[Cog]

About time.

[eXpat]

$this->bbcode_second_pass_quote('pstarr', 'O')r it is because the Great and Mighty Kingdom of Saudi Arabia (Praise Allah!) is running out of petroleum.

[Outcast_Searcher]

This is getting interesting.

In practical financial terms, it seems to me the Saudis would want as high an oil price as they can get, as long as it doesn't cause:

1). Significant demand destruction.
2). A global economic crash (caused by plummeting oil demand and then prices).
3). The west to decide to just roll in and take the oil by force.

If the problem is really oversupply, then prices shouldn't get to a SUSTAINED level to cause major demand destruction. (I don't think we know what that price is -- pundits have it anywhere from $3.50 to well above $5.00 for a U.S. gallon of gas, yet they routinely deal with $10.00 and up for a gallon of gas in Europe).

Or if prices DID get to such a sustained level, the Saudis should increase supply accordingly - to avert a later price crash.

I think it will take having sustained very high crude prices causing the west to plunge into recession with no meaningful supply increase from the Saudis before we can make a strong bet on them running out of supply.

If that happens, then what? More volatility but lower average global economic output and then lower aggregate oil demand?
Or does Chindia plug along (as a trend) regardless, so despite high volatility, the average price of crude OVER TIME is much higher?

I suspect you need plenty of guts, cash set aside, and a longer timeframe than most people exhibit to play this game successfully. No wonder the rich find it easiest to win at this game, with cash flow to burn.

[eXpat]

$this->bbcode_second_pass_quote('Outcast_Searcher', 'T')his is getting interesting.

In practical financial terms, it seems to me the Saudis would want as high an oil price as they can get, as long as it doesn't cause:

1). Significant demand destruction.
2). A global economic crash (caused by plummeting oil demand and then prices).
3). The west to decide to just roll in and take the oil by force.

[Cloud9]

This does not have to be an either or premise. Both contentions could be right. On the one side you are seeing a perceptible decline in production and on the other the Saudi Royals want to hang on their gig a little while longer. It is probably a whole lot more fun being a real prince rather than being a has been prince living in exile.

[Plantagenet]

More info on the Saudi production cut: the Libyans produced sweet crude for the EU---the Saudis export more sulfur rich crude, and the refineries in the EU can't handle it.

So there is demand for crude after all----the EU desperately wants their Libyan crude back.

EU refineries in Italy etc. can only handle sweet Libyan crude

[rockdoc123]

OK some clarification is necessary I think.
$this->bbcode_second_pass_quote('', 'T')wo Saudi officials told Reuters on Tuesday that the extra rig activity would maintain rather than increase the kingdom's oil capacity. It completed a multi-year expansion in 2009 meant to boost spare capacity by more than 3 million barrels per day.
"It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said

[eXpat]

$this->bbcode_second_pass_quote('rockdoc123', '
')And as to the Italians not being able to handle the sour crude that's a bit over the top. The article referenced is incorrect in stating that Saudi produces Arab heavy sour.....in fact only 20% of their total production is heavy and about half has sulphur over 1%. When blended with Bonny Light the oil is very comparable to Libyan crude. If the Italians are missing Libyan crude I suspect it has more to do with missing tarrifs on the import line and the fact they are a producer in Libya (ENI makes money on both ends).

[Serial_Worrier]

It's very simple, Ghawar is running out of oil. The world is running out. Doom!

[eXpat]

Oil Situation May Be Worse Than You Think
$this->bbcode_second_pass_quote('', 'N')EW YORK (TheStreet) -- Oil is the biggest single cost input into any business, good, commodity or product. We know it, but it bears repeating.
So, if you're looking for a reason for commodity prices to rise, you probably don't have to look any further than the single biggest input.
Right now, oil prices are scratching around the $110 a barrel range, a price unthinkably high even three and a half years ago. Laughably high. Ridiculous. Who could afford gasoline costing more than $4 a gallon?
The Financial Times recently published an astonishing story that just isn't getting enough attention. I like to think of the FT as the newspaper The Wall Street Journal would like to be if it weren't trying so hard to impress everyone with fancy Weekend sections and glossy magazine forays.
If you want to look distinguished, you might read the WSJ in public. But if you want to be informed, you'll also read the FT in private.
The story? The Saudis, as you may have heard, are increasing their social spending programs in an obvious attempt to deflate any "rebellious" ideas from their population.
They've recently announced a $125 billion spending program, which amounts to something close to 30% of GDP.
What it means is that the Saudi family will require a slightly ... higher sustained price of oil in order to break even. From the FT story:
"The break-even oil price the Gulf kingdom requires to balance its budget will jump from $68 last year to $88 this and then $110 in 2015, according to new estimates by the Institute of International Finance, a leading industry group."
Of course, even with the days of peak oil production likely in the rearview mirror, oil doesn't just double in price in a few years ... unless of course the currency you're using to price oil is also being devalued at a record pace.
So, you've got to start thinking that maybe Federal Reserve Chairman Ben Bernanke is starting to realize some of the disastrous effects of his devaluation policy
Oil contracts are settled in dollars, and the Saudis, as well as every other oil producer, don't have too much interest in playing along with the Fed's schemes.
The markets will continue to push oil's price higher and higher, as a simple function of dollar weakness. And the Saudis will continue to readjust their "break-even" number to account for dollar weakness. If they're not getting the price they want, they'll simply pinch the hose.

[Sys1]

So... we should do war with Saudis since they prevent western world to access cheap energy?
They can't stop having good ideas

[Pretorian]

$this->bbcode_second_pass_quote('Sys1', 'S')o... we should do war with Saudis since they prevent western world to access cheap energy?
They can't stop having good ideas

[Sys1]

$this->bbcode_second_pass_quote('', 'n')o need for the war. Just stop feeding 'em

[Pretorian]

$this->bbcode_second_pass_quote('Sys1', '')$this->bbcode_second_pass_quote('', 'n')o need for the war. Just stop feeding 'em

[Daniel_Plainview]

$this->bbcode_second_pass_quote('eXpat', '')$this->bbcode_second_pass_quote('', '[')size=150]"The break-even oil price the Gulf kingdom requires to balance its budget will jump from $68 last year to $88 this and then $110 in 2015[/size]

[rangerone314]

How about creating a FOODPEC?

Food producing and exporting countries. Jack up the price and make more money.

Good for the goose, good for the gander.

[Revi]

The Saudis are stuck between their people and the rest of the world which wants what they have got. They have to play a difficult game with keeping the people happy while sending enough crude out to keep their coffers full. I wonder what happens when they start to run out?

[Pablo2079]

If an exporting country wanted to make it seem like they had extra production capacity, wouldn't it make sense to pull back.... build up their stored oil and then release it in a surge later on? This would provide the illusion that they could provide a higher sustained production rate than they really could.

So the plan would look like:
1) "Increase" production (release some of the stored oil)
2) Claim the market is oversupplied (regardless of price) and pull back exports.
3) Build up storage again (as prices increase)
4) "Increase" production again (step 1 again)

This could go on as you go proceed up the price staircase. No real panic as many believe there is still plenty of excess production waiting in the wings...

Does anyone know how much storage they have? Would the outside world know what that status of that storage is at any given time?

[Pablo2079]

I'll have to look it up, but I thought Saudi Arabia was building a huge number of tank farms a few years ago.

Update: Just did a quick search and found this (as of 1992):

$this->bbcode_second_pass_quote('', 'T')he kingdom had three main export terminals for crude oil with a number of smaller facilities closer to production units. The export terminals at Ras Tanura on the Persian Gulf were the largest in the world. Designed to export crude oil and LPG, the facilities included two piers and one sea island with a total of eighteen berths, which can accommodate ships of up to 550,000 deadweight tons (dwt). The facilities also included a tank farm with total storage capacity of 33 million barrels. Also on the Persian Gulf, thirty-three kilometers north of Ras Tanura, is the port of Al Juaymah. Tankers of up to 700,000 dwt could be accommodated at its six single-point moorings. Up to 4 million bpd of crude oil could be exported from Al Juaymah. Two additional berths were designed to export 200,000 cubic meters of LPG. Tank farm storage facilities had a capacity of 17.5 million barrels. The third Persian Gulf export terminal at Az Zuluf, located sixty-four kilometers offshore, served the Az Zuluf and Al Marjan fields with one single-point mooring.

[Nefarious]

I don't know about that. My mother used to work for Morton Salt. The Government came in and took control of one of their salt mines on weeks island and filled it with approx 73 million barrels. Made the salt company dig out a whole new mine on the side of the old one. Now I believe they have decommissioned the SPR at weeks island la. While it's not tanks or pools it is a storage facility that never had oil to begin with. There might be other locations similar to this one.