Peak Oil?: Saudis Warn About Future Oil Production Shortfall

Fans of peak oil rejoice. Saudi Arabia has privately warned the U.S. and Europe that OPEC is unlikely to be able to meet increasing oil demands in the next ten to fifteen years.

According to the Financial Times: "At today's prices, the world will need the cartel to boost its production from 30m to 50m barrels a day to 50m by 2020 to meet rapidly rising demand, according to the International Energy Agency, the energy watchdog for consuming countries. But senior Saudi energy officials have privately warned US and European counterparts that Opec would have an ["extremely difficult time"] meeting that demand. Saudi Arabia calculates there is a 4.5m b/d gap between what the world needs and what the kingdom can provide."

The concept of peak oil is not new, and has been discussed here before, with our point of view being that there is likely more oil around than many would expect, but that it's not going to be easy to get at, given the fact that oil companies don't want to spend $100 to find it and extract it, while only selling it for $60.

Recently, T. Boone Pickens, the Texas hedge fund manager, and well known oil man has been predicting $100 oil within five years.

The current scenario, of Saudi Arabia running out of oil, is explored by Matthew R. Simmons chair of Simmons & Co., a Houston oil investment bank specializing in his book Twilight in the Desert: The Coming Saudi Oil Shock and the World. In the book, Simmons puts forth a scenario that suggests that the Saudis have been cooking the books for years, and that they don't have as many reserves left as they say they do.

According to the book, the Saudis main oil field Ghawar is in trouble. Reports have surfaced that detail a series of major problems. According to the Village Voice: "The field is rent with fractures and faults, letting in unexpected amounts of water, which complicates production. Masses of tar were discovered, and that makes extraction more difficult. The authorities claim that problems will straighten out as they drill wells north to south along the long reservoir. But Saudi experts admit that as production moves south, the permeability and porosity of the rocks decrease. Taken together, these technical reports portray the oil field in real trouble, with production inevitably decreasing, in the end making the 5 million barrel a day figure unrealistically high. It is unlikely that Saudi Arabia's other oil fields could take up the slack; their output has declined over the years. Possible new production in areas such as the depths of the Red Sea and land along the Iraqi border is considered dubious. "Unless some great series of exploration miracles occurs soon," writes Simmons, "the only certainty about Saudi Arabia's oil future is that once its five or six great oil fields go into steep decline, there is nothing remotely resembling them to take their place."

Recently, Cambridge Energy Associates, headed by Daniel Yergin, author of "The Prize," predicted increasing amounts of oil production within the next ten years. CEA is expecting increased production of "oil like" fuels from Canada's vast tar sand deposits, as well as natural gas.

A perfect example of the search for alternatives to oil has recently been revealed in Forth Worth, Texas. According to a report on, Forth Worth is the focal point of "the Barnett Shale, a vast underground gas reservoir trapped inside the bedrock stretching beneath 5,000 square miles in and around metropolitan Fort Worth. For decades, geologists have known the gas was there, but it had always lain just beyond the reach of the drilling technologies needed to break it free."

Many residents in Forth Worth are now allowing drilling for natural gas to take place on their properties. The reported current royalty rate is $250 per acre, per month.


The oil story is nowhere near finished. In fact we may be witnessing an interesting new chapter.

Oil Market Summary And Outlook: New All Time Highs Fade Fast After London Explosions

Oil markets retreated after details of the London explosions emerged. But selling was accelerating in London and as of 5:30 Central time oil had fallen over $3.00 and was trading near $57.

Crude oil futures for December closed above $63 on 7-6. Traders are now fretting about damage to Gulf and Caribbean rigs from the increasingly aggressive hurricane season. Last year was a significantly damaging season. Of course no two hurricane seasons are the same, but forecasts generally agree that this one could be even worse than last year's. With steady demand, and slightly better than expected supply, the market is again betting that supplies will tighten as shipments from the Gulf slow down.

Supply data will be out on Thursday, with a one day delay from the 4th of July holiday. According to "Estimates generally call for a decline in crude supplies, with IFR Markets betting on a contraction of 1 million to 2 million barrels, while Alaron Trading's looking for a decrease on the higher end of that range. Fimat expects inventories to come in lower by 300,000 barrels. IFR expects distillate stocks, which include heating oil and diesel fuel, to have climbed between 1 million and 2 million barrels last week, and Fimat sees a smaller 600,000-barrel buildup. In contrast, Alaron sees a 2 million-barrel decline."

According to Bloomberg: "OPEC's output rose 130,000 barrels a day to 30.08 million barrels in June, according to a Bloomberg survey of oil companies, producers and analysts. It was the highest since October, when members pumped 30.54 million barrels a day, the most since 1979, based on U.S. Energy Department records."

According to Reuters: "Fears of a fourth-quarter supply squeeze amid robust U.S. oil demand -- thus far seemingly impervious to the impact of soaring prices -- has emboldened speculators to test the upper limits of what consumers can endure. ["The world crude oil market has now boiled down to one in which prices and demand are in the ultimate prize fight,"] said Martin King, research analyst at Canada's First Energy Capital Corp., said in a report. Below-average U.S. inventories of distillates -- which include high-demand fuels such as diesel and heating oil -- have traders worried about refiners' ability to meet demand this winter, when consumers around the world use oil for heating."

Our very long term opinion has not changed. We are still in a very long term bull market in oil, until proven otherwise. The long-term line in the sand, for us, remains $40 per barrel.

The Philadelphia Oil Service Index (OSX) made an all time high on 7-6.

The Amex Oil Index (XOI) delivered a stout break above 915 on 7-6, which if continued, could ignite a significant rally in the oil sector.

In the Rigzone Store:

Successful Energy Sector Investing: Every Investor's Complete Guide

Dr. Duarte's book predicted many of the current developments in the economy and the energy markets, and provides an excellent set of benchmarks and trading lessons for what could be in store for the future.


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