It’s Put-Up or Shut-Up Time for the Kingdom

The scuttlebut is that Saudi Arabia may be set to announce an increase in oil production at this Sunday’s special meeting of OPEC members in Jeddah.

So will they or won’t they? The drama is almost as good as watching Top-Chef. A better question to ask is... can they raise production in a meaningful way?

The Saudis are clearly the big-dogs on the oil-block. It’s the only producer that can substantially increase – or decrease – crude production at will... or so they say.

Many oil market analysts, who roll with the “peak oil” crowd have grown highly skeptical of the Saudi’s claims – so this weekend’s meeting could prove to be an interesting showdown. I’m all in!

You Gotta Believe...

Let’s look at the stats: the Saudis produce about 9.5 million barrels of oil a day (mb/d). They “claim” they have the capacity to push production up to 11 mb/d or more. They further “claim”  they have discovered another 80 fields that haven’t even been tapped yet.

The Sheiks of the burning sands say: “leave it in the ground, with grace from God. Our children need it.”

Others, aren’t so sure about Saudi Arabia’s “claims”. The problem is that none of the Saudi oil production or reserve data can be independently verified.

The state-owned oil firm, Saudi Aramco, is the only game-in-town. No other western oil firm has been able to poke around since the late 1970’s.

So, as Jim Rogers says: “you either you believe them or you don’t.”

A growing legion of oil analysts simply don’t believe them. At a price of $140 a barrel, why wouldn’t the Saudis pump more oil. Holding out for $150, or $200 maybe?

Production Slump Fuels “Peak Oil” Fears

In fact, the Saudis helped put us in this pickle in the first place by cutting crude production from 9.6 mb/d in early 2006 to just 8.5 mb/d in April 2007. The Kingdom has boosted production again since then, but the damage is done.

Less Saudi oil on the market – combined with falling production from Mexico, Venezuela, Nigeria, and others –  led to a loss of almost 1 million barrels a day in global crude oil inventories last year!

Something has to give, and soaring crude oil prices are now biting into global growth, especially in developed countries; less so in some emerging markets where fuel prices are heavily subsidized (see yesterday’s blog article).

High Oil Prices Making Consumers Change Their Ways

But one thing is certain: sky-high oil prices are pushing up inflation around the globe. Consumers and businesses are feeling the pinch. According to the latest data, American drivers are cutting back big time in response to high gas prices.

Total miles driven by Americans since November 2007 has plunged by 30 billion miles, according to the Federal Highway Administration. That’s the biggest slump in road-trips since 1979... when the Shah lost his oil fields in Iran and Americans lined up at filling stations!

Faced with data like this, maybe the Saudis are beginning to change their tune. They should be worried about falling demand amid sky-high prices and slower global growth. That’s because people are changing their driving habits.

Trading in Hummers for Hondas... and Vespas

At our Soverign Society offices we now have two intrepid people who motor-scooter their way to work just about every day... with a third member of our staff thinking seriously about taking the Vespa plunge too (he already got his scooter license).

Habits are hard to break, and once you change them you’re unlikely to go back to your old ways anytime soon.

Once you’ve pushed your gas-guzzling Hummer into the river and start driving a Honda, you aren’t getting back behind the wheel of an SUV again anytime soon.

The Saudis realize this too, and the potential for a permanent slump in oil demand worries the Kingdom, as the world embraces alternative fuel instead, or simply figures out ways to cut back.

This brings us to Sunday’s special OPEC meeting, called unilaterally by the Saudis. Might a policy shift be on the way – a willingness to open the spigots and let more oil flow?

Is a Meaningfull Oil Output Hike in the Cards?

Again, the scuttlebut says the Saudis may boost production by at least 200,000 b/d, which is only a drop-in-the-bucket. A more meaingful increase however, in the 500,000 to 750,000 b/d range, might really make a dent in oil prices.

To avoid greater “demand destruction” for oil, it makes sense for Saudi Arabia to increase the flow of oil – at this point it’s in their best interests. The real puzzle is CAN they do it. As just about everybody’s mother used to say: where there’s a will, there’s a way.

The Saudi’s may have the will, but do they really have the excess capacity necessary to boost production in a meaingful way?

The oil bulls say the Saudis are just bluffing... and they can’t wait to call that bluff. If they’re right, crude prices could keep right on shooting higher this summer.

But if the Saudis are holding a full-house, then it could mean a decisive break for the bubble-like spell oil prices are under.

Either way, it should be a great side-show on Sunday, full of interesting drama. I may have to TiVo Top-Chef just to watch the OPEC outcome unfold live on CNN this weekend.