Pamela Ann Smith interviewed Robert Mabro, a world recognized expert on oil and gas and founder and current honorary president of the Oxford Institute of Energy Studies. The full interview is at RedOrbit (hat tip reader Michael) but the formatting is annoying (bizarrely, it doesn’t say who is saying what, although readers can infer most of the time). I’ve taken a section from the blog OilMastery where they did mark who said what, and did the same myself for another bit later in the interview.
Robert Mabro: On the supply side, there Is a huge controversy about what Saudi Arabia’s reserves really are. There is talk of a peak, very soon, In oil supplies worldwide and that after that, we will have to learn to live with much less oil. It’s all irrelevant. It’s nonsense. When we talk about reserves, we are talking about oil in the ground. The concepts about reserves are metaphysical concepts. They have never been accurate, and they never will be.
Pamela Ann Smith: So, the distinction between proven and probable reserves is meaningless?
Mabro: No, it’s not meaningless. But it is one phony number compared to another phony number. I’ll give you an example. I tell my students, do the following exercise. ‘Go to the BP Statistical Review of World Energy and see what the reserves of the non-Opec countries were 20 years ago. Then, compare them with the reserves of the same countries in the latest issue. Then, they have to make a longer calculation: ‘see how much these non-Opec countries have produced in these past 20 years.’ Now, if the first estimate is correct, they, the non-Opec countries, would not have a drop of oil left. That’s the first point. The second point is, ‘Why should I care? Why should anybody on earth care whether Saudi Arabia has 260bn barrels of crude oil reserves, or 100bn?’ It doesn’t matter, not at all. Because what you can produce today, whether it’s 260bn or 100bn, the answer is the same. You cannot produce on the basis of 300bn, or 260bn in reserves. But if you produce at the same rate vis-a-vis reserves that the North Sea has, Saudi Arabia would be now be producing more than the whole world’s consumption. Of course, its oil would then run out quickly. So, it’s irrelevant unless you are thinking 40 or 50 years ahead. But I will certainly be dead by then…
Smith: And all sorts of things could happen by then?
Mabro: Yes. There is a hysteria about what the reserves are. But there is an even worse hysteria produced by a guy called Simmons. I have met him, he is a fun guy, but he is dangerous.
Smith: You mean Matthew Simmons, the author of Twilight In the Desert: The Coming Saudi Oil Shock and the World Economy? The book that is a bestseller In the States?
Mabro: He has said that the Ghawar field in Saudi Arabia, which is something like 110 miles long and 17 miles wide….
Smith: It’s huge. It’s the biggest one in Saudi Arabia, isn’t it?
Mabro: Yes, and it is well behaved, too. Simmons has said, “It cannot produce anymore. It is declining, and there is water in it.” Well, every field has water. If there isn’t water in it, the oil doesn’t come out! oil is not like a swimming pool, it is in rock, in porous rock. There is water and gas, so when you make the hole, you bring the pressure down, and the water pushes up, so all oil has water in it, and you have to take it out. He claims it’s a lot more, and makes a comparison with a field in Oman which is declining. But this is like comparing a calf with an elephant. A small thing with something big. He has written nonsense on Ghawar. Then he said Saudi Arabia has no surplus capacity. In other words, that they don’t have the capacity to produce more than they are producing today. Why? I was in Saudi Arabia, and I haven’t seen this. Whose leg is he pulling? You can’t see any evidence for this. We have lists of the fields that Saudi Arabia has shut down. This is public knowledge. ‘Surplus capacity’ means that you can produce more, but you keep it in the ground, you shut down certain fields so that you can re-open them when you need it…..
Saudi Arabia produces as little, or as much, as its customers want, subject to its own production constraints. If customers go to, let’s say, Algeria, Algeria may say no. Saudi Arabia has much more oil, much more. They will say yes. The production quota set by Opec is not relevant, except if the market is tight. What determines the level of production is demand.
There is one exception. If the oil price collapses and prices are going very, very low, then Saudi Arabia will produce less than the market wants. This happened in 1998. But the rest of the time, they produce for the market.
Smith: So, is Horsnell right? That too little supply is the main problem?
Mabro: Some other people would say that oil, along with wheat and some metals, remains more attractive than other investments in the financial markets. And we know that the people who lead these markets are financial institutions, the banks and the hedge funds. They are the leaders. So the paradox is that, consciously or unconsciously, the determination of the oil price has gone away from the producers to the financial sector. It went away from the oil people to the non-oil people.
Smith: So is there anything that could stop the oil price from rising in the coming year?
Mabro: Yes, of course. A bubble has formed. We know one thing about bubbles, and that is that they burst. When, I don’t know. It could be tomorrow, it could be in four years’ time.