On May 16 President Bush met with King Abdullah of Saudi Arabia. He appears to have collided with the Saudi Princes’ decision to initiate political peaking of the world’s oil production. See here for a description of political peaking, and here for King Abdullah’s announcement that they will begin additional projects to increase their oil production — in effect initiating political peaking.
Bush asked them to substantially increase oil production. They said no. Here is the post-meeting annoucement, almost meaningless — except for what it does not say.
For an analysis of the consequences we turn to the always interesting Dennis Gartman, writing The Gartman Letter (19 May 2008) — Excerpt:
However, of much greater concern to us is the material “loss of face” that President Bush has caused the United States to suffer in his ill-advised trip to Saudi Arabia, where he embarrassingly pleaded with the Saudis to increase oil production. They refused, and we think with very real justification.
The President broke the very first rule of good lawyering: Never ask a question to which you do not know the answer; and if you must ask such a question, be certain that the answer you hope to get is the answer you do indeed get. He asked the wrong question, and he got the worst possible answer. In the process, he has diminished the US all too publicly.
We have taken this President to task for many things in the past, perhaps the most open of which was his support of steel protection several years ago. Too, we’ve taken him to task for his refusal to veto legislation that clearly should have been vetoed. This, however, is the most serious violation of our trust in the Bush Administration.
We are, after all, the United States of America. This is the most powerful nation the world has ever seen. We do not bend before foreign powers and ask for their help, but we have now, and we were and are utterly embarrassed by that fact. In one futile gesture, Mr. Bush has put the US dollar’s position as the world’s reserve currency at risk, for reserve currency status mandates that the reserve currency nation bow to no one.
So long as Great Britain ruled the seas and was the most powerful nation on earth, Sterling was the world’s reserve currency. Her mantle passed to the shoulders of the United States after the World Wars. The mantle now is in jeopardy of moving again, but to whom we are not quite certain.
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For more information about Peak Oil
- When will global oil production peak? Here is the answer! (1 November 2008)
- The most dangerous form of Peak Oil (8 April 2008)
- The world changed last week, with no headlines to mark the news (25 April 2008)
- Peak Oil Doomsters debunked, end of civilization called off (8 May 2008)
Here is an archive of my articles about Peak Oil.
Here are other resources about Peak Oil.
The Saudis have no reason to work with an extremely unpopular president with less than a year left in office. If they have plans to increase production, they are smart to wait until the new president comes into office first. They can start things off on the right foot with the new president by letting him, not Bush, receive the credit for increased production.
We shouldn’t be asking the Saudis for more oil we should be asking the Canadians. Eventually prices will rise to the point it becomes more feasible to exploit the much closer oil sands.
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Fabius Maximus replies: The momentum appears to be running the other direction for development of Canada’s oil sands. Increasing mining from 1 million barrel-equivalents/day to the goal of 5 million by 2020 probably requires more water and natural gas than they have — and would make Alberta look like the surface of the moon. Here are two of the many articles on the growing opposition to these projects.
“Canada’s oil sands a massive disaster: green group“, Reuters (15 February 2008) — Opening:
“Canada’s massive oil sands are “the most destructive project on earth” and the federal government must intervene to clean up the mess, a leading green group said on Friday. Environmental Defence said excavation of the oil sands in the western province of Alberta — home to the richest petroleum deposits outside the Middle East — is producing vast amounts of greenhouse gases and poisoning local water supplies.”
“Canadians Investigate Death of Ducks at Oil-Sands Project“, New York Times (1 May 2008)
“Water used to separate and process the oil-bearing tar in oil-sands deposits ends up in large ponds and becomes a toxic sludge. Alberta officials said Tuesday that Syncrude had failed to operate noisemakers to frighten away birds. The company also appears not to have notified the province’s government about the birds’ arrival on Monday. An anonymous tip eventually alerted officials that about 500 birds were in the pond {dead}.”
“Canadian Oil Sands Project Is Delayed“. New York Times (15 May 2008) — Excerpt:
“Work on a large oil sands project was delayed on Wednesday after the Federal Court of Canada rejected an appeal by Imperial Oil to reinstate a permit that was voided in March. A court at that time found that an environmental review panel had not adequately analyzed the greenhouse gas emissions the project would create. Imperial had planned to start draining swampy land near Kearl, Alberta, this spring as the first stage of the project.”
Didn’t the Saudi King say that they were not going to exploit any new deposits of petroleum recently? That they were going to save it for their children for if Saudi Arabia is able to continue production that their economy will do well. As such, would it be sort of idealistic to think that they would produce more because we asked them to (even if the message is conveyed via a more popular president than what we have now).
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Fabius Maximus replies: Yes, that is the “political peaking” referred to in the post. See the two links in the post for more information about this — perhaps the major story of the year.
Fabius —
This was very strange, almost a violation of the hospitality for which the Saudis are justly famous.
I would have expected something of a fig leaf — an offer to investigate the technical aspects and increase production, Insha’allah. Something.
Pat Lang speculated recently on this subject, and his guess strikes me as plausible — that the Saudis were torqued off at a number of things Bush has done, esp. his Knesset speech en route to Riyadh. At the very least, Bush’s Saudi reception was a not-so-subtle signal that they intend to be more independent in the future.
It’s also telling that the Saudis don’t seem to be providing much support to their fellow Sunnis of the “Awakening.”
It should be aded that the Saudis are paying a terrible economic price for their support of the US. Every cent that the $US drops costs them a lot of money, both in income and their huge US assets. Plus inflation is killing them.
They are actually putting loyalty to the US well ahead of the own economic interests. For Bush to arrive and ask for cheaper oil is basically an insult, given how many billions (how many hundreds?)it has already cost them.
In reality the $US is no longer the reserve currency now, only a few, especially the Saudi’s are still sticking to it. They should be thanked for their loyaly, not haranged about oil prices. Plus I’m coming more and more to believe that they are struggling to keep up production. I admit the evidence is not all in, but some of the indications are, well, interesting.
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Fabius Maximus replies: I believe you are greatly overstanting the situation.
The end of the US dollar’s (USD) role as the reserve currency (a process, not a point), will have observable consequences — both good and bad. It is probably happening now, but slowly. Here are two things to watch:
(1) The USD will decline to a point where our goods and services regain competitiveness on world markets. The trade deficit will go to zero. The outsourcing of jobs to other nations will slow.
(2) The Bretton Woods II system is the major remaining support for the USD’s status as a reserve currency. A sign of change will be the slowing growth of Asian foreign exchange reserves (not yet happening). Theis will will allow Asian currencies appreciate to something like fair value vs. the USD — for the RMB, that is 1/4 to 1/2 above current rates.
“slowing growth of Asian foreign exchange reserves”
Look at these reserves in terms of how much indigenous money they’re worth to get an idea of their real value. Nominal currency reserves can grow and become less relevant at the same time.
The last I read is that the Chinese are less dependent on NAFTA than on the EU as export customers these days, that in itself will force some changes in their currency reserve. The behaviour of India, Russia and Brasilia is also quite important and afaik doesn’t point at stronger ties to NAFTA.
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Fabius Maximus replies: Since the BWII exporter state peg their currencies to the US Dollar (to varying degrees) their reserves growth looks similar in terms of their own fx or US dollar (USD). To see an illustration, see the graph of China’s foreign reserve growth at “Stein’s law, China edition … What can not go on forever“, Brad Setser, Council on Foreign Relations (20 May 2007).
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Yes, China’s exports to the EU are growing faster than those to the US (or N. America). But that is an effect of RMB’s peg to the USD, not in spite of it. As the USD declines vs. the Euro, the RMB does as well — making China’s exports more competitive in EU markets. A similar dynamic can be see in Brasil’s reserve growth.
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India is breaking out of BWII; Russia has already done so (more or less). Oil exports have no need to peg to the USD; in fact, doing so causes accellerating inflation — as the Middle Exporters have learned to their sorrow.