Saudi Arabia isn't Texas

[RobertRapier]

Robert Rapier has definitely tried to wean us away from the use of Hubbert Linearization. I didn't realize he got Stuart Staniford to start rethinking his strategy. As I recall, when I criticized Stuart almost two years ago for his use of the Logistic equation, all he got was mad at me.

An intriguing point in his post is when Robert said "He doesn’t know whether there are fields yet to be developed, or what the overall production plan is." I contend that the history of discoveries together with a model of discoveries can tell statistically which direction we are going. And in watching where Staniford is headed, I think he has gone from too much a heuristic and macroscopic a view to focussing too much on the micro-view of a set of oil fields in SA.

I don't think Stuart has uttered "Hubbert Linearization" since I posted that essay, and what he was saying to me offline indicated that his confidence in the HL as a predictive tool was gone.

Cheers, Robert

[RobertRapier]

Mr. Rapier, I wonder if you could give us your opinion on why the cost of gasoline is currently so high.

http://www.financialsense.com/fsu/edito ... /0531.html

Part II is done and soon to be posted. And yes, I know your position on this.

It seems as if the oil oligopoly's goal isn't to deliver the cheapest product possible to the most people. This seems to be reflected in the difference in the price of gasoline, at current per barrel rates as opposed to the cost of gasoline the last time oil languished at these prices per barrel.

First, no I don't believe that their goal is to deliver the cheapest product possible to the most people. Their objective is to maximize shareholder return. But they can't do this by simply raising margins. Prices have not gone up because they have just run prices up. If that were the case, you would see a disconnect between gasoline that is openly traded on the world market and the prices that refiners are getting. The tight market is pushing prices up, but no doubt refiners are making very good margins as a result. But prices aren't high BECAUSE refiners are making good margins, which is what a lot of people seem to believe. That reverses cause and effect. (Now, have their actions contributed to current high prices. Yes, but there are some reasons for that which many people don't think about. Part II addresses this).

Oh, and for "pstarr", I would also point out where Professor James Hamilton goes for his information on refinery questions:

http://www.econbrowser.com/archives/200 ... refin.html

Check out the essay, and then his comments near the bottom. Next time I will send him your way.

By the way, after sleeping for a full 6 hours last night, I woke up to find 37 new e-mails. They spanned the range, from job offers to technical queries to hate mail. Typical day. After answering the ones that needed answering, I worked on a book chapter that I have been asked to write for a book that is being edited by a professor whose name you would immediately recognize. Also trying to finish various essays for various sites. On Friday, I fly to London to provide some technical advice on a cellulosic ethanol project. On Monday, I fly out to one of the oil rigs in the North Sea for a technical evaluation. I am just so thankful that I am no longer a major player. Who could find the time?

Cheers, Robert

[threadbear]

Thanks so much for taking the time, Robert. I'll read it.

[WebHubbleTelescope]

Regarding the Hubbert Linearization technique possibly going out of favor.

So you think bottom's up analysis is the only alternative?

Pretty sad state of affairs that with all the mind-power out there and the importance of understanding our petroleum predicament, that a cheap heuristic first gets top-billing and then gets discarded like a cheap suit. We are thus left with a bean-counting exercise.

[peripato]

So, as I have said before, if they peaked, they certainly did so at a convenient time – just when demand for their oil was falling.

But SA production declines began while the oil price was still climbing and before Hurricane Katrina hit. Why would they do that? Restrict production when the market was making all time highs? One would think that they could use the money...

It doesn't matter how high the price is if the inventories are filling up. And during most of the cuts, inventories were high and rising. And that is also the reason they cited. So the evidence that is publicly available backs up their account of why they cut. And that first little step down you show happened in October of 2005 - not prior to Katrina:

http://www.eia.doe.gov/emeu/ipsr/t11c.xls

Be that as it may the Saudi's pledged to increase capacity by 1.5 mbs p/d from 9.5 to 11 million (75% of the 2 million barrels that OPEC was going to provide) in the wake of Katrina which never materialised. Instead extraction started to decline - how do you explain that?

I explain it by pointing out that your claim is inaccurate. That is NOT what they said. Pull up the story – link to it, and then let’s discuss. Look at the inventories after Katrina, and then let’s talk about what they said and what they did.

Ok Robert here you go;

OPEC delegates said Monday that the group planned to allow its members to provide up to two million barrels a day of additional crude oil if the market needs it. But oil traders brushed aside the move and instead sent oil prices higher on worries of another possible hurricane.
OPEC's plan, proposed by Sheik Ahmad Fahad al-Ahmad al-Sabah, the group's president and the oil minister from Kuwait, has the backing of Saudi Arabia, OPEC's largest producer, which would provide 75 percent of the additional oil.

OPEC's proposal is largely shaped around an earlier pledge by Saudi Arabia to fully open its taps to consumers who asked for more oil.

OPEC hoped to send a message to oil traders, who have been bidding up oil prices over the last two years, largely on the belief that the growth in demand was outstripping the ability of suppliers to bring more oil into the market. That has contributed to a doubling in oil prices over the last two years.

"There is no issue with crude oil supplies," said Abdullah bin Hamad al-Attiyah, the minister from Qatar. "The real shortfall is in refineries, especially in the United States. We can do everything we can, except we can't interfere with the nature of the problem."

But plenty of the wrong kind of oil?

Furthermore, I continue to point out that despite all of these cuts, the price of oil is where it was a year ago. Look at how much revenue they are making now, versus how much they would have made had they kept pumping and caused the price to fall $15/bbl. I think they know how to manage oil reserves.

But if they don't increase volumes to meet rising demand from exponential population and economic growth then a lack of product can lead to a collapse in price due to economic slowdown. So which is it?

Finished product demand is setting all kinds of records. Yet the crude tanks are full. When the crude tanks start to get drawn down, then we will see if they can increase volumes.

No one rings the bell at the top...

Cheers, Robert

Cheers!

[RobertRapier]

Regarding the Hubbert Linearization technique possibly going out of favor.

So you think bottom's up analysis is the only alternative?

Pretty sad state of affairs that with all the mind-power out there and the importance of understanding our petroleum predicament, that a cheap heuristic first gets top-billing and then gets discarded like a cheap suit. We are thus left with a bean-counting exercise.

That's the problem with these opaque reserves. This is art, not science. I like science better.

[RobertRapier]

Cheers!

Here is what they said, from the same story:

"The crude is available," Ali al-Naimi, Saudi Arabia's oil minister and OPEC's most influential voice, told reporters in Vienna. "If you want it, here it is."

So what they said was, if you need crude, we have crude. What happened? OPEC did open up production a bit, but in the U.S. the refiners turned to the SPR. They needed oil immediately, not in 6 weeks or more when they could get it from Saudi. So they borrowed from the SPR (they would have been paying a premium, also, for the Saudi crude, as prices had run up) and the Saudis did not receive specific orders for the crude they offered up. I know that refiners preferred to take their chances at paying back the SPR with crude purchased after things settled back down than to pay a sharp premium to the Saudis.

I have had this conversation with several people. None of them could ever demonstrate that Saudi had a specific call for oil that they turned away. If they didn't get a rash of new orders, then it would not have been necessary to open the taps. Further support for this comes later in that article you quoted:

To illustrate the availability of oil on the market, many here pointed out that the United States Energy Department had recently found buyers for only 11 million barrels of crude oil from the nation's strategic reserves, just a third of the amount it had put on sale.

Cheers, Robert

[peripato]

Robert,

OPEC in general and the Saudi's in particular have said repeatedly that they can ramp up production by 1.5 to 2 mbs p/d for quite some years now. It is always just coming, but never arrives;

"Oil prices have pulled back from 21-year highs as fears over threats to supplies eased thanks to good news from Opec... Opec said it had the capacity to ramp up production by up to 1.5 million barrels a day..... Only a day earlier Opec said it could not pump any more to cool prices, and that Saudi Arabia, the world's biggest exporter, had spare production capacity but could not raise output immediately."

"[Saudi Oil Minister Ali al-Naimi] said Riyadh was pumping 9.3 million barrels a day of crude and was ready to tap surplus capacity of 1.3 million bpd should it be required. Saudi would meet demand for more than 9.3 million bpd in September, Naimi said. A capacity crunch among members of the Organization of the Petroleum Exporting Countries is a leading factor supporting prices. The International Energy Agency, in its monthly oil market report, said OPEC's sustainable spare production capacity shrank to 600,000 barrels a day in July as the cartel raised output to try to contain prices. 'The thin margin of spare capacity held by OPEC producers has contributed to recent price strength,' said the IEA, adviser on energy to 26 industrialised nations. The IEA figures would mean a buffer of less than one percent on the 82-million-bpd world market, compared to about eight percent in 2002 when spare capacity in OPEC was 6-7 million bpd."

"Saudi Arabia, the world's largest oil producer, can pump another 1.3 million barrels a day and keep that up 'indefinitely,' Adel Al-Jubeir, foreign affairs adviser to the Saudi crown prince, told U.S. reporters. The Saudis are now pumping about 9.3 million barrels a day, up 1 million from earlier this year. 'We have the capacity and are ready to tap into it immediately,' Al-Jubeir said. He called current prices 'absolutely not justified' and said clients have not suggested they are looking to buy more oil. 'There is no shortage,' he said. Wachovia economist Jason Shenker calls the Saudi announcement 'a lot of smoke and mirrors,' an opinion that was reflected in the markets."

Saudi Doubts

I would put it to you that what is keeping prices up is not high inventories (increasingly of the wrong grade of oil?), but a capacity crunch.

What else would explain the over 2 year production plateau we've been experiencing and the extreme price volatility that such slim margins of spare production give? In fact OPEC has admitted as much itself in this slip of the tongue statement;

"Concern about oil supplies was further heightened when the president of Opec, Purnomo Yusgiantoro, gave warning that it was unable to supply more oil to the market."
London Times, 4 August 2004

When the next crisis hits, (and we are always now just one crisis away), and or the Saudi's cannot, as world swing producer, increase volumes to meet needs then we'll really know...

Regardless geology will sooner or later trump any shenanigans, and even the best field management.

Warmest regards.

[RobertRapier]

Robert,

OPEC in general and the Saudi's in particular have said repeatedly that they can ramp up production by 1.5 to 2 mbs p/d for quite some years now. It is always just coming, but never arrives;

I always look to inventories though. If they say they can do, but inventories are all healthy as they are right now, then they don't need to do it. Opening up the taps would oversupply the market, and cause prices to drop. If am managing their reserves, I want to get the most for my remaining reserves.

I would put it to you that what is keeping prices up is not high inventories (increasingly of the wrong grade of oil?), but a capacity crunch.

What else would explain the over 2 year production plateau we've been experiencing and the extreme price volatility that such slim margins of spare production give? In fact OPEC has admitted as much itself in this slip of the tongue statement;

"Concern about oil supplies was further heightened when the president of Opec, Purnomo Yusgiantoro, gave warning that it was unable to supply more oil to the market."
London Times, 4 August 2004

Yet they raised production after that. And they say they have new fields under development. As I said, we can't base our energy supply on trusting them, but they have done what they said they would do.

When the next crisis hits, (and we are always now just one crisis away), and or the Saudi's cannot, as world swing producer, increase volumes to meet needs then we'll really know...

I have been saying for months that we would know as soon as inventories start getting pulled down. If not for the refinery problems in the U.S., Saudi might have been forced to put up or shut up. As it is, they can still rightfully point to very healthy crude inventories as a reason not to open up the taps.

Cheers, Robert

[peripato]

Yet they raised production after that. And they say they have new fields under development.

Thanks Robert,

Just to clarify when you say "they" do you mean OPEC or just SA? And when you say "new fields" are these brand new never before tapped fields, or reworking of existing ones?


Cheers!

[peripato]

Opening up the taps would oversupply the market, and cause prices to drop.

Opening up the taps could also provide more of a spur for their products by accelerating world GDP growth, which is what we've been witnessing the past few years. One could argue the reverse that not supplying the market at such high prices can cause a slowdown in growth and consequently a turndown in demand for product.

[pup55]

Hello, Robert:

I am with you on several points:

http://peakoil.com/fortopic27445-0-asc-0.html

The main one being that we are looking at the data and from that trying to imply "intent". Or, rather, making the assumption that Saudi's statements about their ability to incease output are necessarily false.

As to the HL method, I always thought it was a really interesting calculation, and gives elegant graphs and results, but it is a big world, the thing we are trying to measure is underground, and so difficult to apply this globally. I think it ought to work great for smaller fields with finite boundaries.

Stop back and visit us again.

[WebHubbleTelescope]

As to the HL method, I always thought it was a really interesting calculation, and gives elegant graphs and results, but it is a big world, the thing we are trying to measure is underground, and so difficult to apply this globally. I think it ought to work great for smaller fields with finite boundaries.

Hubbert Linearization relies on the mathematical characteristics of the logistic curve. The logistic is a nonlinear variant of a stochastic differential equation which requires a rather large aggregate of entities to hold true. As fields get smaller and finiteness looms, the laws of stochastic processes give way to determinism. Why again would HL work better on smaller fields?

Let me put this another way: If we have a finite cube of oil containing crust, say 1000 meters on a side, how would you from first principles derive anything that derived a logistic equation?

This can't be that hard to do! Yet know one has done this exercise. You know why? Because you can't. The fundamental equation describing the logistic curve does not describe anything on this scale or these units. The only thing close it describes is population dynamics, and population dynamics does not play out on a smaller field.

Birth and death rates, P = population:
B = B0 - B1*P
D = D0 + D1*P

Population dynamics:
dP/dt = (B-D)*P

expanding
dP/dt = (B0-B1*P-D0-D1*P)*P = (B0-D0)*P - (B1+D1)*P[sup]2[/sup]

correlating to the logistic:
dP/dt = rP*(1-P/P[sub]infinity[/sub])

So where again does oil fit into this derivation?

[threadbear]

Exactly Web Hubble, You took the words right out of my mouth!

[WebHubbleTelescope]

Exactly Web Hubble, You took the words right out of my mouth!

That's what happens on a forum called "Depletion Modeling". Mathematical wankery at its finest.

[pup55]

Why again would HL work better on smaller fields?

Perhaps size of the field is less important than the complexity of the region in question, and the ability to extract the field in a non-constrained way. Examples: The HL curve for Norway is fine: the fields were a known size, pumped in an organized fashion, and no revolutions or invasions to contend with, so the HL method works fine in predicting with good accuracy the shape of the curve.

However, the case of Iran is quite different due to the above-ground chaos associated with the way the region was exploited.

The importance of the "rather large aggregate of entities" is that the noisy outliers are averaged out. I see your point on this.

I do not know enough math to get into an argument on this, except to say that enough of the world's oil production comes from places like Saudi and Russia and Iran that have constrained extraction rates because of political factors, that it may throw off the global calculation enough to make a difference.

[Tyler_JC]

We're missing the point.

Saudi Arabia's oil production is controlled by a monopoly which seeks to maximize its own profits while maintaining marketshare (a very tricky game).

Oil production in Texas was controlled by no one at first (leading to rampant overproduction, evaporating profits, and the bankruptcy of plenty an oil company).

Then Texas production was controlled by the TRC whose sole purpose was to keep prices from falling too low. The TRC was not in the business of ensuring high oil profits as it was run by the state, not the state-owned oil company (because there wasn't one...)

The difference between the two organizations is the critical reason why oil production looks like a perfect bell curve in Texas and will NEVER look like a bell curve in Saudi Arabia.

TEXAS. Pump as much as you can, as fast as you can. Look anywhere, drill everywhere, make as much money as humanly possible in the shortest amount of time possible. (Uber Capitalist model). Limiting factor? Geology.


SAUDI ARABIA. Pump only as much as you have to. Maximize long term profits and marketshare. All profits go to a single government-run organization. If you overproduce, you are punished. (State-Run Model). Limiting factor? Economics/Politics


The two oil producing regions are very different from each other.

There's a reason that the USGS doesn't try to come up with depletion models...the reason is that depletion models are guesswork when you're talking about a country whose oil production is controlled by a king running a monopoly, not a CEO in a highly competetive marketplace.

The Persian Gulf is full of oil and the Saudis aren't even bothering to look. They don't need to.

[peripato]

There's a reason that the USGS doesn't try to come up with depletion models...the reason is that depletion models are guesswork when you're talking about a country whose oil production is controlled by a king running a monopoly, not a CEO in a highly competetive marketplace.

Rubbish. The USGS does not want to come up with depletion models for political reasons, which is why its 2000 report is so flawed. It makes wildly optimistic assumptions of the “undiscovered resources” waiting to found around the world which have not been borne out by the actual discovery trend since even before the study was first published.

The Persian Gulf is full of oil and the Saudis aren't even bothering to look. They don't need to.

Total rubbish. Edward Price, who was Sadad Al-Huseini's predecessor, as head of Aramco, and who oversaw the transition to Saudi control, cites an exhaustive (though unpublished) study of that country back in the 1980’s which only had 16 billion barrels left to find there, as opposed to the USGS's absurd claim of 87 billion barrels. Any unjustified pronouncements coming out of SA, that their proved reserves are about to increase significantly, can be dismissed as political tub-thumping on the part of a no doubt anxious regime, faced by the inevitability of decline in their fields for all the same geological reasons, regardless of how they are managed.

[threadbear]

Thank you Tyler It's so clear, so beautifully clear and yet very few here can grasp this. Peak oil is an intuitively appealing concept. Oil will run out one day, but the exact timing can't be known.

Do any of you naive doomers understand what the implications of Tyler's post is???Hmmm? The implication is,( barring a disruption in shipments, due to some political event), when the economy starts to fail it's possible oil will drop way down in price, unless the spigots are intentionally tightened. And from a business model perspective, why would the cartel do this?

[peripato]

Thank you Tyler It's so clear, so beautifully clear and yet very few here can grasp this. Peak oil is an intuitively appealing concept. Oil will run out one day, but the exact timing can't be known.

Exact timing yes, but why is this so important to know the exact timing? Is it not perhaps better to concentrate on what happens to "all of this" after that event? And as for oil running out, who on a peak oil website even discusses it in those terms? You only here of PO referred to as "the oil running out" from the industry (which has a lot to lose), economists, or others who plain don't get it, or want to.

Do any of you naive doomers understand what the implications of Tyler's post is???Hmmm? The implication is,( barring a disruption in shipments, due to some political event), when the economy starts to fail it's possible oil will drop way down in price, unless the spigots are intentionally tightened. And from a business model perspective, why would the cartel do this?

I fail to see how doomerism is in anyway associated with the matter of Saudi oil reserves. Sure oil may drop in price, but what comfort if the underlying reason for this is its permanent decline, hmmm?