Production of Oil in the Middle East (Briefing) | Opec | Petroleum

The production of oil in the Middle East is a very interesting and pervasive subject. It has shaped much of U.S.

cultural and political history for the past century. However, it will most likely have an even greater impact on the cultural and political shifts of the future. This paper will aim to give a brief overview of this topic and uncover some of the reasons as to why many Americans remain focused on a small, politically volatile area of the world. A common way of connecting with other people or opening conversation is to complain about something. Americans consume a large amount of gasoline and other petroleum products (19 million barrels per day, or 25% of the world total)1, but very few are educated about where it comes from. Hence, the highly volatile prices of gasoline have become a common complaint. History of Oil Production It is important to understand why so much of the current US infrastructure depends on oil in the first place. The first oil well was drilled in Pennsylvania by Edwin Drake In 1859. Early oil fields in the US were discovered in Pennsylvania and Ohio, with major oil fields found in Texas and Oklahoma in 1901. At this time, the US produced between 60 and 70 percent of the world’s oil supply.2 The first oil concessions in Persia (Iran) were also granted in 1901, to British businessman William D’Arcy. Britian helped fund D’Arcy’s business, mostly in order to maintain political power in the Middle East. In 1905, oil was found all over the Middle east. Everette DeGolyer, a petroleum geologist, estimated reserves of up to 300 billion barrels of oil at that time and exclaimed that “the oil in this region is the greatest single prize in all history.”3 Nowhere else in the world was oil concentrated like this. The US began to experience concern over dwindling reserves and began to import crude oil from other nations. By 1920, Oil had been discovered in Mexico, Venezuela, and all along the Middle East. However, The US did not begin to take an active role in Middle Eastern exploration and production until World War II. It is important to understand that when oil was first discovered, its main use was for kerosene lamps. By this time, however, it had become a strategic commodity. Aircraft, mechanized warfare on land, and naval propulsion systems all used abundant, cheap petroleum products. During the war, the US provided virtually all of the oil required by the Allied armies (6 billion out of the 7 billion total barrels used).4 The war also was very damaging to the economy of Saudi Arabia, so the situation which resulted worked out well for both countries. After the war, the US economy grew rapidly and Middle Eastern producers (along with Venezuela) quickly noticed that much of this growth was due to US reliance on low-priced oil as an energy source. (With 6 percent of world’s population, US account for 33 percent of the world’s oil consumption).5 In addition, most profits from the sale of oil were going back to the oil companies that owned the wells and not to the countries that held the land. In response, OPEC was formed in 1960 to
1

CIA World Factbook 2010, accessed at: https://www.cia.gov/library/publications/the-worldfactbook/rankorder/2174rank.html 2 Gale, Thomson (2005-2006), “Oil Is Discovered in the Middle East”, Science and Its Times. 3 Ibid. 4 Miller, Keith (2002), “How Important was Oil in World War II?”, History News, George Mason University. 5 Ibid.

negotiate for higher and more stable oil prices. By 1970 most OPEC countries had also nationalized their oil production. By this time, the American infrastructure had become dependent on oil imports – it had thousands of miles of oil pipeline and thousands of miles of highways with millions of vehicles that could not function without oil. The US had little choice but to rely on the oil prices that OPEC maintained. This led to interesting situations as the US now had to careful with its political actions. For example, in 1973 when the US supported Israel during the Yom Kippur War, OPEC raised the price of oil by 300 percent and for a short time stopped selling to the US.6 Perhaps not surprisingly, the US has been involved to some degree in nearly every major Middle Eastern conflict since the mid-70’s. Over time, other oil finds have diminished OPEC’s power, but it still maintains a disproportionate share of world oil supplies. Currently, the US does not receive most of its oil from OPEC countries. In fact, the US receives the most oil imports from Canada, followed by Mexico, Saudi Arabia, Nigeria, and Venezuela.7 However, current developments in the Middle East seem to indicate that this area of the world will play a much larger part in future U.S. oil imports. Current Oil Production in the Middle East A country’s Ultimately Recoverable Reserves is defined as the sum of its cumulative production, reserves, and an estimate of yet-to-find reserves. The Middle East accounts for 42% of the global share of URR.8 However, the oil fields are definitely not evenly distributed among countries in this area. The Middle East can be divided into three main subgroups. First, there are countries that have little or no potential for oil production: Afghanistan, Bahrain, Israel, Jordan, Lebanon, Pakistan, Syria, and Yemen. Some of these countries have been major producers in the past and are still producing, but in decline. Any significant discovery in these countries would be a highly unanticipated event – although it is not impossible. Second, a few countries have stable midsize oil production potential: Kuwait, Oman, Qatar, and the UAE. However, the discussion in this paper will focus on the three largest regional oil powers: Iran, Iraq, and Saudi Arabia. Geographically, 90% of Middle Eastern Reserves are concentrated in a horseshoe-like region (see appendix). 70% of them come from Saudi Arabia, Iraq, and Iran. The appendix illustrates some projection scenarios for production in these three countries. Iran is the weakest of these three countries in terms of oil production. It currently faces declines in its major oil fields that have not been replaced. Recently all major finds inside of Iran have turned out to not be as significant as originally expected. It is generally conceded that in order to maintain its status as an oil superpower, Iran must take some exploration risks and see some momentous changes in proven reserves.9 Saudi Arabia is the strongest country of the three, but it is also the most predictable. It is the largest oil producer and exporter in the world, and has been the
6 7

Ibid. Source: EIA, accessed at http://www.eia.doe.gov/dnav/pet/pet_move_impcus_a2_nus_ep00_im0_mbbl_m.htm 8 AM Samsam Bakhtiari (7/7/2003), “Middle East oil production to peak within next decade”, Oil & Gas Journal 9 Middle East Economic Survey, Apr. 14, 2003, p. A16.

main pillar of Middle Eastern production and also of OPEC since the inception of the organization. URR estimates for the country are more than 300 billion barrels of oil. There are still some issues with the country’s oil production, however. Previously, most internal and external analysts estimated that maximum Saudi Oil production was about 10.5 – 12 million barrels per day, but during its last period of maximum production (the Iraq War) it only made it to 9.3 million bpd. Since Saudi is the main supply cushion for OPEC, this may mean that the cushion is less than most realize. Also, Saudi output relies heavily on the Ghawar oil field. Ghawar is the largest oil field in Saudi Arabia, and the nation is very secretive about the field’s sustainability.10 Iraq is the country that currently has the most exceptional opportunities. After ultra-low production in 1990’s and during the war in the 2000’s, Iraqi production has now scaled up to record levels and seems poised for even higher production and a longer plateau than any other Middle East country.11 Iraq’s oil minister recently raised the country’s reserves by 25% to 143.1 billion barrels, and some estimates even suggest that there may be up to 350 billion barrels, exceeding the size of Saudi Arabia’s. Thisfigure is currently three times the country’s proven reserves, however.12 Current estimates for Iraqi production, including the most optimistic scenario of increasing 3-4 fold over the next 10 years, are shown in the appendix. There are several deterrents to Iraqi oil production, however, and these will be discussed in the next section. Challenges for the Future Most estimates predict that Middle East production will remain flat or rise slightly, while production in other regions will decline, increasing the Middle East’s share of global oil output. The predictions of oil reserves that are frequently used for analysis are based on constant, rational developments in the Middle East, and tangible parameters such as production capacities. However, this region is possibly the least “constant” in the world. Intangible parameters that disrupt production capacity are more prone to erupt here than anywhere else. For example, in the past 35 years the Iranian revolution, the Iran-Iraq war, and the two Iraqi wars of 1991 and 2003 have led to dramatic revisions in oil output predictions, not to mention the recent widespread government protests in the area. Many of the reports of Iraq’s coming oil boom have been met with skepticism. Some of the problems cited have been the war-torn infrastructure, a water shortage, and the “parlous security situation.”13 Ignoring political frictions, there are also a growing number of skeptics that Saudi Arabia will be able to increase or even maintain its oil production in the future. Saudi Arabia is nearing the midway point of its proven reserves, and due to the atypical behavior of Persian Gulf OPEC countries between 1985 and 1990 (all of them reporting massive oil increases while in the middle of disputes over quotas which
10

Kamal, Rami A.; Al-Shahri, Ali M.; "Giant Achievements by a Giant Producer; the Saudi Aramco Success Story with Horizontal Drilling," American Association of Petroleum Geologists Bulletin. 11 Verma, Sonia (5/20/2008), “Iraq could have largest oil reserves in the world,” The Times (UK).

12
13

Ibid.

Guy Chazan (10/13/2010), “Iraq Oil is Game Changer”, The Wall Street Journal.

were based on proven reserves), many believe that the true midway point has already passed. The Ghawar oil field has been sustained by water injection in some form since the 1960s. In 2008, Saudi Aramco executives insisted that the current rate of about 4 million barrels per day from this single field can be sustained for many years to come. However, French petroleum consultant Jean H. Laherrère pointed out that "When water level hits the horizontal well, it is finished. Ghawar has not yet peaked, but when it does, it is going to be a cliff!" In addition, most OPEC countries now dependent on oil prices for national budgets, which is dangerous. As a result of political unrest, Saudi Arabia promised $93 billion to its citizens. A fall in oil prices is a major risk for its economy. This suggests that there is a major incentive for OPEC countries (which have significant pricing power) to retain high prices. The history of Oman presents a typical scenario of how unexpected things may be in the Middle East. During the 1980s, Omani oil production gradually ramped up to 700,000 bpd from 300,000 bpd; then during the 1990s it continued to rise, reaching almost 1 million bpd by 2000. New production records were set year after year, since Oman was not tied to the OPEC quota system. In 2000, however, after an excellent track record and no prior hint of reversal, production plunged when 50% of proven reserves remained. The Shell Oil Company, who managed the project (ruling out a lack of technology as the cause for decline), attributed the drop to “a poor understanding of reservoirs."14 After trying every feasible enhanced drilling technique, they conceded that the decline was irreversible. Then in 2009, Oman reported a sharp increase in production and exports. Currently, the price of oil is high due to a number of current issues, among them: elimination of Libyan output, uncertainties in resolution of Middle Eastern political unrest, and expectations that Japanese demand will rise as it rebuilds from the earthquake. Saudi Arabia is choosing to cut production in spite of high oil prices, since there is currently plenty of supply in the market.15 It is difficult to predict what will happen next. Conclusion Last year, Forbes released a list of the most important oil fields of the future, that is, those most likely to produce 1 million barrels or more by the next decade (for comparison, the total global consumption is 85 million barrels). Of those, 6 were in the Middle East, and 1 each in Kazakhstan, Brazil, Venezuela, and the US (Alaska).16 The article points out that many Mexican and Russian fields are terminally declining, and Canada’s massive oil sands region still costs 20 times more to produce per barrel than a typical field in Iraq, even disregarding the environmental externalities. The previously mentioned list of top oil exporters to the US will most likely look different 20 years from now. For this reason it is important to understand the volatile nature of the oil industry in the Middle East. As the largest consumer of oil in the world, our nation is likely to be more and more tied to the Middle East as years pass. Along with this link
14

Bakhtiari, A.M. Samsam, "Oman seeks to stop the rot," Weekly Petroleum Argus, Dec. 23, 2002. Bakr, Amena; Shamseddine, Reem (4/17/2011); “Saudi slashes oil output, says market oversupplied,” Reuters. Helman, Christopher (1/21/2010); “The World’s Biggest Oil Reserves,” Forbes Magazine.

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comes a great deal of uncertainty for the future, and no guarantee of a steady oil supply (much less a steady oil price).

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