The World's Number One

The future is bright for Aramco

AMERICANS were treated this week to the spectacle of oil-company bosses, including the heads of Exxon Mobil and Chevron Texaco, being cross-examined on Capitol Hill. The bosses of big western firms stand accused of “price gouging” and other supposed crimes. What the politicians rarely say is that it is OPEC that fixes prices on the world market—and that even the biggest western firm is but a pygmy compared to Saudi Arabia's national energy company.

Aramco, which controls nearly all Saudi oil production, is 20 times the size of Exxon. The Saudis are the world's leading producers and exporters of oil today, cranking out perhaps 11m barrels per day (bpd). The company has recently unveiled a $50 billion investment plan designed to lift Saudi output to 12.5m bpd by 2009. For comparison, Iraq and Venezuela produce less than 3m bpd of oil each, and no big private-sector company produces even that much. In short, Aramco is the Goliath of the oil world.

But for how long? Critics have been attacking the firm on two fronts. Petro-pessimists, including some independent geologists, have argued that the Saudis do not really have all the oil reserves in the ground that they claim, and that the world is nearing the peak of oil production. Matthew Simmons, an energy investment banker, has argued in a recent book that Saudi fields are in such bad shape that even Aramco's current production levels are unsustainable.

Happily for the world economy, there is reason to think the critics are too pessimistic. This week, the International Energy Agency (IEA), a quasi-governmental outfit, released its annual World Energy Outlook. The focus of this hefty tome is energy from the Middle East and North Africa—especially Saudi oil. After exhaustive analysis, the IEA concludes that the sceptics are wrong: there is more than enough oil in the ground to meet expected demand beyond 2030. It argues that Saudi Arabia's production levels can not only be sustained, but expanded dramatically to over 18m bpd by 2030. Aramco's talk of sustaining an output of 15m bpd for 50 years does not seem so unreasonable.

All is not good news, however. Aramco's oil could indeed keep gas-guzzlers humming for many years yet. But if energy demand continues to soar at the current scorching pace, especially in America and China, the only place those extra barrels of oil can come from is the Middle East. That, warns the IEA, means a sharp rise in the market share and pricing power of Aramco and its neighbours in the Persian Gulf—and with it, the prospects for a future oil shock.

-The Economist Nov 10th 2005