However the cold war being fought between Saudi Arabia and Iran plays out at this week’s OPEC meetings, oil consumers shouldn’t take any subsequent pledges of increased cartel production too seriously.
Other than a gratuitous gesture to their concerns, any announced OPEC production increase isn’t going to pump more gasoline into U.S. gas tanks or, for that matter, the tanks of motorists anywhere in the OECD.
Shrinking volume, increasing appetites
OPEC production remains well below its level prior to the Libyan civil war, and what ever modest increase its kingpin producer, Saudi Arabia, can muster will be more than consumed by that country’s own soaring demand for power from air conditioners in the approaching peak power summer season.
The only thing OECD oil consumers can count on growing in Saudi Arabia and the rest of OPEC is the cartel’s insatiable thirst for its own oil. With the price of gasoline less than bottled water, Saudi Arabia already burns three million barrels a day with demand claiming a third of its total oil production.
Khalid al Falih, chief executive officer of state-owned Saudi Aramco recently warned in April that at the country’s current rate of growth in domestic oil consumption, Saudi Arabia would burn a staggering 8.3 million barrels a day of its own oil by 2028. That is almost its current level of production.
Ridiculously cheap gasoline and even cheaper diesel-fuelled electric power are one of the key tangible benefits the Saudi population, outside, of course the extended royal family, get to benefit from the country’s massive oil wealth.
In a period of unprecedented and growing social unrest in the region, those oil subsidies are unlikely to be withdrawn any time soon.
A different kind of bear market
Russia, the one country actually able of producing 10 million barrels a day, isn’t even at the table at the OPEC meeting. And it’s been Russia that has been adding the most to world exports over the better part of the last decade as OPEC exports have faltered.
Oil production in Russia, the world’s largest producer, rose to a near post-Soviet high of 10.26 million barrels a day in May. Unlike Saudi Arabia, which has been hard pressed to maintain even a nine million barrel a day production level, Russian production has been north of ten million barrels a day since September 2009.
Prime Minister Vladimir Putin has made it a national priority to maintain Russian oil production at over ten million barrels a day for the next decade. Let’s hope Russian oil giants like OAO Rosneft are up to the task.
Because if Russia can’t produce any more oil, don’t expect OPEC to do it.
Cross posted from Jeff Rubin’s Smaller World.