It’s all about Saudi Arabia and IEA stats: Contrarian oil watcher Henry Groppe

Canada’s Globe and Mail has an interview with iconoclastic oil analyst Henry Groppe, who argues most oil statistics -  including those from the IEA – are wrong because they are based on incorrect data. This is because, he says, they look at exports rather than imports.

Imports are more reliable because they are taxed, Groppe says, and looking at these figures shows that oil exports are overstated by between 1.25m and 2m barrels per day:

Ignoring unreliable weekly inventory numbers and dismissing claims of oil-filled tankers sitting idle in the Caribbean as largely fanciful, he has concluded that much of what has transpired in the past two-and-a-half years “can be traced to specific changes to the supply-demand balance.”

Groppe argues that speculators did not cause the big run-up in oil prices to $147 last year, but that they exacerbated some of the swings caused by supply and demand factors.

His views on the real causes of last July’s oil spike are outlined in a longer Houston Chronicle story from October 2008, where he explicitly linked the IEA’s overstatement of production to Saudi Arabia then “quietly reducing its production”. This, he said, was compounded by an unusually cold 2007/08 winter in the Northern Hemisphere and a massive earthquake in China leading to a switch to diesel from coal.

But the IEA and Saudi Arabia’s production are Groppe’s key themes in the last couple of years: he expressed similar views in a Global Public Media interview 2007 about $99 oil prices that year. Again, it was due to Saudi Arabia over-cautiously cutting production on the back of IEA data that overstated the rise in non-OECD production. Saudi Arabia, he said, it terrified of repeating its mistakes of the 1980s:

We think that the Saudis are always preoccupied with avoiding the terrible fiasco of the early 80s for them, where they were stuck with high contract prices with the mistaken view the market was going to go turn at any time and come back, and they watched their market decline from ten million barrels a day to a low of two and a quarter million barrels a day in April of ’85. And Eumoni was responsible for that, and he got fired for it. And so they never want to repeat that again. The IEA was very strong a year ago in forecasting that there would be a 1.8 million barrels a day total increase in non-OPEC production in ’07 – the largest non-OPEC increase since 1984 that got the Saudis’ attention.

Groppe is a peak oil believer – but in contrast to most who believe production has peaked, he doesn’t believe delays will lead to huge increases in oil price any time soon. He says those who believe Saudi Arabian reserves are overstated are wrong: they are fairly accurate because of Saudi Aramco’s continuing involvement with Exxon for several years even after Saudi assets were expropriated. At the same time, he says, production is falling in the rest of the world. Again from the Global Public Media interview:

…as we observe the responses among all of the consumers, we have found that instead of growing at a historical rate of 2.5% a year, consumption has actually been essentially flat for three years because we’ve had prices in the $60-70 a barrel range. So, if we – we’ve eliminated all growth in consumption at the $60-70 range – if prices are above that, consumption – based on all the results we’re seeing – will continuously decline.

And for the future? In the Globe and Mail interview, Groppe forecasts oil will hit $90 to $95 later this year.

Speculation could take crude even higher by another $10 or $20 a barrel, and volatility will remain a fixture of the market.

“It will run up to a high enough price level so the Saudis will feel they must act. And I think they will overreact again. I would expect oil to approach $100 later this year and correct back to $50 or $60 the middle part of next year. And then do it again.”

Incidentally, his forecast in late 2007 for 2008 oil prices was $65 – $85, “without extraneous disruption”.

Related links:

Peak flow rates, not peak oil? (FT Energy Source, 19/06/09)
Saudi Arabia’s oil capacity and Copenhagen (FT Energy Source, 29/07/09)

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