The myth of liquid black gold - Can Saudi Arabia keep the world supplied with oil over the next century?

in politics •  last year 

I first visited the Kingdom of Saudi Arabia back in 1403 when my mum lived there. From a desert land, whose main source of income was pilgrims to Mecca, Saudi had become very rich on its oil. Sparkling malls with enormous fountains where workers would wash for prayers, shops with hundreds of different doughnuts, good roads where flashy cars were driven badly and everywhere women sporting designer goods under their niqabs. The monarch was a King Fahd one of the many sons of Ibn Saud, the founder of the nation. There was a population of 9 million, who were subsidised off the oil income, and a very large ex-pat community.

Indeed, it is quite probable that by 1403 (or in our calendar date 1982), the peak of oil production from the largest oil field, the "King of Kings" had been reached in Saudi Arabia. Since the US reached its peak in 1970, Saudi took over as the world's leading supplier of excess reserves to keep oil supply up with the growing demand. This put them as the world's third largest producer behind the US and the USSR. This demand had jumped from 20 million barrels a day in 1950 to 50 million by 1970. OPEC chief Barkindo predicts demand will pass 100 million barrels a day by 2020. However, this is of no concern because Saudi Arabia has unlimited oil reserves and we can just keep on trucking. Such grandiose claims beg the question: Does Saudi Arabia really have unlimited oil reserves that can support the world economy over the next century?

What we know about the Kingdom's oil is basically what Aramco (the state owned oil company) and the Royal Family want us to know because they stopped reporting data on oil reserves back in 1982. Since then data on number of producing wells, rate of production, and the value of each has been non-existent. Indeed, as Aramco prepares for the world's biggest stock market flotation this year there has been concerns raised that shares will not sell without more disclosure. There are questions abound about the extent of Saudi's oil reserves. The Saudis would have us believe they are limitless, and that feeds into the fantasy that we can have infinite economic growth on our finite planet forever.
From the 1930s to the late 1970s the Saudi oil industry was developed by the usual suspects - Exxon, Shell, BP, Mobil, Chevron, Texaco and Gulf - who were at various times shareholders of Aramco until the Saudi government took control of the company. Nearly all of Saudi oil comes from 5 large giant oil fields. Indeed, 75% of its oil output is from its super oilfields Ghawar and Safaniya.

In 1971 Nixon ended the Bretton Woods agreement by ending the gold standard. This led to a situation in which the real price for Middle East oil was falling. In October 1973 following the US decision to re-arm Israel which led to the Israeli victory in the Yom Kippur War OPEC called an oil embargo against the US. This caused a quadrupling of oil prices and the massive inflation this caused helped push the world economy into recession. However, the Vietnam war had been very expensive for the U.S. and along with decreasing exports was causing a gold run until Nixon had been forced to close the gold window. The new floating (fiat) US currency, increased demand and a striking market liquidity (which flowed from removing the restraints of gold) had led to real upward pressures on the price of oil.

Meanwhile, behind the scenes, an operation was being put in place to create the petrodollar. The need for an energy crisis was discussed at the Bilderberg meeting back in May 1973, and Kissinger consequently helped engineer the Yom Kippur war. In return for only transacting in US dollars the Saudis were provided with arms and military protection. In return the Saudis would recycle their dollars into U.S. treasury bonds. There are some insiders who say that the Middle Eastern nation was given an offer they couldn't refuse i.e. accept the dollar for oil payments or face being deposed in a U.S. sponsored coup.

As demand continued to grow, despite huge price spikes, Aramco ramped up oil production. Still in private hands, it can be argued that executives were trying to maximise profits before the company passed into state ownership. This has undoubtedly added to the picture of a land of plentiful oil, more than enough for everyone.

This was further promoted by the Iranian crisis in 1978. In 'Killing Hope' William Blum suggests that it was Carter's actions in cutting off the long-term supply of payments to Iranian clerics was a key element leading to the Shah's collapse. This was a leader who had offered Nixon a ten year oil deal at $1 a barrel in 1969. The 1979 revolution led to a collapse in oil supply as Iran's oil production collapsed from six million barrels a day turned to 1.9m. Of course, Saudi Arabia came to the world's rescue. The same happened again in the first Gulf War during 1990-91 following Iraq's invasion of Kuwait.

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Between 1997 and 1999 there was an oil price collapse. The belief perpetuated that Saudi had unlimited oil led commentators to believe that it was Saudi Arabia that was flooding the market deliberately. As a result Venezuela, Mexico and OPEC agreed to cut production. However, the impact on the price was a threefold increase. Hardly a sign that Saudi was flooding the market, and probably more of a sign of recession.

Based on what we do know (which is not that much), Saudi Arabia has a quarter of the world's proven oil reserves and the fourth largest gas reserves. However, it needs to be noted that, with the exception of the Hawtah Trend discovered in 1989, there have been no sizable discoveries since 1967. This now makes the Saudi oil fields mature, and maturity brings challenges.

We do know that by 1978 Aramco was aggressively testing new methods to control growing water incursion problems. However, the Iranian Revolution meant opening up the valves again regardless that it may have long term consequences for the Saudi oil fields by over producing them. Aramco brochures also show us that various advanced technologies, such as horizontal drilling, simulators and 3D seismic surveys, were being employed. No longer could the Saudis simply just open the tap.

In addition, the Saudi oil industry now requires complex processing procedures. In addition the oil in the reserves has a higher percentage content of medium and heavy oil, as opposed to the traditional light oil we have come to expect . The Saudis have massively increased their gas production, and have built the world's largest gas processing plant. New drilling techniques, such as maximum reservoir contact (MRC wells), equipped with intelligent design like downhole sensors are being employed. All indicators of maturity.

The industry is a complex and highly technical one. However, pointing to new technologies as a way of facilitating longer term production gains is a big assumption. Finding new oil discoveries becomes harder when you have already used your best technology to search for them. More efficient ways to get oil out of the ground may keep the production of oil up with our growing demand, however, unless you buy into the myth of Saudi having all the oil in the world at its disposal - we may end just sucking it up quicker.

That so many have bought into this fantasy is symptomatic of the world we live in. We believe we are heading towards colonising outer space as the world we actually live in is falling apart around us. The Saudis are covering up the true situation facing the world. They have been lying for decades. The true reason the Saudis have invaded their neighbour Yemen is in order to steal their oil. With an exploding domestic population and the ending of the petrodollar system the Saudis are desperate to sell Aramco and China will be first among the buyers. The US meanwhile is bathing in its own bullshit mythology that fracking is going to save the day.

Sources:
https://www.cnbc.com/2017/10/19/global-oil-demand-will-pass-100-million-barrels-per-day-by-2020-says-opecs-barkindo.html


Matthew R Simmons, Twilight In The Desert: The Coming Saudi Oil Shock And The World Economy, John Wiley and Sons, 2005.
William Blum, Killing Hope: U.S. Military And CIA Interventions Since World War 11, Black Rose Books, 1998.

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