Wednesday, February 09, 2011

Oil Shock: Saudis Overstating Reserves and Capability To Pump Oil By 40%?

According to a report in the Guardian, the Saudis may have been overstating their reserves and capability to pump oil by 40%. That would sorely undermine the Saudis' ability to keep oil prices relatively stable at around the $100 price point.
The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom's crude oil reserves may have been overstated by as much as 300bn barrels – nearly 40%.

The revelation comes as the oil price has soared in recent weeks to more than $100 a barrel on global demand and tensions in the Middle East. Many analysts expect that the Saudis and their Opec cartel partners would pump more oil if rising prices threatened to choke off demand.

However, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco's 12.5m barrel-a-day capacity needed to keep a lid on prices could not be reached.

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12m barrels a day in 10 years but before then – possibly as early as 2012 – global oil production would have hit its highest point. This crunch point is known as "peak oil".

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.
If this can be confirmed, it would likely send prices much higher in the short and long term, and hamper the global economy, which still relies heavily on oil supplies for transportation, food production, and the petrochemical industry.

This development would necessitate US and foreign countries to develop alternative energy resources as quickly as possible to minimize the disruption of energy supplies and to keep the fragile global economy from sliding back into a recession or dropping into a depression. Thus far, the one saving grace has been that the recession in the US and the slow pace of growth have kept the energy prices somewhat contained by reducing demand in the US. When US demand picks up, the oil prices will once again move upwards.

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