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So no, I don't see what they have to gain by coming clean.
I feel that way about their reserves. It doesn't really serve much of a purpose. If they are less than stated, then they would lose face as you say. Their OPEC production quote would also be reduced.
I guess the same loss of face would happen if they admitted to a production peak, but I imagine that this would ensure huge profits - far beyond the windfall of the past couple of years. I just go back and forth as to whether admitting to a peak would be something I would want to do. I think I would. I would want to foster supply/demand concerns, so that my remaining barrels have greater value.
I see your point, and we agree on most of it, but in your initial post you did say that you would come clean about that peak, mainly because of extra profits, if I understand you well.
What is more important to me than it seems to you is the possible shock for the world economy that a Saud peak announcement might bring.
And that would make those added profits "not secure" at best. There could be a massive shift towards other producers, or other fuels, there could be much more (geo-)political tension, their region is already volatile to the extreme. Uncertainty and finances are hard to mix.
If I were Abdullah's chief economist, I'd tell him to be very careful, and ride the train he's on now for as long as he can hold on.
Of course, if Abdullah knows what we don't, that there is a peak, he will have to look beyond that train ride as well. But, being his economist, I think I'd still advise him to sit tight for the moment.
Lastly: Abdullah, if he announces a peak, runs a serious risk of being targeted by his population for mismanaging the resources. Whaddaya mean it's almost gone?
Lastly: Abdullah, if he announces a peak, runs a serious risk of being targeted by his population for mismanaging the resources. Whaddaya mean it's almost gone?
That's just the thing, though. It wouldn't be almost gone. They would have enough for many more years of production - years in which they can extract absolute top dollar if scarcity is perceived. That's why I don't think the citizens would revolt if they announced a peak. It's not like the oil is going to be gone in a few years and the citizens living under bridges.
But that is still at odds with what the rulers have been telling their people of how they have enough oil to last for a century or more. If they have already produced around 107 billion bbls and they ONLY have another 85 billion bbls that might seem pretty ominous. It is going to take a while for people to understand that they are going to get paid a great deal more money for that remaining 44%.
The other thing the Saudi leadership needs to worry about is how the US is going to react when we realize how they have been lying to us about OUR oil. The Saudis might fear that when we realize that they cannot raise production to meet our projected demand growth, we might decide to take the oil under our protective custody (a la Iraq). We might want to fire their management for malfeasance and put in our own people.
re: Saudi Public reaction and US reaction to such an admission..
This was why I (so vaguely, I guess) was thinking in my first reply about considerations other than immediate profitability increases.. to jump back the 'Addiction' theme, a pusher can't tell his addicted customerbase that he will certainly be running out, even if there's some great benefit 'in the meantime'.. "The last few hits always feel the best!, Even if they cost a bit more!"
Of course jumping to the Drug analogies seems as audacious and uncalled for as comparing your political enemies to the Nazis.. but, there it is. There does seem to be some truth in the analogy.
"There's no greatness without Audacity"
-Oscar Wilde
By announcing a peak KSA would lose the political clout of seeming to be a swing producer. Also it would energize the world to look for alternatives sooner than otherwise. Such an announcement would be evidence of lying which might have political consequences.
I agree. People and organizations in power tend to be conservative. I mean conservative in the classic sense - resisting change. If you're on top in the current situation, naturally you'll be wary of any change. Those on top have little to gain and much to lose if things change.
Al-Qaeda has denounced the House of Saud for selling oil too cheaply to the infidels, instead of husbanding the resource for future generations. Announcing a peak would be playing into Al-Qaeda's hands.
I would say that restricting/husbanding output while charging whatever the market will bear is in the interest of both the House of Saud and its subjects. Such a viewpoint has great implications for the future of Iraq.
Iraq is currently outside OPEC's control and will remain so for as long as the US military is there. This provides the motivation for the resistance, whose actions serve to keep production low and effectively forestalls any actions to increase it. Thus, as the Saudi's have stated, they want the US to remain, but for different reasons, of course.
It's also interesting to note that Iran has the same basic interest as Saudi--hell, we might as well lump all oil exporters together, which is OPEC's main raison d'etre--stretch out production and maximize price. I think the US invasion of Iraq has effectively ended the "grand bargain" between FDR and Saud, and the mixed political messages we get from the Saudis is an artifact of a power struggle between the nationalist faction and the US Compradore faction within the Royal Family.
Given the above assumptions and their dynamics, it's actually in the interest of ALL the West Asian regimes to keep the US mired in Iraq thus stifling its ability to become the next "swing producer" until world oil supply has declined to the point where the concept of "swing producer" no longer has meaning. Thus the corollary is for the US to evacuate Iraq while doing everything it can to revamp its oil industry, although this won't be in the interest of the oil "majors" either, as their interests are essentially identical with OPEC's.
These boys are looking further ahead than they get credit for. The Sauds haven't remained in power by being utterly stupid. They anticipate, they divide and rule, they hooked up with the US for the only secure protection available to them, in short, they've played their hands quite well.
It's not smart to assume that today they would have lost their smarts. They're not going to sit and wait in total apathy while their wells run dry. KSA is one of the biggest clients of the US arms industry, and has been for years. The House is armed to the teeth. We won't find out if they have nuclear bombs till they use them, but I wouldn't dare bet against the possibility.
If there are problems with Ghawar, or the entire Saudi reserves, they will have their eyes on sharing both Iraq and Iran oil reserves, once these have been "secured". Aramco is a very professional team, well able to do what Exxon and Shell do, and they'll want and get their share in exchange for further support of the US. The White House can't make moves in the Middle East without the Saudi's, and why should they wish to? KSA is a voice that carries a ton of clout, and the US needs that, every inch of it.
They'll be like Siamese twins, each risks dying without the other.
It's one thing to buy armaments and another to be able to apply them effectively. The appraisal of Saudi's military capability is very poor. All their purcahses were no match for Saddam being in Kuwait. And remember they were duped by false US satillite photos into thinking they were next, which promted them to "invite" the US Oil Protection Service to occupy their country.
I find it very interesting who wants the US to remain in Iraq. Actually, it's easier to list those wanting the US to leave--the Iraqi nationalists, which comprise both Sunni and Shia groups. ALL the other regimes in the region want the US to remain, all citing various reasons, none of which have to do with oil. Even the Green Zone government allied with Iran wants the US to stay, as do the Iranians. This reality was reflected in the recent interview of Moktada al-Sadr in the Italian press and discussed by Juan Cole at his indispensible blog Informed Comment.
From both the Peak Oil and Climate Chaos perspectives, higher prices and decreased production are positives, while increased Iraqi production would be a negative since it would cause prices to fall and CO2 emissions to increase [The same goes for tar sand production increases]. Such a perspective seems bizzare since it implies an ongoing war in Iraq, but such is the current reality, although there's no guarantee that Iraqi oil production will rise after the US leaves given the dynamics of Iraq's internal struggles.
"If there are problems with Ghawar, or the entire Saudi reserves, they will have their eyes on sharing both Iraq and Iran oil reserves, once these have been "secured". Aramco is a very professional team, well able to do what Exxon and Shell do, and they'll want and get their share in exchange for further support of the US."
Damn!!! Never thought of that...makes damn good sense though...
Thank you.
These things need much more attention. People in power have one goal first and foremost: to stay in power. In order to do that, they have to look ahead. That can be done one of two ways: plan and execute action, or anticipate others doing it. Mostly, a combination of the two is the most logical.
From what I see, people in general see the Saudi's as a group of rich guys who sit back while their source of wealth will run out, whether in 2 or in 20 years, or 60 for all I care. For the Saudi's themselves, that is not the view. Of course it's not, they are the power that will do about anything it takes to retain that power. They look beyond the depletion point, and they know much better when that'll be, which is a huge advantage.
They have three things going for them right now, vis-a-vis the US:
The Fed can print $10 billion tomorrow, but not $200 billion. It would collapse the dollar. KSA has much more then those $200 billion, and can dump it in 5 minutes.
So their take is: give me a reason not to.
These three "powers" are being played out as we speak by the House of Saud, as a leverage against the inevitable depletion of their resources. I give you something now, if you'll give me something later. And they do have the smarts to not be easily cheated by empty promises.
Aramco will be one of the companies moving into Iraq and Iran, well, at least according to the plans being drawn up. We'll have to see how it plays out. The suggestion that the Sauds have all those weapons and don't know what to do with them is naive. They've covered their bases alright, but they're not trigger happy, that's like showing your hand in a poker game. Let the US do the shooting, that's the deal after all.
So...you're saying the US military is basically one, big mercenary group for the Saudis? That's ludicrous, that's insane, that's...not a bad deal for the Sauds at all.
US military ground forces, the type that really matter, are being rapidly used up in the Iraqi meatgrinder, and as the following show, the Saudis have virtually no offensive, let alone a defensive, military capability. And as to the battle capabilities of the Iraqi resistance, even someone without any military training should be able to understand these after-action reports, http://www.juancole.com/2007/02/4-us-troops-announced-killed-troops.html...
From the National Review, not a source I usually use, http://www.nationalreview.com/nr_comment/nr_comment020102.shtml
"As the ruling princes meet in secret family conclaves in their Riyadh palaces, they will have another consideration to bear in mind. They know that they have spent hundreds of billions of dollars on military equipment, but to no avail. The Saudi army is not an effective fighting force, and many, if not most, of the airforce pilots are only mercenaries on hire from other Islamic countries such as Pakistan. Maintenance and morale are equally poor. In their one and only experience of battle, Saudi soldiers ran away from the Iraqis during Desert Storm in 1991. Had the American military not been present, Saddam Hussein could have captured Saudi Arabia as swiftly and easily as Kuwait."
All indicators point to no improvement in Saudi military readiness/ability. "The small Saudi Army is denied ammunition to prevent it staging the kind of coup that overthrew Iraq’s British-run puppet monarch in 1958. A parallel `White Army,’ composed of loyal Bedouin tribesmen led by US `advisors, watches the army. The US Air Force, now based in Iraq and the Gulf emirates, is ready to intervene to protect the royal family in the event of a coup attempt." http://www.ericmargolis.com/archives/2004/06/the_storm_headi.php
Then there's this thread, http://www.strategypage.com/militaryforums/40-238.aspx and this one, http://www.worldaffairsboard.com/war-iraq/27818-saudi-will-intervene-ira...
Lastly, "Why couldn't the Saudis defend themselves?
"They had spent easily a hundered billion dollars since 1970 buying the best US equipment and training. Saudi Arabia spends more per capita on defense than any country in the world and has done so for years.
"In 1989 its expenditures of US$14.7 billion ranked eleventh among countries of the world. Nonetheless, this level of spending reflected a declining trend from a peak of US$24.8 billion reached in 1983. ... The share of gross national product (GNP) originally earmarked for defense in 1990 was 16.9 percent, materially below the peak of 22 percent reached in 1983 but still about twice as high as the Middle East as a whole. Defense outlays constituted 35.5 percent of central government expenditures in 1989.
Even today the Saudis spend more on defense than South Korea. The amount of American-made military hardware sold to the Saudis is stunning. They had the best hardware that the US, Britian and France could sell them. Given all this, why couldn't the Saudi army fortify its border with Kuwait and grind down Saddam's army?
"There are two answers, one general and one specific. The general answer is that the Saudi can't defend themselves because the Saudis can't do anything. Foreign labor performs all the real work in the Kingdom, from wasking clothes and picking up garbage, to construction, to the oil industry. Why should defense be any different? The specific answer is that a lot of the defense spending is wasted in corruption and graft. A lot of it is spend on the Saudi Arabia Nation Guard whose job is to protect the royal family from internal rebellion. But I think that isn't the real story. The true answer is that dispite all the equipment and training over decades, the Saudis simply do not know how to use what they have. Their culture does not create or support the kind of soldier required to use the complex tools at their disposal, nor does it promote indenpendent thinking or problem solving. The equipment is useless without strategy and tactics." http://rantwraith.blogspot.com/2005/02/frontlines-house-of-saud-1980-to-...
Business as usual is definetly in their best interests. Upsetting the apple cart by declaring peak would create many disagreeable events; covetousness, on the part of others, outrage, on the part of the population, as pointed out above. Etc. Very very bad for the oil industry - surely bad enough to offset ‘greater’ profits. (Many of these points are made above - I just started to type after the question...)
Then, just as important, there is loss of face - the fact of having to admit that the real world is not quite as it was presented, or that situations can change. Keeping a rosy, stable, all is OK face on things is practically mandatory; difficulties are deemed to be something that can be dealt with cleverly when they arise; the winner is the one who anticipates correctly and saves face for everyone. Loss of face means instant loss of power, eg. in OPEC, etc. Peak oil is an open secret, to be cleverly managed. Note, Western authorities do the same thing, but with a lot more noise in the media, it is a question of cultural style.
Lastly, there is the small matter that Saudi, in the sense of the Royals and those directly responsible or involved may themselves prefer the status quo, as they have been maintaining their position through a more or less fixed strategy since post WW2. Admitting that strategy, or the real world state of affairs, comprises upcoming difficulties, may be hard, even 'repressed.' My guess is that beyond commercial considerations, coupled with some good old geo-political calculations and acquisition of clout, no real planning for depleting resources has been made. This is evident in the dire impoverishment of their huge ‘young’ population, their use of slave immigrant labor, their grandiose projects, their stranglehold on the population, their lack of investment in other industries, etc. Conservative .. to a high degree; as their power both at home and abroad rests on it..
The curse of black gold, indeed.
Imagine if Saudi Arabia had had half of the planning intelligence of Norway. They could have invested themselves into hundreds of years of prosperity and a renaissance for their culture including the muslim faith.
Leanan
That has been a common perspective. If that was true with the historical belief that the Saudi's had plenty left...
How would the decision trees change for all parties if we were Post Ghawar Peak and there was a reduced amount each year???
For one example;
Would someone "Seize it" before it was too late?
If they announced it, and the world believed that the age of oil is coming to an end, we could see demand destruction on a huge scale after a few years, which would lead to a collapse in prices.
Kind of like what happened in the early 1980's - world demand for oil *did* decrease for a while.
Ericy, yes there was huge demand destruction in the 1980, but that did not result in a collapse of oil prices. In fact, the exact opposite happened, prices went through the roof. Prices did not drop to normal levels until 1886 when production began to ramp back up. Demand destruction does not cause prices to drop....normally. Only if we have a severe depression will prices collapse. Of course most of us doomers expect that to happen....eventually. But I expect to see $300 a barrel prices long before we see $30 oil prices.
Ron Patterson
Oh, so THATS what the civil war was really about!
Just kidding Ron, I know you ment 1986 :P
Of course, as any animator knows, you have to have a wind-up before a punch. They call it 'anticipation'..
.. and in the case of a broad acknowledgement of PO, you'd have to balance the likely extreme reactions: the eventual demand-destruction against the initial and then persistent hoarding.. everyone would be building out SPR's and backup SPR's, no?
Bob Fiske