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Page added on April 7, 2012

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Replacing Iran’s Oil Production

Replacing Iran’s Oil Production thumbnail

If an embargo is successful in preventing Iran from selling a significant amount of oil on the world market, what would replace it?

On Friday the White House released the following statement:

there currently appears to be sufficient supply of non-Iranian oil to permit foreign countries to significantly reduce their import of Iranian oil, taking into account current estimates of demand, increased production by some countries, private inventories of crude oil and petroleum products, and available strategic petroleum reserves and in fact, many purchasers of Iranian crude oil have already reduced their purchases or announced they are in productive discussions with alternative suppliers.

That the President or anybody else is counting on the world demand for petroleum curve to shift left in 2012 seems doubtful. And which are the countries from which increased production is anticipated? Libyan production averaged only 500,000 barrels/day in 2011, and if things go well could soon be producing a million barrels more than that daily. In the mean time, disruptions in Sudan, Syria, and Yemen have taken out a separate 640,000 barrels/day. The best hope is perhaps Saudi Arabia, which presumably has been making private statements to U.S. officials similar to this public statement from Saudi Oil Minister Ali Naimi last Wednesday:

Saudi Arabia’s current capacity is 12.5m barrels per day, way beyond current levels demanded, and a reliable buffer against any temporary loss of production. Saudi Arabia has invested a great deal to sustain its capacity, and it will use spare production capacity to supply the oil market with any additional required volumes.

Where have we heard something like that before? Maybe this statement from June 2004 rings some bells:

Oil Minister Ali al-Naimi, in Beirut ahead of the OPEC meeting, said Riyadh was “fully ready” to increase its oil production in an effort to trim soaring prices to the cartel’s target range of $22-28 a barrel.

Or perhaps this one from August 2004:

Making good on a pledge made in May, Saudi Arabia announced Wednesday it is prepared to increase oil output by up to 1.3 million barrels per day — 14 percent — to cope with world demand. ….[Adel al-Jubair, foreign affairs advisor to Saudi Crown Prince Abdullah] said the Saudis had informed all of their customers within the last week of the kingdom’s intention to make additional crude oil available to the international market.

Just for fun, here’s a graph of actual Saudi production in the years following those statements, with the date of the second quote above noted by a vertical line.

Replacing Irans Oil Production

Saudi Arabian crude oil production, monthly, in thousands of barrels per day, Jan 1994 to Dec 2011. Includes lease condensates but excludes natural gas plant liquids and refinery processing gain. Vertical line at August 2004. Data source: EIA.

And in case you’ve been hiding in a hole for the last few years, here is what actually happened to the price of oil after those words. To help your imagination, I’ve also drawn a horizontal line at $28, the upper end of the price range referred to.

Replacing Irans Oil Production

Price of West Texas Intermediate, dollars per barrel, monthly, Jan 1994 to Dec 2011. Vertical line at August 2004 and horizontal line at $28/barrel. Data source: FRED.

Moving along through the President’s list of alternatives in the first quote above, what about a release from strategic stockpiles? This may well happen, but it’s obviously only a temporary stopgap. I’m therefore inferring that Plan A is the embargo successfully shuts down Iranian exports, the world gets by for a short while on releases of strategic reserves, the Iranians cry “uncle” within a few months, and President Obama enjoys a great diplomatic success.

I guess my only question is, what does Plan B look like?

Wall St Pit



4 Comments on "Replacing Iran’s Oil Production"

  1. BillT on Sun, 8th Apr 2012 2:16 am 

    There better be a Plan B and a Plan C and a Plan D because and attack on Iran will take more than it’s oil off line. It could take most of the Middle East’s oil out of circulation. THEN American’s will truly experience war but it will be at their local gas station.

  2. MrEnergyCzar on Sun, 8th Apr 2012 3:49 am 

    Plan B is lowering the standard of living or another oil war….

    MrEnergyCzar

  3. DC on Sun, 8th Apr 2012 7:09 am 

    Amerikas plan to ‘conquer’ Iran, in the short term, seems to be to make em go broke. They are hopeing for a repeat of the 1980s when Ronald Raygun dialed up the King of S.A and asked him to flood the world with cheap oil-thus depriving the SU of its # source of for-ex earnings.

    Of course, back then, S.A still had oil to waste complying with amerikas idiot requests, and the North Sea was just getting ramped up.

    2012

    S.A. has little if any spare oil to flood the world with to appease there amerikan masters. The UK has managed to put its North Sea into sharp decline in a little over a decade. Amerika cant call on S.A. to subsidize Irans downfall, as much as it sounds like they want to, in the same they way they were able to the SU. Different world now. If amerika bombs Iran, the price of oil goes through the roof. And this time, they will be bombing China and Irans and Japans oil, to name a few.

    The US has no business seeking to ‘replace’ Irans oil. Its a delusion to think they can. But the empire has delusion to spare these days.

  4. Kenz300 on Mon, 9th Apr 2012 9:36 pm 

    Replacing Iran’s oil is a short term issue. We need to be looking for alternatives to oil for the long term. While there is no one good substitute for oil and the energy it gives there are many smaller things that can be done that will add up to make a huge difference. Energy conservation is a key factor. The US has already moved down that path by increasing the fuel efficiency standards for vehicles. Oil consumption is actually starting to decline due to greater energy efficiency and demand destruction due to higher prices. While biofuels have taken a bad rap, second generation biofuels made from algae, cellulose and waste hold much promise. Biofuels can now be produced from waste or trash. That waste is already being collected and can provide cheap inputs to biofuel production. The world produces a lot of trash every day. If every landfill was converted to produce biofuels, energy (methane) and raw materials for new products we could produce local fuel with local labor. Electric vehicles also hold much promise. Battery technology is improving in the labs and will soon be in production. As the mileage range improves so will consumer acceptance of electric vehicles. Natural gas if flooding the market. Long haul truckers are switching to LNG to fuel their vehicles and save money. There is no single solution to the high price of oil and the reduction of supplies but there are solutions that can make a significant contribution.