Ever since the US went into terminal decline for oil production in 1972, Saudi Arabia has been the world’s “swing producer,” able to ratchet up production at any point to stem rising oil prices if need be. Their massive stated reserves and historical production levels over the last few decades have backed their claims up time after time. Times are changing, apparently, for Russia produced more oil than Saudi Arabia in June 2006.
Even considering the news source (not exactly unbiased), this is big news. Yes, Saudi Arabia is subject to oil production quotas via OPEC that Russia isn’t. Saudi oil minister Ali Naimi has stated this summer that Saudi Arabia has backed off oil production due to a perceived lack of demand. Since Russia is apparently pumping full-bore and oil prices stay at historically high prices, this seems to be complete BS. If Saudi Arabia does have any reserves, it’s probably the gunky, heavy stuff polluted with Sulfur and/or vanadium, which is costly and difficult to remove. Considering oil experts have been accusing the Saudis of trying to hide declining production in their old supergiant fields, I’m guessing that there’s more to this than what Mr. Naimi is telling us.
Surging demand for oil means that pretty much any country will produce as much of the stuff as they can without damaging their fields. There’s a tricky balance between limiting production to keep prices high, and letting prices rise too high and damage the economies of the consumer nations, killing the goose that lays the golden egg, as it were.
Russia becoming the swing producer will mean a number of things to the USA. First, Russia is using it’s new-found oil wealth to pay off it’s international debts, and start building up it’s precious metals reserves. This takes away a lot of the leverage that the western countries have been using on Russia over the last decade or so.
Second, being both free of the shackles of international debt, and still possessing a strong military (and nuclear) arsenal, Russia is beginning to flex her muscles on the international stage once again. Vladimir Putin is no pushover, and he has shown a willingness to be even more ruthless than the USA when it comes to pursuing his geopolitical goals. Putin will not tolerate the west interfering in the operation of Russia, unlike most other oil producers, which are both economically and militarily weak. In fact, Russia is showing more willingness to interfere with the west, as her natural gas shutoff in the Ukraine last winter showed.
Finally, Russia is talking about selling oil in rubles. The hegemony of the American Dollar is based it being the only currency accepted in oil transactions around the world. If the new number one producer of oil will require buyers to acquire rubles to buy their oil, the dollar’s demise will be hastened. If this comes to pass, I would expect to see more anti-Russian rhetoric coming out of the mouths of Cheney and his cronies. Putin has shown himself to be an autocrat in the old Soviet tradition, and I’m sure he’d like nothing more than to put the US in its place. Reducing oil exports and forcing oil purchases to be conducted in rubles would put a double-whammy on the US economy that could be fatal.
Matthew Simmons has said that when Saudi Arabia goes into decline, the world will go with it. We’ll see about that soon enough. The more pressing concern for now is a resurgent Russian bear now in possession of the the greatest weapon in the world: oil.