Peak Oil: When Saudi Spare Capacity Falls Short

One Step Ahead of Saudi Panic

Energy and Capital

By Keith Kohl, 27 July, 2011

The last few nights have been restless, to say the least.

And the worst part is I know exactly why I keep up my insomniac pacing. A single thought has been rushing to the forefront of my sleepless psyche: Let's hope it won't be us asking the Saudis for more oil.

That's what we were left pondering after seeing firsthand how hungry China is for Canadian energy.

Unfortunately, it's more likely a U.S. diplomat will be making that future phone call, apologizing to the Saudis for past grievances and promising we won't stray from their oil taps again...

The real kicker is there's a good chance they'll say no.

Their refusal won't come from some repressed anger, but rather the fact that all they can do is shrug their shoulders helplessly...

Turns out the Saudis might not be able to feed our addiction any longer because they've fallen victim to their own racket.

The Sight of Saudis Panic

We've listed Saudi Arabia's varied issues countless times before. The panic, however, won't stem from the country's declining fields, or even the fact that the extra oil it can produce is heavier and more expensive to refine (that's also assuming that some European refineries can even handle the stuff)...

The problem is the Saudis have gone from providing for the world's oil addiction to developing their own fix. Imagine a heroine dealer who can't sell any more of his product because he's too busy using it.

And the Saudis' domestic oil consumption is heading higher — much higher.

Right now, we believe they're producing about 9 million barrels per day (of course, the way they cook their books, it's hard to be sure of anything when it comes to OPEC).

Last year, the Kingdom consumed approximately 2.4 million barrels per day — a 50% increase just within the last seven years. To give you a comparison, U.S. demand for crude oil and petroleum products declined by almost 4.5% during the same period.

Although they have a long way to go before they reach our nation's level of dependence on the stuff, the fact that the Saudis are headed down a path to oil addiction should be alarming in itself.

And think about this...

If Saudi Arabia's domestic consumption is increasing by nearly 6% per year, its demand will exceed three million barrels per day by 2015 and four million barrels by 2020 — and that's in the unlikely scenario that demand growth remains steady.

No Leftovers for Us

Saudi Arabia is one of few countries left on a very short list that will be able to increase its domestic oil production.

Depending on to whom you're listening, the Saudis can pump out an additional 2 to 3 million barrels per day. For now, let's give them the benefit of the doubt and assume they can push their output to 12 million barrels per day...

Not only is that amount supposed to make up for any gaps between the world's supply and demand, but now it's practically guaranteed they'll have less available oil to export.

And we've already seen those headlines. Anyone else recall last December, when Saudi oil exports fell 4.9% to around 6 million barrels per day? That's 20% less oil they're shipping than they were in 2005.

We'll confess that this decline is not to blame on their rising consumption rates alone, but the Saudis themselves are expecting to see more of the same going forward. They're anticipating a decline in exports to 5.6 million barrels per day in 2020, and a fall below five million barrels per day in 2030.

When the longtime kings of oil realize that the cheap, easy-to-get crude is long gone, they're going to have a difficult time subsidizing energy prices...

We wince at the thought of $5 a gallon; imagine how we'd feel if we were paying only $0.60, as the Saudis are right now...

Beating the Saudis to Oil Profits

Even though the Saudis are headed for a Peak Oil disaster, there's certainly no shortage of revenue right now.

Catching word of the $1 trillion paycheck OPEC will take home this year from its oil addicts is enough to make anyone's blood boil. That total is nearly 30% higher than 2010.

And taking home the biggest purse, as we would expect, is Saudi Arabia.

But no matter how indignant we are for the $228 billion Saudi payday, we'll have the last laugh... Because while they continue to rattle off unlikely production numbers and build a dependence on fossil fuels, we're busy securing our own oil wealth.

As my colleague Christian DeHaemer recently explained to me with a wide-eyed grin, “Good oil is hard to find. But these guys, Keith... These guys stole $267 billion worth from right under the Saudis' noses.”

So much for begging the Saudis for more oil...

Perhaps they'll be asking us for a few extra barrels in the decades to come.