It almost happened last Wednesday. Several news reports during the day said that OPEC had removed all restrictions on production; OPEC member countries would be free to sell all the oil they could produce. In essence, it would have announced the death of OPEC. However, on Thursday morning The Wall Street Journal said that OPEC settled on an alternative: announcing a production limitation high enough to encompass the entire OPEC capacity. That way, OPEC publicly retains the image of a viable cartel.
Over the next few months, it will be particularly interesting to observe the oil exports from Saudi Arabia. Varying opinions are floating around about the unused Saudi Aramco production capacity: from two million barrels per day down to zero. In my opinion, the Saudis are in a tight squeeze. On the one hand, they don't want high oil prices to trigger enormous initiatives on conservation and alternative energy sources. The Saudis don't want to kill the goose that laid their golden egg.
On the other hand, the supergiant Ghawar field, which produces roughly half of the Saudi oil, has a problem. Within the limestone (calcium carbonate) reservoir rock, there are streaks that were altered to dolomite (calcium-magnesium carbonate) before the reservoir filled with oil. As is often the case, oil and water can flow more readily through the dolomite streaks than through the limestone. There is an active waterflood program at Ghawar; seawater is being injected at the lower edge of the oil reservoir to push oil in to recovery wells at the crest of the dome. Increasing the oil production rate at Ghawar will generate an unwanted byproduct: pulling water through the dolomite streaks to the oil production wells. Gahwar is already producing one barrel of water along with every three or four barrels of oil.
In one sense, both estimates of "unused" Saudi capacity could be correct. Saudi Aramco could turn some valves and increase production rate by two million barrels per day. In doing so, they might cut short the life of their largest resource.
It occurred to me a couple of months ago that I might be the only geologist outside of Saudi Aramco to sit down with a microscope for a leisurely examination of the Ghawar reservoir rocks. During the 1970s, we had a visiting faculty member from a university in Saudi Arabia. After some haggling, Aramco loaned us a box of samples. Those dolomite streaks are real.
During the debate about high gasoline prices, one of the issues raised was the limited U.S. oil refinery capacity. Currently, refineries in the U.S.A. are running at 95 percent of capacity. No new refineries have been built for decades. However, last week the shortage of refinery capacity was being blamed for the high price of crude oil. I emphatically do not understand economics, but I would have thought that a refinery shortage would increase gasoline prices but would LOWER crude oil prices. If I own crude oil and can't find a refinery, I don't expect to get paid extra. That story became less prevalent this week; maybe economists are smarter than I thought.
Part of my excitement last Wednesday about the OPEC announcement was the coincidence that it happened on the fifth birthday of my granddaughter Emma. "Hubbert's Peak" is dedicated to Emma and the book ends with a letter to her. At age 5, Emma is a highly intelligent, and very complicated, little girl. But, as it happened, OPEC did not die on her birthday.
I'm still standing by my prediction that the smoothed world production curve will peak on Thanksgiving Day, 2005. Click on January 16, 2004 for details.