Saudi Arabia in talks to boost oil output

Posted on February 24, 2011 @ 10:11 am (Thursday) by WARREN MOSLER

Right, as swing producer/monopolist that’s what they necessarily do- set price and let quantity adjust.

But if quantity demanded exceeds their ability to pump they lose control of price on the upside.

>
>   (email exchange)
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>   On Thu, Feb 24, 2011 at 9:43 AM, Greg wrote:
>
>   Just like you say about the Saudi’s…..
>

Saudi Arabia in talks to boost oil output

By David Blair, Jack Farchy and Javier Blas

February 24 (FT) — Saudi Arabia is in “active talks” with European oil companies to meet the production shortfall left by Libya, the clearest indication to date that the leader of the Opec oil cartel is about to boost supplies to stop further rises in the oil price, which surged to near $120 a barrel on Thursday.

Riyadh is asking “what quantity and what quality of oil they [the European refiners] want,” a senior Saudi oil official said on condition of anonymity.

Oil traders said the talks signalled that Saudi Arabia realised that the political crisis in Libya was now an oil supply crisis and that the kingdom needed to act quickly and decisively to stop oil prices hurting the global economic recovery.

“You can only expect the price to go up. It is fear of the unknown. The risks are all to the upside,” one senior oil trader said. “Saudi Arabia needs to respond.”

The kingdom is considering two options for increasing supplies. The first would be to boost Saudi production and send more crude through the kingdom’s East-West pipeline, which links the Gulf region with the Red Sea port of Yanbu, for shipment to Europe.

Another possibility, which is currently only being “studied”, would be a swap arrangement, whereby West African oil intended for Asian buyers is redirected to Europe, with Saudi Arabia stepping in to supply the Asian customers.

West African oil, such as Nigerian crude, is very similar to the gasoline-rich Libyan oil, traders said, noting that West Africa is geographically closer to Europe than Saudi Arabia.

“Right now, there are active talks in order to implement what is needed,” the Saudi oil official added. He stressed that the kingdom retained spare capacity of some 4m barrels a day – more than than double Libya’s entire output which totalled 1.58m b/d in January, according to the International Energy Agency.

Saudi Arabia has not yet decided whether to increase its output in response to Libya’s crisis, the official added, saying it would depend on the requirements of European oil companies.

If it proved necessary for Saudi Arabia to produce more, “then that will happen, there’s no problem at all”, he added.

Traders believe Saudi Arabia has the capacity to boost production by at least 1m b/d with just 24 hours notice, meaning that if a decision was adopted now, the oil tankers could be arriving in Europe within 10 days.

The move by the world’s largest oil producer comes as Eni of Italy, the most active foreign oil company in Libya, said on Thursday that oil production from the North African country has plunged to just a quarter of normal levels.

Increasingly panicked buying drove the price of Brent crude futures, the global pricing benchmark, up 6.7 per cent to a peak of $119.79, the highest since August 2008. Traders and investors feared that the near-total shutdown of Libya’s oil industry would leave the global oil market with little supply cushion should the political crisis spread to another major Middle Eastern oil producer.

Paolo Scaroni, Eni chief executive, on Wednesday made the most pessimistic public assessment to date of the impact of the Libyan crisis on the country’s oil output, saying the country was producing only 400,000 b/d, compared with 1.6m b/d before the violence erupted.

“The real phenomenon is there are 1.2m barrels less on the market,” Mr Scaroni told reporters in Rome, adding that the loss of Libyan production was “not a huge thing, but it is something and there is also a sense of general uncertainty in the region which can be the trigger for speculation”.

The shortfall means the world market is enduring its biggest oil crisis since hurricane Katrina in 2005 knocked out most US oil production in Gulf of Mexico.

Traders believe that Saudi Arabia has the capacity to increase production and also the oil of the right quality to meet the shortfall. The kingdom produces so-called Arab Extra Light and Arab Super Light, which through blending could be made to resemble the high-quality, light, sweet oil produced by Libya.

The Saudi move comes as oil prices reached levels that many economists believe will dramatically slow the global economy and potentially trigger a double-dip recession. Oil prices hit an all-time high of nearly $150 a barrel in mid-2008.

New Drilling Method Opens Vast Oil Fields in US

Posted on February 10, 2011 @ 9:46 am (Thursday) by WARREN MOSLER

Might need to delay ‘peak oil’ a bit.

More interesting, I’d estimate it would take about a 5 million barrel a day ‘shift’ in net demand to dislodge the Saudis as swing producer, as they can only cut production by less than that much to sustain price should that happen.

In other words, a combination of increased non opec supply and reduced world demand of 5 million bpd would force a cut in production of that much for the Saudis to be able to continue to set price, from their current production level of about 8.5 million bpd.

And along with these ‘new drilling methods’ Iraq is looking to add over 5 million bpd in capacity over the next several years.

The question is what will happen with demand, and looks to me the US and Europe are starting to go the other way and reduce gasoline demand via conservation (higher mpg’s in vehicles) and shifting to alternative fuels, directly and indirectly.

So what’s the Saudi’s best move here?
Keep prices high a long as possible and get all the wealth they can before prices collapse?
Or cut price in an attempt to discourage the forces at work that are threatening their pricing power?

New Drilling Method Opens Vast Oil Fields in US

February 9 (AP) — A new drilling technique is opening up vast fields of previously out-of-reach oil in the western United States, helping reverse a two-decade decline in domestic production of crude.

Companies are investing billions of dollars to get at oil deposits scattered across North Dakota, Colorado, Texas and California. By 2015, oil executives and analysts say, the new fields could yield as much as 2 million barrels of oil a day—more than the entire Gulf of Mexico produces now.

This new drilling is expected to raise U.S. production by at least 20 percent over the next five years. And within 10 years, it could help reduce oil imports by more than half, advancing a goal that has long eluded policymakers.

“That’s a significant contribution to energy security,” says Ed Morse, head of commodities research at Credit Suisse .

Oil engineers are applying what critics say is an environmentally questionable method developed in recent years to tap natural gas trapped in underground shale. They drill down and horizontally into the rock, then pump water, sand and chemicals into the hole to crack the shale and allow gas to flow up.

Because oil molecules are sticky and larger than gas molecules, engineers thought the process wouldn’t work to squeeze oil out fast enough to make it economical. But drillers learned how to increase the number of cracks in the rock and use different chemicals to free up oil at low cost.

“We’ve completely transformed the natural gas industry, and I wouldn’t be surprised if we transform the oil business in the next few years too,” says Aubrey McClendon, chief executive of Chesapeake Energy, which is using the technique.

Petroleum engineers first used the method in 2007 to unlock oil from a 25,000-square-mile formation under North Dakota and Montana known as the Bakken. Production there rose 50 percent in just the past year, to 458,000 barrels a day, according to Bentek Energy, an energy analysis firm.