Saudi Oil Conference Targets Crude Production Capacity
Against the backdrop of surging crude oil prices, the special Saudi oil conference in Jeddah aimed to find solutions to a problem affecting the whole world economy.
The summit brought together oil producers and consumers as well as the energy ministers of the major economies and the CEO’s of the oil majors.
British Prime Minister Gordon Brown had led the calls to convene this summit given his concern about the impact of sustained high crude prices on world economic growth.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! In fact Mr Brown observed that the present crisis is in fact worse than the difficulties experienced during the 1970’s oil shock.
According to the BP World Energy Statistical Review global oil production fell by 0.2% to 81.533 million barrels per day in 2007.
Demand for crude oil remains strong and there is very little spare global crude production capacity.
King Abdullah of Saudi Arabia suggests that the reason for the high oil price is threefold:
Increased Output One of the main outcomes of the Jeddah Summit has been the Saudi decision to increase oil output up to 9.7 million barrels per day, a level not reached for almost 30 years.
This consists of an increase of 200,000 barrels per day in July 2008, on top of the extra 300,000 barels per day announced in May 2008. Furthermore, the Kingdom also has plans to increase its production capacity, aiming for a daily output level of 12.5 m barrels by 2009.
The Saudi energy minister, Ali Naimi, aims to maintain a spare capacity margin, believing this to be the best way to maintain global stability.
Saudi spare capacity is currently estimated at around 1.5 mbpd, however, as consuming countries demand more crude that buffer will inevitably fall away without a further expansion in crude production capacity.
Declining Output in Nigeria While the Jeddah Summit welcomed the Saudi announcement on increased oil output, the news that Nigeria now pumps less than 1.5 mbpd, in fact a 25 year low, seemed to set the challenge in a new light.
Estimates are that Nigeria has a capacity for pumping 2.5 mbpd but the latest unrest seriously undermines efforts to regenerate that countries oil output.
Market Reaction After the Saudi oil conference ended the crude oil market seemed to shrug off the supposed benefits of the Saudi output announcement, with NYMEX West Texas Intermediate light, sweet crude futures rising over $135 per barrel.
Putting aside the short term geopolitical issues the fact remains that production capacity for OPEC as well as non-OPEC producers will need to be increased. And more investment needs to be made in refining capacity to deal with the more abundant heavy sour crude oil remaining.
If oil producers are reluctant to address these issues it will only reignite the argument put forward by advocates of the Peak Oil theory, that we are at or near that point where output is on an irreversible downward trajectory.
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