OPEC's view on future supply is intriguing. Taking new discoveries into account, OPEC reckons that the rest of the world can grow oil output between 5% and 12% between 2010 and 2030, but claims that its own production would go up by between 25% and a whopping 80%. However, in his book “Twilight in the Desert” Matthew R Simmons, an American oil trader with many years’ experience, points out that Saudi Arabia has not disclosed any information about its output or reserves for thirty years. Why is this significant? Because Saudi Arabia is a hugely influential producer in its own right (responsible for one-eighth of global oil output) and a strategic mainstay of OPEC. Evidently, though, any Saudi statistics we and the energy markets see are a mix of speculation, fabrication, rumour and Chinese whispers.
Secrecy itself is not an issue but Simmons reckons the Saudis are hiding an unpalatable truth. He bases this conclusion on readings of some two thousand papers presented at technical conferences by oilfield engineers and geologists talking about the various technical difficulties they have had over the years in the kingdom, and how they have overcome them. These include things like having to pressurise oil fields artificially by pumping as much or more water into them as they get liquids out, a highly costly operation symptomatic of fields approaching the ends of their lives. I say ‘liquids’ because water increasingly now forms a sizeable fraction, sometimes a majority, of what comes out of most wells. This too signals decline, and of course adds to the cost of extraction, as does the ever-increasing need for complex multi-branching directional wells needed to exploit increasingly intractable reserves. In other words, Saudi Arabia’s oil fields are acting no differently from any other country’s, whatever they may baldly assert to the contrary. Worryingly, too, they rely preponderantly on a handful of “super giant” fields from the 1940s and 50s and despite strenuous efforts have not discovered significant replacements for them.
These doubts make OPEC’s blithe optimism about their future capacity astonishing, but astonishment turns to incredulity when one examines table 3.1 of their report which shows estimated total world oil resources. It is not so much the numbers (although it’s interesting to note that OPEC accounts for half the total) but the basis of the calculation. A footnote to the figures shows them to comprise cumulative production, proven reserves, reserve growth, and undiscovered resources. Reserve growth is just about credible: as oil prices rise, it becomes economically viable to exploit more difficult sources. But “undiscovered” resources? Who are they kidding?
So whichever you slice it, the conclusion is that oil prices are going up. The only question is by how much. If you believe that OPEC is being less than candid, the answer to that is “a lot”; and where oil leads, other fuels will follow. Why would they not?
Vilnis Vesma
September 2007