It’s not how much oil, but how much influence

July 5, 2016

The United States has more oil than Saudi Arabia, says a new study by Norwegian consultancy Rystad Energy. The size of American reserves, at 264 billion barrels, is around a fifth higher than what is estimated to be located in the desert kingdom. That’s a surprise. But it’s also beside the point. Oil supremacy goes not to the one who has most, but the one who controls the price.

Reserves are an important measure for estimating future supply and the potential earnings of producers. But they are only worth counting if they can be produced economically over time. Consider an extreme example: the backers of an oil discovery in southeast England known as the “Gatwick Gusher” claim it sits above 124 billion barrels. However, only a fraction of this crude may ever be sucked out of the ground because environmental restrictions – and the presence of a giant airport right next door – make it too expensive to take seriously.

Saudi – which is the world’s largest crude exporter – has a big advantage because its oil is cheap to produce and largely unregulated. The same cannot be said about the United States, where the shale oil industry is being slowly asphyxiated by the collapse in oil prices over the last two years. Production in the United States has fallen by about 1 million barrels a day to 8.7 million barrels per day in May, when the price of crude averaged around $48 per barrel. By comparison, Saudi output has remained above 10 million barrels a day, and the kingdom says it has up to 2.5 million more it could add at any time. The ability to keep prices low means that Saudi effectively decides whose reserves are economically viable.

In reality, guessing how much oil is out there is frustrated by Saudi’s scanty disclosure. The kingdom has measured its own oil holdings at around 260 billion barrels for decades. The rate of depletion of major fields such as Ghawar – its largest deposit – is unknown. Plans for an initial public offering (IPO) of a stake in state-owned producer Saudi Aramco may push Riyadh towards lifting the veil of secrecy around its oil industry, especially if the IPO includes Aramco’s upstream assets.

One day, if wells start to run dry and other energy sources haven’t taken crude oil’s place, who has how much of what will matter deeply. But until then, supremacy in oil reserves is less important than influence over prices. In this regard Saudi is still unchallenged.

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