Can the Saudis Back the Boast and Increase Crude Oil Production

Behold, the people are one, and they all have the same language and that language is money and now nothing they can imagine will be restrained from them, with the brick and mortar of securitization, derivitization, and financialization. Amen.

The secular adaptation of Genesis, Chapter eleven is this: stocks, bonds, shares, and resources can all go much higher when all the world speaks in the language of dollar and the syntax and grammar of credit and debt.

Not the most precise analogy, but the market’s march to new highs, and this persistent doubt that oil deserves to be in a bull market, are both evidence of the widespread belief in the financial benefits of globalization. The chief article of faith in this new religion of money is that there’s no problem more money can’t solve. We’ll see about that. The last Biblical flood we recall destroyed the world rather than making it richer. We don’t know why it would be any different this time around.

In Genesis, man was punished for his hubris by a suspicious God. His tongues were confused and his tower to the sky abandoned. In markets, the process may be less dramatic, but the net effect is just as biblical: thousands-maybe even millions of people go broke as their chief financial beliefs are cast down to the ground by the reality that you can’t get something for nothing.

But since when has reality stopped people from trying impossible things? “Saudi Arabia plans to increase its crude oil production capacity nearly 40 percent by 2009 and double its refining size over the next five years to keep pace with growing global demand, the country’s oil minister said Thursday,” reports today’s International Herald Tribune. Take that, peak oilers!

We’re joking, by the way. We love the peak oilers, both for their exacting science and profound passion. And here’s a question for you: Can the Saudis really increase oil production capacity from the current level of about 10 million barrels to about 14 million barrels by 2009? Do they have the oil to back the boast? There are plenty of sceptics, including certain occupants of the Old Hat Factory, but oil minister Ali Naimi is not one of them. “Additional projects have been identified for implementation after 2009, if warranted by market conditions,” Naimi says.

With plenty of global demand for its oil, market conditions certainly support new projects. It’s just the oil has been awfully hard to find. But apparently the Saudis have plenty more where the last fifty years of oil have come from. And they certainly have plenty of uses for the money that comes from increased oil sales. After all, the proposed $100 billion expansion would be paid for with oil money. And then there is the coming war with Iran to pay for as well, you know, the one taking place in Iraq.

But wouldn’t this looming conflict between Sunni Saudi Arabia and Shia Iran be bullish for oil, with or without the facts behind peak global oil production? Jim Rogers thinks so. “Oil will resume its march toward $100 a barrel after a `correction,” said Jim Rogers, who predicted the start of the commodities rally in 1999,” reads another Bloomberg article today.

Rogers continues, “I’m just not smart enough to know how far down it will go and how long it will stay, but I do know that within the context of the bull market, oil will go over $100. It will go over $150. Whether that is in 2009 or 2013, I don’t have a clue, but I know it’s going to happen.”

When you throw enough money into the global mix, anything is possible. We agree with Rogers. But in the meantime, crude oil’s correction has been ruthlessly efficient, falling 34% to a 19-month low after hitting nearly $80 per barrel in July. The real question is whether oil and energy stocks will regain their lustre even when crude regains its footing.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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2 Comments on "Can the Saudis Back the Boast and Increase Crude Oil Production"

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Douglas Low
“40%” does not make sense. The root of the problem is the distinction between ‘production capacity’ and ‘actual production’. Production capacity now is about 11 mb/d, not 9 mb/d. Therefore, the increase to 12.5 mb/d by 2009 is an increase of only 1.5 mb/d, not 3.5 mb/d, not 40%. The most recent detailed, and public, report of what exactly the Saudis hope to achieve was given by Nawaf Obaid on Nov 9th last year in a PowerPoint presentation to the Center for Strategic and International Studies (CSIS) in Washington, which is still available online. There is a review of the… Read more »
Rod Campbell-Ross
Can the Saudis increase production? This is the big question, to which no one knows the answer, possibly not even the folks who run Aramco. The Saudi oil minister is likely told what he wants to hear; and isn’t told what he doesn’t want to hear. That’s the problem with government arrangments such as you find in Saudi. The best idea one can get about Saudi production can be found in Matt Simmons book “Twilight in the Desert”. He goes into Saudi production field by field using information gleaned from over 200 technical papers delivered at oil industry conferences. The… Read more »
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