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Is Saudi Arabia Exaggerating Its Oil Production Potential?

Is Saudi Arabia Exaggerating Its Oil Production Potential?

Authored by Simon Watkins via OilPrice.com,

  • For years, Saudi Arabia has made some pretty hefty claims about its oil potential.

  • It is becoming increasingly clear, however, that the Kingdom may be stretching the truth a little too far.

  • Analysts are now beginning to doubt that Saudi Arabia even has the reserves it says it has.

For many years now, Saudi Arabia has been wildly exaggerating every metric connected to its oil business, from how much crude it can produce to its level of reserves and everything in between, as analyzed in depth in my first book on the oil sector in 2015 and the latest one in 2021. Why does it lie so much and so often about these figures? Because without the power it has in the world directly associated with its crude oil production, spare capacity, and reserves it has no real power at all, so enormously exaggerating each of these figures is geared towards puffing itself up in terms of its geopolitical importance. The problem Saudi Arabia has right now, however, is that the U.S. and all other developed market countries whose economies are suffering under the weight of ongoing high oil prices are pressuring Riyadh to deliver on these claims, in order to bring these oil prices down. If Saudi Arabia had not been lying all these years about the amount of oil it can produce then it will not have a problem, but it has been, so it does.

To the figures themselves, then, and firstly, Saudi Arabia’s crude oil reserves figures. At the beginning of 1989, Saudi Arabia claimed proven oil reserves of 170 billion barrels, but only a year later, and without the discovery of any major new oil fields, the official reserves estimate had somehow increased by 51.2 percent, to 257 billion barrels. Shortly thereafter, it increased again to just over 266 billion barrels, a level that persisted until a slight increase in 2017 to just over 268 billion barrels. On the other side of the supply-demand equation, from 1973 to the end of last week, Saudi Arabia pumped an average of 8.192 million barrels per day (bpd) of crude oil. Therefore, taking 1989 as a starting point (with 170 billion of crude oil reserves officially claimed in that year), in the subsequent 32 years Saudi Arabia has physically pumped and removed forever from its oil fields, a total of 95,682,560,000 barrels of crude oil. Over the same period, there has been no significant discovery of major new oil fields. Despite this, Saudi Arabia’s crude oil reserves have not gone down, but rather have actually gone up. This is a mathematical impossibility. 

Secondly, Saudi Arabia’s spare capacity figures, which are a function of Riyadh not just lying about the numbers outright but also engaging in semantic trickery involving the use of various oil market terms interchangeably, despite their not meaning the same thing at all. To be clear here: the official Energy Information Administration (EIA) definition is very specific about what constitutes ‘spare capacity’ in the global oil markets, and it is as follows, directly quoted from the EIA rules: “Spare capacity is production that can be brought online within 30 days and sustained for at least 90 days.” That is it; that is what spare capacity is, no more and no less. However, Saudi Arabia includes within its own use of the term ‘spare capacity’ every drop of crude oil that it can get hold of: including oil supplies in storage, supplies that can be withheld from contracts and re-directed into those stored supplies, and any oil that it can buy through brokers in the spot market and then sell on as its own. Exactly this semantic trickery was used to cover up the actual supply shortfalls in the aftermath of the September 2019 attacks by the Iran-backed Houthis on Saudi’s Khurais and Abqaiq facilities and later attacks. 

In reality, as written in the 2015 book: “The country has often stated that it has a spare capacity of between 2-2.5 million barrels per day (mbpd), with the capability to ramp up its production to about 12.5 mbpd in the event of unexpected disruptions elsewhere. However, it is very unlikely that it could pump at these levels for a sustained period of time, and this idea has been supported by comments from Gulf officials at OPEC, which stated in the midst of Iraqi supply fears that Saudi Arabia could ramp up output by another 1-1.3 mbpd in a best-case scenario. Officials also mentioned that production of 11.5 mbpd is untested and could only be maintained for a very short period and that, in any event, higher production would be very difficult and would require producing heavy crudes.” Nothing meaningful has changed since then. 

And thirdly, the ludicrously-inflated ‘production’ figures that Saudi Arabia has been bandying around for years and which appear to be from the Hans Christian Andersen School of Oil Economics As highlighted above and back in the 2015 book, despite all the flim-flam and general nonsense from the Saudis about being able to ‘produce’ 11 million bpd or 12 million with ease, and plans to ‘increase this’ to 13 million bpd, Saudi Arabia has actually produced from 1973 to the end of last week, an average of 8.192 million barrels per day (bpd) of crude oil; that is it. Moreover, as analyzed as long ago as the 2015 book, it has only ever – in the history of the world, up to and including the end of last week – managed to produce 11 million bpd and sustain it for a month on two occasions. Even when Saudi was at almost existential points in its recent history – such as the all or nothing 2014-2016 Oil Price War it instigated to destroy or disable the then-nascent U.S. shale oil sector, or when former U.S. President Donald Trump threatened withdrawal of military support for it if it did not increase oil production – Saudi still could not increase oil production above just 10.5 million bpd for long. 

It is consequently of no surprise whatsoever that OPEC+ last week decided not to increase its production over and above what had previously been agreed – because it simply cannot do so. Perhaps this was why neither the Saudi Crown Prince, Mohammed bin Salman (MbS), and the Crown Prince of Abu Dhabi, Mohammed bin Zayed Al Nahyan (MbZ), agreed to take telephone calls from U.S. President, Joe Biden, after all: not because they were seeking to marginalize him (although that is more than likely true as well) but because they could offer him nothing and have been caught out in a lie. This latter inference can be taken from subsequent remarks – relayed to the world last week by the French President, Emmanuel Macron – that he had a call with MbZ: “He told me two things. I’m at a maximum, maximum [oil production capacity], this is what he claims,” said the French President. “And then he said [the] Saudis can increase by [only] 150 [thousand barrels per day], maybe a little bit more, but they don’t have huge capacities before six months’ time,” Macron concluded. 

Tyler Durden
Tue, 07/05/2022 – 15:45

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