Saudis dream of oil price stability, but for now prefer wild market gyrations

These posts are geared to helping average citizens understand the energy world a little better because the media doesn’t help much what with their outlandish headlines (ok, I’m guilty too), and a lot of energy information on the web is biased to the point of silliness.

Sometimes though this stuff is just too crazy to explain by anyone. Oil prices recently crashed because on a global basis slightly more oil is being produced than consumed, about one percent more, and the Saudis decided they wouldn’t cut production as they have always done in the past to create a ‘shortage’ and drive prices back up. The burst of lethargy on the part of Saudi Arabia has perplexed the world’s energy markets, who expected the Saudis to cut production to drive prices up again, and when those markets are confused they act like hyperactive children with a cup of Starbucks. Trillions of dollars were sliced off the supposed value of the world’s oil reserves, which then gets added back when some market junky unearths a minor statistic that is simultaneously both irrelevant and wildly over promoted by the attention-starved media.

Some of the statistics are interesting though, even if we can have no clue what they mean. An example: Saudi Arabia has long proclaimed to have over 2.5 million barrels per day of spare capacity that they can turn on at any time they want (of course the Saudis claim a lot of things, including a demonstrably ludicrous assertion that they have 260 billion barrels of reserves, a number which never changes, year after year. In the 80’s, OPEC members decided the best way to allocate production quotas among members was to allocate it based on reserve levels – lo and behold Saudi Arabia found a 50% increase in reserves in 1988… ). This alleged spare capacity has long pacified the world, because no hurricane, war, typhoon, or Baby Jumping Festival can disrupt oil production enough to tax Saudi Arabia’s mighty capabilities. It could all be bullshit, no one knows for sure, and they don’t have to tell if they don’t want to.

On the other hand, the Saudis are now drilling oil wells at a feverish pace, drilling for oil using more rigs than they have in the past 10 years including the period when oil prices exceeded $140/barrel. From 1995-2005, the Saudis averaged 17 rigs drilling for oil at the same time. In the past 12 months they’ve averaged 70.

What’s going on? Lots of speculation of course…the Saudis are trying to crank up production to wipe our shale drilling in the US and prevent it from spreading like Christianity. But the subtext is that they may be having difficulty maintaining production, because their production hasn’t really gone up much.

Those theories sort of make sense, but every time the Saudis or OPEC open their mouths they say some crazy thing that contradicts what they’re doing, like wanting stable oil prices, or commenting on the “excellent markets” for their oil, as Prince Abdu-something or other did a week or two ago. So no, you’re not an idiot if you don’t understand the oil markets, no one else does either, no matter how much they (we) think they do.