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Is Saudi Arabia Still the King of the Oil?

So it's almost official: World oil production is in trouble. The secret has been slipping out of late, with reports of Royal Dutch Shell and other oil producers downgrading their reserves, but it now seems that Saudi Arabia may also be in crisis mode over its reserves.

At an energy conference in Washington, D.C. on Tuesday sponsored by the Center for Strategic and International Studies and the Saudi Business Council, the idea that Saudi oil reserves are drying up was certainly not something that the Saudi oil finance ministers and their U.S. counterparts would have admitted. In fact, they lined up to say that the industrial world has nothing to worry about on the oil front for decades.

That so many high-ranking Saudi and US officials should gather in public to tell us not to worry should be quite worrisome.

The need for questions was underlined all day by a stream of contradictions and a statement from Federal Reserve Chairman Alan Greenspan, who turned attention away from the future of global oil and towards the future of U.S. natural gas.

The scare that drew the Saudis to Washington this week began two months ago, when the world's largest private energy banker, Matt Simmons, began loudly voicing his concern about the state of the Saudi oil reserves to the media.

Simmons said then that "the entire world assumes Saudi Arabia can carry everyone's energy needs on its back cheaply. If this turns out to not work, there is no Plan B, and the world will face a giant energy crisis."

The happy tune hummed on Tuesday was that while people have been warning that we will run out of oil since the 1880s, the market has always proved them wrong. In an effort to calm fears, Saudi and American officials joined ranks to get their stories straight. Saudi Petroleum Minister Ali Naimi told the packed house of bankers, diplomats, economists and media that "Saudi Arabia's oil reserves are real," and guaranteed that there would be "no shortage of oil for the next fifty years."

U.S. Deputy Energy Secretary Kyle McSlarrow agreed with the Saudis that serious oil difficulties won't begin for another forty or fifty years, though there are "challenges." For instance, he wasn't at all happy about gasoline prices, which he blamed on high oil prices, driven up by the recent OPEC cut in production. Indeed, oil prices have been closer to $40 than $30 per barrel for all of April, when prices should be at their lowest for the year.

The Saudis countered by suggesting that the U.S. could lower gas taxes if it wanted cheaper driving, and they offered a paradoxical reassurance that they were absolutely committed to $25 oil barrels, but not any time soon. Just how uncommitted they are to lower oil prices was later underscored by the Saudi Minister of Finance, Dr. Ibrahim Al-Assaf, who said that they'll need to spend billions of dollars on desalination and power plants.

Those billions won't come from exporting sand. Oil export revenues make up more than 90 percent of total Saudi export earnings, about 80 percent of state revenues, and around 40 percent of the country's GDP. Dr. Assaf also said that although Saudi Arabia is seeing 4 percent economic growth, it really needs 8 percent to cope with its growing social problems and exploding population. It doesn't take a super-computer to work out where that doubled growth must come from.

Several speakers, including energy analyst and White House advisor Daniel Yergin, explicitly denied what has come to be termed the "oil peak." The term refers to the inevitable peak and decline in production of a non-renewable natural resource. U.S. oil peaked in 1970, just three years before the devastating Arab oil embargo. If in 1973 U.S. oil output had had spare capacity, the effects of the embargo would have been much more muted – perhaps the Persian Gulf producers would not even have tried it.

Now there are growing voices inside and outside the oil industry warning that with world oil discovery having peaked in the 1960s, it has been nearly a quarter century since we found more oil than we used.

They remind us that exactly forty years after US oil discovery peaked in 1930, its production peaked. In other words, the world is now where America was in 1970. Since an unexpected decline in world oil production is generally regarded as a catastrophe, no government or official institution has yet admitted it. Signs of oil peak therefore have to be found indirectly.

Even those who believe that this is the decade that oil will peak and decline had thought that the Middle East, and Saudi Arabia in particular, would be immune for at least another ten to fifteen years.

Now it seems even that shard of confidence might be misplaced.

Cutting No Slack

Whether or not it is true that Saudi oil reserves are real, the oil minister did say something that no one disputes: that the economic miracle of the 20th century depended on a plentiful supply of cheap oil, and that future stability depends on spare capacity. With high prices and supply problems from Venezuela to Nigeria and Iraq, the cheap abundance is already in question. Where is that spare capacity, that may soon be so badly needed? Nowhere but Saudi Arabia, according to Guy Caruso, head of the U.S. Energy Information Administration, the statistical arm of the Department of Energy. He said that in the entire world the spare capacity is only two million barrels a day, and all of that two million is in Saudi Arabia.

In itself, two million barrels a day is far too little slack for a system that needs 80 million barrels a day, and more dangerous still to have it all in one unstable place. Just how unstable was demonstrated last week by a suicide bombing in the capital, Riyadh, and Tuesday by a highly explicit threat of new and more ferocious attacks by Al Qaeda, who say that "the apostate Saudi government will be incapable of protecting their interests or providing security for them."

But those are operational matters. What if the Saudi spare production capacity itself is not real? Credible sources have suggested that Saudi Arabia can barely maintain its current output of around 8.5 million barrels a day, and that when it does increase output, it is only briefly and mainly by means of using its strategic reserve, which may be as large as 70 million barrels. If this is the case, it could maintain a 2-million-barrel-a-day increase in output, but only for a month. Is this what they would use to back the Saudi promise to help Bush win another term, as Bob Woodward recently claimed, in Plan of Attack? The Saudis vigorously denied any such promise, but no one asked them about the exact nature of their spare capacity.

Interpreting the Oracle, Alan Greenspan

In his comments, Alan Greenspan took a skeptical approach, first questioning whether we could be so sure that all was well with oil, by pointing out that for six years long-term futures prices have seen a "dramatic rise." He expressed dismay yet again that too little attention was being paid to these kinds of long-range energy prices, which were ominous indicators of a difficult energy future, which could "alter the magnitude of and manner in which the United States consumes energy."

Greenspan warned that we had spent "more than a century draining the more immediately accessible sources of crude oil," and that much new technology was being devoted to exploring and producing in very harsh physical environments. And unlike the other speakers, he cryptically left the door open for oil peak as being an underlying cause of rising oil prices by saying that the "strength of crude oil prices presumably reflects fears of long-term supply disruptions in the Middle East." He didn't sound very convincing. Then, again, he may be signaling that he is not convinced either by Saudi claims of practically endless oil.

However, there is no doubting that Greenspan sounds both convincing, and really concerned, when he talks about US natural gas. Despite this being a conference about oil, he reserved his strongest remarks for gas.

He pointed out that natural gas futures jumped in 2001, and that natural gas is really something to worry about. So much so, Greenspan warned, that in order to get access to the world natural gas markets, America must build a huge new rash of liquefied natural gas terminals, especially offshore (where it is harder to argue that they are a safety hazard). Without immense capital investment, natural gas prices will stay high, and that will hurt the economy. In fact, Greenspan is saying quite openly, that in the near term, there is no solution to tight natural gas, and this will have broad effects on industry trying to increase jobs, and on a power sector struggling to supply ever more electricity to an economy that must grow fast in this highly political year.

Some are predicting that 2004 will see the highest economic growth for a generation, both in the U.S. and in the world. That growth, fueled by ravenous desire for oil by China, and now India, combined with American gas problems, seems set to make 2004 a tough year for oil and gas, and possibly ruin the rosy forecasts of super growth.

Which brings us back to Saudi Arabia. If it turns out to be playing by the same rules as Shell, now facing threats of criminal investigation for lying about its proven reserves, the whole world should start asking for some tangible proof that Saudi Arabia is still the king of oil.

Julian Darley is the author of High Noon for Natural Gas: The New Energy Crisis, forthcoming from Chelsea Green Publishing. He is director of the Post Carbon Institute and editor of Global Public Media.

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