A $10,000 bet on peak oil

Over the past 50 years the desert kingdom has consistently played the role of global provider of crude of last resort, stepping in at key moments to provide extra crude whenever the world has needed it. When the Iranian revolution resulted in oil from Iran going offline, it was the Saudis who stepped in and made up the balance, a role they played again in the first Gulf War. As provider of the single largest chunk of oil to markets, Saudi Arabia has been to this point the world’s swing producer, a role only the Saudis can play and one they have responsibly taken on over the years. So why now, with oil at record levels, are they not playing that role? What’s going on?
The current reticence to step in and up production is even odder when you consider it was just a couple of years ago, when prices of crude first began to rise earlier this decade from the roughly US$20 a barrel crude had traded at through the late ’80s and ’90s, that the Saudis pledged to defend a price band of between US$22 and US$28 a barrel. Since then, of course, crude has since touched US$100. Sure, crude prices can be expected to come off in the wake of the recent market meltdown (and will likely fall further as global demand drops through whatever type of economic downturn is looming), but it is still the case that prices are now roughly 400% above the range they traded at for a generation. What happened to the defense of the trading band? Is there something else going on?

An alternative narrative to the current mainstream crude story — which is, basically, that it’s fine, the world has enough — has slowly emerged over the past couple of years. This alternative narrative challenges the mainstream assumption that Saudi Arabia contains an infinite amount of reserves and an innate ability to increase production as fast and as far as they would like, far above the current 10 million barrels a day. The primary source of this alternative narrative is Matthew Simmons, a Houston-based energy investment banker, who, earlier in this decade, began sifting through the one source of data other than official pronouncements from Saudi Aramco (the national Saudi oil company) that could give a clue as to the real state of Saudi oil resources — some 200 published papers submitted by Saudi engineers to the Society of Petroleum Engineers.

It is, of course, well known that Saudi Arabia stopped publishing detailed data about its operations back in 1982, choosing instead to “go dark” and hide its state secrets behind a veil of secrecy. As a result the world energy industry has motored along on assumptions formed back in the early days of the Saudi miracle (back when Western companies used to run Aramco), and those assumptions have changed little since then.

The problem, though, says Simmons, is that our current picture of global production capacity is seriously flawed. He came to that conclusion after his detailed study of the engineering papers and collected those observations in his authoritative, exhaustive, detailed work, Twilight in the Desert. The theme of the book is simple: Contrary to what we assume about Saudi Arabia, the technical writing on that country’s oil fields suggests the reality is far from what many think.

Canadian Business