The Great Saudi Oil Dilemma
You have to love it when a plan comes together.
For the Saudis, it was a question of how on earth they could deal with the booming Permian Basin.
To put it lightly, the U.S. oil industry was a thorn in the side to Saudi Arabia.
This year, however, a revelation came to light regarding Saudi Arabia’s pride and joy — the Ghawar oil field — that was even more harmful to the House of Saud.
For decades, roughly 5 million barrels of crude was flowing out of the wells at Ghawar, making it the largest oil field on the planet.
When it came to giant oil fields, nobody was able to come close to it, and that’s even despite the fact that the Saudis were pumping an ungodly amount of seawater into its wells in order to keep production high.
Then the Saudis dropped a bombshell: The mighty Ghawar wasn’t living up to the hype!
Some of you might remember when we talked about this Saudi dilemma back in February.
I mentioned back then that the Ghawar field accounted for 90% of Saudi Arabia’s export revenue, half of its GDP, and nearly 90% of the government’s budget.
Well, it turns out drillers weren’t extracting 5 million barrels per day from Ghawar.
When Saudi Aramco filed its base prospectus back on April 1, we all learned the cold, bitter truth behind the world’s largest wishing well.
The Saudis revealed to the world that the Ghawar oil field’s production capacity was actually 3.8 million barrels per day — more than a million barrels per day LESS than everyone believed!
Back in 2004, the Saudis had stated that field production was 5 million barrels per day.
Given how closely guarded Saudi field data has been up to this point, do you really trust them at all?
I didn’t think so.
As if things weren’t bad enough, the U.S. tight oil boom threatened the Saudis’ market share in the Gulf of Mexico, which it had already been fighting with Venezuela over.
Since 2003, Saudi oil exports to the U.S. have dropped by 45%.
The House of Saud had to find a new oil customer.
It had to be done quickly, too.
In 2018, 88% of the world’s oil production growth was from the United States.
And with our crude exports picking up momentum, it was only a matter of time before the Saudis’ greatest fear would come to fruition: a world supplied by U.S. crude.
Keep in might that with OPEC+’s production cut deal still in place, the Saudis have lost their position as the world’s swing producer to the United States.
Fortunately for young Saudi princes, China has developed a taste for their crude.
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Trade War Blues
Recently, Reuters reported that Chinese customs data showed a 60% year-over-year decline in oil imports from Iran.
With full sanctions in effect and no more waivers after May, China turned to the Saudis.
But this isn’t some sudden phenomenon.
Saudi Arabia has been steadily increasing its oil exports to China for more than a year.
What’s interesting is that throughout this bitter trade war, China still hasn’t imposed tariffs on U.S. crude oil.
Perhaps it’s because they know just as well as we do how valuable U.S. oil is to them; let’s not forget that China took over as the world’s largest oil importer last year.
Besides, beggars can’t be choosers, can they?
Soon, they may not have a choice, especially if the mighty Ghawar wishing well peaked and is officially in an irreversible decline.
As you read this, plans are already underway to build the necessary pipelines to get that light, sweet Texas Tea in the Permian to the right ports along the Gulf of Mexico.
Need more proof?
A few weeks ago, a quiet project commenced in the port of Corpus Christi.
It was an expansion project that will deepen the Corpus Christi ship channel to accommodate the huge oil tankers that will be feeding U.S. crude to the rest of the world — China included.
And there’s one place my readers and I are looking that could play a huge role in fueling the U.S. export boom out of Corpus Christi.
Until next time,
A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.
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