Are OPEC’s recent decisions responsible for the current price of oil? I’m not persuaded that they are, and here’s why.
Econbrowser reader GT points us (in comments #6 and #13 here) to a graph at an anonymous website called Saudi oil production which relates crude production from the Kingdom to the production quotas set by OPEC. I was able to reproduce this graph (as shown below), using for production quotas from 2004 to October 2006 the “crude oil production ceiling allocations” from OPEC’s website, and for the most recent data subtracting from those ceilings the production cuts from the last two columns in that document to calculate the quota series displayed. The production data (per GT’s instructions) are from Table T12 from the Energy Information Administration, which excludes lease condensate. Units are in thousand barrels per day.
Here is GT’s interpretation of the graph:
I am continually amazed by the absence of any discussion of OPEC’s role in reduced Saudi production and the Kingdom’s need to meet its quota if it is to maintain its leadership position in the group….
Prior to 2006, it had been the economic consensus that price spikes of the magnitude seen since 2003 never fail to cause recession and massive demand destruction of the type Saudi obviously doesn’t want to see. But through 2005, I think the Saudis became convinced that the world, or at least the US could withstand quite high prices….
But why did the Saudis start cutting production 6 to 12 months previous to the OPEC cuts? Because they knew that a) the “fundamentals” showed the market to be oversupplied and b) that the geopolitical effects the situation in Nigeria, tension with Iran, and the war in Lebanon were having would blow over. When the hype perpetuated by the speculators went away, the bubble would burst.
They had already successfully tested $77. Why settle for anything less than that? They could safely send out signals that they were defending $60. My guess is that they are aiming for $90. But there was no way $50 was going to fly.
But they had a problem. OPEC works as a group (in theory, cheating is another issue). For a number of years critics have opined that the cartel has no effective power. I don’t believe this. I sometimes ask myself why a country like Angola would join the group when it will likely result in limits placed on their production at some point. Besides, the Saudis have as much incentive to have the others share the burden of any cuts as the others have for a floor being put under prices.
The problem was that if cuts were necessary, Saudi Arabia was overproducing by 500,000 bpd over its official quota. They would have no credibility trying to convince the others to cut with this being the case. So they eliminated the excess 500,000 barrels, dropping from 9.6 to about (depending on whether you accept the IEA or EIA’s numbers on this, see 2nd chart) 9.1 mbpd (their quota) by September. When OPEC met to discuss cuts they were in a credible leadership position.
From the standpoint of economic theory, GT is quite correct to reason that the response of a monopolist to a decrease in the perceived elasticity of demand should be to restrict production and increase the price. Data also support the view that the price elasticity of petroleum demand may have decreased in recent years, and that oil price increases seem less likely to lead the developed world into recession than many of us believed a few years ago. So, this part of GT’s explanation makes perfect sense to me.
I was curious to construct analogous graphs for the other major OPEC producers. Iranian production, like Saudi Arabia’s, was clearly in decline well before the OPEC cuts, possibly due to underinvestment in supportive infrastructure. I would not want to attribute the decline that began in Iran in November of 2005 to a strategy for influencing the decision that OPEC announced in October of 2006.
Nigeria’s production decline also began a full year before the announced OPEC cuts. Local rebels rather than OPEC ministers are surely the most important part of the story there.
Perhaps you could argue that the very small drop we’ve seen in Venezuela production is a response to OPEC’s announced new goals, though their production today remains 600 thousand barrels per day (kb/d) below their quota.
I think the best case you could make for an OPEC effect is Kuwait, though here too there clearly are other issues as well. The supergiant Burgan oilfield is as important to Kuwait as Ghawar is for Saudi Arabia. Burgan appears to have passed peak production, and there is currently a heated political debate within Kuwait about whether the country has been depleting its national resource too quickly. There was a proposal by some in the Kuwaiti parliament to limit annual production to 1% of total reserves,
in order to ensure that enough oil is left to support future generations. With reserves officially claimed at 99 billion barrels, that would imply a ceiling of 2,700 kb/d, well above the current 2,400 kb/d production. However, Petroleum Intelligence Weekly claimed in January 2006 that it had seen internal documents estimating total Kuwaiti reserves at only 48 billion barrels, for which the 1% rule would suggest a desired annual production rate of only 1,300 kb/d. The decline in the OPEC quota may well have given Kuwait an excuse to move in a direction it already wanted.
The United Arab Emirates also cut production following the OPEC agreement, though the cut just puts it back to the 2,500 kb/d level it had been maintaining for the last year and a half.
What OPEC actually agreed to at these meetings was a cut in production rather than new quotas, and if you compare October 2006 (right before the first announced OPEC cut) with April, you do see some reductions in every one of the participating countries, though usually significantly less than was agreed to.
| Country | Oct announced | Dec announced | Total announced | Actual decline |
|---|---|---|---|---|
| Algeria | 59 | 25 | 84 | 30 |
| Indonesia | 39 | 16 | 55 | 10 |
| Iran | 176 | 73 | 249 | 50 |
| Kuwait | 100 | 42 | 142 | 130 |
| Libya | 72 | 30 | 102 | 20 |
| Nigeria | 100 | 42 | 142 | 130 |
| Qatar | 35 | 15 | 50 | 60 |
| Saudi | 380 | 158 | 538 | 200 |
| U.A.E. | 101 | 42 | 143 | 100 |
| Venezuela | 138 | 57 | 195 | 50 |
| Total | 1200 | 500 | 1700 | 780 |
Another clear conclusion from economic theory is that if the OPEC members were indeed functioning as an effective cartel, reducing output so as to raise the price above that which would prevail in a competitive environment, there would be a very powerful incentive for individual members to “cheat” on the agreement, by producing more than they had individually pledged. From this perspective, when you look at the very loose way in which OPEC defines and monitors what each country is allowed to produce, and the wide and persistent discrepancies between the quota and what each country actually appears to be producing, one is tempted to view OPEC not as an effective cartel but instead as a loose collection of producers occasionally announcing new rough goals that essentially specify what each individual would want to do if left entirely on its own. Thus for example OPEC member Angola, whose current national interest is best served by increasing its production, was not a party to either the October or the December agreements, and has in fact increased its production by 300 kb/d since October.
But is there any reason why, in a perfectly competitive market, most of the OPEC members would have decided in October that it was not in their interests to be pumping so much oil? I think there is indeed an excellent reason. Many analysts have revised up their forecasts for the growth of global petroleum demand over the next few years, as evidenced for example by the recent International Energy Agency and pending National Petroleum Council reports. Put this together with the apparent indication that peak production has been passed for the world’s most important oil fields– Saudi’s Ghawar, Kuwait’s Burgan and Mexico’s Cantarell— one is led to the conclusion that, despite the many new promising developments in Angola and elsewhere, it today makes sense for the price of oil to command the scarcity rent that economic theory has always predicted it should. Regardless of what the other members of OPEC might choose to do, I am not sure that it is in Kuwait’s national interest to be pumping 2,700 b/d today, for exactly the reasons currently being debated in that country.
But why have these big OPEC meetings and declarations at all, if they simply ratify what each country wants to do anyway? The OPEC quotas do serve an important purpose, providing countries like Kuwait and Saudi Arabia some political cover from criticism for cutting output from consumers like the United States, and may likewise give the rulers of Iran and Venezuela a different kind of political cover.
The irony is that, if that indeed is why Kuwait has decided to reduce production, that ultimately will prove to be in the best interests of consuming countries. If we are indeed facing a significant crunch in meeting demand for petroleum in the coming decade, it is vital to hold back more of the production today, in order to have more in the future when we really need it. A price jump today would help us to conserve what is used now and begin the process of spurring the development of alternatives.
But what is not at all in the interests of consuming countries is to be kept in the dark as to the true geological status of the oilfields in locations like Saudi Arabia and Kuwait, and to be left guessing and speculating as to what is really going on.
Technorati Tags: oil,
oil prices,
Saudi Arabia,
Kuwait,
oil supply,
energy economics,
economics,
peak oil,
OPEC
The embarrassing failure of the Hotelling model, surely one of the most fundamental applications of the principles of resource economics, may finally be coming to an end. For decades, producers have acted as though they believed that the resources they sat on were inexhaustible, in plain contravention to both common sense and the testimony of geologists. Now it may finally be sinking in that the oil won’t really be around forever, and it makes sense to manage their dwindling resource so as to maximize its value. The ghost of Hotelling is no doubt chuckling at his belated vindication.
The interesting thing about Hotelling price increases, as compared to cartel-driven ones, is that individual producers have no incentive to cheat. Even though they are each selling the oil for far more than it costs them to produce and could easily undercut one another, each one knows that doing so will only hurt himself by reducing the profits that will come in a few years when oil is even more expensive. So it is a self-sustaining equilibrium whereby producers receive handsome “excess” profits but nobody cheats.
It makes a fine picture at this crude level, but AFAIK nobody has tried to see if it really works mathematically. Hotelling predicts a price series into the future of increasing prices at roughly the rate of prevailing interest. The futures markets see a very different picture; prices in 2015 are no higher than today. So that is one mark against this theory.
Another problem is that the price trend predictions are pretty robust, but the actual price level (in effect, the initial price level) is less well defined. In principle the price should be set at that point where slow and steady price increases will restrain and moderate demand, so that just as the last drop of oil emerges from the ground decades hence, gradual price increases will at just that moment have caused demand finally to fall to zero. Obviously this is not an easy price level to estimate, but given some kind of demand elasticity model it ought to be possible to estimate what price level would achieve this goal, and compare it to current prices. That would be another test of whether the Hotelling model explains what is happening today.
Yes indeed, Hal, the futures prices (the long-term contracts currently trading a few dollars below the short-term) are clearly a weak point for the hypothesis I’m advancing. I’m suggesting that Kuwait and Saudi Arabia have some inside information here that is influencing their decisions, but not yet incorporated into the consensus of market traders. If I’m right, that does imply some money still sitting on the table, and that gives me some doubts. But I’m not seeing an analysis out there explaining why the IEA assessment will be wrong, other than the possibility of a big economic downturn in the United States and/or China. So this is my best effort to understand what is currently going on. A key ingredient in the story is the uncertainty on the part of everyone as to the true facts in the Middle East.
JDH worte:
The irony is that, if that indeed is why Kuwait has decided to reduce production, that ultimately will prove to be in the best interests of consuming countries. If we are indeed facing a significant crunch in meeting demand for petroleum in the coming decade, it is vital to hold back more of the production today, in order to have more in the future when we really need it. A price jump today would help us to conserve what is used now and begin the process of spurring the development of alternatives.
Professor,
Great post once again.
Producers should produce so that they maximize their profits. This will balance supply and demand. The price of oil will then regulate demand. But as the price increases alternative energy sources will come on line. These alternatives will not come on line all at once but over time.
One of the most important is nuclear. As the price of oil increases the political opponents of nuclear will find their support weakening. The best way to get alternative fuels on line is to let the price of oil rise.
Now if the producing countries determine that they will maximize their profit over time by cutting their production then that is the decision they should make, but the best alternative for both producers and consumers is to let the market work.
Are not the independent oil companies in a similar situation?
In its recent medium term report, the IEA wrote:
What more could one expect from those collecting scarcity rents? This isn’t meant to bash the IOCs, BTW. Just to point out that it may not be rational to expect pell mell R&D efforts out of those guys if oil is indeed scarce.
As I posted here a month ago:
Production (mboe/d) ExxonMobil Shell BP Chevron Total ConocoPhillips
Q1 2006 4.56 3.75 4.04 2.64 2.44 2.09
Q1 2007 4.44 3.51 3.91 2.64 2.43 2.01
That table tells us that none of the big oil companies has been able to increase its oil production over the past year – in fact, most have seen a decline in their production.
Big Oil is unable to increase its oil&gas production. And this, after almost 8 years of almost non stop oil price increases.
What’s going on? Aren’t markets working? A price increase, especially such a longlasting and massive one, should be a signal to producers to produce more, and to consumers to consume less. As we know, consumers are burning more oil thanks to record economic growth in China and elsewhere, and demand appears to not be very sensitive to prices in both emerging economies and oil producing countries as the good times roll. Despite flatter consumption growth in the developed world, demand is going up overall, and drives prices up.
But supply should then have delivered. And indeed it has, as spare production capacity around the world has been put in service. But new capacity, in particular that developed by the oil majors, should have followed. And yet we see from the above numbers that it hasn’t. Again, BigOil has been unable to increase production in the past 5 years.
One thing is obvious – it’s not for lack of money. The companies are enjoying record income and profits, thanks precisely to those high oil prices. It’s just that this money has been used to a much larger extent to buy back shares (effectively handing the money back to shareholders) than to invest in oil&gas production.
BigOil is effectively telling the market that it thinks its shareholders can use their money more profitably in other sectors of the economy.
Despite the significant increases in their costs (everything has gone up: raw materials, rigs, qualified personnel, as well as tax rates in oil producing countries), the profits from those assets they have put in production are high enough to suggest that oil companies would invest if they could.
Thus it means that they can’t. Quite simply, they no longer have access to new reserves.
This was data from Jerome A Paris (TOD).
Conclusion: BigOil lost his power and OPEC and the main producer countries decide the price. So, petrol won’t be anymore cheaper than bottled water, and we’ll learn to use it like we use the good wine!
I just listened to a conference call where new BP chief economist was talking about BP recently released statistical review of energy markets.
His point was that higher prices are restricting demand for oil, particularly in developed nations, and that OPEC has restricted supply because of the fall in demand and to keep prices high.
He claims the usual small increase in global reserves, partly because BP are now including more oil shales. He is saying that the higher prices make oil shale economic today and that this is analogous to the situation 20 years ago where they started to include previously uneconomic deep water offshore oil.
He also pointed out that energy consumption had increased faster than GDP for the last couple of years and that because coal has substituted for gas and oil, carbon intensity had actually gone up, particularly in europe and despite carbon pricing in Europe. Carbon intensity in the USA had declined despite not having carbon pricing.
He, like me, sees this as ironic.
One important reason Big Oil hasn’t invested more in exploration is that they’re using $40 per barrel for their long-term economic analyses.
The best explanation for that is the psycho-heuristic mistake called “anchoring”. Most oilmen expect the price of oil to go back down where it’s been most of the past 25 years, so that’s what they’re basing their long-term expectations on. I ask senior mgt of these companies what they think of Hubbert all the time, and they consistently say, “Hubbert was/is wrong”. Their reasoning is no more insightful that the standard CERA rationalizing, however.
I personally/professionally believe that it’s probably not-so-bad that they’re using $40, however, because studies I’ve seen generally suggest that on average the major oil companies have not gotten very good returns on their exploration over the past 3-4 years EVEN WITH higher prices . . . . . . because there just aren’t any virgin mega-fields sitting out there to be found.
Very good analysis and comments — thanks.
Why are oilmen using $40 a barrel? Hard won personal experience in the ’80s and ’90s. It was a brutal business to be in during those years because they overexpanded so much in the ’70s.
They’re not going to make the same mistake, Chucky Schumer be damned.
Well, as Mark Twain once wrote, “We should be careful to get out of an experience only the wisdom that is in it — and stop there, lest we be like the cat that sits down on the hot stove-lid. She will never sit down on a hot stove-lid again, and that is well; but she also will never sit down on a cold one, either.”
IMHO, the aggressive overexpansion of the 1970s and early 1980s was based in large part on the consensus view that oil prices were going to continue rising as far as the eye could see. The lesson I would take from that is that oil prices are extremely difficult to forecast, so one would do well not to put much confidence in any forecast they make. Under that framework, using some average of the current price and the forward prices implied in the futures strip out 18 months or so is about as good as you can do.
Big oil CEO’s to my eye are much like generals fighting the last war – they got way too optimistic last time, not gonna make that mistake again, no sir . . . . . and the end result is that this go-round they’re going to be way too pessimistic.
Wow, I’ll have to be more careful now that people are watching.
I’ve always enjoyed your site. I can’t believe you would quote me at that length.
As you can see with Stuart’s last major posting and with his responses to this other post by Ace – Stuart is backtracking. His position is unsustainable and he is smart enough to know that it isn’t. Stuart’s responses are really a reaction to the things I have said which you have published.
Now watch as he destroys his remaining credibility with his responses.
I’m surprised to see the poster “HeIsSoFly” leading the charge.
My goodness, GT. I don’t believe I’m backtracking at all, nor have I changed my position in response to your arguments. My views are very similar to what JDH has outlined above. I think your telepathy is failing you.
I’m glad I woke you up. I am quite aware of your views. You don’t need to brief me.
JDH is quite conservative. You are the author of several pieces.
Saudi 8% (your wish to stand off debunked by “Pitt the Elder” courtesy of “GreyZone”)
Saudi and Gasoline prices(completely amateur and wrong – update that one at any time – I can do it for you).
“Oil Price is not in a Bubble” – oil dropped from $78 to $50 almost the minute you said that. I know what you are going to say. It is $78 now.
Whatever. Tell me what it will be next month, or next year.
You are a smart guy, don’t get me wrong. But please. Is there any reason we should pay any more attention to you than Westexas.
I speak for a number of people who know a helluva lot more about oil than you do and knew about peak oil before everybody with the exception of Deffeyes or Hubbert.
Raymond was on CNBC this afternoon. He didn’t put forth the story the people on your website said he would or was.
It would take all day to show how wrong your initial analysis of the NPC report was. I’m not interested.
Why? Why am I not interested. Because you are doing what I figured you would. Skip the fact that Saudi oil production isn’t moving down by 8%.
Deal with that first. You are backtracking. You are trying to get rid of that inconvenient FACT.
You never counted on flat 8.6 mbpd. You were so confident. Tell us who Fractional_Flow is. Out him.
Tell us who all your other “anonymous” sources were.
GT, Stuart Staniford has written a great number of provocative pieces. Most of the points you select out in order to criticize above may be unfamiliar to Econbrowser readers. The most important of his claims which we have discussed at length here is the suggestion that production from northern Ghawar is near or past peak. Do you have any factual evidence to which you’d like to refer us that would suggest that this particular conclusion is in error?
I would gladly write 1000 words or more on anyone of the above-mentioned topics and more. With factual evidence.
I’ve already started. “Provocative” is definitely the key word.
The Northern Ghawar issue is a case in point. It only became the story after an 8% Saudi decline based on Stuart’s analysis was obviously just a “provocative” headline. Is Stuart a researcher or an exploitation journalist?
Ghawar peaked in 1981. Something rarely mentioned. According to my math that was 26 years ago. When did it start producing? 1950? I’d have to look that up. But at one time I knew. In fact, if you give me some time I’ll dig up some work I’ve done on the subject based on Matthew Simmons’ work.
So yeah, it’s past peak. And in light of this, every inference that Saudi production is suddenly crashing should be met with some skepticism.
Graphs to follow.
GT, we don’t have a facility for readers to include graphs with comments, but if you don’t have a place to post your graph, feel free to send it to me, and I’ll give it a permanent url that you could use to refer to it with in comments here.
Please let me know where you get the annual production figures from Ghawar, or by what other means you may have arrived at your 1981 date.
As for the 8% figure, that strikes me as not the key issue here, though I agree it would be quite a scary development if true. The real question is whether Saudi production is ever going to be above 9.6 mb/d again.
GT:
“I am quite aware of your views. You don’t need to brief me.”
Actually, you mainly show a continual tendency to pronouncedly mischaracterize them. For example, I never said that Saudi Arabian oil production would continue to decline at 8%. Feel free to try to support your contention on that point with some quotes. What I actually did do in that piece was point out that the average rate of decline during the prior period was 8% (which is fairly numerically incontrovertible), show what would happen in the scenario were that *were* to continue, and point out that that wasn’t very likely because the resulting URR would be unreasonably low based on all prior estimates.
You seem to be angry at me for reasons I don’t have the first idea about.
I apologize. I should be grateful you are actually responding to me.
I could try to support my contention on the point of what you meant or did not mean by an 8% decline, but I don’t know what the point would be.
It has already been done. See the responses of “Pitt the Elder” to “GreyZone” on your own website. I’ll gladly look up the dates if you don’t have the time. No, I am not Pitt, but I value his input highly and he is one of the few writers I can stomach anymore on the Oil Drum. You are also one of the few. Pitt’s comments are in no way opposing the things you have said, they pertain to how your readership views them.
As a few people have suggested in response to your original 8% article, that number didn’t require much research.
What is more important is what your readers came away from your work understanding/believing – views which you have done nothing to dissuade them from.
So I ask you, if an 8% decline is not what you wanted taken away from your writing, if you had to do that headline over, what would it be?
Do you indeed forecast Saudi in decline? Has Saudi peaked? Or will they peak soon?
Your $1000 bet on Saudi production falls into (in my opinion) what Pitt calls the “false dilemma fallacy” category. You suggest that their production is falling (and will continue to fall) but want to bet that it won’t rise above an amount 10.7 that hasn’t been achieved yet. My problem is that we are going in two different directions here. The grey area in between could last for over 5 years, maybe more, by that time we will have moved on to others “issues.”
Saudi production in 2004-2005 was historically very high. I don’t see a drop to 8.6mbpd as necessarily significant given what I believe are reactions to a new paradigm in the oil world.
A serious recession in this country cascading to China and to the world precipitated by high oil prices will knock Saudi production back to at least 6 mbpd. And though having nothing to do with peak-oil, will be touted as such by the peak-oil crowd.
It is not a good bet anyway. You can never win. Just send me a bunch of blank checks and I’ll fill them out everytime Saudi production moves above 10.7 mbpd.
Do you think Simmons is going to win his bet with Tierney?
If you are serious about the oil professionals of the world betting on Saudi production might I suggest petitioning Intrade.com to set up a serios of options on the matter. It will happen sooner or later, you may as well take credit for it. They currently have options on the “last named Tropical Storm (i.e. hurricane)of the season.” I am researching the statistics and hence the odds on this proposition on a daily basis. I am convinced these options are priced too low, and there is a killing to be made in the next three months. The statistics are freely available on wikipedia and from other weather services.
There could be options in various thousand-barrel per day increments by certain dates. By various countries or OPEC in general.
Anyway, I’ve got to go. More later. I promised to present something on Ghawar and need to find my files on that. I appreciate you listening.
Yes, I was a bit angry, reading the Oil Drum tends to make people like me angry. But you just work there, right 🙂
“Yes, I was a bit angry, reading the Oil Drum tends to make people like me angry. But you just work there, right :)”
Actually, I volunteer there – everything I’ve done to date is pro-bono just because I think these issues are important. When I disappear, or come back, it tends to have a lot to do with other factors in my own life that allow more or less time for unpaid activities, and not all that much to do with what other folks are doing or saying. In general, I devote as much time as I can possibly spare to this research, and sometimes rather more.
“I could try to support my contention on the point of what you meant or did not mean by an 8% decline, but I don’t know what the point would be.”
“What is more important is what your readers came away from your work understanding/believing – views which you have done nothing to dissuade them from.”
I am responsible for my words, and you are responsible for your words, and neither of us is responsible for what other people choose to think or write. Many commenters at The Oil Drum believe all kinds of things that I completely do not subscribe to, and if my words could persuade them they would have changed their minds long ago. As a matter of fact, you are not the first person to misinterpret what I wrote in this particular way, and I’ve already expended considerable energy pointing out what I actually did say about the 8% decline (which was the actual decline rate during the course of 2006). My words were, for the record, from this post:
http://www.theoildrum.com/node/2331
“For the medium term, if you just project the underlying linear decline rate in 2006 out for the next five years and add in the known megaprojects, you get the red line in the following graph:”
http://www.theoildrum.com/files/ksa_scenario_0.png
“If that were true, production would have halved by 2012. However, it’s very hard to believe that declines would continue at that rate. Eg, if they continued all the way to zero after ten years, that would only be another 16 billion barrels of oil production. No-one is that sceptical of Saudi oil reserves. Eg Hubbert linearization suggests there’s about another 80gb or so of oil there. ASPO estimates 170gb still to produce (though based on a fairly generous recovery factor).”
“So rather than declines continuing at the present rate all the way into the ground, more likely, I think, is that there are a large number of small fields, and pockets in big fields, which carry the remaining reserves.”
I would change my emphasis a little based on further analysis – I understand Ghawar’s reserves much better now, for example, and believe there is a lot of oil remaining in the southern half of the field. If I had know that then, I would have said it, but nothing in my statements seem wrong, and in particular, I don’t know how I could have made it any clearer that I did not expect the 8% decline rate observed during 2006 to continue indefinitely, but rather “found that very hard to believe”.
So when you said that “A projection of 8% was offered”, and that I am now “changing my position”, I think you are distorting my words. I have never said that production might not stabilize at some lower level. It is entirely possible that the stabilization of the last 3-5 months (depending on data source) is the start of some new plateau level. Alternatively, it is also quite possible declines will resume. I don’t have enough data to distinguish the possibilities at present. However, I do continue to feel comfortable that “international oil agencies will never report sustained Saudi production of crude+condensate of 10.7 million barrels or more.” which was the outline basis of my bet.
So far, nobody, or at least nobody with a name and address they were willing to share, has been willing to risk their money to bet against me on those terms, so my offer remains outstanding. The Saudi’s say they will increase capacity to 12.5mbd, but at least so far, I haven’t found anyone willing to risk money on that prospect.
Prof. Hamilton,
I hope to read your comments on OPEC’s new President Mohammed El-Hamri’s declarations yesterday. He said the price of oil today is the same as three decades ago (in real terms). I presume he is right. He also said (more or less) that OPEC is decided to avoid a world recession and will flood the markets with cheap oil as soon as they feel there is a danger of a slowdown. He gave the impression that OPEC is in full control of the situation, but who knows.
Jaim Klein, I tend to discount any of these announcements or promises of what OPEC says they might do in the future. I’m reminded, for example, of the many times in 2004 that we heard such announcements from the Saudis. But the reality proved to be that there were no production increases that year even as the price continued to climb.
In particular, in the present instance I have difficulty recognizing the operational significance of the intention to flood the market as soon as there is a sign of an economic downturn. I see plenty of indications right now of an incipient downturn. If it does turn into an outright recession, one of the first things I would expect to see is a sharp drop in petroleum demand and prices. OPEC will flood the market in such a situation? I think not. If they are waiting for even stronger indications of economic softness than we have right now, then they are planning to wait until it would be too late.
My general rule is to look at the quantities that individual OPEC members produce, rather than the statements made by OPEC spokesmen.
Thanks. I should have been more skeptical about OPEC’s rethoric. It is privilege to read Econbrowser and “talk” with you.
It was interesting to see that Stuart’s original article on an 8% Saudi drop was actually a response in some ways to things Professor Hamilton had written.
I have spent the last few hours reviewing the charges and writing a piece on what I believe to be the truth. I’m never quite sure why it is so hard to “prove” when it always seems to be in plain view for all.
I had read all Stuart’s pieces carefully at least three times when they were published. This is to his credit. But I hadn’t revisited the original one until now.
Stuart starts with a couple of very short introductory paragraphs, a long quote from JDH, and a couple of graphs on the situation. His introduction is basically explaining the graphs.
Then as he gets into it, these are some of the first things he says (From March 2nd):
[…]”However, the regressions make clear that all four sources are in strong agreement about the nature of the decline.”[…]
[…]”As far as I know, there are no known accidents or problems that would explain any restrictions on oil supply, and the Saudis themselves have maintained publicly that their production is unproblematic and they intend to increase it.”[…]
There are perhaps 300 more words some discussion of projects and a graph or two more(one’s link is broken now, I think), then this:
[…]”I also looked at the question of whether there is any evidence for the idea claimed by OPEC that the Saudi’s deliberately cut production starting in November. Specifically, I constructed a series that represents the average decrease, month-over-month, in the four series. That data looks like this (the blue box is one sample deviation up or down from the mean – the heavy black line). “[…]
The words “cut production” above are linked to a Bloomberg article and the whole section reads, quite frankly, as if the OPEC cuts are either a conspiracy or a rumour. The fact that they were actually real, substantial, and the real reason behind both the price increases and the Saudi reductions is, well, missing. We can only see this with the benefit of hindsight, of course.
But this was March 2nd. The OPEC cuts had been discussed since August and September. The price was already rising. The second set of cuts was initiated on February 1st.
If you say there are no known problems, accidents, or restrictions – then it can be either one of two things. Voluntary or involuntary. And you clearly make no case for voluntary and present everything you can for involuntary.
Forget everything else you have written on the subject. These were your first words.
Where exactly was I mischaracterizing you?
I spend most of my time trying to compose stuff on MS Word, and then end up posting something completely different and then as soon as it is posted want to add something else. Forgive me. The nature of blogs, I suppose.
I believe the book is called “The Black Swan” – recommended by somebody I know. I think the subtitle is “the importance of highly improbable events.” I think I want to read that next. Some of it’s early main points have been related to me. I couldn’t help but see their relevance to the world of oil.
Let’s be serious, Stuart. If Saudi oil production drops in 2007 and 2008 by another 8%(or even 6%, 3% per year) after dropping by your 8% in 2006, you won’t exactly be distancing yourself from your comments of March 2nd.
When I say you are backtracking, I mean it. You are saying the things you are saying now because odds are that Saudi oil production won’t do the things that you suggested (and honestly thought they would do in the near future when you suggested them).
If you were initially correct in predicting geologic decline for Saudi Arabia, and we move off this “new plateau” as you now describe it in the next year, you will be just as quick to distance yourself from the remarks you made to me in July 2007.
But this would not necessarily be the best move. If my sources are correct, being an “expert” is not about being the most correct, but about being the most articulate.
Thanks for these additional comments, GT. However, I’d still like to suggest that the two main questions as far as I am concerned are first, Has production of oil from northern Ghawar peaked? You earlier seemed to agree that it has. In any case, this question in my mind has nothing to do with words or personalities, nothing to do with the 8% figure which you continue to bring up, and everything to do with the specific quantitative arguments laid out
here.
The second big question is whether, and under what circumstances, Saudi production will ever exceed 10mb/d.
I’m still trying to find my excel file. But yes, if you don’t believe me, consult “Twilight in the Desert.” You do have a copy, don’t you:)
Oh,wait, *Northern* Ghawar? Regardless, I’ll lay out a scenario for the second question tomorrow morning. But basically the answer is yes. And I’ll bet, too, I just want better odds than 1-to-1, and a bit better definition on timeframe. Inflation and Net Present Value are quite important
Britney Spears-
Whoops, I did it again!
I wrote this whole thing and than ditched it at the last minute. It was good, it was correct, it just wasn’t what I wanted. I have control over that on my own blog. Not here.
Stuart has control over his “stuff” on TOD.
I published a new chart of Ghawar on my site(blog). This is Simmons-derived. In fact it is pure Simmons.
Notice “Ace”‘s new post on TOD. I might comment on this soon. Ace uses Simmons. And this is going to become a problem shortly. One cannot reconcile Staniford’s and Ace’s opinions with mine when all three of our views are based on Simmons’ work.
Hmmm.
Is Simmons wrong? Or is Staniford? Certainly I am not. I have a pristine reputation. Stuart is a pretender. Hah!