Oil importing nations have long treated Saudi Arabia as an infinitely deep well of crude oil supplies. In 2005, Matt Simmon’s book Twilight in the Desert did much to call attention to the possibility of diminishing production from the desert kingdom’s aging wells. More recently, cables released by Wikileaks highlight the possible overstatement of Saudi oil reserves. Excellent commentary and links to detailed information covering these issues can be found in a recent post on The Oil Drum.

What much of this discussion ignores, however, is that oil exports from Saudi Arabia depend on more than just production — they are a function of both production and internal consumption. This post will focus on the existing trends of energy consumption within Saudi Arabia and how they will impact future exports, whatever future production levels may be.

This post is a contribution to Honda’s “Racing Against Time” thought leadership series. The Oil Drum was selected to provide a unique perspective on how we should approach the discussion of oil as a finite energy source. During the first week of October 2010, five individuals provide their own thoughts on the subject. These independent contributors were not compensated for their participation and as such their views are their own and do not necessarily reflect those of Honda. Details and links to what others are saying about “Racing Against Time” can be found at www.facebook.com/honda.

This week, Honda is focusing conversation on the world's dependency on oil as a finite resource. Many people assume that the concern about the finite nature of the world's oil supply is way off in the future, but this really isn't the case.

We hear that there are huge reserves of oil, so we assume that the oil will be available when we want it. That is not necessarily true. Even if we know the oil is there, if it takes more than one barrel of previously-extracted oil to extract a new barrel of oil, the fact that the oil reserves are there doesn't really help us--it is too expensive in terms of oil, to extract the new oil. This relationship also holds in terms of dollars. Once a barrel of oil is too expensive in $$ to extract, relative to what it can produce, the system starts breaking down.

The question is how high oil prices can go, without the economy being adversely affected (say, by recession). Analysis by Oil Drum staff member Dave Murphy suggests that this level is $80 or $85 a barrel. The current oil price is about $82 a barrel, so we are again reaching the problematic range.

Lending further credence to this concern is the fact that world oil production has been flat for five and a half years now - 2005 to the present - despite a rising number of vehicles. So there is a reason we keep hearing about alternatives.

Even if you are a staunch proponent of U.S. biofuel policy, it is hard to argue that the current subsidy on grain ethanol serves the purpose it was designed to serve. Further, it does not help ethanol producers compete against oil companies. Why? Because we now have mandates. As I will explain here, this nullifies the purpose of the subsidy.

But first, how did we get to this point? In an effort to spur development of a domestic renewable fuel industry and wean the U.S. off of foreign oil, the U.S. government introduced tax credits for ethanol usage with the Energy Tax Act of 1978. The tax credit was an exemption to the Federal Excise Tax on gasoline, and amounted to $0.40 for every gallon of ethanol blended into gasoline at the 10% level (increased to $0.60 per gallon in 1984 and gradually decreased to the current level of $0.45 per gallon).

(Note: This was also published to Forbes' energy blog.)

Every year in late summer, you will start hearing references in the media about the conversion to winter gasoline, such as the following (originally in the Bradenton Herald, but the link is long dead):

Motorists can thank a mild hurricane season in the Atlantic for the lower gas prices, according to the American Automobile Association.

Other factors include the end of the summer driving season and a cheaper winter fuel mix.

Gas stations sell a special, more expensive fuel blend during the summer to cut down on smog during hot months. Stations nationwide will start selling a less-expensive winter fuel blend Friday, which could lead to even lower prices, analysts said.

So what does this mean, and why does it make winter gasoline less expensive?