The best analysis that I've seen and tracked on Saudi output is that they can't really "open the spigot" more anymore. Gwahar has been managed by way of waterflooding the formation (fecal pellet limestone, by the way). Back in its glory days, Gwahar sported a production level of about 5.5 million barrels per day. It's going down now. The word in spring of 2004 was that it was running about a 55% water cut (bad). 2006 demonstrated a 70% water cut. No, if they "open the spigot" any more, they'll just start coning the field. "Coning" means that the water below pushes its way up to the wellbore due to the viscosity of the oil being greater than the viscosity of the water. We learned our lesson about spigot opening in the fields of West Texas.
"Doesn't Saudi have more fields?" Why... yes, they do--all vastly smaller than Gwahar with a lot of sour and/or heavy crude, which isn't something that refiners want if they can keep from it. The "heavier" an oil is, the more it's comprised of heavier molecules. Think: lubricants... paraffins... tar... that kind of stuff. Tar sands, by the way, are literally organic deposits that weren't buried deep enough and haven't been able to "cook" into the higher-energy molecules that we'd like (natural gas is the highest-energy version, by the way, but isn't as useful for portability as fuel oils and gasoline).
One way of looking at the prices rising is that they already have, you just didn't realize it. Big users like airlines and retailers have already bought very significant portions of their expected usages years in advance. When you see "spot market prices", you're not seeing the whole picture. As an example, QuikTrip may have already bought many years worth of tiered futures contracts in anticipation of doing business years from when they bought them. And they've already agreed to a much higher price for those futures contracts than you know. Locking in a deal well in advance both entails and mitigates risks. You can think of it like a "diversified portfolio" since we're mostly all aware of those. They won't have bought ALL of their anticipated gasoline and diesel, so they'll have to compete in the short-term futures markets when the time actually gets close to actual consumption. That is, they might have to buy 5% of their expected needs for the month of September in August and so have to go with the spot market to do it. That's a rough example.
What ended up actually happening with the oil price spike was a cascading demand destruction that wiped out a significant amount of demand for a relatively short period. Worse, it caused a nasty backlash of profits-turning-to-losses that bankrupted a lot of companies and individuals. That kind of crap doesn't generally show up immediately but it's doggone sure showing up now. When you add to that the dirty trick that Russia did to the money market funds in September of last year, it was too much for the world economic system.
Don't get me wrong... the rise of the finance economy since the creation of "credit default swaps" and "collateralized debt obligations" in the mid-'90s and the repeal of Glass-Steagall, all of that ultimately caused The Mother of All Bubbles that couldn't be sustained for more than the ~15-ish years that they have been--it was bound to crash eventually, just like it did back in '29 and then again a little later in the early '30s. Matter of fact, they're basically not doing anything significantly different at this point to avoid a further crash. Washington does NOT have control of this thing, the banks do. You have no idea how scared they're running at this point or how completely insolvent they are. Exact same thing back in the early '30s.
Listen, I'm an engineer. I play with hydrocarbons and how to both process and use them on a daily basis. I've been offshore a bunch of times. I've watched wells die and I've watched fields die. I've seen hundreds of millions of dollars spent trying to make projects work (fields) that just didn't ultimately pan out and turned out to be horrific losses. That's exploration for ya', it is what it is. Today, we're having to work much harder (read: spend A LOT more money) to bring the same flows onstream that we used to do so easily decades ago. Crap... it was "effortless" back in the glory days compared to now.
And... the mathematics aren't looking too good. Fossil fuels (oil, coal, gas) give us about 85% of our entire world energy consumption:
It wouldn't be quite so bad if the big bankers hadn't goosed everyone and everything so deeply into debt. At this point, there's way-the-heck-and-gone too much debt in the system that's ultimately robbing our ability to provide the capital required to get set up for a decently controlled consumption decline on the scale that we require.
Mrs. Haman, of course, believes that if only we can legalize marijuana and market it through American mom-and-pop producers AND save tons of money through socialized medicine, we'd have the money to build the Enterprise and start star-trekking around the universe. I guess I forgot to mention getting the money back from the 1%-ers... the same folks that threatened CONgress to either cough up the TARP money or watch the banking system go bye-bye back in late 2008. Yeah... good luck on getting that...
I offer a public and sincere apology.
