It’s the sort of news that would spoil an oil executive’s breakfast. Last night the Guardian reported that a cache of WikiLeaks cables from American diplomats in Saudi Arabia indicated that the Mideast country’s oil reserves could be overstated by as much as 40%. If true, that would have major implications for oil prices because the Saudis are not only considered the world’s second biggest oil producer, with one-fifth of the world’s proven oil reserves, they have also long claimed to have spare production capacity that could be essentially “switched on” when oil prices rise too high. Here’s the news from the Guardian:
Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco’s 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as “peak oil“.
A cable from December 2007 tells the story. U.S. diplomats in the Saudi capital of Riyadh met with al-Husseini. The American representatives had been told earlier by current Aramco executives that the company had 716 billion barrels of total oil reserves, of which just over half were considered recoverable. (“Recoverable” oil means that petroleum that is economically worth the cost of getting it out of the ground.) Current Aramco executives believed that in 20 years the company would have over 900 billion barrels in reserves, and that advances in technology would mean that 70% of it would be recoverable—good news for those who want to keep oil prices from rising in the future.
But al-Husseini, the former Aramco exec, told the U.S. diplomats that his successors were far too optimistic. He said that Aramco was overstating its reserves by as much as 300 billion barrels. He believes that Saudi Arabia has approximately 360 billion barrels of proven reserves—meaning oil that has already been produced or which can be exploited with current technology. Al-Husseni said that once 50% of those reserves had been produced, the country would reach an inflection point, resulting in a slow and steady decline in output. He also believes that inflection point would be reached in 14 years at current rates of production (12 million barrels a day), and that it would be followed by a plateau in output and then a decline. Al-Husseini also told American diplomats that Saudi Arabia lacked the engineers and other resources to push production to the max.
Other cables released by WikiLeaks confirmed that American concern on the ground in Riyadh over Saudi Arabia’s ability to continue meeting world oil demand, while noting that as Saudi Arabia kept growing, using more oil for electricity, it would have less to sell to the rest of the world:
Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period.
For Kevin Drum of Mother Jones, the cables were proof that peak oil may be coming soon:
Production capacity just isn’t going up.There’s always Iraq, of course, which certainly has more production capacity if it can develop it, but Saudi Arabia increasingly looks like it’s peaked already. And if that’s true, it probably means that the global peak in production, which was delayed a few years by the 2008 recession, is most likely not too far away. Our future is going to be increasingly oil free whether we like it or not.
He was seconded by the Oil Drum, a popular blog for energy experts that has frequently raises worries over the possibility of peak oil:
It is almost certain that the Saudis are overstating their capabilities. The reserves for Saudi Arabia and the rest of the Middle East are not audited, nor are their supposed “spare production capacities.” They may have some spare capacity, but not the amount stated. When oil prices spiked to $147 barrel in July 2008, Saudi Arabia and others in the Middle East increased their production a bit, did not really come through with a huge surge in production, the way one would expect from their suppose spare capacity.
World oil supply has been roughly flat since 2005. Many are concerned that oil production will actually begin to fall in the next year or two – what is referred to as “peak oil” in the Wikileaks cable.
But here’s the thing: if the WikiLeaks cables were really the bombshell some commentators are making it out to be, global oil prices almost surely would have responded. Yet they’ve barely moved over the past day, sitting at about $86 dollar a barrel at midday Wednesday. The Wall Street Journal thinks it knows why:
Mr. al-Husseini says he has no problem with either Saudi Aramco’s official figures on current proven reserves or Mr. al-Saif’s estimate, but was simply making the point that to describe “oil in place” as reserves was to inflate the kingdom’s figures by several hundred billion barrels.
By that reckoning, the world of energy looks pretty much how it looked yesterday, with Saudi Arabia set to remain the world’s biggest producer for some time yet.
The Financial Times also notes that al-Husseini has always been more bearish than his colleagues on oil reserves and global petroleum production. He also might have a beef with his former company Aramco, as one cable noted:
Al-Husseini retired in the midst of an executive dispute, supposedly caused when he unsuccessfully attempted to engineer his ascension to the position of CEO. Although he continues to live at Aramco’s main camp and has close interpersonal relationships with key Aramco executives, many of al-Husseini’s views on Aramco are shaped by the perception that the company would be better off if he were running it.
So is the world really on the brink of peak oil? The truth is we still don’t know—though Saudi Arabia’s opacity about its reserves doesn’t help us at all. Oil prices have been rising in recent months, in part driven by muscular demand from the developing world—especially China—which has been recovering from the recession much more quickly than the U.S. Predicting the future of fossil fuels is hard—new production techniques, like ultradeepwater drilling or hydrofracking natural gas, can suddenly extend seemingly depleted reserves, though at an environmental cost. Oil won’t be going away any time soon—but it’s not likely to be getting any cheaper either.