Does Saudia Arabia want Obama to lose?

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"Does Saudia Arabia want Obama to lose?"

Is the recent run-up in oil prices due in part to Saudis slashing production in March by over 800,000 barrels a day?

Oil prices history

West Texas Intermediate crude oil price vs. year (2003 to present)

So the right-wing has gone from attacking Obama for supposedly bowing to the King of Saudi Arabia to attacking him for ignoring the Saudis and helping to ease out Mubarak.  A Fox News story from February, “Saudis Warned Obama Not to ‘Humiliate’ Mubarak,” stated:

America’s closest ally in the Gulf made clear that the Egyptian president must be allowed to stay on to oversee the transition towards peaceful democracy and then leave with dignity.

“Mubarak and King Abdullah are not just allies, they are close friends, and the King is not about to see his friend cast aside and humiliated,” a senior source in the Saudi capital told The Times.

Yes, kind of odd for Fox News to stand with Saudi Arabia and against ousting dictators.  Guess it’s that “enemy of my enemy” stuff.

More seriously, the falling out with the Saudis seems real.  A Sunday WashPost op-ed, “Amid the Arab Spring, a U.S.-Saudi split,” by a senior fellow at the King Faisal Center for Research & Islamic Studies, calls it “a tectonic shift.”  They don’t like our Obama’s pro-democracy moves in the MidEast:  “With Iran working tirelessly to dominate the region, the Muslim Brotherhood rising in Egypt, there is simply too much at stake for the kingdom to rely on a security policy written in Washington.”  So “The special relationship may never be the same.”

Presumably that mean the Saudis just aren’t into us and Obama anymore.  Of course, you’d be hard-pressed to find lots of evidence of that special relationship in, say, their influence on oil prices in the past several years.

And if they are driving oil prices now to harm Obama, then one would have to conclude they really wanted to screw the Republicans and their old buddy George W. Bush when they let oil prices run up to almost $150 a barrel in mid-2008.

But what’s germane here is a too-little-covered story from Bloomberg in mid-April in which the Saudis said they slashed production in March:

Saudi Arabia’s Oil Minister Ali al- Naimi said the global “market is oversupplied” with crude even as the world’s largest oil producer cut output last month by more than 800,000 barrels a day.

“Our production in February was 9,125,100 barrels a day,” al-Naimi said, as he arrived in Kuwait for a conference.

“In March, it was 8,292,100 barrels. It will probably go a little higher in April. The reason I mention these numbers is to show you the market is oversupplied.”  Saudi Arabia’s spare production capacity is about 3.5 million barrels a day, and its total capacity is 12.5 million barrels a day, he said today.

If true, this is a mini-bombshell story.  But it didn’t get much coverage because it didn’t fit with the other narratives being offered for the recent run-up in prices — MidEast unrest, speculators, Obama’s supposed efforts to stifle drilling, which made the least sense since US oil production has risen sharply in the last two years:

USFieldCrudeProd2000-2010 New

The interesting thing about the Saudi claim is that the price of crude did begin its latest jump above $100 a barrel in late February, roughly coincidentally with the Saudi cuts.

Whether the Saudis are to be believed about the cut and their spare capacity is another matter.  A May 11 news article in the Wall Street Journal, “OPEC’s Hot Summer May Get a Saudi Breather,” buys it:

The Saudis recently cut back their production after encountering little demand for their extra barrels.

According to the latest report by the International Energy Agency, effective OPEC spare capacity has fallen to 3.91 million barrels a day, compared to 5.47 million barrels a day one year earlier….

Forget last week’s oil-price correction. Failing a response from producers, such fundamentals could set the stage for a potential spike and collateral demand destruction.So if OPEC, as expected, decides not act as a group, Saudi Arabia, along with producers with spare capacity such as Kuwait and the United Arab Emirates, may take the matter into their hands and increase their own production unilaterally later this year.

But an April 27 WSJ commentary by James Herron, “Saudi Oil Production Doesn’t Add Up,” disputes it:

Some analysts claim that the increase in oil production Saudi officials promised in late February to compensate for lost Libyan supplies was fictitious. Statements from the Saudis themselves imply that the kingdom cut its production several weeks later much more sharply than reported. But either scenario contradicts previous statements from Saudi officials….

Shortly after the civil war in Libya erupted in February and halted much of the country’s 1.3 million barrels a day of oil production, Saudi Arabia promised to quickly fill the gap. On February 28 Saudi officials said they would raise production to 9 million barrels a day-swift action that reassured oil consumers that unrest in the region wouldn’t result in supply shortages.

However, Mr. Al-Naimi’s statement contradicts this version of events. According to him, Saudi Arabia was already producing an average of 9.125 million barrels a day in February, before the output hike in response to the situation in Libya.

So did the Saudis really pump more oil to make up for the loss of Libyan crude?

Analysts at Goldman Sachs and Barclays Capital say no. “They were producing at nine million barrels a day since November in response to the strength of demand,” said Barclays analyst Amrita Sen.

Goldman analysts said in a note: “While Saudi Arabia announced a boost to production to offset the [Libya] shortfalls, the production increase had likely already happened some time ago.”

… By crunching the numbers above, Saudi Arabia’s March production should have averaged around 9.4 million barrels a day. But Mr. Al-Naimi said it produced 8.3 million barrels a day in March. The only way you can get to Mr. Al-Naimi’s figure is to assume that in the second half of March the Saudis slashed production to just 7.0 million barrels a day. This is a level not seen since the 1990s and it is scarcely credible that Saudi Arabia would cut so deep at a time when oil demand is still growing and prices have been hitting two-and-a-half year highs. Independent estimates from the International Energy Agency and OPEC put Saudi Arabia’s production at 8.9 million barrels a day in March.

So what is going on?

The honest answer is that nobody knows right now.

And then we have Forbes’ Timothy Siegel in mid-April, “Why I think Saudi Oil Production is now at Capacity

To me, it only makes sense, it only all fits together if the Saudis are hitting the wall predicted by [Matt] Simmons. It makes sense that if they were seeing declining production, they would lie about it 1) to avoid admitting that they have been lying all along and 2) to avoid spooking markets, which although it could yield a short term benefit in higher oil prices, would (in their view) get them quickly back to 1985 all over again. If they had excess capacity, they would follow their post 80′s philosophy and increase oil output. It just does not make sense to believe that they have excess production capacity but that it somehow does not fit with the worlds refining capacity. Because there is so much excess capacity in the worlds refineries, because there is a fair range of capabilities in that excess capacity and because if there was not enough refining capacity to handle all the sour crude that is available, the price of sour crude would be selling at a greater discount to sweet crude than the current modest discount.

Also, the Saudis are apparently changing their story. The International Energy Agency told a tale of production-refinery mismatch, now the Saudis are just saying that the world is “well-supplied.” High oil prices are due to other factors, they indicate. Well, the law of supply and demand has not been repealed. These high prices indicate that the world is not well supplied. I don’t believe that Saudi output fell by 800,000 barrels per day from February to March, but that they had some oil stored up, and could make a show of increased exports in February. But now, with the continuing Libyan crisis, they have exported their stores, they cannot continue at a higher level, and, I believe, they are forced to reduce exports.

And let’s not forget this WikiLeaks peak oil bombshell from February: “Saudi Arabian reserves overstated by 40%, global production plateau immiment.”

I agree that nobody knows exactly what is going on right now, especially in the short term, which no doubt is adding some sort of uncertainty premium to the price of oil.

But the medium- and long-term trend is up, up, up:

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20 Responses to Does Saudia Arabia want Obama to lose?

  1. PurpleOzone says:

    My broker was firm that the recent run-up in prices was due to speculation AGAIN. She said there is no fundamental reason for it; in fact there are ships waiting out at sea for the price to go up.

    Undoubtedly prices will rise due to increased demand and diminishing supply (the Hubbard curve, we are at peak oil now). But the current surge is not natural.

    Unless and until Congress acts to tamp down speculation, bubbles will recur and recur.

    What is in the mind of the Saudis, who knows? They certainly can’t be happy with the changes in the Mideast. But they would be punishing the whole world; it’s not all about us. They refused to pump more oil due to the last speculative bubble (oil @ $140 a barrel) because there was no fundamental reason for it. It costs $$ to start up and can’t be done overnight anyway.

    The biggest question going forward is: How much oil reserves does Saudi Arabia hold?

  2. Sou says:

    The politics and economics is beyond me. Interesting to note the country is looking at renewables in a big way, building ‘the world’s largest’ solar powered desalination plant to be up and running next year, and ‘looking towards solar power and other non-hydrocarbon sources as strategic options to bolster energy generating capacity by 50 percent within the next ten years’.

    http://www.zawya.com/story.cfm/sidZAWYA20110507070012/Solar_power_to_generate_five_gigawatts_of_energy_for_Saudi_Arabia_by_2020

  3. Douglas says:

    I’ve seen so many TV talking heads confidently predicting the Saudis would make up for any dip in supply due to Libya, etc. It’s very Orwellian, at least as far as TV news goes — peak oil is the Problem That Must Not Be Discussed (unless to mock one of its proponents).

  4. John Tucker says:

    Sou – not only is the oil running out but their fossil water supply is also. Recently too those aquifers were found to be highly contaminated with natural radioactive material, in some cases at incredible levels.

    Jordan’s fossil water source has high radiation levels

    The combined activities of 228 radium and 226 radium – the two long-lived isotopes of radium – in the groundwater we tested are up to 2000 percent higher than international drinking standards…

    … Groundwater from the Disi aquifer is already used for drinking water in parts of Jordan and, more extensively, in Saudi Arabia, where it is known as the Saq aquifer. ( http://www.physorg.com/news154714642.html )

  5. Andy Hultgren says:

    It will be interesting to see if the May 11 WSJ prediction comes true, and Saudis increase production on their own later this year. If not, and if they know they are destroying demand with high oil prices, that would seem to add evidence to the possibility that Saudi production is/has/will-soon peak.

    Joe, I assume you’ll be following up on this “later this year” (Q3 or Q4 I suppose)?

  6. Mike Roddy says:

    The Saudis preferred presidential candidate would be Dick Cheney. There is no obvious political connection to withholding production now, since it’s a long way until the next election. I don’t think that they will slow production in summer/fall of 2012 just to screw Obama, since it would be too obvious.

    As for their capacity, it is likely to be a lot less than they say, but in a way it doesn’t matter. We are going to run very short of oil in the coming decades, so spikes and shortfalls are just symptoms.

    The bigger issue is: why are we allowing a country that supplies suicide bombers and performs public beheadings of teenage lovers to have any power at all over our economy? Through their actions, much of our leadership is essentially groveling to them. The Right likes to talk about national pride, but it is apparently only operative if money is not involved.

    John Tucker, thanks for those details. My father worked in Saudi Arabia on advanced ag salt drainage system- a lost cause, along with their aquifers. Expect them to build huge solar arrays just to power their desal plants.

  7. Sou says:

    Now the numbers are changed once more. This report says that “March Saudi crude (was) down less than 400,000 b/d, not 800,000 b/d.”

    Saudi Arabia’s crude oil production represents a key piece of global market data. The kingdom has been a perpetual champion of “data transparency” to the point of strongly supporting and ultimately hosting the Joint Oil Data Initiative (Jodi) in Riyadh. But recently Saudi data has gotten very murky, with officials stating one set of numbers, and Jodi and others on a different page. Possibly motivated by a February report by Goldman Sachs highlighting eroding Saudi spare capacity as a trigger for a projected major upward price move, Saudi officials talked down March production, to the tune of an 800,000 b/d monthly dive, bolstering the view of Saudi spare. Apparently it worked, as Goldman reversed course, contributing to a sharp price drop. Jodi’s latest data released on Wednesday show March Saudi crude down less than 400,000 b/d, not 800,000 b/d. Opec’s June meeting may expect to hear less Saudi rhetoric about transparency. David Knapp, New York

    http://new.energyintel.com/pages/ViewFullPortlet.Aspx?Control_ID=4&&Date=May.%2018,%202011

  8. Steve H says:

    No matter the reason for or the severity of their drop in production, we’re all over the barrel now. Humor is not my strongpoint, but this should be stark reminder to our elected leaders that they need be realistic and smart about our energy future.

  9. Maximus says:

    I guess we should be glad the trend is straight up. Should boost the renewables.

    One other hypothesis is that the Saudis actually sensed that middle east unrest might spill into their country and so they decided to spend the extra cash to cool the mood. It is highly unfair to blame them for that. After all it is their oil.

    I hope no one here thinks that road to renewables will be without hiccups. There will be withdrawal symptoms. But the doctors shouldn’t complain about it.

  10. sault says:

    Look at the chart of oil prices at the top of the article. The evidence is a little shaky, but I distinctly remember an announcement in the summer of ’06 about the discovery of the “Jack 2″ supergiant oil field. It was in very deep water and not much has come from it yet, but it did seem to cause a dramatic decrease in oil prices, and a corresponding increase in stock prices, that was not at all like the years before or after. ’04 shows a similar drop in oil prices after the summer driving season as ’05, but was a little steeper. If anyone remembers the summer and fall of 2000, that was the first time I remember gas costing over $1.20 a gallon and it sure made a lot of people mad.

    It seems that, since 2000, when an election is eminent and Republicans are in power, fuel prices tend to drop. When Democrats are in power, the prices tend to rise. 2008 might have been an anomaly, but I would wager that oil and/or gasoline will be more expensive in the late summer and fall of 2012 than in the spring or early summer. Refining margins, speculation and the possible Saudi political interests could sway the market appreciably if the fundamentals are right, but if the economy goes back into recession, it will be much harder to pull off the necessary price swings.

  11. Rob Honeycutt says:

    The Chinese have it figured out. They just set the price of gas at the pump. ;-)

    I was doing work in China during the last oil spike. The response from the oil companies was hilarious in a way. The government would NOT raise the price of gas because it would hinder expansion. But oil was at a price where the oil companies (I guess) could not make a profit. But they also were not allowed to stop pumping gas. There’s another law in China that says that you can’t pump your own gas. An attendant has to pump your gas. So, the oil companies response to the oil price spike was to pump gas very very very slowly. These long long lines of blue container trucks would stretch for miles and miles leading up to a gas station.

  12. Theodore says:

    It seems that many participants in this discussion are unsure of whether less oil is a good thing or a bad thing. It reminds me of the mixed up kid playing football who scores for the other team.

  13. Ian says:

    Joe,

    Not sure if you addressed this question before (so pre-apologies if this is a repeat query) but it seems like oil shortages in the next 5-10 years could seriously impact the US’s ability to move ahead with investments in clean energy simply because we won’t have enough liquid energy.

    If you just assumed the best case scenario in terms of govt. action on clean energy, it seems our ability to deploy will be undermined by peak oil. So, if you couple peak oil with political reality (very little support in Congress) it seems like renewables are in really, REALLY bad shape.

    So, are the looming realities of peak oil a huge blow to renewables? Am I overstating the problem?

    It doesn’t seem like peak oil is spurring positive action on renewables, but maybe I just don’t see that it is?

    Also, side question, as gas prices go up and up, are there any grumblings about coal-to-liquids becoming reality? I seriously hope not, but I’d be interested to know if there are any rumors in Wash DC floating around.

    It would be great to hear anyone elses thoughts as well.

    Thanks.
    -Ian

  14. Tony O'Brien says:

    While I doubt the Saudis would be at all sad to see Obama loose, I also doubt they would take any action that is not in their own interest. The Saudis did not pick up the shortfall caused by Libya because they cannot.

    Sure there is an element of speculation in today’s price, but not nearly as much as many would like to believe. Any price fall will be small and will soon be offset by the soft dollar.

    International support for the US dollar is based on emotion not on reality. There is a belief that the US is too big to fail, but there is no one big enough to bail the US out and the fundamentals are pretty bad.

  15. Michael says:

    The first graph you show uses the WTI price, which isn’t representative of the global crude oil price, a better measure is Brent. The main reason is because of the glut in Canada tar sands oil coming in at Cushing, OK, but with no pipelines to transport it out; this was covered at the Oil Drum a while back, the price differential continues (started in December):

    Why are WTI and Brent Oil Prices so Different?

    We have all heard at least a partial explanation as to why West Texas Intermediate (WTI) and Brent prices are so far apart. We have been told that the Midwest is oversupplied because of all of the Canadian imports, and the crude oil cannot get down as far as the Gulf Coast, because while there is pipeline capacity to the Midwest, there isn’t adequate pipeline capacity to the Gulf Coast. I have done a little research and tried to add some more context and details. For example, the opening of two pipelines from Canada (one on April 1, 2010 and one on February 8, 2011) seems to be contributing to the problem, as is rising North Dakota oil production.

    http://www.theoildrum.com/node/7519

  16. Mulga Mumblebrain says:

    I’d say that the Saudis are farther down the depletion curve than they make out. And the brutal, atavistic Wahhabist tyranny that rules in Saudi, and is (with full US approval) aiding and abetting a savage repression in Bahrain, does not wish to lose its grip on power. The Sauds have been US allies at least since the 1940s and if they want Obama out it will only be because they prefer the Republicans. You could say it was because Obama was too close to the Zionists, except all US politicians are owned by the Israeli Lobby (although they do sub-let)and the Sauds themselves increasingly work with Israel against common enemies like Iran. One thing is for sure, though. The ruling elites in Saudi Arabia, Israel, the US and just about anywhere else that you care to study, are ‘mad, bad and dangerous to know’.

  17. nyc-tornado-ten says:

    http://edition.cnn.com/2011/POLITICS/05/18/obama.saudi.arabia/

    This article by CNN seems to confirm the saudi-us rift, and I give Obama credit for it, if it is true. The saudis are not our allies, other than our addiction to oil, they are a brutal, anti-semetic and anti-american dictatorship, they are working to continue the oppression of the peoples of the gulf region in order to keep their wealth and power, just like khadafy and assad (libya and syria).

    The main problem in the middle east is arab-islamic dictatorship and bigotry against non-muslims, we should recognise this, and end our consumption of their oil for this reason, in addition to the global environmental catastrophe our consumption of their oil (and all fossil fuel) is causing.

    There is a good chance that the saudis would prefer a bush style republican government, that preaches hatred of common muslims, but kisses the islamic dictator of saudi arabia on his texas ranch (april 2005). Remember what they say about what goes on at those texas ranches, there’s nothing down there but steers and queers, both bush and bandar have no horns!

  18. Robert says:

    If I was running Saudi I would do my best to game the system just like all other players do. Back in the $20 era the Saudis used to spout all this nonsense about wanting to keep stable oil prices to avoid rocking the global economic boat, but what they really meant was to avoid upsetting their customer the USA when there was a glut of oil and a buyer’s market. Now that oil is genuinely in short supply they are raking it in and who can blame them? If I had a finite supply of precious oil I would try and sell every last drop for as much as possible.

    Just a shame we (in the UK) flogged off out precious North Sea oil at knock down prices back in the 90′s. It would have made a whole lot more sense to have left it where it was for a few decades. That’s capitalism for you – untouched by human brain and a time horizon of 15 minutes if you’re lucky.

  19. mozi says:

    nyc-tornado-ten, how can saudis be anti-semitic? saudis are semites.

  20. Mulga Mumblebrain says:

    #17, the only part of your rant I agree with is the description of the Sauds, but you must admit that they have served the US loyally for decades, and have even collaborated with your precious Israel. The Middle eastern problem with ‘arab-islamic dictatorships’, as you describe them, is the fault of the US, which installed, maintained and financed them all, and which will impose new ones in Syria and Libya if the aggressions there succeed, and which will certainly strangle Egyptian democracy in its crib.