Wiarton Jeff’s peakonomics

The surge in oil prices in the wake of Libyan turmoil has inevitably brought the Peak Oil groundhogs out of their burrows. Wiarton Jeff Rubin, former chief economist for CIBC, was on the CBC’s The Current on Wednesday, and in The Globe and Mail on Thursday, claiming that further sharp price increases could be on the immediate horizon. He said that this crunch had been coming even before the unrest in North Africa and the Middle East. The problem lay not so much in the prospect of Saudi revolution as in the deficiencies of Saudi oil reservoirs. The smoking gun, he claimed, lay amid the recent Wikileaks data dump, which allegedly confirmed the theories of late peakster guru Matt Simmons that the Saudis had been lying about how much oil they had.

When Mr. Simmons made these claims in his 2005 book ­Twilight in the Desert, most knowledgeable authorities — and obviously the Saudis — claimed that he had sand in his gears, but Peak Oil theory is a little like 9/11 conspiracy theory: impervious to facts except those that support it. That’s where we come to Wikileaks.

The latest batch of leaked documents included diplomatic cables referring to discussions in 2007 between U.S. diplomats and a former executive of Saudi Aramco, Sadad al-Husseini. They spoke to him after interviewing Saudi Aramco’s then head of exploration, Abdullah al-Saif. Mr. al-Saif had told them, they claimed, that the country had reserves of 716 billion barrels of oil, a figure that he expected to rise to about 900 billion in 20 years. The diplomats’ subsequent conversation with Mr. al-Husseini led them to believe that Mr. al-Saif’s figures might be grossly inflated, perhaps to the extent of 300 billion barrels.

According to Mr. Rubin, these cables confirm that Saudi has “little more to give.” He claims that the official Saudi production capacity estimates of 12 million to 12.5 million barrels a day are bogus, and that Saudi Arabia “is barely able to pump out between eight million and nine million.” Hence we are already in another supply crunch, with the Saudis lying their faces off to keep speculators at bay.

There is one major problem with Mr. Rubin’s smoking gun: Mr. al-Husseini himself subsequently refuted the interpretation of his remarks by the U.S. diplomats. What Mr. al-Husseini actually disputed was dubbing that 716 billion barrels as “reserves” rather than “oil in place.” Oil in place is the total amount of oil there. Reserves refer to the amount that is recoverable, and is further classified — according to the likelihood of production — into “proven,” “probable” and “possible.” Saudi Arabia itself acknowledges that its proven reserves, that is, reserves that are highly likely to be economically produced, are 260 billion barrels, as does BP’s world statistical review, not 716 billion.

Mr. al-Husseini had also previously specifically refuted Mr. Simmons. In 2005, he said that he expected world oil production to level off at 90 million to 95 million barrels a day by 2015, but that this plateau could “be sustained beyond 2020 at continuously higher oil prices and with rapid improvements in overall energy efficiencies throughout the world” (current production is around 88 million bpd). Earlier this month, Mr. al-Husseini also stressed that he had been wrong in his pessimism about Aramco’s production potential.

Mr. Rubin’s claim that the Saudis are not opening the taps because they are tapped out is moot for other reasons. Saudi Arabia has good reason to be wary. Opening the taps in the past has led to price collapses, notably in 1986 and 1998. Indeed, a couple of weeks ago, one prominent Saudi expert noted that the Saudis were more concerned about bulging global oil inventories than prospects of a shortage. The expert was Mr. al-Husseini.

Meanwhile, the basic flaw with peak oil theory is that it is not so much about oil as moral disapproval of oil, and a rejection of markets more generally. Mr. Simmons described the market as a “500-pound wrecking ball” and compared Adam Smith’s “Invisible Hand” to an instrument of strangulation. He also wanted draconian legislation to force behaviour that complied with his anti-oil, anti-freedom agenda.

Mr. Rubin’s decision to embrace anti-market “sustainability” became evident with his 2010 book, Why Your World Is About To Get a Whole Lot Smaller. (The book won last year’s National Business Book Award, thus extending that award’s celebration of anti-business books — such as Naomi Klein’s No Logo — to anti-economics books.)

Mr. Rubin’s abandonment of economics is further suggested by his failure to note what has been called the “Ben Bernanke premium” in the oil price, that is, the extent to which loose U.S. monetary policy might be fuelling global commodity inflation.

In any case, noodling about Saudi Arabia’s reserves seems wildly irrelevant in current circumstances, although Mr. Rubin does in fact mention the possibility of political unrest. Saudi Arabia is ruled by a family kleptocracy with a penchant for dabbling in ­terrorism. Corrupt and inefficient, it has long been supported by the United States, to the detriment of its citizens, 40% of whom are estimated to live in poverty. The fall of the House of Saud is — from a human rights perspective — much to be desired, but it could present massive political problems for the United States.

Dumping 7,000 Saudi princes may be a good deal messier than abandoning Egypt’s president Hosni Mubarek. It is also a much more relevant and immediate issue than paranoia about Saudi reserve statistics.

Financial Post