Bruce Pile

Oil and the Futures Market

The reservoir flow rate argument mentioned above is probably a mute point for post peak production. Throttling production to maximize URR is what you do in the primary recovery and, unfortunately, in the world's two biggest producing areas, Saudi Arabia and Russia, that was not done very responsibly.

Saudi Arabia cranked up production in the 70s to try to keep up with the demand surge of that era (yes, it was demand, not an embargo that lasted a whole 10 years) to the point of field damage and a set of Congressional hearings into the American oil companys' production of the Saudi fields before they were taken over by the Saudis. Matt Simmons details these hearings in his book Twilight in the Desert. Russia in the 70s and 80s was busy taking over the world and making it a Marxist Empire. They produced little of interest to global trade other than oil and lots of it. So their prolific fields were produced at gunpoint by the dictates of the generals more than by geology 101.

If you look at a production profile of these two giants (together they pump nearly a quarter of the world's oil) you see a collapse of production in the 80s and 90s followed by a relatively weak recovery that has now fizzled. This was due to having to rest the fields in Saudi Arabia and by the collapse of the Soviet Union in the late 80s. Just when we really need all that bypassed oil that was left behind in the ground of the damaged fields as we approach global peak production, the poor past management of these fields is now denying this crude to the world market.

Russia, which had been producing 9.9 mbpd (as compared to the Saudis' 9.5) was really the swing producer in control of world oil prices the last few years just barely able to keep up with the demand growth from India and China barrel for barrel. But last October, their production stopped climbing, in accordance with Hubbert analysis done at the Oildrum about 2 years ago on Russia. Raw production has dropped 2.3% since October, but more significantly, their exported oil has dropped by about 5% since then. It is net exported oil that is bid on and sets the oil price. Last October is when the present price climb began to gather steam, and that may be more than just a coincidence.