Saudi-Oil-Depletion Hysteria

Glenn Reynolds notes a new book by Matthew Simmons that argues that Saudi oil reserves are closer to being depleted than is commonly believed, and that we are all in trouble if this happens. I don’t buy it.

The world has huge non-Saudi oil reserves. What keeps most of them unexploited is the extremely low Saudi marginal cost of production: SA can at any time increase its production, and by so doing lower prices and make expensive investments in new extraction technologies worthless. Peter Huber made this argument well here.

So what happens if the estimates of Saudi oil reserves are indeed overstated and Simmons’s oil-shock scenario comes to pass? It seems likely that a lot of oil-extraction ventures that aren’t worth the risk now, with the Saudi marginal cost of production at just a few dollars a barrel, would become worthwhile. And once the investments in those projects are made there is little reason not to continue producing oil from them. That wouldn’t be good for the Saudis but it would be fine for consumers. I doubt that the end of Saudi oil, unless it occurred precipitously, which is unlikely, would raise long-term prices very much if at all.

UPDATE: Glenn Reynolds has updated his post to include links to a couple of other critics of Simmons’s argument.

10 thoughts on “Saudi-Oil-Depletion Hysteria”

  1. I’d actually welcome a more-rapid-than-expected depletion of Saudi oil. The Saud family are simply not nice guys (it made me ill to see pictures of GWB walking hand-in-hand with Abdullah). We’d be less-motivated to prop up that really sorry regime. And there’d be less Saudi money going to fund hatred.

  2. Without some extreme political interference such as that which happened in the 70’s there never is a “shock” associated with natural resource depletion. The resources don’t just suddenly run out. They grow increasingly more scarce and expensive which in turn suppresses demand and drives substitution.

    People think of oil as just existing in giant natural tanks under ground that will suddenly go empty like somebody draining a can of coke through a straw. It doesn’t work that way. Instead production gradually tapers off causing rising prices that communicate the increasing scarcity. This is true of individual oil fields much less the oil production of an entire country.

    The Saudis will find it increasingly difficult to meet demand and to rapidly raise production. Eventually their cost of production will rise driving them off the center stage of oil production but this will be a process that will occur over many years if not decades.

    There will be lots of warning. There will be no “shock.”

  3. I have read that the book claims that the Al Sa’uds have wired the oil fields to be blown up and contaminated with radioactive debris (so-called “dirty bombs”) in the event that they are are overthrown or conquered. If the fields are played out, why is this a problem?

    Otherwise, I think this is good news. Couldn’t happen to a nicer bunch of guys.

  4. There are some people that look at this kind of statistic, and wonder why with all our advances and progress we aren’t showing better results right now because we know billions are being spent on exploration:

    Fifty years ago the world was consuming 4 billion barrels of oil per year and the average discovery was around 30 billion. Today we consume 30 billion barrels per year and the discovery rate is now approaching 4 billion barrels of crude oil per year.

    If we are successful in finding these hidden fields, will we be able to utilize in a timely manner?

    “In the 1960s we discovered North America, Mexico and the North Sea, and the world knew the oil would come to market. But the price of oil went up 10 times, because it could not get to market quickly enough.”

  5. A statistic almost never used: the actual number of oil wells in Saudi Arabia. Anybody care to guess? Last time I looked it was 1500 – as in fifteen hundred. Huber is exactly right, nobody can afford to ignore this almost-no-cost competitor when contemplating multibillion dollar investments.

    When we saw all those wells burning in Kuwait as Saddam withdrew in 1991, IT WAS ALMOST EVERY WELL IN KUWAIT, and Saddam’s beef was that Kuwait was poaching on the MARGINS of Iraq’s fields.

    In the USA, about 500,000 wells. Ours average about 12 barrels per day, the Sauds about 6,000 barrels per day.

    There is much NOT being said about the capabilities and risks of the Middle East oil patch. As long as we are content to accept that Iraq’s fields are “decrepit” without asking “what would it cost to modernize, and what is the return on investment?”, we will just keep blowing $80 Billion per year (and hundreds of young lives) down this military adventure rat-hole with no tangible goal or justification. Give me a break on “Freedom on the march…” Either state a worthy goal and go for it or get the hell out and let the primitives flop around trying to recover their “government” and their almost-embarrassing oil reserves.

  6. Here are excerpts from the article I was talking about:

    Might the Saudis Blow Up Their Oil Infrastructure?
    by Daniel Pipes
    May 11, 2005

    Investigative writer Gerald Posner reveals something most extraordinary in Secrets of the Kingdom: The Inside Story of the Saudi-U.S. Connection, his book to be published by Random House later this month: that the Saudi government may have rigged its oil and gas infrastructure with a self-destruct system that would keep it out of commission for decades. …
    Saudi engineers apparently then placed explosives and RDDs throughout their oil and gas infrastructure, secretly, redundantly, and exhaustively.

    The oil fields themselves, the lifeline for future production, are wired … to eliminate not only significant wells, but also trained personnel, the computerized systems that seemingly rival NASA’s at times, the pipelines that carry the oil from the fields …, the state-of-the-art water facilities (water is injected into the fields to push out oil), power operations, and even power transmission in the region.

    The Saudi planning began in earnest, he reports, after the Kuwait war of 1990-91, when the Iraqis left behind an inferno of oil-field fires … which, to everyone’s amazement, was extinguished within months, not years. In response, the Saudis thought of ways to assure their oil would stay off the market. They began ‘exploring the possibility of a single-button self-destruct system, protected with a series of built-in fail-safes. It was evidently their way to ensure that if someone else grabbed the world’s largest oil reserves and forced them to flee the country they had founded, the House of Saud could at least make certain that what they left behind was worthless.”

    … Posner provides considerable detail about the mechanics of the sabotage system, how it relied on unmarked Semtex from Czechoslovakia for explosives and on radiation dispersal devices (RDDs) to contaminate the sites and make the oil unusable for a generation. The latter possibilities included one or more radioactive elements such as rubidium, cesium 137, and strontium 90. …

    Nor is that all; the Saudis also sabotaged their pipelines, pumping stations, generators, refineries, storage containers, and export facilities, including the ports and off-shore oil-loading facilities.

    … Posner raises the possibility that this entire scenario is a Saudi piece of theater, meant to deter an outside force but without any reality. … Another limiting factor: the Semtex explosive only has a few more years of useful life in it, expiring in about 2012-13. …

    If such a system is in place, two implications leap to mind. Should the Saudi monarchy retain its grip on power (which I consider likely), it has created for itself a unique deterrence against invasion. But, should the monarchy be replaced by an Islamic emirate in the spirit of Afghanistan’s Taliban, this ferociously anti-Western government would have at its disposal a cataclysmic suicide-bomber capacity; with one push of a button, conceivably, it could shake the world order. And it would be highly inclined to do just that.

    Western intelligence services need urgently to do more than listen in on Saudi conversations; they need to find the truth out about those explosives. Should they exist, Western governments need profoundly to reassess their relationships with the kingdom.

  7. If this is true, you have to admire the ruthlessness of the House of Saud. The message is — “if you try to take us down, we take you down with us.” From their standpoint, this is a reasonable measure. I’d do the same thing if I were in their shoes.

  8. My guess is it’s theater. The Saudis are as smart as anyone about oil economics. They must know that beyond a brief period of disruption and high prices, the destruction of their pumping capacity would not be a major problem for consumers. Alternative sources of supply that are currently too expensive to exploit would start coming on line within months after such a Saudi debacle. In the long run it would be a problem mainly for Saudi Arabia.

    BTW, such a scenario would be great for Iraq. I doubt that the Saudis are so eager to help their newly democratic neighbors.

  9. Jonathan is hoping one irrational (or at least, as ben Deste puts it, unwise) feeling will counter another.

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