Tuesday, November 15, 2011
Saudi oil production has been declining modestly for the last 2-3 months (depending on your preferred data source) while the oil rig count in country has continued to increase. See above graph (the black line is the average of five sources of production information on the left scale, while the red curve in the lower part of the graph is the Baker Hughes rig count on the right scale).
For readers that don't follow every twist and turn of Saudi oil statistics let me sketch the back story since 2005. In about 2005 when global oil supply appeared to plateau, Saudi Arabia also had appeared to plateau at around 9.5mbd. At that time the rig count, having been stable for years, began to rise as Saudi Arabia launched a series of large megaprojects to expand production capacity (or replace oilfields that were in decline depending on your point of view). Then in 2006, production began to mysteriously decline despite high oil prices (provoking a great deal of debate in the energy blogosphere as to whether this was a voluntary move to further increase prices, or an involuntary one due to underinvestment and/or declines in some of their fields). Regardless, in mid 2007, production began to gradually increase again until by mid 2008 it had reached the previous plateau level of 9.5mbd.
With the financial crisis of 2008, oil prices dropped below $40/barrel and the Saudis, in co-ordination with other OPEC countries, made a moderate but sharp cut in production down to about 8mbd to protect prices. Then in 2009 and more so in 2010 they began to gradually increase production as the global economy improved and prices got higher. This culminated in a brief hiatus just below 9mbd around January 2011.
Indeed as the world lost Libyan production in January/February of this year, Saudia Arabia initially did nothing. However, a few months later there was an agreement with the IEA such that the OECD countries would release oil from government strategic reserves for 30 days while the Saudis ramped up to a level of 10mbd. Saudi Arabia did then increase oil production sharply in June to a peak of around 9.7 mbd or 9.8mbd - not quite achieving the promised 10mbd.
They have not then gone on either to increase up to 10mbd or to maintain production at the peak level, but rather have eased back to about 9.5mbd.
So are we any the wiser as to the great question of whether Saudi Arabia has significant spare capacity and could increase production to 12mbd or more if only they chose? Only slightly I fear. I interpret the fact that the Saudi's couldn't quite meet the 10mbd promise and almost immediately backed off that, despite amply high prices, as consistent with the story that the recent Saudi production expansions have only gone to offset declines elsewhere (perhaps especially in north Ghawar). The increasing rig count also suggests a lack of comfort with the amount of spare capacity presently available.
However, I can see that someone who thought the Saudis were able to produce more but are profit maximizers who intend to keep prices as high as possible consistent with not actually throwing the world economy into recession might also be able to tell a story about how the Saudis did the bare minimum to moderate prices after it became clear that the Libya price spike was causing global economic harm but then began gradually lowering production as prices slowly began to fall following the price spike, keeping the world in a state of slow growth, but some growth, while maximizing the Saudi take for its oil. The one weak point in this story is that it offers no explanation for the rising rig count.
Of course - at this point maybe the difference between the two views doesn't actually matter that much - either the Saudi's can't produce more or they won't, but either way the effect is to keep oil prices high enough to be a significant constraint on a world economy that is already struggling.