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Saudi Arabia Spins Another Tale

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Saudi Arabia Spins Another Tale

At the international energy forum this weekend Saudi Arabia said it was NOT going to expand capacity beyond its current 2009 target of 12.5 million barrels per day.

Saudi is currently in a five-year expansion program to increase production from 11.3 mbpd to 12.5 mbpd. The cost of this program is said to be between $50 - $90 billion depending on what typed of infrastructure you include in the total.

After several announcements over the last two weeks of new capacity coming online in the next 18 months Saudi threatened to play its hold card this weekend. To offset any potential price declines from their new production increases they said there would not be any more increases after 2009 until 2020. Saudi Oil Minister Ali Naimi said, "According to our projections, at least to 2020, we do not require anything higher."

Naimi said growth in biofuels is casting a growing cloud of uncertainty over future demand forcing the kingdom to put the brakes on new capacity plans possibly for a decade after 2009.

This is total smoke and nothing but a major bluff by Saudi to keep prices high. Ethanol and biodiesel remain only a tiny fraction of overall energy fuels. According to the IEA biofuels are expected to rise to only 378,000 barrels per day in 2008. That is up +80% from 2006 but still only 0.005% of the 88 million barrels of oil we will consume daily by the end of 2008. This is hardly a threat to global oil demand.

Current demand growth numbers from the IEA call for an increase of 1.3 million barrels per day in crude demand in 2008 and another 1.8 mbpd in 2009, 2010, etc. Crude demand has been increasing by 1.6% to 1.8% per year and that demand growth is expected to continue given the rapid economic advancement by China and India.

Given the disparity between the paltry 378,000 barrels of biofuels and the average growth estimates for demand of 1.6 million barrels per year and the loss of 4.5 mbpd do to depletion there is no chance that biofuels will reduce the need for additional Saudi capacity. This is pure smoke and mirrors by Saudi and OPEC to keep the pressure on prices. 

The world economy is floating on a river of oil that is rapidly reaching its peak flow. That roar you hear is the equivalent of Niagara Falls just around the corner and there is nothing we can do to stop the world from plunging right into the abyss once that peak appears.

Jim Brown

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