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- June 8, 2006 -

Is Saudi Arabia Running Out of Oil?  
  Latest comments from oil minister on declining production lead “peak oil” theorists to say “I told you!"  


SCDigest editorial staff

The News: Experts continue to debate whether there are signs Saudi Arabian oil output has peaked


The Impact: If true, another sign that global oil output has or soon will peak, while demand grows, meaning much higher prices in the near future and dramatic supply chain impacts.


The Story: Pundits of every stripe have been heavily debating in the past few months whether there are signs that oil output from Saudi Arabia, the world’s largest producer, has slowed and may indicate it has reached peak output level that can only decline from here.

As we’ve discussed a few times in Supply Chain Digest, “peak oil” theorists predict even greater rises in fuel costs than we seen in the last 12 months are inevitable, which would dramatically change the way we need to think about our supply chains (Supply Chain Management and the End of Oil, Supply Chain Impact of $100 Oil).

Houston energy analyst Matthew Simmons, for example, is one of perhaps dozens of pundits who argues that Saudi Arabia has overestimated the vastness of its oil reserves, and the difficulties of getting the hard-to-extract oil that remains underground. In other words, it has or soon will reach its peak output. Simmons is perhaps the most vocal of the oil pessimists, and has even said there may be a rapid drop in Saudi production within 3-5 years, sending oil markets into chaos. The impact of any decline from the Saudi’s is not only due to its global market share, but because until now at least it frequently had some excess production capacity it would unleash when global supply conditions tightened.

The Saudi peak oil speculation got some added juice this week when a Saudi official said the country’s oil had recently declined because global demand was ebbing. That caused even well-known financial commentator and radio show host Jim Cramer to say that this was just “an attempt to hide that the Saudis are running out of oil.”

Energy Bulletin blogger Mark Derewicz also recently had this to say: “Saudi Arabia, which is notoriously secretive about the decline rates of its fields, says it can increase the overall flow of oil to meet increased demand. The Saudis, though, haven’t released field-by-field justification of this statement for decades and, in fact, they are mostly just reworking old oil fields to squeeze out more oil, not bringing large new fields on line. This will bring on peak oil faster, and the decline rates will likely be even steeper than projected, which are typically between 4 and 7 percent annually.”

Others say such pessimism is nonsense, often noting that many times in the past “experts” have predicted we would run out of oil, only to be proven dramatically wrong. One expert also commented recently that it is in the Saudi’s interests to underestimate their reserves publicly, as acknowledging the true, higher levels  might have the effect of damping crude prices.

One such expert is Daniel Yergin, the author of a Pulitzer-prize winning book on the history of the oil industry and head of energy consulting firm Cambridge Energy Research Associates. "This is the fifth time that we've run out of oil," Yergin recently told a congressional committee, taking a swipe at Simmons and other peak oil theorists. "The first time was in the 1880s. The last time before this time was in the 1970s. And since then, world oil production has increased by 60 percent."

Others note that even if Saudi and world oil production has peaked, the resulting higher prices will spur technical innovation and make vast new types of oil resources, such as Canadian tar sands, economically viable.

What the reality? No one can really know. As we’ve said all along, the key is building a flexible supply chain strategy that can react effectively whether oil goes up or down from here.

Do you think Saudi and/or global oil production has peaked? Why or why not? Is this a crisis in the making, or will innovation and alternatives provide great answers? Let us know your thoughts.

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