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  • The US-Saudi Oil-Supply Standoff: Which Country is Really Dependent?

    Posted by Jonathan on August 6th, 2005 (All posts by )

    Glenn Reynolds links to a helpful blog post that points out we import less oil from Saudi Arabia than previously, notwithstanding journalistic fretting about our supposed “dependency” on Saudi oil.

    The essential point about oil dependency is that the Saudi regime depends on oil revenues for its survival, so SA can’t stop selling oil for very long. And since oil is fungible, stopping the sale of oil is the only way for SA not to sell to us — otherwise we can always buy oil via intermediaries. So which nation is really in a vulnerable position here? I don’t think it’s us.

    We have allowed the Saudis to use a couple of brief supply interruptions in the distant past, whose effects we exacerbated with our foolish policy of keeping price controls on petroleum products, to bluff us into a state of perpetual deference to them. Since we no longer have price controls, and since we now have several major alternative suppliers, not to mention a military choke hold on the entire Middle East, perhaps it’s time we gave less weight to the Saudis’ wishes.

     

    25 Responses to “The US-Saudi Oil-Supply Standoff: Which Country is Really Dependent?”

    1. pat Says:

      One,I agree that we don’t need to bend over as much as we have to the saudi’s, but your very foolish if you think they are just one of many suppliers. Look at the amount of reserves they have, versus rest of world. Over the last 30 years its increased, NOT decreased. So has OPEC’s. The reason we don’t have to bend over backwards,is that they need or military support, and our support in general (we could de-stabalize and cause regime change rather easily) Credit Suisse has a great oil/gas primer that goes into the specifics. But with all that said, going back to the time of Nixon, where he created a project to reduce our dependency…. our policy’s have been lousy. The new energy bill is a joke, as been our policy over the last 4 years ( when 9/11 changed everything ).

    2. Jonathan Says:

      Yes, SA has big reserves. If they increase production prices will decline, which is good for us. If they embargo or significantly reduce production their revenues will decline, which in anything beyond the very short run will hurt them more than it hurts us.

    3. Carl O. Witz Says:

      What if they gradually reduce production, forcing prices upwards. They break even and we lose.

      Hmm, isn’t that what’s been happening lately?

    4. Opinionated Bastard Says:

      Yeah, they tried that in 1972… It didn’t work. First it caused this economic shock which immediately led to lower oil consumption, then it sort of forced the US to conserve, which ultimately led to them making less money…

      Higher prices don’t always mean more money made, often its the reverse. If you can sell twice as much at 10% less, you make 80% more…

      All these higher oil prices are making alternative fuels cost effective…

    5. mikem Says:

      I really hope you are right, but it feels like whistling in the dark to me when I try to look at it the way you have presented it. I don’t think the Saudis have to successfully cut us off from their oil to punish us. I am not an economist, even the garden variety, but it semms like there must be some tremendous wealth transfers happening with these ever higher oil prices and even the threat of higher prices causes spasms in the world economy.
      I could spit everytime I think of how we have abandoned nuclear production of energy in this country. We apparantly will not even consider that alternative and all because of a couple mishaps and an end of the world, chicken little panic fed by the media and the greenies. As if technology has not advanced in 25 years so that we can develop safe systems. Instead we spew millions of tons of pollutants into the air every year and remain dependant on hydrocarbon resources.
      And just to make this personal to my fellow proud Americans, the vile French have been getting the vast majority of their energy needs from nuclear power for decades. We are in the Dark Ages compared to them. (spit)

    6. Jacob Says:

      The US needs Saudi oil and the Saudis need the US to sell her oil, and for military protection. It is silly to ask who needs whom more ….

      The problem is not about the Saudis intentionally stopping oil shipments for whatever reason. That will not happen. (Though reduced production and price rises are possible).

      The problem is the break of stability, and reduced oil shipments due to sabotage, destruction, war, insurgency or some such situation when things get out of control, for the Saudis and for the US as well.

      The US (together with the rest of the world) is highly dependent on Saudi oil, and nothing can change that in the foreseable future (next several decades). Avoiding chaos and a loss of oil shipments is of paramount importance.

    7. Josh Says:

      I disagree. I think that they have us by the short hairs. The question is whether the Saudis have as much oil as we think they do. I recommend you check out an excellent book called “Twilight In the Desert” which posits from at Hibbertian view that Saudi Arabia is overstating its petroleum reserves. His basic argument is that Saudi produces most of it’s oil from five big fields, that the fields are aging and watering out, and that SA inflates it’s reserves to increase political influence.

    8. Dorian Says:

      “If you can sell twice as much at 10% less, you make 80% more…”

      This is not necessarily true. If your profit margin is only 10% then you make nothing no matter how much you sell at 10% less and if you sell for more than 10% less you will lose money.

    9. chip Says:

      Oil sands may still be the domain of optimists but it’s a fact that the amount of oil in Canadian and Venezuelan oil sands exceeds the combined total of conventional oil reserves today. Furthermore, Canada — which is the US’s biggest source of oil — already gets 40% of its oil from the sands with plans to boost that by some 50% in the next several years.

      Sure, it’s expensive to extract, but you could also say that propping up despotic Middle Eastern countries is also taking its toll if the source of terrorism is anything to go by.

    10. PacRim Jim Says:

      The point is that were Iranian nukes to take out major Saudi fields, demand would increase elsewhere, thereby damaging the global economy (or forcing the adoption of alternate energy sources).

    11. mishu Says:

      Well, the Saudis enjoy a much greater markup than 10%. Oil currently is over $60 per barrel. The cost of production for Saudis is around $1 – $2 per barrel. So, a 10% reduction in price surely won’t hurt them.

    12. Dorian Says:

      “The cost of production for Saudis is around $1 – $2 per barrel”

      I didn’t realize the Saudis realized a 3000% markup on oil. Can you list the source?

      Thanks.

    13. J-Deal Says:

      Heya Pat, you state,

      “Look at the amount of reserves they have, versus rest of world.”

      This isn’t your fault, but the media’s fault for not teaching the general public what an oil reserve is. Usually it’s any oil that can be extracted for 15 dollars a barrel. At 60 dollar oil, you realize quickly it’s nonsense.

      Just as an example.
      At this defnition, Canada has 5 bbo in oil reserves. Saudi has 261 bbo of reserves. But if we jump this up just a couple of dollars. Canada now has 180 bbo of oil and Saudi number remains the same.

      So what does this mean? As technology increases, more oil will be found -though it has already been found.

      Just imagine this, imagine we find a cheap way to extract shale oil? What happens then? Utah has as much oil as the Middle East.

      Technology will save the day when it comes to commodities, this has been proven throughout history.

      Though I wouldn’t mind tarrifing OPEC nations in the meantime, I have always believed America should not do business with Cartels. They aren’t legal in our country, so why do we allow trade with them?

      -You can find all this info in the Almanac btw, which is even sadder, because it means the media isn’t even bothering to check it. I wonder how many in the Media even know that we get more oil from Canada, and Mexico than the middle east. Or that the Middle East only provides us with about 12% of our total oil -not imports. pg 173 of 2005 Almanac.

    14. Tom Grey - Liberty Dad Says:

      Nobody likes gas taxes, or any other kind. But Pres. Bush should have a $0.05 /gal, increasing by a penny every time the world market price /barrel goes down. With the gas tax increasing until it meets some 10% of the Federal Revenue — or more.

      Kyoto should be replaced by agreements that gas and/or carbon emission taxes will represent some amount of the gov’t revenue, and that amount should increase.

      Letting folks get tax credits in return — so those wanting to buy smaller, more efficient cars, can do so. And everybody will know that gas prices just keep going up.

      Until alternative tech comes on line. Which happens sooner with higher gas prices, and soonest with gov’t support (not always “better”, but faster).

    15. Jack Says:

      Saudi lifting costs (ie. base per barrel costs to get oil out of the ground) are not public. Estimates have historically run in the range of $3 per barrel.

      However, Saudi has to cover a lot of other costs with its oil revenues and so the $3 figure does not represent a level at which they could sell oil. There are other costs associated with oil production as well as the massive costs of running the Saudi government and social system. The country does have a lot of non-oil revenue.

      The average per barrel cost of Saudi crude (simple average price of Saudi light, medium and heavy crudes since August,2004) has been $39.51. This is from Dept of Energy Energy Information Agency (http://www.eia.doe.gov/).

      Personally, I agree with sceptics such as Matt Simmons who say that Saudi may not be able to increase production much in the future. In any event, it is a topic ripe for speculation. Saudi (and most OPEC) reserve figures are really political constructs and have not been audited in any way by outsiders.

      However, there is no doubt that the financial position of oil exporters has reversed and they are currently swiming is cash.

    16. mishu Says:

      Here are my sources Dorian.

      Energy Bulletin

      Aramco Expats

    17. Andy Freeman Says:

      Grey believes at least three things that are either questionable or wrong.

      He thinks that govt makes things happen faster. Clearly wrong. Govt makes some things happen faster, or at least has done so occasionally in the past, but often slows things down. (Govt often makes it easier for folks to make money on process than results, which leads to more process and less results.)

      He seems to think that reducing gas consumption is a good thing. If it required no other changes, sure, but reducing consumption by reducing travel is a cost as is reducing consumption by replacing equipment. Sometimes the benefit is worth the cost, but not always.

      He seems to think that carbon by humans is a big issue. He’s wrong.

    18. John Burgess Says:

      I think you err in assuming that oil is the primary factor in the US-Saudi relationship. There are two others I’d put before it:

      1. Like it or not, when the Saudis speak on Islam, 1/6 of the world’s population listens. They don’t always agree, but Saudi influence is very, very high. If the Saudis bless a questionable action by the US, then it’s easier for the US to get acquiescence from the rest. Conversely, if the Saudis object, it gets that much harder.

      2. Talk to anyone in Logistics for the USAF in general, or CENTCOM in particular, about the problems they’d have if the Saudis were no longer willing to open their airspace to the US. The US does not own enough mid-air tankers and does not have enough ports to refuel flights going east of Suez. Turkey helps, to an extent, but it not a complete answer.

      Finally, the Saudis are so deeply invested in the US economy–estimates put it around $800 Billion–that damaging the US economy equates with damaging the Saudi economy. They do not have monetary reserves to permit that as they’re still paying their bills from Desert Storm, as well as continuing infrastructure development. They’ve had a couple of good years, but are using that money mostly to pay down their debt.

    19. Sandy P Says:

      Are we really sure they have big reserves?

      From what little I read, all the arab, if not other oil-producing countries play it extremely close to the vest.

      Plus a couple of things I read on Rantburg how they’re using water to flush the oil closer to the surface. That’s only used if the wells are running dry, IIRC.

    20. Anonymous Says:

      Just imagine this, imagine we find a cheap way to extract shale oil? What happens then? Utah has as much oil as the Middle East.

      Great, another theocracy.

      /JK

    21. John B. Chilton Says:

      Read this article on Saudi economy.

    22. Jonathan Says:

      Jack & John Burgess: Very interesting.

      Many other thoughtful comments here as well. Thanks.

    23. David Foster Says:

      mikem..there’s a lot to be said for nuclear power, but it won’t do a lot to reduce oil demand, at least in the short term. Electric power generation has moved away from oil and is now mostly fired by coal and natural gas. What oil is used is mainly for peaking turbines, which run only in periods of extreme demand, and even many of these are now natural gas.

      For nuclear to do much for oil consumption, you need to either (a)convert electricity and/or heat to fuel (viz hydrogen) or (b)store electricity efficiently in vehicles (better battery technology)

    24. Bill Hight Says:

      High oil prices drive innovation in alternative fuels and energy sources.

      Environmentalists retard innovation in alternative fuels and energy sources.

      Keep oil prices up and environmentalists down and we will soon be able to tell the Saudis “no, thanks.”

    25. Mitch Says:

      If we can figure out a cheap way to burn coal cleanly, WE are Saudi Arabia.