Saudi oil production plans

A potentially huge story from the New York Times.

NYT reports:

Saudi Arabia, the world’s biggest oil exporter, is planning to increase its output next month by about a half-million barrels a day, according to analysts and oil traders who have been briefed by Saudi officials.

The increase could bring Saudi output to a production level of 10 million barrels a day, which, if sustained, would be the kingdom’s highest ever. The move was seen as a sign that the Saudis are becoming increasingly nervous about both the political and economic effect of high oil prices. In recent weeks, soaring fuel costs have incited demonstrations and protests from Italy to Indonesia.

Saudi Arabia is currently pumping 9.45 million barrels a day, which is an increase of about 300,000 barrels from last month.

Data source: 2004 through March 2008: EIA; April-June: numbers discussed in NYT article.

The loss of 1 million barrels per day of Saudi production between 2005 and 2007 was one of the single most important factors in the run-up in world oil prices over the last several years. One theory of the cause behind the earlier drop was that the Saudis’ magnificent Ghawar oil field had entered into decline, in response to which the Saudis made a big increase in drilling effort to develop alternative sources within the kingdom. The Wikipedia Oil Megaprojects database calculates 1 million barrels/day in eventual gross new capacity from Saudi projects scheduled to begin producing this year. The Calgary Herald today reported:

Saudi Arabia will start pumping from its new 500,000 barrel-a-day Khursaniyah field within the next month, a board member of state oil company Saudi Aramco said.

An alternative explanation for the earlier Saudi production cutbacks, discussed in my recent paper on oil prices, is that the decline in the price-elasticity of petroleum demand in recent years could have made lower production levels in the Saudis’ economic interest. I attributed the decline in the U.S. elasticity to the very low share to which energy expenditures had fallen relative to GDP by 1998, but noted that with the recent dramatic increase in prices, that share had risen substantially and we should expect to see a corresponding return in the elasticity to the higher levels seen historically. There is abundant evidence that U.S. consumers are now making significant responses to higher oil prices.

Whatever the explanation, if the Saudis do produce 10 million barrels a day next month, I would expect it to have a significant impact on near-term oil prices.

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17 thoughts on “Saudi oil production plans

  1. John Mashey

    Do you know how much of the increase/spare capacity is sweet light crude [which everyone wants], as opposed to sulfur-heavy sour crude [for which refining capacity appears limited]? I didn’t see that mentioned in the NYT article, although I understand Khursaniyah i supposed to be sweet,

    I.e., can you update from JDH on sweet and sour?

  2. Fat Man

    I am disinclined to take the Saudis at their word. They have ample reason to lie. If they are telling the truth, it will come out in the market soon enough.

  3. Sandman

    No impact whatsoever. That isn’t the reason Oil prices have risen.
    Weak Currency and saftey is. Raise the dollar and rates and that money will flow out of oil.

  4. an OIL watcher

    I’m wondering:
    Aren’t the Saudis close to the Bushes???
    It (a Saudi increase in production) would be the first good news for the world economy since JULY 2007.
    Hope that works,
    Hope that would be enough to save us from the incoming global tightening process

  5. bsamples

    Note that the Saudis’ plan runs counter to claims they have voiced for over a year that oil prices are not ‘fundamentally justified’ (does that empty phrase even mean anything).
    Raising output b/c of admitted concerns over high prices seems a clear enough admission that fundamentals, and not those dastardly speculators, are the driver of current prices…

  6. Charles

    In Ed Markey’s committee, there was discussion that the 10 M was actually lower than the 12.5 M they had previously planned for. A Reuters article reposted here gives the context.

  7. cb

    They have been claiming that they could produce 12.5 since 2005
    [Jun 3, 2004] Saudi Oil Minister ALI AL-NUAIMI says the oil-rich kingdom is fully ready to increase oil production in an effort to return prices to OPEC’s target range of $US22-28 a barrel.
    [Apr 23, 2005] Ahead of the crown prince’s visit, Saudi Arabia said it would do what it could to step up oil production. Saudi oil minister Ali Naimi said the kingdom is now pumping about 9.5 million barrels per day and could increase that to 12.5 million barrels per day by 2009 if necessary to maintain …

  8. Longview

    Very wise indeed. Pump flat out now and thus set the conditions for a steeper decline later.
    People who “get” PO can only view this nonsense as hilarious or sickening. I choose the first view since it’s probably healthier.
    Go ahead, let the ship charge full steam (against the iceberg).

  9. Bruce Hall

    One can come up all sorts of “plausible” explanations for the Saudi production plans:
    * Fear of being sued by the U.S. Congress
    * Fear of the U.S. Congress ethanol mandate ending the petroleum stranglehold
    * Fear of the U.S. Senate investigation into price manipulation
    * Fear that the U.S. Congress will reverse 40 years of restrictive domestic drilling policy
    * Fear the the U.S. Congress/EPA will develop a streamlined refinery approval process aimed at increasing diesel output and reducing oil demand
    Or, maybe they figure it’s better to get high demand at $3.25 per gallon than dramatically falling demand at $4.10 per gallon. The Saudis are not a philanthropic organization. Besides, they recognize that you can only raise prices so far so quickly without a pause for people to get used to the high prices. Remember when $2.00 per gallon was outrageous and now it sounds “cheap?”

  10. M1EK

    Or they really can’t increase production this much without it being heavy and sour; but want to talk down the price anyways to continue to FUD the alternatives (even conservation).

  11. PaulHunt

    Oooh wouldn’t this be nice? Cheaper oil would be awesome for my wallet. But I am worried that if this does lower prices enough we are going to abandon our en devours into renewable green energy, which I think is key to the Earth’s well being. But until then we are dependent on oil. This article, called The Oil Melt-Up and Why the U.S. Economy Wont Run On Windmills Alone…, explains why we just can’t jump ship onto green energy completely just yet. Even as much as I would like to.

  12. RocketMan

    What I think is interesting about this article is that everyone is jumping up and down about this huge 500,000 barrel per day Saudi oil field and how it is going to help bring down oil prices.
    That is a lot of oil but, ANWR is projected to bring one million barrels per day to the US market at peak production and possibly more, and soooo many folks say it’s not worth bothering with.
    If 500,000 barrels from Saudi Arabia is going to help so much imagine how much 1 million barrels from Alaska will bring down costs? Not to mention the huge benefits of keeping that money here instead of giving it to OPEC; adding more and more to the bloating trade deficit.
    There is an energy plan you can support right now.
    It’s a real Energy Bill called S.2958, just introduced to the Senate, so half the battle is done. Now we need to support the Bill to get it passed.
    This organization is gathering support to lower gas prices and pass The American Energy Production Act of 2008, S.2958.
    Take a look and before you dismiss it notice how broad the plan is, including ANWR, Federal offshore waters, CTL, oil shale, advanced batteries for electric cars, bio-mass, etc. No plan is perfect but this one is the best I have seen and it’s here right now.

  13. spencer

    There is a massive bottleneck that would have to be overcome before ANWR can bring one million BBLS/day to market. that bottleneck is the pipeline. Unless you are going to completely rebuild the pipeline there is no way ANWR can bring one million BBLS/day to market.

  14. John Mashey

    S.2958 could be summarized as:

    “Find it and use it all as fast as possible, and get its CO2 into the atmosphere SOON, first the oil and gas, and then the coal, and then really awful EROI stuff like oil shale and CTL.”

    Some people really like that plan.

    A friend’s 13-year-old asked him “Daddy: will you adults leave any oil for us?”

    I’d guess that ANWR will be drilled sooner or later: oil is just too useful. In any case, building on permafrost right now seems dumb – we might as well wait until it melts. It might be nice to leave a little oil in the ANWR piggy bank for Americans in 2050-2100.

  15. George Barwood

    Has anyone considered that this is just political stage management for the new field that was coming on stream anyway?

  16. bruce

    FYI: This would be great!
    Secretly behind closed doors the final resolutions are being put together to set the next phase of Energy Independence for the US.
    This Month the motion is being put forth to set standards on auto production / numbers for alternative requirements for all Auto Manufactures selling Light Trucks and Cars in the US, a specific time line will be imposed on all. This will send significant waves through the Oil Market as need for crude oil will significantly be reduced / the US market could even at the 2025 Mark support its own demand.
    2015 25% of all Light Trucks and Autos sold in the US must run on alternative fuels.
    2020 50% -
    2025 75% -
    2030 95% -
    Would not hold onto my Oil stocks too long!

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