Will producers limit output & cash in later? A flatter p

pigleg

If you had a stockpile, I don't see why you'd be in a rush to sell a commodity that is only going higher.

This article today "Russia seen playing role in tight oil market, higher prices" suggests that Putin is deliberately keeping production flat.

Clearly oil is only going to become more valuable, so if I had an oilfield and was aware of peak oil, I think I would wait and produce more later. This is sort of what OPEC has done and that has flattened the world curve, but if more producers come to this conclusion, it might actually bring us to peak sooner and cushion the decline?

Jack · Dark Lord Joined: Aug 11, 2004 Posts: 4970

Please recall that the oil producers tend to depend on the revenue stream - Saudi Arabia gets a lot of money from their oil sales, but they spend it on an array of social programs. So one must ask how long they could function without income.

And, too, if they squeeze too hard the global economy collapses, resulting in reduced income to the producers. It's a delicate balancing act; whether it can be maintained remains an open question.
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mekrob · Expert Joined: Dec 09, 2005 Posts: 2663

SA and Russia are two different scenarios entirely. SA needs the money to keep their population happy. If their population were to go with even less than they have now, then they could (and are) turn to radicalism (or just wanting everything to be fair). This would lead to revolution and the overthrow the the government. Something the princes do not want.

Russia is different. They have an economy outside of energy. Oil provides 99% of their exports. Russia on the otherhand only relies on energy for 50% or so for their exports and have plenty of revenue from within their nation. While Russia might seem poor to the average American, they are by no means living in squalor (on a mass scale) and will have to fall a long way to lead to revolution (compared to SA at least). Also, whereas the Saudis are driven by the need to keep America happy, Russia sees no need. PO is their oppurtunity to deal a devastating blow to the West and be the sole superpower in the world. Why would they care if the US can barely afford their oil? They have plenty for themselves and will always find consumers willing to pay triple digits for a barrel. With Putin consolidating power, I doubt that he doesn't dream of a Russia that is supreme in the world and a day when America is on her knees sucking Russia's ... He was KGB after all. He probably doesn't think too highly of America.

I don't fret about the Arab trouble. I would keep an eye on mother Russia though.
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pigleg

Though, as prices increase, you'd think they could get the same revenue with less and less oil - prices have tripled since the late 90's, so I'm not sure maintaining the revenue stream is a problem. Point taken though, some producers would be more or less in a position to limit production. Big oil companies too would need to meet shareholder expectations.

My point was just that the depletion modelling seems to assume that producers will supply as much as they can. That might not be the case. But... perhaps it would have an insignificant effect on the curve.

pup55 · Expert Joined: May 26, 2004 Posts: 3590

I think this is a really interesting question. Take the case of Iran, who is producing at around 4 million barrels per day. This, times $70, times 365 days means their revenues are about $104 billion per year.

If they could get $120 per barrel, they could get the same amount of revenue if they pumped 58% of this amount, or about 2.38 mbo per day. So, I can't figure out why they just don't do it. Make an announcement that we are not going to sell the great satan more an 2.38 mbo per day, and see what happens to the price.

The resultant shortage of 1.7 mbo per day should be enough to get the oil price where they need it.

Up until now, if they tried something like this, Saudi would just say "no problem, we will just pump more", and issue one of their famous statements about how plentiful oil supplies are, and how they are such a good supplier etc. The threat of them doing this used to be sufficient to keep Iran or anyone else with this size of oil reserves from getting out of line. This is one of the main reasons for the Saudis being so secretive about the actual state of their oilfields. It's important for them from a negotiation standpoint to be able to do this, or at least to make the claim.

So, if the Saudis are truly at peak, and unable to increase production more than just temporarily, they lose enormous political power because they can no longer be the supplier of last resort.

The Saudis had their reasons for doing this, of course. For one thing, they believed that if the oil price got too high, it would choke off the global/US economy, and cause the price to fall, ultimately. So, in their veiw, they have to play a little bit of a balancing act, allowing the less well off nations to have enough revenue to keep their populations happy, but not get so high as to cause a lot of problems. Saudi benefited from this by gaining extra friendliness from the US, namely security, arms sales, other prestige that they would not normally be able to have in the international community.

At some point in the day, maybe pretty soon, the ability of Saudi to pump all of that oil will be called into question, Simmons notwithstanding. We all know that dueling press releases by various Saudi princes have come out in the past couple of weeks that refer to this supply issue.

An underlying factor that no one talks about is the recent death of the Saudi King. No doubt there are disagreements happening in the power structure over there that could partly explain a possible shift in attitude.

Back to Iran: If you divide the 104 billion by the population, 68 million, it only comes to about $1500 per Iranian, so we are not talking about a lot of money here, and in fact, they have about the same per-capita GDP as Mexico. So, from their standponit, even more reason to believe that the foreign powers are exploiting them since, unlike Saudi, their standard of living is third-world like.