Above are the latest oil production statistics for Saudi Arabia, along with rig counts. The production statistics come from five different sources, but most people will just want to focus on the heavy black line, which is the average of them. Production is on the left hand scale, and is not zero-scaled to better show the changes. Meanwhile, the red curve by itself is the number of oil rigs in country according to Baker Hughes, and is on the right scale. Click for large version in a new window.
Before the beginning of 2005, the rig count was low and didn't change regardless of what happened with production. My interpretation of this is that Saudi Arabia had spare capacity such that they could just turn a tap in order to increase production. Notice, for example, the huge increase at the start of 2003, when, in a very short period of time they added 1.5mbd to production to buffer the world from the loss of Iraqi production due to the US invasion of that country.
In late 2004, they reached a plateau of 9.5mbd (amidst rising oil prices and a rapidly growing world economy), but then production fell slightly right at the end of 2004, and it is at that moment that the rig count starts to increase. My interpretation is that they were struggling to maintain production of 9.5mbd, due to depletion in some of the older oilfields combined with long underinvestment. Indeed there was a further dip in 2006-2007, as oil prices went even higher and Saudi Arabia, the traditional swing producer, should have been increasing production to moderate them. Then, presumably as the delayed effect of all the drilling began to come onstream, production slowly increased again back up to 9.5mbd.
At that point, in summer 2008, as the global financial crisis hit, demand fell and Saudi Arabia sharply reduced production to support prices, and the rig count started to decline as they canceled and delayed projects. Even in 2010, as production increased in line with the recovering global economy, the rig count continued to decline. My assumption up until very recently was that they could turn on the taps and go back to at least 9.5mbd when they wanted to.
However, what we seem to have instead is that in January 2011, production reached a new and lower plateau at around 8.5-8.7mbd and has stayed in that range through May. At the same time that plateau was reached, the rig count started to rise very steeply again.
While there's obviously a considerable amount of guess-work and reading between the lines here, the following appears to me to be the natural interpretation of this data:
- Saudi Arabia is managing its oil production in a completely reactive manner with very little planning ahead for forseeable rises in demand. They only start amping up the rig count when they actually hit a situation where they'd like to produce more, or maintain production at a certain level, but can't. There's then a significant delay before they can restore/increase production.
- Saudi Arabia currently is producing at capacity, which has eroded from 9.5mbd in mid 2008 to 8.8ish today.
- If that's right, then oil production will not go to 10mbd by July. Thus the IEA is going to be disappointed in its hopes, and world leaders will have to decide whether to keep draining the SPRs or not.