Wednesday, August 14, 2013
The above graph shows Saudi production of crude and condensate (ie oil) from 1995 through July. There are several data sources, but the black line is the average. The red curve is the number of oil rigs working in the country, and is a rough proxy for the level of effort being made to maintain or increase production.
In the middle of the price spike in 2005-2008, Saudi Arabia began to reduce production, rather than increasing it, and at the same time increased drilling over the very low level they had traditionally maintained. This suggested to some of us difficulty maintaining production (probably due to long-standing under-investment in developing new resources to replace aging fields).
Then in late 2008, Saudi Arabia sharply reduced production in response to falling demand due to the great recession. Simultaneously, the drilling program was allowed to fall off. Then, several months after the Libyan revolution, Saudi Arabia increased production again to almost 10mbd, and began increasing rigs again, which has continued since, with some bumps along the way. However, they decreased production in late 2012 (possibly to offset US production increases), and have only partially restored that production again.
It is unclear how much further Saudi Arabia could increase production - they never provide sufficient detail to verify claims as to spare capacity. The conservative view is that they can only increase to previously demonstrated levels - in this case, that is only a few hundred kbd above the present level. If that were the case, a fairly modest disruption in oil supply anywhere on the planet would be enough to trigger sharp price increases (much as the Arab Spring did).