Wednesday, June 29, 2005

Relying on Arabia
I just read a review in the Wall Street Journal of a new book on the reliability of Saudi oil reserves. The author, Matthew Simmons, is one of the leading skeptics about the ability of the Kingdom to increase--or even maintain--its oil production in the future. Despite new pipelines bringing new oil onto the market from the Caspian Sea region and West Africa, Saudi oil remains essential to the maintenance of an oil-based global economy, even if we intend to replace oil with some other energy source in the next twenty years. Mr. Simmons doubts the Saudis can continue to play this role, even ignoring the political frictions within Saudi society. How worried should we be?

Mr. Simmons may be right to question the condition of the half dozen key producing fields in Saudi Arabia, including Ghawar, the largest oil field in the world. However, recent Saudi presentations on their production plans look solid, at least to this (non-geologist) engineer's eyes. For me, though, the key uncertainties reside in the historical data on OPEC's reserves.

If you look at reported oil reserves in the 1980s, it's clear that something odd was going on within OPEC, particularly among its Persian Gulf members. In 1985 Kuwait increased its reported reserves by about 1/3. In 1988 Iran and Iraq doubled their reserves, while the UAE tripled theirs. And in 1990, Saudi Arabia increased its reported oil reserves from 172 billion barrels to 258 billion, about where they stand today. Now, it's not unusual for companies or countries to restate their reserves. But you don't need a suspicious mind to wonder how the state oil companies of the Middle East could have suddenly found a quantity of oil equal to the total that Saudi Arabia claims to have today, all in the span of a couple of years. And if memory serves, OPEC was embroiled in serious internal disputes over quotas in the same period, with reserves playing a role in how much each member got to produce, in a market that was suddenly flooded with oil.

For the sake of argument, then, let's postulate that this upward revision was spurious, and that Saudi Arabia hasn't found a drop of new oil since 1980--an extremely conservative assumption. Since then, Saudi production has averaged a bit over 7 million barrels per day. That means they have produced a cumulative 66 billion barrels of oil, leaving them with about 100 billion barrels of their 1980 reserves. By comparison, the US produced roughly the same quantity of oil as Saudi Arabia over this period, from reported reserves that never exceeded 30 billion barrels and that have slipped to 22 billion barrels today. In fact, only if Saudi Arabia has mis-stated its reserves going all the way back to its early 1970s, pre-nationalization figure of 137 billion barrels would we have real cause for concern about the level of aggregate reserves.

Despite the compelling arguments of Mr. Simmons and others about the reliability of Saudi reserve data, I continue to believe that we should be more focused on the factors of geopolitics and industry economics that might cause future oil production to fall short of demand.

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