Why Is Saudi Arabia

We still have three years and nine and a half months to learn who will win the bet between energy investment banker Matthew R. Simmons and New York Times columnist John Tierney over whether oil prices would be above or below $200 a barrel in 2010. Tierney bet “below” because he believes that over the long term, the prices of natural resources always tend to decline, and he cited a 1980-1990 precious metals bet that favored that outcome. Simmons has looked deeply into the extraction of oil from underneath the sands of Saudi Arabia, and has concluded that their oil production will most likely decrease or flatline in the coming years. Saudi Arabia claims 25% of the world’s proven oil reserves, by far the largest share claimed by any country. Those who have watched The End of Suburbia: Oil Depletion and the Collapse of the American Dream have heard Simmons say, “If it turns out that Saudi Arabia has peaked, then, categorically, the world has peaked.”

With oil prices having fallen into the $50 range and now trading in the $60 range, for the moment it looks like Tierney’s ahead in the bet. But the more important question for the worldwide economy is whether Saudi Arabia can increase its oil output in the years ahead or not. The Oil Drum has hosted a spirited debate on that question recently.

First, on March 2, Stuart Staniford noted that Saudi Arabian oil production has declined 8% during 2006, from about 9.3 million barrels a day in January ‘06 to about 8.45 million barrels a day in January ‘07. Simultaneously, the number of drilling rigs looking for oil in that country has surged – a parallel with the situation in the United States of 1970, then the world’s leading oil producer, when rising rig count failed to stanch the fall of oil production.

Staniford notes that either the Saudis are voluntarily withholding production or they are pumping as much as they can and falling victims to the same inevitable geological constraints that have caused oil prices to fall in many of the world’s once robust oil reservoirs. Staniford wonders why the Saudis would voluntarily withhold hundreds of thousands of barrels a day when prices are at levels that just a couple of years ago would have seemed incredibly high.

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