There’s trouble ahead for the oil industry that this week’s conference in Riyadh, Saudi Arabia isn’t going to paper over. The conference is billed as a “coming out party of sorts” by the New York Times (Saudi Arabia’s Grand Plan to Move Beyond Oil: Big Goals, Bigger Hurdles by Ben Hubbard and Kate Kelly) because it showcases a country that’s liberalizing (they’re about to let women drive) and moderating (they’re touting a moderate form of Islam, but the conference might better illustrate the idea of a calm before the storm.

The Riyadh conference’s underlying theme reveals  a grand plan to move beyond oil and that’s a big red flag. Why would one of the biggest oil producers on the planet want to move away from oil? Saudi Arabia has long been a key component of the global oil industry and the swing producer in the OPEC cartel and it still is. So sponsoring this conference doesn’t make a lot of sense unless the Saudis know they’re running out. Here are some market signals and analysis that support that hypothesis.

Peak Oil

First, consider Peak Oil the fact that no resource is infinite including oil fields. The Saudis have been tapping their reserves since just after World War II and those fields are showing their age.

Peak oil was first proposed by M. King Hubbert, a petroleum engineer, when he was working at Shell Oil in 1956. The idea was not warmly received according to the website Peak Oil Barrel, which says about Hubbert,

Although derided by most in the industry he was correct. He was the first to assert that oil discovery, and therefore production, would follow a bell shaped curve over its life. After his success in forecasting the US peak, this analysis became known as the Hubbert’s Peak.

• The amount of oil discovered in the US has dropped since the late 1930s.
• 40 years later, US oil production had peaked, and has fallen ever since.

World discovery of oil peaked in the 1960s, and has declined since then. If the 40 year cycle seen in the US holds true for world oil production, that puts global peak oil production, right about now; after which oil becomes less available, and more expensive.

Hydraulic fracturing has made more oil available from old wells but it doesn’t do anything for exploration and discovery. With Fracking US production has rebounded but this should be seen as a temporary phenomenon. Also, the above definition of Peak Oil was written a few years ago. Just to set expectations no new oil has been discovered in the world since 2003.

That’s why oil producers are careful about revealing their known reserves. Using rates of extraction and reserves estimates along with simple arithmetic can tell anyone when a given resource is likely to be exhausted. This lack of hard information results in the troublesome problem of estimating reserves against known consumption. As I write in “The Age of Sustainability,”

Proven reserves are not typically numbers that many nations share with the world so there is ambiguity in almost any description of oil supply compared with data on consumption which governments and oil companies keep good records on. Even an entry in Wikipedia listing countries and their reserves offers this caveat: “Some statistics on this page are disputed and controversial. Different sources (OPEC, CIA World Factbook, oil companies) give different figures.”

Holy (*&^%$ Batman!! Even the CIA doesn’t know how much oil is left!

But based on the happenings in Riyadh this week it’s likely that the people who really know their reserves are getting low are putting together a Plan B complete with renewable energy sources.

Plan B

So why isn’t the price of oil going through the roof?

 Good question. The law of supply and demand dictates that when a commodity becomes scarce for any reason, it becomes expensive because demand increases for a declining resource.  But the cost of a barrel of oil on the spot market this week (courtesy DOE and EIA) doesn’t reflect this; the price is stable, in the low to mid-$50 range. It’s not happening with oil because producers have other ideas that basically put a thumb on the scale.

Producers have assets in the ground that, given supply and demand basics, should cost double or triple their price on the spot market. But producers also know that conservation and increasing opposition to carbon pollution are beginning to curtail demand, a process that will accelerate. The more successful renewables become, and the more alternatives consumers have such as electric cars, the more demand will shrink.

So a strategy of flooding the market with cheap product will do two things. First it dampens demand for renewables, which are still a bit more expensive. Secondly, selling a barrel of oil for about $50 rather than letting it stay in the ground is good business. It’s a half-a-loaf solution but producers think that’s fine and you probably would too.

The Riyadh conference

So back to Riyadh. The Saudi Arabian conference this week is an elaborate exercise in making a lifeboat or, given this part of the world, an ark. The country is doing its best to promote private enterprise and get as many of its citizens out of government jobs, and off the government payroll, as possible. Government would rather invest in industries of tomorrow than support of able-bodied citizens today, which only makes sense. But the government also has to contemplate how to provision fresh water for its growing population of 30 million and it needs to invest in infrastructure too.

The Times article also says that,

More than 3,500 private-equity investors, corporate chief executives, heads of global organizations and government officials from dozens of countries flocked to this week’s conference, making Riyadh a who’s who of international business leaders studying the kingdom’s moneymaking prospects.

That’s all well and good but these investment professionals are interested in helping Saudi Arabia to spend its vast wealth. At the same time though, the Saudis know they can’t just throw money at a problem; they have to see concrete returns. Other oil producing nations in the region face similar constraints because Peak Oil will affect all of them. Some of the challenges they face individually, especially natural resource provisioning, might be better solved if these nations band together not to produce a federated nation state but to tackle regional problems they all face as they emerge from their oil bubble.

Soif you were in doubt, there really are two big reasons to move away from the fossil fuel paradigm. First, the exhaust is literally killing us and second, the fuel is running out. Even the Saudis can’t hid that fact.