U.S. Hopes Saudi Arabia, Russia Can Offset Loss Of Iran Oil Supply

Your article is based on many faulty assumptions. The first one is that President Trump wants a production increase by Saudi Arabia and Russia to stabilize the oil market and compensate for losses of Iranian oil exports. In fact this has more to do with the U.S. midterm elections in November. He is afraid that rising oil prices could undo the economic boost from his tax cuts.

The second assumption is that you are taking it for granted that US sanctions will lead to a significant loss of Iranian oil exports. This is not going to happen. Iran’s trump card is the petro-yuan which has virtually nullified the effectiveness of US sanctions. That is why I have been projecting that Iranian oil exports will not lose a single barrel of oil as a result of the US sanctions.

The third assumption is that Saudi Arabia can raise its oil production to 11 million barrels of oil a day (mbd). Saudi claim that it can produce at least 12.5 mbd if needed doesn’t stand scrutiny. Saudi Arabia’s production never exceeded 10.4 mbd before with almost a million barrels of which coming not from actual production but from stored crude oil on tankers and on land. Saudi Arabia is only able to raise its oil production by 400,000 b/d being the amount it cut under the OPEC/non-OPEC production agreement. Moreover, Saudi Arabia’s claim that it has a spare production capacity of 2 mbd is very questionable.

Saudi oil production peaked in 2005 at 9.6 mbd and has been declining since with depletion rates in its major oilfields including the giant Ghawar estimated at 5%-7%. Ghawar accounts for more than 50% of current Saudi production. A depletion rate of that magnitude means that Saudi Arabia has to add annually some 500,000-700,000 barrels a day to maintain current oil production. This has not been happening to all intents and purposes.

Russia can only add up to 300,000 barrels a day (b/d). Still, Russia has every reason to ignore US sanctions against Iran and to continue to implement the oil-for-goods barter trade agreement with Iran having been subjected to US sanctions against it since 2014.

And with the exception of the recent Canadian outage amounting to 360,000 b/d, all the other outages from Venezuela to Libya and Nigeria have been factored in by the global oil market long time ago.

Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London