Can The Saudis Give Biden Long-Term Oil Price Stability?

President Joe Biden is going to Saudi Arabia with the widespread perception that he will ask them for more oil production to lower prices. One wonders if Energy Minister Prince bin Salman will educate him on the many other entreaties made to his country over the years, and the contradictions therein. From James Schlesinger telling the Saudis that the world needed them to produce more oil, and by the way, it was more economically rational to keep the oil in the ground, to Vice President George H. W. Bush who was the first senior politician to complain that the Saudis were driving the price too low. (Of course, in the 1950s, rising Saudi oil supply caused prices to drop, but it was the U.S. independent oil producers who complained that oil prices needed to be higher.)

It seems highly unlikely that the Saudis will offer any significant short-term increase in oil production beyond what has already been agreed with their OPEC+ partners, but will Biden want them to provide assurances of more upstream investment so as to prevent the looming market squeeze with the post-pandemic, post-recession oil demand boom? Because numerous pundits and analysts have argued that oil prices could hit $200 within months and “The Era of Expensive Oil is Here to Stay.” (Citations below)

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In theory, the President will demur, preferring a long-term goal of de-emphasizing fossil fuel use and investment—no doubt backtracking when prices rise. And with an administration whose energy experts are more informed about climate change than oil policy, the Saudis are unlikely to trust any projections of ‘needed’ future capacity. As I have written before, the industry consensus, exemplified by EIA projections in the figure below, have always been too aggressive about the need for future Saudi oil supplies.

This time, the situation is confused by recent claims that Saudi capacity—and their ability to increase it in the future—is seriously constrained. (Pause for laughter.) We seem to be awash in pundits who don’t understand the difference between ‘can’t’ and ‘won’t’ as in a recent story arguing that Saudi Arabia hasn’t produced significantly above 10 mb/d since late 2018, suggesting a physical constraint. This is true but is clearly a case of ‘won’t’ not ‘can’t’ as weak markets have meant that the Saudis (and OPEC+) have had to restrain production to prevent prices from crashing.

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The belief that the Saudis’ ability to raise production significantly in the short- and long-term goes back decades. In the late 1960s, when global oil demand was soaring, much of the new production came from the Middle East and the Saudis in particular. It was subsequently claimed that Saudi Aramco (then owned by American oil companies) had raised production so rapidly that oil field pressure had dropped, endangering long-term Saudi oil recovery. A Congressional report described these concerns and received significant attention at that time, although one prominent peak oil advocate later referred to it as a ‘secret’ report—by which he meant he hadn’t known about it.

And the book Twilight in the Desert, published nearly two decades ago, argued that the Saudi oil sector was in serious trouble and production was on the verge of collapsing because of technical problems. In fact, the book was a classic case of a non-technical person not comprehending technical issues: it claimed that oil fields whose pressure dropped below the ‘bubble point’ where associated natural gas was released would become inert. In reality, while production might drop fields could be repressurized—as the Saudi fields were in the 1970s.

Saudi Arabia could certainly increase capacity over the long term, and quite substantially, but will they? Presumably, the wishes of the U.S. government will have little sway with them, even if it could produce a coherent policy, as opposed to the current Oliver Twist stance of “oil is bad, but please sir, might I have some more?” Climate and Greentech advocates insist that oil demand has peaked implying any new Saudi capacity will be unused and the investments wasted. But then, oil supply pessimists think U.S. shale oil production has peaked and therefore new Saudi capacity will be vital to the global economy—and soon.

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There could easily be a supply crunch next year, with good economic growth, no end to sanctions on Russian, Iranian and Venezuelan supply and/or interruptions to Libyan oil. On the other hand, an end to Iranian sanctions alone, combined with a recession, could see the market once again in surplus. Describing next year’s oil market doesn’t require an economist, but an octopus: on the one hand, on the other hand, on the other other hand….

Perhaps President Biden can make a Solomonic deal with the Saudis, wherein they add capacity and he agrees to buy oil from them to refill the Strategic Petroleum Reserve. Given the relatively inexpensive Saudi capacity, this could be enough to warrant the investment even should it become idle after a year or so. But the calculation of the market impact, short- and long-term, is complex and uncertain—even though hundreds of pundits will insist otherwise.

OilPrice.comTop Oil Traders See Oil Topping $200 By End-2022 | OilPrice.com

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