Why Saudi Arabia can no longer temper oil prices

The global economy had no sooner put in its first year of solid growth when world oil demand, like a jack in the box, sprang to a new record high. China alone added almost a million barrels a day to global demand, which ended the year at more than 87 million barrels a day. And demand shows no sign of abating this year.

It was far from clear where the world was going to find another two million barrels a day of new supply to meet another year of demand growth. That would be in addition to the nearly four million barrels a day of new production that must be brought on simply to replace what is lost every year in depletion.

Then came the turmoil in North Africa and the Middle East. Now it’s even less clear where that oil will be flowing from. The region of the world that was expected to pump that additional oil supply, utilizing its supposedly ample spare capacity, is now falling into anarchy.

In reality, that official spare capacity hasn’t existed for years. Confidential cables from the U.S. embassy in Riyadh recently released by Wikileaks confirm what skeptics like the late Matt Simmons long suspected. Saudi Arabia, OPEC’s biggest producer, and the country holding the world’s largest oil reserves, has little more to give.

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The low-hanging fruit of this world is gone. If you understand that, you’re halfway there. We’ve got nearly seven billion people on this world all chasing for the same goods.


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