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What Does King Abdullah Know?

By Jeff Rubin

24 July, 2010
The Globe And Mail

It was only two years ago that King Abdullah of Saudi Arabia cautioned consumers that, without $75-per-barrel oil, there was no incentive for his kingdom to bring on new production. Today, apparently, even that price no longer works. Recently, the King announced that he has ordered a halt to all further underground oil exploration, arguing that further finds should be left to future generations of Saudis.

That announcement may have gone over well with the class of Saudi students he was addressing at the time, but for oil consumers around the globe it was an explicit statement that the country with the world’s largest oil reserves has no plans to tap them further.

So much for the International Energy Agency’s forecast for huge production increases in the kingdom. Like so many of the agency’s previous optimistic projections, this one isn’t any likelier to pan out. But what does King Abdullah know that the IEA doesn’t?

For one thing, leaving oil in the ground in Saudi Arabia only makes production in the Gulf of Mexico, and the recent environmental disaster at the sunken Deepwater Horizon rig, even more critical to future supply. Even if the effective federal moratorium on drilling expires in November, the loss of drilling rigs and the uncertainty arising from the staggering financial consequences borne by well operator BP will have lasting constraints on Gulf production. Throw in a few hurricanes, and production could soon be retreating again, as it did after the 2005 storm season.

And if suspending oil exploration in Saudi Arabia or new deep-water drilling in the Gulf of Mexico isn’t bad enough, check out the new ad campaign against the Alberta tar sands, next in line after deep-water wells to drive future global oil supply. The campaign, “The Other Oil Disaster,” recently rolled out, urging American tourists (and, before too long, British ones) to boycott Alberta, which is quickly becoming a bête noire to the world environmental movement.

So where exactly is tomorrow’s crude supply supposed to come from? Clearly not from Saudi or from the Gulf of Mexico, where there are moratoriums in place on either exploration or new drilling. And not from the tar sands, which is an increasingly contentious source, both environmentally and economically. No doubt the oil industry will seek out new frontiers.

Those drilling rigs soon to be pulling out of the Gulf of Mexico can always find safe havens where the regulatory burden is less onerous. There are, after all, far fewer film crews covering the environmental devastation from the countless oil spills in the Niger delta, or elsewhere in the developing world, where the crush of poverty compels different environmental trade-offs than the ones to be made in the Gulf region or Alberta.

But no matter where you look, it is becoming increasingly clear that tomorrow’s oil supply is going to come from very different places than today’s.

Providing, of course, that it comes at all.

About Jeff Rubin : After nearly 20 years as the chief economist of CIBC World Markets, Jeff Rubin left the bank earlier this year to seek a larger audience for the story he wanted to tell. His predictions of steadily rising oil prices over the last decade, including $100 (U.S.) per barrel oil by 2007, had flown in the face of conventional economic wisdom. As he said, soaring oil prices demonstrated that the traditional laws of supply and demand were no longer working for one of the global economy's most basic and essential commodities. The consequences would be severe. He argued that it wasn't sub-prime mortgages, but record oil prices that drove the world economy into its deepest post-war recession. And unless the economy starts to wean itself off an ever depleting supply of affordable oil, he believes there will be other recessions to follow as economic recoveries quickly push oil prices right back into triple digit range. But weaning our economy off oil means some fundamental changes in the way we live.
That's not the kind of message chief economists' at investment banks are supposed to deliver so he resigned from CIBC World Markets to write about it in his new book Why Your World Is About To Get A Whole Lot Smaller. See his website at jeffrubinssmallerworld.com.