When the King of Saudi Arabia talks about oil, we should listen

Summary:  One astonishing aspect of the energy crisis is the western media’s preferences when it comes to sources of information.  They love western speculators, economists, oil company executives, and politicos.  Others go to small articles in the back pages, including statements by leaders of oil producing nations – even the King of Saudi Arabia, home to the world’s largest reserves.  No wonder the American public gets surprised by every new development.

In the following interview, King Abdullah of Saudi Arabia stays on message with what the Saudi Princes have said for several years.  He has just become more explicit.  He makes two things very clear.

  1. He dashes any hope that they plan any new large new projects to expand oil production (beyond those under construction). 
  2. He fires a warning shot at consuming nations that plan to raise taxes on oil – either directly or via carbon taxes.  We cannot complain that oil prices are too high and then tax it more.  If we believe higher oil prices would benefit the ecosystem, the Saudi Princes can oblige us.

Interview with King Abdullah of Saudi Arabia, Arab Times, no date (aprox 1 July 2008) — Bold emphasis added.  Excerpt:

Q: How was the meeting between the oil producing and consuming countries in Jeddah, Saudi Arabia, in which you explained in detail the effect of high oil prices on daily living?

A: During the meeting, we declared our strategies on the soaring prices of oil in the international market as well as the policies of the Kingdom. Starting from the establishment of OPEC, we have always been keen on keeping the price of oil at a normal level to reduce the burden on both the producers and consumers. Our enthusiasm to protect the interests of the international community, in terms of oil, is on par with our eagerness to protect national interests.

We have nothing to do with the rising prices of oil in the world and there might be some other factors contributing to the increase, such as a few people trying to play with the market to serve their personal interests while some countries are increasing duties on oil products, except on those which they produce locally.

Despite OPEC’s commitment to meet the growing demand for oil as well as its lack of control over the price of oil in the world – which is decided by the market, some groups still accuse the organization of causing the hike in prices of oil. The oil consuming and producing countries should look into the issue to identify the real cause.

People who think that oil prices will go down once production is raised are wrong because there are indications the prices will remain high. As an oil producing country, we are not linked to such indications or observations. We market our products in the international community based on the current prices, whether high or low.

Many countries have hinted about a decrease in current speculations but we have nothing to do with such hints as an oil producing country. Worldwide development is in the offing, hence, there is a growing demand for oil.  OPEC used to have full control over the price of oil but many consuming countries opposed it, arguing the price should be based on the law of demand and supply, to which, OPEC agreed. Still, some groups are accusing the organization of causing the increase in the prices of oil.  Is this fair?

Looking at the recent reports from the experts, I think oil will go down if there is an alternative source of energy, but the price of that energy will also increase due to the booming world economy. Prices will continue to soar as the economy flourishes because energy is a vital resource in development. Thanks to the Almighty, our region has a strong oil reserve that can meet future demands.

Some people might disagree with our point of view but we are not the target in such a situation. We are very transparent in our visions to limit the price of oil in the international market. We hope other countries will look for alternatives to help their citizens overcome their burdens caused by their need for energy like oil.

 Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about Peak Oil

  1. When will global oil production peak? Here is the answer! (1 November 2008)
  2. Links to articles and presentations of some A-team energy experts  (11 November 2008)
  3. The most dangerous form of Peak Oil  (8 April 2008)
  4. The world changed last week, with no headlines to mark the news   (25 April 2008)
  5. 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.

10 thoughts on “When the King of Saudi Arabia talks about oil, we should listen

  1. Even Saudi oil is scarce in the long run. Why would SA increase production now to lower prices and hasten the day of its running out? On the other hand, it’s concern about countries reducing demand by raising taxes, shows that it is very comfortable at the current level of production and profitability.

  2. He fires a warning shot at consuming nations that plan to raise taxes on oil – either directly or via carbon taxes. We cannot complain that oil prices are too high and then tax it more. If we believe higher oil prices would benefit the ecosystem, the Saudi Princes can oblige us.

    One more nail in the coffin of the nation state. Notice how a foreign entity is asserting ( “dictating” is too strong, I think ) how not only our energy but our tax policy should be.

    Essentially, the debate over whether we will pay higher fuel taxes has already been decided. We will. The only issue is whether we will pay them to Washington in the form of excise taxes to the Saudis in the form of petroleum fees.
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    Fabius Maximus replies: That is one perspective, assuming that the oil belongs to “all of us.” Hence the price charged by oil exporters is a “tax”, rather than honest proceeds from sale of scarce goods.

    I doubt the Saudi’s share this view. If it is their oil, why should we benefit from it’s sale? Do we share the revenue from Microsft’s products with the world? After all, these products are developing using the intellectual heritage of humanity. Why should not the profits be shared?

    Is it not rank hypocrasy to complain that the price of oil products (like gasoline) is too high when our taxes so greatly boost the price?

  3. We find ourselves between a rock and a hard place; probably due in no small measure to our own stupidity. I’m not certain that you can completely trust what the leadership of KSA say in regards to oil. My understanding is that there is litte transparency on the subject of oil reserves in the ground in that country. They don’t allow foreign audits of their oil fields. You can only choose to believe or not believe what they tell you in regards to their supplies.

    We know oil is a finite resource and the Saudis therefore cannot continue to pump it forever. The demand for oil is also increasing globally, and I suspect, athough I have no evidence to support it; Demand is increasing faster than supply. Finally, speculation is also undoubtably a factor in price increases.

    Are there other factors driving up the price? If so what can be done about it?

    One way to fix the problem would be to stop using oil where possible and look for alternatives, although this is admittedly difficult. The best way to accomplish it would be through some innovative use of the taxation system. The problem in implementing such a measure is that governments do not tend to be particulary creative thinkers at the best of times.

    Has anyone considered the financial implications for the US dollar of alternatives? Oil is traded in US dollars. If demand for oil started to plateau or even go down (unlikely in the near term), sure, oil prices would probably follow the general trend too; but with less petrodollars being recycled globally, there could be a substantial decline in the value of the US dollar in such an event, making debt servicing diffcult.

    You would think that the US (and other industrialised countries) would be making the necessary changes to minimise risks and adjust to that sort situation before anyone else did … and yet I am not certain that we see that happening. Either what I have said is not a fair assessment of global oil, or governments are extrodinarily slow to react.
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    Fabius Maximus replies: Many of your questions have been extensively researched and discussed. See here for my articles about peak oil, and here for other reports (esp. note Hirsch’s “Mitigations” report, the definitive study to date of how we can adapt to higher oil prices).

    The US dollar’s status as the world’s reserve currency depends far more on people holding dollars (using it as a storehouse of value) then people trading dollars (a medium of exchange). The latter has psychological (reputational) significance, of course.

  4. Is it not rank hypocrasy to complain that the price of oil products (like gasoline) is too high when our taxes so greatly boost the price?

    I am not suggesting anything about the merits – or lack thereof – of anybody’s position.

    I am merely noting the realpolitik that the ability of the United States to determine its own tax policy is being circumscribed, to the detriment of its sovereignty. For better or worse; and rightly or wrongly – as the case may be.
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    Fabius Maximus replies: Perhaps, but it is an unusual conception of sovereignty that requires other nations to sell us their national resources at a cheap price. Can we require them to come over here and work for us for free, too?

  5. Oil is a commodity that is much more difficult price in the future when compared with Gold or Wheat or Rice.

    Oil is needed by all countries except those without the slightest industrial complex.
    Oil cannot be substituted. Rice is Wheat is Corn is Food Staple.
    Oil prices are determined by many factors, some of which I will list here, and some of which I will undoubtedly miss.
    Demand in the present
    Demand in the future (both expected {or known} and unexpected)
    Supply in the present
    Supply in the future (peak oil, etc)
    Geopolitical events that this blog does an excellent job of deciphering
    The value of the US dollar in relation to other currencies, if only because oil is traded in dollars
    Speculation
    And then those two wonderful market participants, Fear and Greed

    Those factors combined with the fact that there exists no credible source of data for our supply in the future (what kinds of oil is in the ground, when and how it will be profitable to extract, and the geopolitical climate of any country that the oil is located in). Add in the fact that oil is seen as an evil thing and you have billions of dollars floating around a commodity that people love, hate and need.

    Should we trust what the King says? Perhaps. Should we move towards cleaner energy? If only for our children and grandchildren yes. Perhaps now that our wallets are involved, we’ll finally begin a project that will take 30 years (conversion of our economy from oil and petroleum based to alternative energies), and that should have been started 30 years ago.

    FM your blog is excellent. Keep up the good work. I especially enjoy your pieces on inflation. Have you looked into the different ways the BLS has changed how inflation is calculated since the 70s? It’s interesting reading…
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    Fabius Maximus replies: I am familiar with the inflation calculation issue, as presented on sites like Shadowstats.

    First, “inflation” and “GDP” are high level abstractions (not like counting apples). There is no “right” way to calculate them. Any methods has problems, and will fit some economic situations better or worse than others. For some apects of the measuring process there are no good solutions.

    Second, the methodologies have by most accounts improved over time in many ways. Our theoretical understanding of inflation and econometrics is much better than in 1970 (pre-Freidman and the the monetarist revolution), and this is reflected in the BLS methodologies.

    Third, the government’s statistical agencies do not operate like DoD — where money is no object. They are grossly underfunded, and do the best they can with what resources we give them. The best way to get better economic stats is lobby your representatives.

  6. While this certainly isn’t the correct forum for this discussion, I must disagree. While there has been no ‘dark cabal in the night’ pressuring for understated inflation, there has been a pervasive effort from politicians on both sides of the aisle to make the numbers look better than they have been. Hedonics, substitution, and all manner of other voodoo are not how the average consumer in America shops. The ridiculous concept of ‘core’ and ‘headline’ inflation is a whole different topic. If we calculated inflation today how we calculated inflation back in the 70s and 80s (a set basket of goods, unchanging from period to period), we would see a much higher number than the 4.0% currently quoted.

    I guess all I am saying is that the model and the reality of the situation do not seem to match up. At which point you have to ask yourself, when, how and why did this go wrong? The American consumer is feeling the squeeze from several different directions in our current economic slowdown; lowering net worth from the housing bust, rising prices in the form of food and gas, debt that can’t be paid in the form of high-interest credit cards and home equity loans or adjustable rate mortgages, a dismal job outlook and a political system that seems to care more about an unpopular war than the people at home.

    I expect, like you I think, a long and protracted recession, and significant changes in our political leadership.
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    Fabius Maximus replies: Current inflation numbers are perhaps lower than if we used the methodology of the 1970’s. Remember, then the calculated residence cost using home price changes. This is the single largest cost element, and now would be strongly negative. With many consumer discretionary items (e.g., autos, both new and esp used) falling in price, that would offset much of the rise in food and energy.

    Hedonics are not voodom, but an attempt to adjust for a real pricing dynamic. Their impact is usally overstated by critics, because chaining offsets much of the impact.

    Core inflation is an important concept, if often misused. The Fed cannot affect food and energy prices. Only target what you can control! So the Fed targets that aspect of prices — core — that they can control. Otherwise they would twist the economy in vain attempts to adjust for commodity prices. The 1970’s demonstrated that this does not work.

    If you look through this archive — End of the post-WWII geopolitical regime — you will see my “forecasts” (past and present) for the US economy.

  7. “Oil cannot be substituted.”

    I disagree. If one is willing to spend money, one can make biodiesel and biologically-based plastic precursors. The technology is proven, it’s now a business problem. Even if this means the price of plastic would skyrocket, life would go on. People would wrap their sandwiches in cheesecloth instead of plastic. Computer cases would be metal, and more expensive. It might be the end of the careers of a lot of bureaucrats, but it would not end civilization.

    The problem is that while many Americans are smart enough to change their technological and financial commitments and get back to leading the green technology trend, they are not willing to do so.
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    Fabius Maximus replies: We burn 85 million barrels of oil per day. That is a lot of cheesecloth. In other words, most oil is burned. And as a liquid fuel there is as yet no equivalent substitute for oil. Time will provide substitutes, but this requires (per the Hirsch report) several decades.

    Biofuels, as should be quite clear by now, are not a large-scale substitutes. We cannot both eat and burn our agricultural output.

  8. Think globally. The economics that make oil alternatives possible (profitable) are just beginning to take effect in America and Western Europe. But for developing countries and developing industries, there are very few (and if they do exist, very expensive) alternatives to oil across the crack spectrum.

    Like I said, oil is global commodity. Look at it from a global perspective; while we can substitute some of the products of processed oil, other countries can’t.

  9. There are companys in the US that have discoverd how to get both Desil and Gasoline from certen strains of Algae. Some of these companys are now looking to partnership with other countries to get this technoligy moving. The economis are now profitable to produce these products. Algae can be grown almost anywhere, can use salt water, produces up to 10,000 gals per acare, and absorbs larger amounts of CO2 from the atmosphere than an other plant source. This could be the next global boom business. lets HOPE.
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    Fabius Maximus replies: I wrote about this technology here: “A snapshot of our engines of innovation, as they develop new energy sources” (12 May 2008). They are all in early stages of development, the most advanced at the pilot plant stage. Even if they work economically at large scales, it will be years, perhaps decades, before these new technologies (and their infrastructure) can be built up sufficiently to make a dent in our liquid fuel consumption — now aprox 85 million barrels/day.

    Hope is nice, but it is not a plan. We need to assemble the data and the people to understand it and the opportunities, give them the tools, and develop plans. Inspired guessing and blind luck are probably poor substitutes for these things.

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