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Jim Hamilton Worries About Saudi Oil Production Cuts

Jim Hamilton worries about Saudi oil production cuts. He writes:

Econbrowser: Saudi oil production cuts: The Wall Street Journal's assumption that these production cuts represent a deliberate effort by the Saudis to stabilize the price is a reasonable one to make. But one problem with that hypothesis is that the trajectory followed by prices really doesn't jibe with the story....

[T]he cuts in Saudi production began in October 2005, when oil was selling for $62 a barrel, and those cuts continued as oil rose to a new high over $75 last summer.

For that matter, the Saudi production numbers themselves don't look to me like they're under the precise control of anybody. Up through the first half of 2005, the Saudis hit 9.5 mbd or 9.6 mbd month after month. I interpreted the stability of those numbers as signaling that the Saudis could hit any target they wanted, and they happened to be picking 9.5 or 9.6. By contrast, the erratic path since is much harder to view as the outcome of some careful manipulations.

We do know that concomitant with this decrease in Saudi production has been a huge increase in the effort they're making to find and produce new oil, as evidenced by the number of oil rigs the Saudis are employing....

We also know that the decrease in production has coincided with a deterioration in the quality of oil that the Saudis are trying to sell and develop....

There's some fascinating speculation as to what this all means.... The first possibility is that the Saudis could still pump 10 mbd or more today if they wanted to, but they are cutting back production and exploring like mad because they put an extremely high value on having 2-3 mbd of excess capacity... because it puts them in an incredibly powerful negotiating position... the ability at any time to flood the market could be used at an opportune moment to undercut expensive alternatives such as oil sands that require an oil price over $50.

The second and more natural interpretation is even more disturbing: the mighty Ghawar oil field is already in decline, and the Saudis don't want anyone to know.

Now this would be a simple enough hypothesis for anyone to test, if the Saudis published field-by-field numbers for production and water cut. But instead, those numbers are a closely guarded secret, leaving people like me simply to guess as to what the truth might be.

But, if you'll indulge me in a bit of cloak-and-daggerism, there are others who must know. This data cannot be something that would be that difficult for American or Russian intelligence operatives to collect...