Last week, Saudi Aramco’s chief executive officer, Amin Nasser, said that the company expects to boost its oil production capacity to 13 million barrels per day (bpd) by 2027 from 12 million bpd now. Given the semantic trickery often used by Saudi Arabia in referring to various aspects of its oil industry, and the outright lies that pertain to many of its claims – about production, spare capacity, and reserves in particular – it is apposite to note a few key facts about the Kingdom’s oil sector because it has real-world effects on how to trade oil.
In reverse order, starting with crude oil reserves - at the beginning of 1989, Saudi Arabia claimed proven oil reserves of 170 billion barrels. 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 266 billion barrels or so, a level that persisted until a slight increase in 2017 to 268.5 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 8.162 million barrels per day 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, a total of 95,332,160,000 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 on this scale.
Next up - spare capacity. The EIA defines spare capacity very specifically as production that can be brought online within 30 days and sustained for at least 90 days. Saudi Arabia stated for decades that it had a spare capacity of between 2.0 and 2.5 million bpd. This implied – given the widely accepted (but also wrong, as highlighted above) belief that Saudi had pumped an average of around 10 million bpd for many years – that it had the capability to ramp up its production to about 12.5 million bpd in the event of unexpected disruptions elsewhere. This is almost the same level as Nasser’s most recent statement. However, as the 2014-2016 Oil Price War dragged on and reached new heights of economic devastation both for Saudi Arabia and its OPEC brothers, the Kingdom could on average produce no more than just about 10 million bpd – very rarely managing to hit above 10.5 million bpd in the two-year duration of the War.
The obvious question was a simple one: if Saudi had the ability to pump up to 12.5 million bpd then why did it not produce this to the maximum degree at this point, given that the core aim of the 2014-2016 Oil Price War was to destroy the US shale sector, crashing prices by producing as much oil as possible? The answer was very simple: it was producing the most crude oil that it could, based on its true oil production figure of around 8 million bpd (therefore an extra 2.5 million bpd equaled 10.0-10.5 million bpd, the very figure it managed just about to achieve) and not on its nonsense figure of oil production of 10 million bpd (which another 2.0-2.5 million bpd would boost to 12.0-12.5 million bpd).
Finally, crude oil production. As highlighted in the two previous paragraphs from 1973 to the end of last week, Saudi Arabia pumped an average of 8.162 million barrels per day of crude oil. Not 10 million, 11 million, 12 million, 13 million, or any other ridiculous figure that it suits the Saudis to dream up: 8.162 million barrels per day, 8.162 million barrels per day, 8.162 million barrels per day. Why does the Kingdom lie about this? Simple: without its oil power the country has no real power at all, so enormously exaggerating its crude oil reserves, spare capacity, and production figures is geared towards puffing itself up in terms of geopolitical importance. In order to obfuscate these real numbers, the Saudis have devised the semantic trickery of interchangeably switching the use of the word ‘production’ with ‘capacity’ or even ‘supply to the market’. The two sets of words do not mean the same thing at all, and the Saudis know it.
‘Capacity’ (or its synonym, as far as the Saudis are concerned, ‘supply to the market’) means the utilization of crude oil supplies held in storage at any given time in the Kingdom plus the supplies that can be withheld from contracts and re-directed into those stored supplies. It also means for the Saudis any oil clandestinely bought in from other suppliers (notably Iraq in the last oil price war) through brokers in the spot market and then passed off as its own oil supplies (or ‘capacity’). Exactly the same 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 as well. Given that ‘capacity’, the term Nasser used again last week, means any and every drop of oil that Saudi can obtain from anywhere else – including from Iran (via Iraq) after the Iran-sponsored Houthi attacks on Saudi oil facilities in 2019 – it is a meaningless term and a meaningless metric for Saudi.
By Simon Watkins for Oilprice.com
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Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More