For those in the oil and gas business, this should come as no surprise. Besides sitting on giant reserves, Saudi oil is inexpensive (to get out of the ground) relative to other sources, plentiful and, above all stable (kingdoms and dictatorships have their privileges). Sure, you could argue, the Saudis sell just a bit too much to the Chinese for our liking, but heck, we're all capitalists at heart (even those who aren't allowed in the city of Mecca because we're not Muslims). But back to the subject at hand: why does the specific reserve number matter when it comes to predicting oil prices (not to mention prices for oil derivatives including resins/plastics, bulk chemicals, waxes, epoxies, fertilizers, pesticides and certain textiles, etc.)?
The Foreign Policy investigation summarizes the argument that the price of oil "is wholly determined by what oil traders think Saudi reserves and production capability really are." Consider that, as an example, oil plunged recently to its "lowest price of the year -- $87.87 a barrel -- when Saudi Arabian Oil Minister Ali al-Naimi suggested that the kingdom will put new oil supplies on the market to compensate for any uptick in global demand." How much capacity does Saudi Arabia have? "In recent years," the article suggests, "the Saudis have brought more productive capacity on line, giving them the capability of producing about 12 million barrels of oil a day. Since the Saudis are currently producing about 8.6 million barrels of oil a day, according to the U.S. Energy Information Administration, that means they alone are providing the world about 3.4 million barrels a day of 'spare capacity,' the key metric for oil prices."
By my own calculations, using a conservative and most would say low reserve estimate of 350 billion barrels, that gives us roughly 80 years of Saudi production at maximum capacity until the sheiks wells dry up (and according to some, less than ten years before Saudi Arabia reaches peak producing capacity and its output declines, the "peak oil" scenario). So perhaps even if you don't mind paying a few extra bucks to gas up your V8, you should think twice about the Saudi's production rate and reserves when it comes to your own commodity management strategy and price forecasting efforts.
- Jason Busch