy than the guys estimating today’s oil reserves. He truly believed what he told me.

Continue reading →

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