Oil prices are volatile and Saudi Arabia is in crisis

"If it turns out that the old '75 numbers are right, then we really are almost to the end of the miracle. We should be preparing for the beginning of steep declines in the five big [Saudi] fields. So my bottom line on all this is not to say, 'I know this is going to happen' — because I don't. But I think this is an enormous worry for the wellbeing of the world. I happen to believe that in fact as much as you might dislike energy, it's the best thing that we've ever had. It's modern energy that basically created every aspect of our society. Unfortunately, there's still 5 billion people on earth who are just starting to use modern energy, and this is a bad time to basically say, no, that era ended". --Matthew Simmons, energy investment banker, July 9, 2004

Oil broke $43 per barrel Wednesday for the first time in over 20 years. The New York Times reports that "Russia's largest oil producer warned on Wednesday that it might be forced to stop exporting...." This was all the excuse traders needed to drive up world price levels. What's really going on when conditions involving just one company within one producing country (albeit a major one) spook the oil market despite the fact that the company, Yukos, "continues to produce" ?

The Times provides details on Yukos, but is more circumspect on the wider issues of "tight supply", reporting that, "[Market analysts]  said that strong demand, tight supplies of low-sulfur crude oil and concerns about production in Iraq, Nigeria, Saudi Arabia and Venezuela were having a far greater effect on the world price of oil". Still, some short-term "bearish" conditions remain in the market.  

So current oil prices are volatile, and they could fall again in the near future. But let's look at the larger world oil picture that produces the environment for hair-trigger speculation. The Times seems to try to avoid raising too many alarms on this front. But there is reason for alarm, and a right-wing think tank recently provided a valuable program focusing on problems with Saudi Arabia, arguably the world's most important oil producer.

The fascinating four-hour program sponsored by the reactionary Hudson Institute aired Friday July 9 on C-SPAN 2. The press release (now including several links to transcripts and video) for the event has it billed as an examination of Saudi Arabia in "internal crisis" where "Wahhabist extremists have now begun to attack the regime.... Some analysts argue that the regime is now in the early stages of a civil war."

The key questions raised include:

Can the Saudi state survive this unrest? Is reform possible? If not, what is the life expectancy of the Saudi regime? Moreover, how will the crisis in Saudi Arabia affect American and international oil markets? Is the U.S. prepared to meet this challenge?

Energy analyst Matthew Simmons  gave a 70-minute keynote (transcript available from Hudson), from which came the quote at the beginning of this post. He said pretty much what I believe:
 
(1) If the Saudis really have the oil, let's see it, let's see some fully transparent data.
(2) We won't know when peak world rate of oil production happens, except in the rear-view mirror. ("Peaking", then, is the time when the world produces the maximum number of barrels per day that it ever will.)
 
(3) No matter what the precise peaking moment is, there's plenty to worry about right now. Let's not be caught off-guard by what quickly could become "surprising times".  But current indications are very, very alarming. M. King Hubbert predicted a world peak in 2000. World oil production has been very close to a plateau since 2000. 
 
(4) If the Saudis come up with the oil in the next few years, great. But if not, there is no Plan B.  

Deep Blade Journal has followed reports about Matthew Simmons through the past few months.  He has attracted lightning by proposing serious questions about the ability of Saudi Arabia to increase and sustain its oil production. Please click the link for a wealth of additional material.

Preview of next posting: Energy and the Democrats--Can they be trusted to guide our country to energy miracles and job growth in new energy technologies as they say they will? I don't know that answer, but I have my doubts. Democrats, along with most Americans, don't seem quite to understand just how serious the looming energy crisis is.  And they won't until our lives are interrupted and energy rationing starts.  Petrol-based economic growth is at risk, even if oil never fully and finally "runs out".  I can't give you a date for any of this, we'll only know for sure that it happened when it does. We better take this more seriously because what the Democrats are actually doing, Carl Pope, Rep. Inslee (D-WA), and the Apollo energy project notwithstanding, wouldn't pass the laugh test if we suddenly really needed that Plan B.