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Dave Summers

Dave Summers

David (Dave) Summers is a Curators' Professor Emeritus of Mining Engineering at Missouri University of Science and Technology (he retired in 2010). He directed the…

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Disagreements Within OPEC Threaten Organizations Structure

OPEC Ministers, meeting in Vienna last week, apparently had one of their more divisive discussions of recent times over the question of raising pumped volumes.

Saudi Arabia, Kuwait and the United Arab Emirates wanted an increase to dampen an oil price that has gained 25pc since tensions erupted in the Middle East this spring while Libya, Algeria, Angola, Ecuador, Venezuela, Iraq and Iran wanted to keep production unchanged.

The two camps are reported to be so far apart as to threaten the structure of the organization. While the lack of agreement (for the first time in 20 years) officially means that there will be no increase in the quotas of the different countries, Saudi Arabia may, unilaterally, move to increase production in order to meet growing demand and stop the steady increase in price. In the short term, however, the lack of agreement has had the immediate effect of increasing prices.

The proposed increase in volume was 1.5 mbd, which is roughly in agreement with the OPEC projection made through their Monthly Oil Market Reports, of a 1.4 mbd anticipated growth in demand this year. That estimate of demand growth recognized the 0.5 total drop in demand from Japan, though offsetting this with greater growth from China, and anticipating repair of the Japanese refineries. (The next report won’t be out until Friday). Given that we are now in the summer driving season for the largest customers, where demand has normally risen, the move, proposed by Saudi Arabia, would at first sight seem a rational step to keep prices under control.

But given the lack of agreement, the question remains as to whether Saudi Arabia (KSA) and its allies at the OPEC table will increase production in defiance of the rest. Bear in mind that should they have the increase, and prices fall, then those countries that don’t (or can’t) increase production lose money as the price falls. However, if the price rises too much, then the world could be kicked back into recession, and global demand could fall, making everyone lose money on smaller volume.

One has only to look at the latest gas prices in this week’s “This Week in Petroleum” to anticipate how this question over the available supply of crude may well kick the graph back into an upward trend.

US Gas Prises
US Gas Prices (TWIP )

Demand for gasoline flickered when the price peaked, but then despite the price, and with vacation time beginning, demand has returned to last year’s numbers and may well continue to increase over the next six weeks, following that curve. That depends on how the price changes. Any indication of more oil may hold it at current levels, but without that, as demand grows globally, then without supply to meet it the price will rise until a new balance is reached.

U.S. Gasoline Demand
Demand for Gasoline in the USA (TWIP)

But this brings us back to the question as to how great a price increase the world can stand, and concurrently, whether OPEC could sustain a 1.5 mbd increase in production. This really (in terms of a significant step) throws the ball back into Saudi Arabia’s court, since they are the one nation that could provide the increase in volume. And certainly in the short term there are enough wells and fields that could have production increased to give the extra volume.

Life is, however, not that simple. To bring additional complexity to the discussion Goldman Sachs has been suggesting that OPEC production will top out next year, and then begin to dwindle. Since OPEC are sensibly the only folk capable of increasing production significantly to meet growing market demand, that prediction had already roiled the market a little. Non-OPEC production has risen 0.8 mbd in the first quarter, y-o-y, but the gains from the US may be over, at the moment.

U.S. Crude Oil Production
US Production of crude (TWIP)

However Saudi Arabia will not over-produce in the short term to hurt the long term production from their fields, thus gains in production in the out years will have to come from new developments. Manifa is the most immediate answer as to where the additional oil will come from, according to the new (2010) Aramco annual review. But with that oil requiring special refineries to process that aren’t anticipated to be available until 2014 for the first, and the second still not finalized, that only gets the increase to 0.4 mbd. There is some additional production that is anticipated from Safaniya, another heavy crude source, but that is directed towards planned refineries at Yanbu and Jazan, but the former is scheduled for 2014, while the latter won’t be ready until 2017. The four new oil fields (Namlan, AsSayd, Arsan and Qamran) that Aramco announced will also take time to develop. As a result the increased production that will come from Saudi Arabia are unlikely to rise much above that available from the recent development of Khurais and Khursaniya, which totals some 1.7 mbd. Some of that new production will concurrently have to offset some of the declining production in older fields.

Overall production will be limited to 12 mbd, acknowledged as the maximum sustainable rate for the country, but that number includes domestic use, which is already at 800 kbd and rising.

Unfortunately the 1.5 mbd proposed for the OPEC increase will likely also include any offsetting increased production to compensate for countries in turmoil in the MENA. So, as none of those countries is looking as though stability has yet been conclusively re-established, the combined picture was not really looking that good before we got the news from Vienna.

By. Dave Summers

David (Dave) Summers is a Curators' Professor Emeritus of Mining Engineering at Missouri University of Science and Technology (he retired in 2010). He directed the Rock Mechanics and Explosives Research Center at MO S&T off and on from 1976 to 2008, leading research teams that developed new mining and extraction technologies, mainly developing the use of high-pressure waterjets into a broad range of industrial uses. While one of the founders of The Oil Drum, back in 2005, he now also writes separately at Bit Tooth Energy.




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  • Anonymous on June 13 2011 said:
    12 million barrels a day might be a transient rate for Saudi Arabia, but they are NOT going to invest in a sustainable output of that magnitude. Please try to believe that.And before you answer...before you answer, note a remark by James Hamilton: where oil is concerned, actions speak louder than words.The last time I looked the price of oil had dropped under $100/b. Neither Saudi Arabia nor any other member of OPEC with nothing to gain personally will accept that situation. 100 dollars is the psycological aiming point...for now.
  • Anonymous on June 14 2011 said:
    the point here surely is that OPEC is facing a double crisis for the first time in its history. not only is the Western and especially the European recession far from over, but the coincidence of those recessions together with the entirely unanticipated upheavals in the Middle East, has produced a double whammy for which OPEC has been entirely unprepared and taken unawares.
  • Anonymous on June 14 2011 said:
    They are therefore caught between the rock of keeping the price low by unsustainable increased production that may help the West to recover from the recession,but may damage production in the long run and the hard place of keeping the income from the unexpected high price arising from the upheavals at above the $100 level. It is not surprising that the fundamental divergences of interests between the Gulf states and the other members of OPEC is showing up rather emphatically given this very unusual situation. The European recession may yet continue quite a while, and the Middle East is not yet done with change.
  • Anonymous on June 16 2011 said:
    I think the biggest mistake for all the western governments is to have antagonised Iran and Venezuela. Without stating it directly, the high oil price is linked to sanctions imposed by Iran and its allies on the west. Watch as prices will ease when sanctions are eased against Iran.
  • Anonymous on September 14 2011 said:
    However Saudi Arabia will not over-produce in the short term to hurt the long term production from their fields, thus gains in production in the out years will have to come from new developments. Manifa is the most immediate answer as to where the additional oil will come from, according to the new (2010) Aramco annual review. :oops: :oops: :oops:
  • Anonymous on September 14 2011 said:
    Whoever published the first comment in this string knows what he is talking about. Saudia Arabia is NOT going to invest in a sustainable output of 12 mb/d, and I doubt if their surge capacity will bring their total output up to that level.What is the point in pretending that SA will look out for our well being rather than their own? Would you if you were in their place? I asked one of the local ignoramuses if I could teach game theory next year, and he said no, but now I am glad. Most of the stuff I taught in game theory was a waste of time, and if I taught it again I would spend most of my time trying to teach people how the oil future will play out.
  • Anonymous on September 15 2011 said:
    "Most of the stuff I taught in game theory was a waste of time, and if I taught it again I would spend most of my time trying to teach people how the oil future will play out." Fred, I respect you for acknowledging this. It seems most of our politicians being amongst the ignoramuses you mention, have been playing some version of 'game theory' for the last 20 years or so. Them and their finhancial backers. It usually takes a fuel crisis in tandem with a ME crisis in tandem with an economic crisis to knock them off their high horses and realise that power lies ultimately in what comes out of the ground, whether its food, oil or rare earth metals, rather than in their fantasy lands of theories and cyberspace.

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