Monday, 23 June 2008

The Great Saudi Smoke Screen

"Fear not. We will save you."

By now everybody and their grandma have heard about the weekend's oil producer/consumer meeting at Jeddah. The deal was for the leaders of the consuming economies to look good, while the leaders of the producing economies could re-state what they have already said several times, namely that they will increase production. Really they will, this time it's true. Please believe them. They were just kidding for the past three and a half years, when they didn't.

So, what was the outcome of the meeting? Let's see:
  1. Saudi will raise their output to 9.7 Mbpd. A Figure they had already promised almost a year ago. This is not new capacity, but capacity on which the world has already been counting on. It will offer very little relief.
  2. Financial speculators are to blame for the high oil price. Really. Somebody is hoarding oil. Please don't look at the inventory figures, or the lie falls apart.
  3. Other Arab OPEC oil producers do not think the world needs more oil at this time, hence they will not boost production. Could they, if they wanted? If so, by how much and for how long?
  4. Saudi's are saying they can increase their high sulfur content crude that almost nobody wants, to 12.5 Mbpd by 2009. Funny that. They've been saying the same since 2005, but the production is yet to materialize. Fatih Birol of IEA surely doesn't believe it. Neither does Chris Skrebowski of the Petroleum Review. But all the analysts eat it up like cup cakes.
  5. OPEC has started a miniscule crack dealer's Buy-Now-Pay-Forever loan fund for the poor nations. Even if they can't afford the oil at the current prices, they can get 'cheap loans' and be in debt forever, as the prices are just going to go higher in the long term.
The news are neither comforting nor assuring.

In order for the world to come out of this for a breather, OPEC would need to increase their production significantly for a while, esp of the lighter and sweeter variety that all refineries are after. That would crash any and all speculation on the market, if it existed and would normalize the prices for both crude oil and fuel products.

Further, the refinery utilization rates would need to get back to the 90+ level.

And finally, the countries heavily subsidizing their domestic oil consumption and therefor growing in demand the fastest would need to remove the subsidies.

None of these is going to happen anytime soon. Producers don't want the price to crash. Refineries can't retool for every swing in the market and subsidies while being cut slowly, are the backbone of the public support for leaders and as such are unlikely to be removed.

So, what remains is the eternal hope. Hope that the demand will destruct by the rising prices without destroying the economy. That the speculative bubble was bigger than anybody imagined, and that Iraq oil production will shoot through the ceiling in a couple of years and save the world. For a short period in time.

What everybody keeps forgetting that the natural decline rate is 3-4% p.a. We need that amount of new production every year just to keep production at level. The more we produce in absolute terms, the more of a challenge that 3-4% represents. The more time goes by, the worse those figures get, as more and more fields go into natural decline. The more we need to pump, the more we have to tap into the heavy crude oil. The more heavy crude oil we pump, the more it costs, the less likely it is for refineries to be able to process it, and the more time it takes - slowing down the production again.

This is a race that cannot be won. It can only be prolonged, while using the time a allotted wisely for a transition that will last a few decades.