Tuesday, April 26, 2011

Saudi Oil & Libya: Is It Important?

Jim Hamilton in the Econbrowser blog has a post on Saudi oil production and the Libyan conflict.  He correctly clarifies that the Saudi public statement in February that they were going to increase production had actually been implemented months earlier and had nothing to do with the conflict in Libya, although it made them look good.  He points out that Saudi production has gone back to lower levels.  Since the price for both Saudi light and heavy oil has gone up, Hamilton surmises that the price would be lower if the Saudi's had kept production up as announced.  Hamilton finds it interesting that the Saudi's plan to increase the number of oil rigs in the Manifa oil field, while planning to spend $100 billion dollars on alternative energy.  Hamilton concludes that the Saudi's are not able to increase production and their comments about oversupply and fear of high prices does not mean that their claims of excess capacity are going to be seen any time soon.

The failure of the Saudi's to increase overall oil production does not to me seem to an overall supply problem.  As I have pointed out in my post "Europe & Libyan Oil", Libya produced 3% of the world's supply and it was primarily sold to Europe, which has reserve supplies.   WTI storage at Cushing, Oklahoma is almost at capacity and its inefficient pipeline distribution system is well documented, accounting for higher gasoline prices in the center of the United States with imports from Canada.  Despite this oversupply, there has no price diminishment as might have been expected a month ago.

With the Libyan conflict, what the Saudi's did was reduce heavy crude production and increase production of its different grades of light oil blends, because they saw an opportunity to make more money on higher prices from European buyers speculating on (or worried about) the length of the Libyan conflict and damage to the oil fields and distribution system.  While total world wide oil production may have fallen approximately 6 tenths of one percent as the result of Libya and the prices are in the same area as 2008 oil shock, I do not see this as the result of significant lower overall Saudi production as Stuart Staniford does, but it is rather the increase in light oil blend production to harvest the even higher prices of European demand for light oil blends  as opposed to the higher prices for Saudi heavy oil.  While this is supply and demand at work as Hamilton points out, it is also prices reacting to stockpiling and speculators piggybacking, as is to be expected in the futures market.

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