the Saudi plan

I was seriously stunned a few days ago by a “status” post from an online acquaintance. I’m presuming that it was probably prompted at least in part by a bit of recent news, of Saudi Prince Alwaleed (one of about 15000 Saudi princes) making a statement saying that his country needs to diversify its economy beyond being an oil exporter.

From the Reuters article:

He said Saudi Arabia’s heavy dependence on oil was “a truth that has really become a source of worry for many”, and that the world’s biggest crude oil exporter should implement “swift measures” to diversify its economy.

That’s pretty sensible, and to get into everything about the situation there would need to get into a whole batch of history. I’m not getting into that, but generally it’s worth noting that what we now know as Saudi Arabia is itself kind of a relatively recent construct, a nation formed in the area generally historically known as Arabia, with defined borders and a government under the rule of the family of the House of Saud (hence the name). This was essentially a product of the interactions in the region of the United States back in the mid 20th century, related to the oil resources of the area. To cut this short, it’s pretty simple to state with certainty that Saudi Arabia, as we know it, only exists as it does because of the oil export business. Without that, it would be a much different place, to understate the case pretty extremely.

It gets more complex quickly, as it appears that the Saudi prince in question has fallen into a growing popular delusion, that shale oil in the US will suck away demand for Saudi crude.

Again quoting from Reuters:

But his warning reflects growing concern in private among many Saudis about the long-term impact of shale technology, which is allowing the United States and Canada to tap unconventional oil deposits which they could not reach just a few years ago. Some analysts think this may push demand for Saudi oil, as well as global oil prices, down sharply over the next decade.

I’ve been over this before, but you can go read the report from David Hughes about the reality of our “shale miracle”, the seriously over hyped situation that has people buying into the PR nonsense about the United States becoming “the new Saudi Arabia”. Finish that, or get a shorter note from the observations of Jean Laherrere. In short form, if you narrow the view (as many people are doing) the increases in oil extraction from the Bakken formation in North Dakota and nearby look impressive. The impressiveness goes away quickly when you consider the longer term and larger picture, including the complexities and high costs, the rapid well depletion, and the simple fact that when viewed in comparison to worldwide oil consumption, the output of shale oil here in the US ends up being almost negligible as statistical noise.

But back to the comments from Facebook. I’ll paraphrase this. The general gist of it was basically saying we should go nuts in using more oil to use up all of Saudi Arabia’s oil (I recall the phrase “Lambos and insane yachts”), so then, when the Saudis were all out of oil, then they would have to come to us for our reserves, and pay us what we want. Apparently he thought this would be a kind of shoe on the other foot turnabout on the Saudis, that we would get back a bunch of all that oil money we’ve paid to them to import oil from them.

I commented, saying that this was just so wrong, it’s epic. He seemed to misunderstand what I meant, taking it as some kind of ethical criticism, like I thought that would be mean to those poor Saudis. He missed the fundamental point, which was that his whole premise to his thinking here was just completely detached from reality.

I mentioned this, pointing him to the summary page I put together some time ago as a reference. He came back and said that he had read it, saying “I agree” (which, to pick nits, is not the same as saying I understand). But then, he went on to make what was meant to be a clarification, saying, paraphrasing again, that in geopolitical terms, he thought it made sense to go use up another country’s oil resources, while hanging on to our own, so then when theirs ran out, we would still be in good shape, having our own oil preserved.

This still isn’t recognizing the most basic reality of the oil situation. There are all kinds of problems to this. For one thing, it doesn’t even begin to consider what this would have meant in terms of oil prices over recent decades, if this “strategy” had been in play.

But let’s ignore that. The all time peak of oil extractions rates (Hubbert’s peak) in the United States came back around 1970-1971 (which, ironically, is about the time my online pal was born), which, by definition, has not been surpassed or even matched since. This is the case, even with a bit of a bump on the diminishing returns downside slope of Hubbert’s curve, with a kind of “sub-peak” back in the decade of the eighties, that came from the contribution of crude coming through the Alaska pipeline from Prudhoe Bay, the area of the largest oil discovery ever in United States territory.

The recent “oil boom” of shale oil brought the graph of US oil extraction rates into a positive slope again over the past few years, which, again, cannot be seriously considered as likely to be sustained for long. That “boom” has brought us up to about 7.5 million barrels per day total US oil extraction output, compared to the 1970 peak of around 9.5 million.

Meanwhile, if that impresses you, stack that up against the average daily US crude oil consumption of around 19 millions barrels per day or thereabouts (and it was bouncing around 21 million per day until the 2008 crash knocked down the ability to buy the stuff). Furthermore, if you go back and look at historical data of US oil extraction rates, crude oil consumption rates, and the resulting difference of net imports, you find that the United States has devoured more oil than it has been extracting from the Earth, and importing crude oil to make up the difference, since around 1950.

So, let’s say we all go nuts and go on some program to use up all the oil in the relatively few net exporting nations of the world. What do we, and all the other oil importing nations, do then? We certainly are not going to have a case of “selling our reserves to the Saudis” and making nice piles of cash from demanding a premium price. Readers should, by this point, not need more explanation of why my first thought upon reading my friend’s comments was “are you completely fucking insane?“.

This is why I keep hammering on the petroleum situation trying to get people to get their heads around it.

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