Oil demand could outpace Saudi production capacity-(ok you can panic now)

charleson ^ | April 09, 2006 | BY JIM KRANE

[Flavius]

DAMMAM, Saudi Arabia - The world's only oil superpower boosted output last month, launching a pair of projects that are part of a massive $55 billion endeavor to keep pace with the world's ever-intensifying thirst for oil.

But demand for the world's premiere source of energy is rising so fast - by around 2 million barrels per day each year - that even Saudi Arabia's vast resources will be unable to cope without drastic help, oil executives and analysts say.

Remarkably, even Saudis, who control over a quarter of the world's known oil, are calling for relief from relentless consumption.

"The current out-of-control demand is not good for us," said Ghazi Al-Rawi, head of private equity at Gulf One Investment Bank. "When you have this kind of demand, you're forced to supply beyond the optimal rate. That's not a positive thing."

Most urgently needed is energy conservation, especially in the United States, which burns a fourth of the oil sold to the world, said Saddad al-Husseini, former head of production at state-owned Saudi Aramco.

Also critical is the development of fuels from oil-rich sands or natural gas that can act as substitutes for oil. Other producing countries, especially OPEC's No. 2 and 3 members Iran and Iraq, could ease the crunch by boosting exports to handle a greater share of the surging demand in China and India, Saudi experts said.

"We need some help," said Nawaf Obaid, a Saudi petroleum adviser with close ties to the government.

If such help doesn't materialize and Saudi Arabia maxes its output - cranking out perhaps 35 percent more oil than it does today - the kingdom's proven reserves might only sustain those gushing flows for a couple of decades before starting to dwindle, al-Husseini said.

"Can (global consumers) afford to keep increasing demand by almost 2 million barrels a day each year? Is it Saudi Arabia's role to meet that demand?" asked al-Husseini, who retired in 2004 after working 32 years in the kingdom's oil sector. "You're leading yourself to having to find an alternative source of energy very quickly."

Few analysts believe oil worldwide is actually running out. But experts differ on whether the current soaring oil demand will outstrip the current supplies, and how quickly.

Many blame today's tight market on 20 years of low oil prices that stifled investment in new wells, refining and exports.

Keeping prices high is the best way to meet demand over the next decade or two, said Leonardo Maugeri, an executive with Italian energy company ENI. High prices give investors incentive to spend the billions needed to boost oil production and develop alternate fuels, Maugeri wrote in the current issue of Foreign Affairs.

But Maugeri also wrote that it takes six to eight years for oil from a new well to reach consumers. Developing oil sands or natural gas-based diesel fuel is even slower and more expensive.

Saudis worry that consumer demand could overwhelm the slow progress in bringing new energy sources to market. "If this continues, you'll have demand outstripping supply over the next five years by a wide margin," said Obaid.

Others, such as Sharif Ghalib of Energy Intelligence Research in New York, say the world's cushion of excess oil production capacity - a safety margin that keeps a lid on prices - is so low that demand could outstrip supplies now. All it would take is a single oil producer going offline for any reason.

"The crunch is already here. It's not five years down the road," Ghalib said. "There is no thought being given in the U.S. to raising gasoline taxes or increasing mileage on U.S. cars. In China, automobile use is skyrocketing."

For now, Saudi Arabia is bent on meeting this demand by drilling wells and laying pipe.

In March, state-owned Saudi Aramco and Japan's Sumitomo Chemical Co. broke ground on a $10 billion oil refinery and petrochemical plant that will be one of the world's largest when finished in 2008.

The refinery, one of two planned in the kingdom, is aimed at opening bottlenecks in delivery of refined products such as gasoline and diesel.

The plant will boost output because it can refine heavy sulfurous crude that the kingdom currently can't sell.

Saudi Arabia and its partners plan to invest a further $28 billion in three more huge refineries, in China, India and Texas, Obaid said.

Also last month, Saudi Arabia began opening valves on a 300,000 barrel-per-day expansion in output from the world's largest oilfield. By summer, the full flow of the oil is supposed to be under way.

These are just the latest installments of what experts describe as the world's largest oil expansion effort, which will boost Saudi Arabia's output capacity by 2009 by almost 14 percent from 11 million to 12.5 million barrels per day.

If demand warrants, the Petroleum Ministry could decide to invest another $8.5 billion in a further boost of 800,000 barrels a day by 2013, bringing sustainable capacity to 13.05 million barrels a day, Obaid said.

Saudi Oil Minister Ali al-Naimi has said the kingdom could reach and sustain 15 million barrels per day in output if needed. But even leaping to those frantic levels won't satisfy spiraling world demand for long, analysts say.

"The Saudis can't do it alone," said Ehsan Ul-Haq, chief analyst of Vienna-based energy broker PVM Oil Associates.

And pumping at 15 million barrels a day, the lifespan of Saudi's 260 billion barrels of proven oil reserves would be shortened by 30 percent, with output dwindling about two decades from now - "within our lifetimes," al-Husseini noted.

The kingdom already has used up 100 billion barrels. Production typically declines when a country has produced half of its reserves. That's 180 billion barrels in Saudi Arabia's case, al-Husseini said.

"If, instead of reliable oil production lasting 20 years, it were to last for 40 years, then we would all be ahead," he said. "That's why there is a need to supplement conventional oil with other sources of energy."

Energy demand heats up far more readily than it cools off. Only steep and painful price increases have much effect on oil consumption, said Dalton Garis, an oil economist at the Petroleum Institute in Abu Dhabi.

Prices could also drop, however, if Saudi Arabia's expansion is met by slowing demand, Garis said.

That is starting to happen. In two years, the increase in world demand has slipped from a high of 2.7 million barrels a day in 2004 to an expected 1.6 million barrels per day in 2006, Ul-Haq said.

Overall, Ul-Haq said, he expects global demand to grow yearly by 2 million barrels per day in the next few years, with most of the growth coming from Asia.

"We're really not going to change our consumption behavior until oil hits $80 a barrel," Garis said.

[Bratch]

[stm]

BOHICA at the pump, Freepers.

[Jaysun]

Hoard all you can friends, in jugs, cans, bowls, bathtubs - make haste!

[IncPen]

"The current out-of-control demand is not good for us," said Ghazi Al-Rawi, head of private equity at Gulf One Investment Bank. "When you have this kind of demand, you're forced to supply beyond the optimal rate. That's not a positive thing."

I actually speak Arabic. Let me translate: "If consumption keeps up at this rate, someone's going to figure out how to do it cheaper, and then we'll be screwed, blued and tatooed."

Anything else?

[Altair333]

When are we going to start using coal to produce gas via the Fischer-Tropf process? It's proven technology- South Africa beat the embargo with it. And it's profitable as long as oil is above 40 a barrel or so.

[claudiustg]

Show of hands, how many here are driving 60mpg hybrid cars?

[oceanview]

do what cheaper? actual cost of production for saudi oil is very low - other possible sources, like Alberta tar sands, cost alot more per bbl to produce. absent some new energy technologies, saudi oil will remain highly profitable forever.

[oceanview]

some companies are developing it, but obviously none of the major oil companies will touch any new technology that intrudes on their massive profit streams from the current system.

[Balding_Eagle]

Show of hands, how many here are driving 60mpg hybrid cars?

Or do you mean 'show of hands, who is helping provide $$$ to solve this problem by investing in energy stocks'?

[conservativecorner]

That is until gas becomes so expensive that demand eases creating equilibrium in a free market economy. The wild card is the volatile Middle East that could go tinderbox at any moment based on world headlines. Keep a very close eye on bio-refineries over the next 5 to 10 years depending on the price of crude. We are at the threshold of a technology that will change the world stage as it relates to oil as politics. This isn't the old ethanol out of corn or grains. It can be made from damn near anything with the new technology. bio-deisel can be made from used cooking oil. Fortune Magazine featured a big section in a recent issue on this very topic.

[IncPen]

actual cost of production for saudi oil is very low

If the market price remains high, someone will make a market in cheaper oil, Saudi or otherwise.

[SE Mom]

Well kids, here's a sobering list, from the website:
http://www.anwr.org/features/oiluses.htm

Products made from oil:

Clothing Ink
Heart Valves
Crayons
Parachutes
Telephones
Enamel
Transparent tape
Antiseptics
Vacuum bottles
Deodorant
Pantyhose
Rubbing Alcohol
Carpets
Epoxy paint
Oil filters
Upholstery
Hearing Aids
Car sound insulation
Cassettes
Motorcycle helmets
Pillows
Shower doors
Shoes
Refrigerator linings
Electrical tape
Safety glass
Awnings
Salad bowl
Rubber cement
Nylon rope
Ice buckets
Fertilizers
Hair coloring
Toilet seats
Denture adhesive
Loudspeakers
Movie film
Fishing boots
Candles
Water pipes
Car enamel
Shower curtains
Credit cards
Aspirin
Golf balls
Detergents
Sunglasses
Glue
Fishing rods
Linoleum
Plastic wood
Soft contact lenses
Trash bags
Hand lotion
Shampoo
Shaving cream
Footballs
Paint brushes
Balloons
Fan belts
Umbrellas
Paint Rollers
Luggage
Antifreeze

Model cars
Floor wax
Sports car bodies
Tires
Dishwashing liquids
Unbreakable dishes
Toothbrushes
Toothpaste
Combs
Tents
Hair curlers
Lipstick
Ice cube trays
Electric blankets
Tennis rackets
Drinking cups
House paint
Rollerskates wheels
Guitar strings
Ammonia
Eyeglasses
Ice chests
Life jackets
TV cabinets
Car battery cases
Insect repellent
Refrigerants
Typewriter ribbons
Cold cream
Glycerin
Plywood adhesive
Cameras
Anesthetics
Artificial turf
Artificial Limbs
Bandages
Dentures
Mops
Beach Umbrellas
Ballpoint pens
Boats
Nail polish
Golf bags
Caulking
Tape recorders
Curtains
Vitamin capsules
Dashboards
Putty
Percolators
Skis
Insecticides
Fishing lures
Perfumes
Shoe polish
Petroleum jelly
Faucet washers
Food preservatives
Antihistamines
Cortisone
Dyes
LP records
Solvents
Roofing

[demsux]

In March, state-owned Saudi Aramco and Japan's Sumitomo Chemical Co. broke ground on a $10 billion oil refinery and petrochemical plant that will be one of the world's largest when finished in 2008.

Oh no, they are going to spoil the final pristine desert area.

/s

[nicollo]

"The crunch is already here."

If so, it's already priced in. I wouldn't go too long...

[oceanview]

from what source? yes, there is other oil out there - but its production cost is going to be nowhere near as low as middle eastern crude. oil sands, offshore drilling, shale oils, etc - the production costs are all higher then middle eastern crude.

[birbear]

The solution is in the first few paragraphs --

"Remarkably, even Saudis, who control over a quarter of the world's known oil, are calling for relief from relentless consumption.

Most urgently needed is energy conservation, especially in the United States, which burns a fourth of the oil sold to the world, said Saddad al-Husseini, former head of production at state-owned Saudi Aramco."


We use a fourth. The Saudi's provide a fourth. We make the Saudi's a deal -- We'll be your sole purchaser of oil at $xx/bbl. We move all the troops from Iraq to Saudi Arabia to offer "protection" for our oil. And we let the rest of the Middle East screw itself.

If the Saudi's refuse, we use the military to take over the oil fields and we'll pump it ourselves.

But then again, maybe it's best I don't make foreign policy decisions.

[MaDeuce]

"Show of hands, how many here are driving 60mpg hybrid cars?"

My Turbo Diesel (TDI) VW Jetta gets between 51-55 mpg ... does that count?

[MaDeuce]

We make the Saudi's a deal -- We'll be your sole purchaser of oil at $xx/bbl. We move all the troops from Iraq to Saudi Arabia to offer "protection" for our oil. And we let the rest of the Middle East screw itself. If the Saudi's refuse, we use the military to take over the oil fields and we'll pump it ourselves.

Sounds like a plan to me!!!! Where do I sign!

[iThinkBig]

"This isn't the old ethanol out of corn or grains. It can be made from damn near anything with the new technology. bio-deisel can be made from used cooking oil. Fortune Magazine featured a big section in a recent issue on this very topic."

Yep. Coal to synth oil which can be used for gas being made in Colorado and Pennyslyvania. Its being subsidized by the Feds.