It seems to me that the first rule of being in power is job security, not that your comments contradict this. But your early-on emphasis on maximising profit might not be the key consideration.

Is it reasonable to suggest that the Saud Family is principally facing an existential crisis (or a percieved one, if there is any difference) at this point? So the balancing game and the swings up and down of supply offerings might be the 'dance done to prolong the dance itself'.. Or at least until some other solution presents itself.. and there one is again advised to be careful what one wishes for, in case what 'presents itself' is a geologically imposed energy-sanction.

Of course, the decisions a manager makes would ideally be based on good, detailed oilfield information, which we here lack, it seems. But to read back from the actions we see, I have to first ask whether they are guided by Adam Smith and those market economics assumptions, or if other priorities and endgames (besides 'maximise shareholder value') are at play in the decision process.. I think 'maximum profit' is a security blanket in western thought, even if it, like the 'security' of carrying a handgun, may not be as guaranteed as one wants to believe.

Bob Fiske

Robert, let's try this step by step.

I don't see what the Saudi's have to gain from announcing either their true reserves, or the fact they they have passed peak. When we say Saudi's, let's be clear we mean the House of Saud, not the country, by the way, a difference that may yet come home to roost.

I'm guessing the present situation serves the Saud House just fine. If we presume that their stated reserves are not accurate, they have information that others don't, and can build future policies on that. Very helpful, both politically and economically, to know more than others. Their present position doesn't depend on what they really have, just on what people believe they have.

A Saudi peak announcement can lead to global economic panic, something that, today, most likely wouldn't be good for them, or their US buddies. Prices may go up, but they may plunge as well, better keep the economy quiet and rolling in a steady stream of income.

Admitting that they have less than stated reserves might cost them face and status, both abroad, just look at OPEC, and at home, where the House of Saud is tolerated only beacuse of oil revenues.

What's best: an aura of unlimited profits, or one of large, but limited ones?

So no, I don't see what they have to gain by coming clean. But maybe you see things I don't.

Robert, very good post, thanks. But I have a question. Now I know you really do not know what Saudi's true crude reserves are. None of us do. But we all have our suspicions. Here are a few guesses that were current on February 20, 2006:

Oil & Gas Journal....................264.3 billion barrels
BP Statistical Review..............262.7 billion barrels
Colin Campbell.........................159 billion barrels
Dr. A.M. Samsam Bakhtiari...120 to 140 billion barrels
Ron Patterson..........................70 to 80 billion barrels
Robert Rapier..........................???
Anyone else who would venture a guess. ????

I realize you may be reluctant to venture a guess, but please do. Let’s suppose for a moment that there was a way to accurately measure Saudi’s reserves. (Although we both know there is not.) And then suppose this were a contest and the one with the closest guess would win a million dollars. What would be your guess? Okay, my guess of 70 to 80 billion barrels is not specific enough so I would guess 75 billion barrels.

Ron Patterson

Robert,
Ther House of Saud is a family of 5,000 oligarchs who "own" the largest production in the world. If they admit to peak oil their 20 mm subjects will realise how badly they've been cheated, and a bloodbath will likely follow to rival the Bolshevic or French revolutions. Also, the US dollar will really and truly collapse and their US Bonds, stocks and real estate become illiquid and possibly worthless.
If I were King of Arabia, I'd probably lie as long as possible about the true state of the reserves and production while rapidly selling as many US assets as possible without an abrupt collapse in the price of the US dollar. I'd buy gold as quickly as possible, and I'd try to make allies in the Islamic Fundementalist movement by giving them financing and refuge in my territory in the hopes they'd stave off beheading my family when the Islamic poop hits the fan.
Isn't it funny that this seems to be whats happening?

But wouldn't an announcement of peak and impending decline be just the thing to catalyze a worldwide scramble for alternatives?

It might not impact the House of Saud (and Big Oil) in five years but in ten, fifteen, or twenty, it would certainly cut something off the hoped-for long, profitable tail.

Also, as others have, I raise the point of political instability -- rulers who once appeared to be beneficial parasites but, in the absence of future oil revenues, are seen only as parasitic might have to skedaddle to Montreux or Dubai years ahead of schedule.

On the subject of US inventories, it has been reported that they're high. Compared to three or four years ago, they certainly are. On the EIA website, though, inventories in 1982 were even higher than today.

What's so important about the five year average as opposed to a longer timeframe?

Robert, Have you been talking to Dmitry ?

"If the challenge is to avert planetary self-destruction, then let's all get on the same page: formulate a project plan, define the next steps, and start executing." Then you realize that the person you are talking to is serious, and the situation becomes awkward. "

Good luck with the "if I were king" excersizes in intellectual masterbation.

Batten the hatches and take stock of your Profound Locale folks...

Your analysis is like one that seems similar to classical economics in its assumptions that people act in a rational fashion. While I suspect there are fairly strong tendencies in KSA to try and deal with the oil issue in a rational way, one would have a tough time trying to sell the idea that the Saudis are 'rational' in a larger sense, unless you consider the medieval feudal kingdom structure of their society to be a rational one.

My own expectation would be that there might be a fair amount of rationality among high-level policy making people in KSA (including King and main Princes), but that there are strong currents of irrationality at lower levels represented by the level of petro-engineers who may (or may not) have a much more accurate grasp of what the overall oil picture is vis-a-vis depletion and spare capacity. And these people are who the policy-makers depend on for the... well, policy making. I see no reason to believe that, at this oil-engineer level, one would find any more rationality or acumen than one would find in say the engineers who predicted the North Sea would sail along until 2010 at max levels, or any similar such group. Look at the Exxon thread and their broad dismissal of PO based on tar sands and 'oil shale.' In fact, if one considers the Exxon and other US-based oil companies as occupying an analogous position in the US as the ARAMCO people occupy in KSA, you would likely get a very optimistically skewed picture of US oil capacities and capabilities. As WT has pointed out, there are even a few who still insist the US has not yet passed its peak.

I see no reason whatsoever to believe that the ARAMCO people are somehow more capable of delivering a true picture of their oil situation than are the US oil industry people.

Saudi Arabia is an interesting and important country for a number of reasons. It's history as a nation is short and intertwined with the recent history of the United States to a remarkable degree. Going way back, it appears that President Rooseveldt made a deal with the Suadi royal family, which was as simple as it was profitable. The United States would support, protect and co-opperate with royal family, with military force if necessary, in return for Saudi oil. In reality Saudi Arabia became a U.S. protectorate and valued partner. There have been ups and downs in the relationship and friction, but basically the alliance has held for the last sixty years.

Saudi Arabia has gone through enormous changes during the last fifty years. Population growth has been dramatic. Six, seven, eight children are the norm. Saudi has one, if not the fastest growing populations on the planet. I believe currently the Saudi population is growing a over 8% a year! The population is also one of the youngest in the world. With a substantial majority under thirty. Unemployment is massive. Estimates vary between twenty and thirty per cent. Good jobs are hard to find, without the right connections. At the same time there are hundreds of thousands of young people with excellent qualifications who are frustrated and increasingly bitter and angry at how their country is governed or perhaps that should be miss-governed.

At the same time as unemployment has grown the living standards for the majority of subjects has fallen substantially. The oil revenues simply can't keep pace with the rapid growth in population.

At the same time as many young Saudies have received educations abroad, they return to a society which is still basically fuedal in its social and political structure. In truth all normal political activity is banned as we would recognise it in the west. About the only "safety valve" where one can express ones discontent is through religion.

The Saudi Royal family, which the United States has promissed to support, is fabulously wealthy, but ridden with strife and factions. The different factions appear to balance each other out, leading to something close to inertia and making "reform" impossible.

Saudi is a country sitting not only on oil, but also on an enormous powderkeg, which could explode at any moment, given the smallest of sparks.

Civil strife or a revolution in Saudi Arabia would draw in the United States almost immediately. It's almost a paradox that whilst Saudi appears "stable" it is also incredibly dynamic, like a pressure cooker waiting to blow.

"Reformists" in the royal family are aware of the enormous problems they face, how on earth do they placate and control the legitmate asperations of their subjects, firstly by creating jobs, without releasing powerful social forces that might sweep the monarchy away. The Saudi royal family are balancing on the edge of a sword.

If it's true that the royal family have wasted the nations oil legacy and reserves are far less than normally assumed, this would function as the spark that would lead to an explosion in Saudi Arabia that would have implications far beyond its borders.

Yep.

Thats about right.

Rule number 1:

Maximise the return on your assets

As would any good family business. (which is all KSA really is).

Russia is doing the same BTW. - Cannot blame them for learning Capitalism... we showed them how.

The boot is on the other foot and its kicking...

I agree with this Robert. But doesn't this kind of logic apply only when you know that you are cose or very close to your peak production?

Hi Robert. I agree completely with the bulk of your story, however, I believe you are wrong that the Saudis would admit to being post peak. I invite you to reconsider this point, based upon the following considerations.

RR wrote:

If my oil production has peaked, I think I would admit it to the world. I would be glad to admit it. I explain to my country that even though production has peaked, we will still be producing a lot of oil for many more years, and now we will get an incredible premium because of the pending supply/demand imbalances. The coming years will be prosperous indeed.

The thing to note is that the consequences for admitting peak occur regardless of whether peak has actually occurred. That is, if admitting peak makes for a prosperous future, it might also be the case that talking up peak prior to actual peak (ie. claim "we may have peaked" when they know they haven't) might also bring a prosperous future. According to your narrative, there appears to be no sensible reason why the profit maximizing time to admit to peak should coincide with the actual peak itself.

If you want to claim that the Saudi's would admit to peak when it occurred, and attribute this to a profit motive, then you need to explain why talking up peak early, or admitting it late, would not produce even better profit outcomes. There appears to me no obvious reason why this would be the case.

Therefore, if we accept profit sensitivity as the basis for the narrative (which I do), then it appears likely that the Saudi's would not admit to peak, for the simple reason that they have been so keen to keep their actual position with regard to peak occluded for so long. The timing of actual peak bears no relation to the appropriate time to admit peak within the context of maximizing profit. They are likely to keep their actual oil position occluded until which time they deem it profitable to reveal. There is no obvious reason why this time should coincide with the actual peak of oil production.

I think I just said the same thing about 4 different ways, but I hope it ended up being quite clear.

If I were king I would do exactly what they are doing... I would see denial as both maintaining demand for the last possible moment and, meanwhile, I would not be so sure I would mantain my uneasy perch on the throne if all my citizens realize over half our treasure has been spent, with no huge fund set up for future generations. The ungrateful wretches might even think I was in some way responsible. Anyway, if I had any thought of coming clean, the rest of the royals would remove me in a flash.

It has long been lucky that the majors, who are well aware of the exact sa situation, are looking at the dismal future from the same perspective. Consider the current xom chair... will he be voted hundreds of millions in retirement - as was his predecessor - for his valuable services if shareholders begin to focus on declining reserves everywhere? Even worse, might shareholders and/or the board revolt as they realize he is not successful in replacing reserves? His clear incentive is to deny as long as possible.

Regarding price, even common knowledge that less oil will be produced in the near future will not necessarily affect price much - the laws of supply and demand will still hold. If production stays in balance with consumption then price will not move much... once storage tanks are full refiners simply can't buy any more to store for future needs, and their lack of buying will lower price. Consider gold... we are far past peak gold, but price has not come close to inflation over the past decades. Of course, some exporters might choose to export less, and future prices will almost certainly climb.