It had to happen, and it finally did. Wikileaks is breaking the story that regular Oil Drum readers knew for some years – that the Saudis don’t actually have the excess oil production capacity that they claim to have, and that the U.S. is clearly aware of that fact.

The leaked cables, reporting on a private conversation in November 2007 between American diplomats and Saddad al-Husseini, former head of Saudi Aramco – the Saudi state oil company – discuss 2012 as a possible date for the onset of a permanent plateau followed by an eventual decline in the world’s annual oil output. The cables also contain a discussion of the issue of growing consumption by India, China and oil producers such as the Saudis themselves, a matter covered in Baobab 2050’s in-depth report titled Net Oil Exports Will Drop to Zero Long Before Oil Production Does. Quoting from the embassy cable:

7. (C) Considering the rapidly growing global demand for energy – led by China, India and internal growth in oil-exporting countries – and in light of the above mentioned constraints on expanding current capacity, al-Husseini believes that the recent oil price increases are not market distortions but instead reflect the underlying reality that demand has met supply

The empirically proven reality that net oil exports must mathematically decline faster than oil production as wealthy oil producers experience exponential increases in their own domestic consumption means that “pure” oil importers will have to deal with serious economic dislocations not too long after the global production peak becomes clearly visible in the rear view mirror. It may even be said that this process has already started.

UPDATE: Reuters reports that Saudi Arabia, with all those supposed billions of barrels of oil in the ground, is embarking on a forced insulation program to insulate al homes because without such action, quote,

Without reducing the rate of energy consumption growth, the kingdom could see oil available for export drop some 3 million barrels per day (bpd) to less than 7 million bpd in 2028, Khalid al-Falih, the chief executive of state oil firm Saudi Aramco said last year.

Indeed, Bloomberg reports an “unprecedented” 5% drop in Saudi oil shipments during December 2010 despite a 2-year high in Saudi production volumes:

“This is a huge difference,” said John Sfakianakis, Chief Economist at Riyadh-based Banque Saudi Fransi, noting the 2.32 million barrel per day difference between what Saudi Arabia produced and its exports.

“It’s not clear if Saudi Arabia consumed the full 2.32 million barrels locally during that month, but what’s clear is that rise in local consumption is becoming eminent,” he said.

END UPDATE

As described on this blog, in The Next Oil Shock? the consequences of the absence of a supply cushion above total demand levels are enormous for a world trying to restart a recession-hit global economy. The lack of spare capacity is precisely the biggest reason behind the high oil prices which threaten to throttle America’s recovery. In all previous post WW II recoveries, the supply cushion was there to help, with falling oil prices acting as an effective tax reduction – a stimulant.

The Oil Drum naturally seized on this story as soon as it broke, and includes in this post links to a selection of previous Oil Drum posts which had foreshadowed the Wikileaks revelations:

The UK Guardian published an article yesterday titled WikiLeaks cables: Saudi Arabia cannot pump enough oil to keep a lid on prices, talking about the possibility that as soon as 2012, world oil production may begin to decline because of “peak oil”. Saudi Arabia may not be able to raise production as much as claimed, and its reserves may be overstated by 40%. Leanan has put together a post with more about the cables. The Wikileak cables can be found here or here. In this post, we provide a few graphs, plus some links to (and excerpts from) prior posts by Oil Drum staff members about Saudi Arabia’s true situation.

The original post on The Oil Drum is a very interesting read, including links to the original Wikileaks cables which broke the story. Highly recommended.