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Tuesday, January 17, 2012
Saudi Oil Maxed Out
The problem is that it appears
that Saudi Arabia
is producing flat out to sustain supply and it will not be able to add 500,000
bpd on demand which it has been able to do for forty years. This means that an additional supply shock
will actually disrupt markets hugely.
This also why Iran has suddenly become bellicose
in order to maximize their advantage which is certainly short-term as new
production is now starting to climb quickly.
The real window is small and perhaps Iran thinks to play the card they
The next two years will settle
this threat once and for all as both new oil and new energy begin to bite and
as the new US pipeline
system allows the US
to back out of the oil import business.
Present pricing allows full out
production investment while yet not curtailing demand. That would happen quickly with only a small
Saudi Arabia, the world's leading oil exporter, has for decades used
spare production capacity to cover shortfalls in output by other oil states and
prevent prices spiraling in times of crisis.
But questions are being asked now whether the kingdom will be able to
come to the rescue if Iran
blocks Persian Gulf exports -- at least one
fifth of the world total -- in its current confrontation with the West.
On paper, Saudi
Arabia has spare capacity totaling around 2
million barrels per day.
Earlier this year, it raised its output to 10 million bpd, in part to
pick up the slack from the drop in output by Libya
because of its seven-month civil war and other drops in strife-torn Syria, Yemen
and South Sudan.
That's the highest level for the kingdom in 30 years.
On Dec. 14, the Organization of Petroleum Exporting Countries, which
includes Saudi Arabia,
increased its production ceiling from 24.84 million bpd to 30 million bpd.
But apart from Saudi Arabia
and possibly the United Arab
Emirates, no OPEC member has any spare
production capability to act as a cushion in the event of a major supply
So the kingdom, as it has so often in the past, will be expected to
play a crucial role if the global oil supply is heavily disrupted, as it would
be if the Strait of Hormuz is closed.
In November, Khalid al-Falihj, chief executive of state-owned Saudi
Aramco, disclosed that Riyadh
has halted a planned $100 billion expansion after the kingdom had reached 12
million bpd capacity.
He said the pressure on Saudi
Arabia to raise its output capacity had
The kingdom launched the expansion program in the early 2000s, when
production was pegged at 8.5 million bpd. The target was 15 million bpd.
Energy analysts said the decision to curtail the drive to boost
production capacity may have stemmed from pressing budgetary problems as the
ruling House of Saud grapples with the pro-democracy uprisings that have
convulsed Arab republics for the last year.
"The current focus of Saudi Arabia
is on domestic social spending on the back of the Arab Spring," observed
Amrita Sen, an oil industry analyst with Barclays capital in London.
King Abdallah announced a social welfare and public spending package
worth $130 billion earlier this year in a bid to stifle any demand for
political reform by the kingdom's 12 million citizens.
Industry sources say Saudi
Arabia would have difficulty sustaining production
rates higher than its declared capacity for lengthy periods.
It has declared reserves of 262 billion barrels of oil, the highest in
the world. But these are what the Saudis say they are, and there have been
suspicions for some time that Riyadh's
reserves may not be what they seem.
In February 2011, diplomatic cables from the U.S. Embassy in Riyadh to
the State Department, released by WikiLeaks, cited Aramco's senior vice
president for exploration, Abdallah al-Saif, as claiming Saudi Arabia had 716
billion barrels of total reserves, of which 51 percent was recoverable.
He further claimed that in 20 years Aramco would have reserves of 900
That's roughly the combined reserves of the seven other leading
producers, including Venezuela,
Canada, Iran, Iraq
But the U.S.
diplomats quoted Sadad al-Husseini, a geologist and Aramco's former head of
exploration, as warning in November 2007 that the kingdom's production capacity
target of 12.5 million bpd, needed to keep a lid on prices, could not be
This, he said, was because the kingdom's reserves may have been
over-estimated by as much as 300 billion barrels, nearly 40 percent.
One cable said that in al-Husseini's view, "once 50 percent of
original proven reserves had been reached Â… a steady output in decline will
ensue and no amount of effort will be able to stop it."
The U.S. consul in Riyadh observed that
al-Husseini "is no doomsday theorist. His pedigree, experience and outlook
demand that his predictions be thoughtfully considered."
Al-Husseini, who had publicly questioned Saudi Arabia's state reserves
before his encounter with the U.S. diplomats, later claimed he had been
misrepresented in the cables.
It's possible he was pressured into doing that. But even so, gulf-based
sources believe Riyadh
could have a tough time covering shortages stemming from a serious
confrontation in the gulf.
China oil firm slams 'puzzling' US sanctions
Beijing (AFP) Jan 14, 2012 - A Chinese oil firm which the US placed sanctions
on saying it was the largest seller of refined petroleum products to Iran has
denied the claim as "fiction", state media said Saturday.
Washington Thursday said Zhuhai Zhenrong brokered
delivery of more than $500 million in gasoline to Iran
from July 2010 to January 2011 and put in place sanctions barring the
Beijing-based company from doing business in the US.
The sanctions came a day after US Treasury Secretary Timothy Geithner
met Premier Wen Jiabao and other Chinese leaders to ask for help squeezing
Iran's key oil revenues and pushing Tehran to halt its nuclear ambitions.
"The accusations that we export refined oil to Iran is complete fiction. We have
never done that. The sanctions are truly puzzling," a representative for
Zhuhai Zhenrong was quoted as saying in The Global Times newspaper.
Calls to the company went unanswered on Saturday and China's ministry of foreign affairs
could not be reached for comment.
Zhuhai Zhenrong defended itself as Wen left Saturday for the Middle
East to visit key oil-producing nations as rising tensions over Iran's
nuclear programme spark fears of major oil supply disruptions.
relies on Iran
for 11 percent of its oil imports.
Vice foreign minister Cui Tiankai this week warned against making any
links between China's trade relations with Iran and pressure on Tehran's
The US sanctions, also placed on companies from Singapore and the
United Arab Emirates -- where Wen will make a stop -- bar the three firms from
receiving US export licences, trade support from the US Export Import Bank and
loans over $10 million from US financial institutions.
Zhuhai Zhenrong's website said the company, founded in 1994, had
imported a total of 150 million tonnes of crude oil by the end of 2010 and has
a long-term contract to import fuel oil from the National Iranian Oil Company.
"The sanctions don't make any difference to our company's business
because we have never had any business cooperation with any United States companies," a
representative, Zheng Mei, told the Legal Mirror newspaper on Friday.
Wen, on his Middle East trip, will first spend the weekend in Saudi
Arabia -- the largest provider of oil to China -- before going to the UAE on
Monday and then on to Qatar on January 19.