Running Dry

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No country is more important to oil markets than Saudi Arabia. The kingdom produced roughly 9.2 million barrels of crude a day in 2006, and accounted for 19 percent of world oil exports. Many analysts expect it to supply a quarter of the world’s added production over the next few years. And as the only producer with significant excess capacity, it has played a crucial role in alleviating temporary supply disruptions, increasing daily production by 3.1 million barrels during the first Gulf War, for example, when oil production in Iraq and Kuwait dropped by 5.3 million barrels.

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The Ghawar oil field is the kingdom’s crown jewel. Stretching for more than 150 miles beneath the desert, it is the largest known deposit in the world. It produces perhaps twice as much oil as any other field, and has doubtless accounted for more than half of Saudi Arabia’s oil production. Yet the Saudis have been removing oil from this reservoir for half a century. Sooner or later, its production must fall.

The Saudis do not release data on how much oil they are extracting from individual wells, or on the remaining reserves of individual oil fields. But the total amount that the kingdom produces has been declining, down a million barrels a day over the last two years of data.

The Saudis have claimed these cuts have been in response to weak demand. However, the big drop in production began in the spring of 2006, when the price of oil was rising from $60 to $74 a barrel; the claim that no one wanted to buy Saudi Arabia’s light crude strains credulity. The drop in production has also coincided with a huge new Saudi effort to find and pump more oil: The number of active oil rigs in Saudi Arabia has tripled over the past three years.

Frustrated by the lack of hard data on Ghawar, Stuart Staniford, a computer scientist with a doctorate in physics, has conducted a painstaking study of publicly available information. His research has been reported at theoildrum.com, a Web site that analyzes energy markets.

The Saudis have developed Ghawar by using peripheral water injection— water is pumped into the reservoir, driving the remaining oil to the surface. More details about Saudi production were available before 1980, allowing Staniford to infer that the depth of the remaining oil column in northern Ghawar at that time was about 500 feet. Evidence from many sources suggests that the water level has been rising at about 18.4 feet per year. If you extrapolate that trend, this would mean that the northern part of Ghawar is by now quite depleted.

Staniford has also built a detailed computer simulation of the Ghawar reservoir, based on its size and shape, the porosity and permeability of its rock, and the assumed oil-extraction rates. The results of this simulation line up remarkably well with Staniford’s other calculations. Oil production from northern Ghawar has likely peaked.

Southern Ghawar still holds a lot of oil, and perhaps the kingdom’s push to find new fields will bear fruit. But northern Ghawar was developed first because it was by far the most promising field. Its production cannot be easily replaced. At about the same time that Saudi production began its decline, the new Haradh project in southern Ghawar began producing perhaps an additional 300,000 barrels a day. The Saudis have also made a huge investment to reopen the Qatif field on the eastern coast, which they had abandoned in 1995; it is now producing an estimated half-million barrels a day. With Saudi production falling despite these new contributions, the situation could be serious.

At a bare minimum, the era when excess Saudi capacity could cushion geopolitical disruptions in oil supplies may well be over, even though the threat of such disruptions is greater than ever. And if Saudi production continues to decline even as world demand keeps growing, in a few years we will look back at the summer of 2007 as the last of the days when gasoline—even at $3.50 a gallon—was still plentiful and cheap.

James D. Hamilton is a professor of economics at the University of California, San Diego; his analysis appears regularly at www.econbrowser.com.