I tried to have a text about the link between the fall of the Oil Price and LENR published somewhere ("non-LENR media") without success. So I decided to make it public on this blog, without changes:
Why is Saudi Arabia not decreasing its oil production and stop the oil price fall?
If you follow me, I will describe you a scenario that could seem almost science fiction, but it is not, and that explains why Saudi Arabia is not cutting production and is letting the oil price fall. The Saudi strategy is probably the first strong sign that the world has already entered the “transition” that in the next decades will change the energy sector and beyond. You’ll decide if it makes sense or not.
Here is what’s happening now in the oil world.
All the possible reasons that could be behind the oil price drop have been thoroughly explained by uncountable articles on journals and newspapers in these last few months. For the House of Saud however all those sensible reasons are just a useful self-weaving blanket that helps them hide the real reason for the move, which is part of an undisclosed long term strategy. The strategy is the response to something extraordinary and disruptive.
In the second half of 2014 the royal family of Saudi Arabia, a country that has 740 billions US dollars reserves, has managed to verify that an energy source that will eventually misplace all others sources has already entered the engineering stage and will probably be openly commercial in 2015.
The energy source is Cold Fusion, the too-good-to-be-true nuclear fusion clean energy that Fleischmann and Pons unveiled in 1989 and that in the following years was completely discredited. Now Cold Fusion is back. In the meantime it has acquired a series of new fresh names, the most common of which is probably “Low Energy Nuclear Reactions” (LENR).
Ridiculous? Ludicrous? Well, try to google it and verify yourself. If you do it properly it will take some time. Check how much Bill Gates is planning to invest in this field. Check also the already delivered 1 [MW] thermal plant that the US based company Industrial Heat is testing right now. And the plans for China producing the plants of Industrial Heat.
A convincing and recent article to start with may be this (but there are many similar ones):
With this short text I am not trying to convince you about the existence and importance of Cold Fusion, I am just suggesting you to look at it, possibly with a honest and informed expert physicist or engineer for technical support.
Back to the strategy of Saudi Arabia.
The consequences of the the engineering of Cold Fusion will be vast and for a large part unforeseeable. What is but foreseeable is that in, let us say, 40 years, crude oil will be used only for producing materials and for a residual number of small means of transport still using internal combustion engines. Thus the amount of oil that humanity will consume is much less than expected so far.
I will now go through a few simple estimations, for which I will use round numbers because what I am trying to convey is the message and not the details.
The world consumption of oil in the late 2014 has been about 92.4 million bbl/day, which corresponds roughly to 34 BILLION bbl per year. Let us imagine that in the next 40 years the average oil demand without any disruption from LENR, would be 15% more than the current value: about 39 billion bbl/y.
The proven oil reserves of Saudi Arabia are 270 billion bbl (the real reserves are clearly more than that). This means that Saudi Arabia, which has a now a world shear of oil production of 12%, could keep selling its reserves for about 60 years. And the number grows probably to 80 years or more with the real reserves.
However, as the House of Saud knows, the adoption of LENR will progressively and inevitably substitute all conventional energy sources. It is impossible to precisely estimate the time that the complete replacement will need, but, based on other previous major changes in energy sources, and given that the cost drop and the advantages offered by Cold Fusion over all other sources are dramatic, it make sense to estimate a replacement time of about 40 years, starting, may be, as early as in 2016.
Then for Saudi Arabia it makes no sense to keep with a strategy that is optimal for a double amount of time and a constant oil demand. Saudi Arabia must change strategy otherwise it will remain with a lot of oil unsold at the end of the energy transition, despite being one of the countries with the lowest oil production cost. So the best strategy is to rapidly increase the production share as much as possible and keep it as long as possible. Thanks to the low oil production costs for Saudi Arabia and other Middle East Countries it is easy to put many of the competitors out of business by just letting the prices fall.
The oil production cost for Middle East Countries is around 30 $/bbl. Saudi Arabia, with a break-even price of 110 $/bbl, roughly equal to the Brent price in the last 4 years, was getting all it needed, until this summer. The gain was then about 110 - 30 = 80 $/bbl.
Let us assume Saudi Arabia wants to maintain the oil revenues as today. If it will manage to rise the production share to three times the present value, that means to 36%, the oil price that will allow Saudi Arabia to keep the revenues unchanged is about 57 $/bbl. In fact the margin per barrel with such a low price would drop to 27 $/bbl, that, multiplied by 3 gives 81 $/bbl, pretty much the present gain.
During the 40 years transition the world oil consumption will decrease with a curve that is difficult to precisely guess. However for the estimation of the total oil consumption during this period, the curve can be simplified to a straight line going from the present consumption to zero in 40 years. This means that the oil that will be consumed during the whole transition will be more or less equal to the initial yearly demand multiplied by the transition time and divided by two (the triangle area is half the base times the height). It is a very rough estimation, but it suffices for explaining the scenario.
So with a world oil production share of 36%, the present world demand +15% and a constant price of 57 $/bbl, Saudi Arabia would manage to finish its proven reserves of oil in 39 years, very near to the estimated transition time. The plan makes sense.
The remaining 67% of the oil production will come from the “simplest” onshore and offshore rigs around the world that have the lowest production costs.
Saudi Arabia is a monarchy and the royal family can decide whatever it wants without needing to explain much to the public. Right now Saudi Arabia is performing a large price fall test that will allow the House of Saud to evaluate how quickly it will be possible to increase its oil share. In fact triplicating the share in a few years would be an unprecedented very large effort that would generate important and probably fierce reactions from countries and markets. It would therefore need very careful planning. The present price shock will provide important data.
After this shock Saudi Arabia and other informed countries will start increasing production and the price will probably stabilize, may be just below 60 $/bbl.
If this scenario is correct, in the second half of 2014 “the transition” towards virtually unlimited energy has already begun. High-end oil, renewables, nuclear fission, hot fusion research and a few other industrial sectors will soon have big troubles. But the transition will offer unimaginable opportunities.
Let’s prepare for the transition.