Devastating Wikileaks leaked cables: Saudi Arabia has peaked

February 9, 2011 | By | 13 Replies More

Wikileaks continues to drop bombshells, even as Julian Assange finds himself on trial.  Unfortunately, the news about Assange is overshadowing some of the latest, and most devastating, leaks.  Namely, that Saudi Arabia has probably been overstating their reserves– no big surprise to those of us who have been studying peak oil.   But where we only had speculation and circumstantial evidence before, now we have confirmation in the form of statements from credible Saudi Arabian authorities.

Saudi Arabian oil production

Saudi Arabian oil production. Image via seekingalpha.com, click for link.

Taking the 4 newly-released cables chronologically, a startling picture emerges of a Saudi Arabia unable to increase production enough to meet demand, even as the price spiked in the summer of 2008 at $147 per barrel.  The cables are available through The Guardian in the U.K.:  cable 1 (12/10/2007), cable 2 (5/7/2008), cable 3 (6/3/2008), cable 4 (11/23/2009).

The first cable deals with a meeting with Dr. Sadad al-Husseini, former Executive Vice President for Exploration and Production at the state-owned Saudi Aramco.  It’s almost comical as al-Husseini goes to great lengths to insist that the theory of Peak Oil is wrong, even as he describes it occurring within the kingdom.  For example, the cable says:

He stated that the IEA’s expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this “inconvenient truth.” Al-Husseini was clear to add that he does not view himself as part of the “peak oil camp,” and does not agree with analysts such as Matthew Simmons. He considers himself optimistic about the future of energy, but pragmatic with regards to what resources are available and what level of production is possible.

I guess as long as we don’t call it “Peak Oil” then it’s OK.  By the way, the late Matt Simmons predicted a Saudi peak in 2005, and so far he’s correct.  Even as prices rose dramatically in 2008, Saudi Arabia still did not pump more oil.  I’m all for pragmatism, but I’m also opposed to doublethink.  If it walks like Peak Oil, talks like Peak Oil, and smells like Peak Oil, let’s just admit it and start dealing with it.  Here’s Al-Husseini’s “pragmatic” description of Peak Oil:

“While stating that he does not subscribe to the theory of “peak oil”, the former Aramco board member does believe that a global output plateau will be reached in the next 5 to 10 years, and will last some 15 years, until world oil production begins to decline…recent oil price increases are not market distortions, but instead reflect the underlying reality that demand has met supply…  Due to the longer-term constraints on expanding global output, al-Husseini judges that demand will continue to outpace supply… new oil discoveries are insufficient relative to the decline of the super-fields, such as Ghawar, that have long been the lynchpin of the global market…”

And that, folks, is Peak Oil.  The “output plateau” Al-Husseini discusses has been a part of Peak Oil theory for some time.  Call it pragmatism if you must, but now we seriously need to get moving on a crash mitigation program.  As Michael Ruppert said in the movie Collapse (reviewed here), “It’s axiomatic that if Saudi Arabia is past their peak, then the whole world is [past its peak in oil production].”

The second cable is much less shocking, it mostly deals with the squeeze in refinery margins as prices were escalating.  In one important tidbit though, Prince Abdulaziz discussed the King’s announcement that the kingdom would cap production at 12.5 million barrels per day, and denied that it was a new policy.  This point is important because it had long been theorized that the onset of Peak Oil would provide a scenario where the incentives for oil producers would lay in keeping the oil in the ground for as long as possible.  After all, why sell oil today when it’s only going to be more valuable (that is, more expensive) later?  The King reiterated this stand last year, and taking it one step further, “ordered a halt to all further underground oil exploration, arguing that further finds should be left to future generations of Saudis.”  Given that the entire world, including the IEA, argues that Saudi Arabia is the only producer capable of bringing on additional production to meet rising supply, the king’s unwillingness to do so throws a rather large monkey wrench in the gears of future oil production.  This provides added emphasis to the statement from the first cable that “the IEA’s expectation that Saudi Arabia and the Middle East will lead the market in reaching global output levels of over 100 million barrels/day is unrealistic, and it is incumbent upon political leaders to begin understanding and preparing for this ‘inconvenient truth.'”

Even George W. Bush seemed to realize that the Saudis simply did not have the ability to increase production, as he was interviewed in January of 2008 shortly after a trip to Saudi Arabia in which he hoped to convince the kingdom to pump more oil to blunt rapidly rising prices.  “When asked what he might say to the King of Saudi Arabia to lower oil prices, George Bush responded, ‘If they don’t have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do.'”  Indeed, welcome to Peak Oil.

The third cable deals with this issue as well:

Bourland noted that the confluence of demands to manage this enormous cash flow, and the challenges to managing growth in the oil sector were beginning to worry the Saudi leadership. He referenced recent comments from an informed source in the oil sector who explained that Saudi Aramco was scaling back proposed future expansion plans. Quoting King Abdullah’s recent comments (ref B) that Saudi Arabia would cap production capacity at 12.5 million bpd and “leave crude in the ground for its children”, Bourland remarked, “There are more accidents, there are escalating costs (in the oil sector). I think the King is reaching the conclusion that the money is safer in the ground than in the bank. He doesn’t want to see it squandered.”

The issue of “more accidents” in oil production seems prescient.  Having the benefit of hindsight, we can see that the Deepwater Horizon blowout is but another symptom of our addiction to oil which is increasingly harder to find, requiring increasingly precarious means of extraction.

The third cable asks the question, “Is the oil market broken?”, and explores the role played by various governmental subsidies around the world in distorting supply and demand signals.  Keep in mind that this cable was released as gasoline prices were really beginning to spike in 2008.  The cable points out that

“while crude has increased by nearly 6 times in the last four years, gasoline prices in the U.S. have at most tripled.  While consumers complain vociferously about rising pump prices, nonetheless they are not absorbing the full brunt of rising prices.”

The subsidies provided by countries such as China and India means that higher prices were also not being fully passed along to consumers in those countries, meaning that “we will continue to see unrestrained demand growth, especially in the Middle East [which also heavily subsidizes domestic consumption] and China.”

The food riots and other indications of unrest brought on by inflation means that “Pressed consumers in many nations have recently found themselves on a kife’s edge regarding food security, and are not likely to peacefully accept the rolling back of petrol subsidies which have become effectively institutionalized.”  As the recent unrest in Tunisia, Egypt, and elsewhere is demonstrating, the issue has not gone away.  Rising oil prices are virtually guaranteed to produce inflation in other sectors, as nearly everything is dependent upon cheap oil.   The cable also noted that Dr. Sfakiankis from the Saudi British Bank predicted “crude prices topping $150/barrel ‘are not unlikely’ by the end of the summer”, a target which was missed by only $3.

The big payoff from the third cable comes from the comments in the conclusion (emphasis mine):

Our Mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period. The May announcement of a 300,000 bpd increase in production barely dented price escalation. It appears unlikely Saudi Aramco could muster the million or more barrels which appear to be needed to make a dent in the normally upwards price trajectory. Saudi Aramco’s ability to sustain such a production increase for a year or more raises serious questions. A series of major project delays and accidents over the last couple of years is evidence that Saudi Aramco is having to run harder to stay in place – to replace the decline in existing production. Additional production would likely come from increasingly heavy crude which the world lacks sufficient capacity to easily refine. The Saudis appear dis-inclined to discount its heavy crude sufficiently, so the market is dis-inclined to purchase it. In neighboring Iran, the regime is now purchasing floating storage for heavy crude which has no takers. While this Mission is far from embracing doomsday “Peak Oil” theorists, Saudi Aramco’s challenges are significant.

Again, note the insistence that these developments are not Peak Oil, even though they are exactly what Peak Oilers have been saying for years.

The final cable is the most instructive, though it requires a bit of reading between the lines.  The cable deals with Saudi attempts to begin to diversify their economy and energy sources away from hydrocarbon energy, “which directly provide close to 50% of GDP and indirectly account for much of the rest of Saudi industry.”  Explaining the move to diversify:

[Saudi Minister of Petroleum Ali] Al-Naimi is keen to discuss potential areas of cooperation, particularly on solar energy (ref a). He has publicly called for Saudi Arabia “to become the Saudi Arabia of solar energy.” Al-Naimi also supports biomass energy projects, including involving algae…  Saudi officials in several ministries have explained their interest in developing renewable energy projects, which they expect to play a major role in meeting the Kingdom’s future energy needs (electricity demand is growing at 8-10% per year, ref b). Developing renewables will reduce the need to divert increasing amounts of crude from exports to fuel domestic electricity generation…  Saudi Arabia is actively considering the development of a civilian nuclear program, which a number of analysts believe is the only possibility the Kingdom has to generate sufficient electricity to meet projected demand from economic and population growth and increasing affluence without wastefully burning large quantities of fuel oil.

These reports are confirmed by recent news indicating that the kingdom is rapidly phasing in both solar energy and nuclear power, as well as enriching uranium for their coming nuclear plants. Why would a country with allegedly plenty of reserves feel such an urgent need to diversify their energy sources?  Perhaps because they’ve been lying about their reserves all along?

There has long been substantial doubt that Saudi Arabia has the reserves that they have claimed to have, and now it that doubt is verified by sources within the kingdom.  It’s time to face the hard questions of Peak Oil, and begin the crash mitigation program that Dr. Robert Hirsch indicated was necessary in his landmark report to the Department of Energy in 2005.  Dr. Hirsch has a new book out, and in an interview last year asserted that there has been a conspiracy to cover up the reality of peak oil.

Q:[oil man] – What happened after you published your 2005 report on ‘peak oil’ for the US Department of Energy (DoE) ?
A: The people that I was dealing with said : « No more work on peak oil, no more talk about it. »

Q:That was in 2006, under Bush administration. Has anything changed with the Obama administration ?
A: It has not changed. I have friends who simply won’t talk about it now. So I have to assume that they are receiving the same kind of instructions.

Q: What about the Department of Defense (DoD) ? Two recent reports show that some people in the US army are willing to give very bold warnings.
A: You’re right. Things may be different there. The DoD is headed by Robert Gates, a brilliant guy and a good friend of James Schlesinger, the first US Secretary of Energy, who wrote the foreword of our book. Schlesinger
has continuously served as an adviser to the DoD.

In 2005, Robert Gates took part in a war game named « Oil Shockwaves », with a number of other very high senior people involved in the administration, both Democrats and Republicans. What they did is they looked at a severe cut off of world oil production, something like five percent.

Q: Like in 1973 ?
A: Something even worse than that. So they looked at the impact, and they saw severe problems for the economy. And they looked at the options that existed, and of course there are no options. There are no valves to turn on someplace.

They even considered military interventions in the Middle East as a means to change things. And they basically concluded that this was an impossible situation.

Q: The Pentagon, Chatham House, even the German army : now that we have this kind of sources saying that we are perhaps close to a decline of world oil production, what is your opinion about the level of awareness of our governments regarding the peak oil issue ? The US oil supplies have been declining for 40 years, China is very aggressive in the way it tries to build up its oil supplies abroad, etc.
A: I think in the case of the United States, that there are people inside the government that understand the problem. I don’t think it’s a huge number of people. And one might say that there is a conspiracy to keep it quiet.

Q: But were you disappointed, appalled, or I don’t know, scared maybe ?
A:  I was not surprised, because if you spend some time looking at peak oil, if you’re a reasonably intelligent person, you see that catastrophic things are going to happen to the world. We’re talking about major damage, major change in our civilization. Chaos, economic disaster, wars, all kinds of things that are, as I say, very complicated, non-linear.

Really bad things. People don’t like to talk about bad things.

It’s time to start talking about really bad things.

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Category: Secrecy, The Middle East, Whistle-blowers

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is a full-time wage slave and part-time philosopher, writing and living just outside Omaha with his lovely wife and two feline roommates.

Comments (13)

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  1. Hal (GT) says:

    I remember that this news was floating around over a year ago. Not quite confirmed so it is very interesting to me that another source for the info has come out. Interesting to me it's from the wikileaks folks. Hope a Jihad isn't launched against them.

    I saw some other news out of the Emirates that gold bars were in short supply as they were buying them up quickly. Protecting some of that cash reserve no doubt.

  2. Brynn Jacobs says:

    Hal-

    Thanks for your comments. Yes, there has been a lot of speculation over the years as to how much Saudi Arabia actually has in reserve. I think the best book on the topic if you are looking for further research is the late Matt Simmons' book Twilight in the Desert.

    The influx of petrodollars has been a problem throughout the oil producing nations, a fact which is also noted in the third cable:

    Bourland estimates the Saudi state is earning roughly $1 billion/day now in oil revenues, of which it expends roughly half, and adds the other half to its official reserves. He noted SAMA added $15 billion to its reserves in March, the seventh month running that reserve additions totaled more than $10 billion. "The amounts are overwhelming," Bourland summarized. He also explained that although the Saudi Arabian Monetary Authority (SAMA), the central bank, continued to hold U.S. Treasury bills, it was also diversifying. SAMA's Investment Department "prides themselves on being diversified," he related.

    11. (C) This enormous influx of petro-dollars is largely held by SAMA. Bourland explained that Saudi investors, however, are currently hoarding riyals. They continue to be afraid of being caught out by a possible re-valuation in the USD-pegged currency. He noted investors continue to anticipate an eventual re-valuation, but "the pressure is not like it was last fall" when the fixed exchange rate came under heavy speculative attack in November. Instead, Bourland sees Saudis hoarding riyals because the "U.S. markets would go on sale" if the Saudi government re-values. Bourland pointed out it was difficult for Saudi investors to even find large quantities of U.S. dollars, saying "it's hard to get $500 million or $1 billion in USD, the banks don't want to hold that much." Bourland stated he does not see much Saudi money involved in hedge funds or other speculative instruments allegedly running up crude prices.

  3. Hal (GT) says:

    Thanks for the book recommendation, Brynn.

    Yeah. That third cable is very interesting to me when it comes to the economic mindset there. Helps to explain some of the info I'm hearing concerning precious metals in the area.

  4. The members of the Bush administration were so eager to maintain the good relationship with Saudi Arabia that this issue was never considered to be very important for them.

  5. dave says:

    Julie,

    Actually, I think the opposite: because the economy is so sensitive to oil prices, the Bush Administration (every administration since 1972, really) has been very very eager to keep good relations with the Saudis.

  6. Jim Razinha says:

    Julie, not just Bush, but pretty much every administration. Saudi Arabia routinely ranks near the bottom (bad) list of repressed countries. But they had a desirable commodity and left alone, kept OPEC mostly in check. So we turn a blind eye.

    http://www.hrw.org/en/world-report-2011/saudi-ara

  7. Erich Vieth says:

    Peak Oil hits the Wall Street Journal (but it's not called "peak oil," of course):

    "In its closely watched annual financial report released Tuesday, the company said that for every 100 barrels it has pumped out of the earth over the past decade, it has replaced only 95.

    It's a conundrum shared by most of the other large Western oil-producing companies, which are finding most accessible oil fields were tapped long ago, while promising new regions are proving technologically and politically challenging."

    http://online.wsj.com/article/SB10001424052748704

  8. Brynn Jacobs says:

    Erich–

    The Journal has been making feeble movements in this direction for some time. Apparently everyone has determined that the big problem is the words "peak oil" themselves, not the "debilitating price spikes", "draconian" government restrictions, "steep and sudden domestic price rises or severe restrictions on personal mobility" that Shell (and the Peak Oilers) have been warning about.

  9. Brynn Jacobs says:

    A coalition of groups is urging Obama to say the words "Peak Oil" on April 20th, the anniversary of the Deepwater Horizon disaster.

    He came close in the immediate wake of the disaster, but like so many others, explains the symptoms of Peak Oil while refusing to name the disease.

  10. Erich Vieth says:

    Bernie Sanders has leaked a lot of information about who is causing the price spikes in oil, and it is oil speculators. http://lordrag.blogspot.com/2011/08/bernie-sanders-rips-lid-off.html#.TlCGItiNYrI.facebook

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