Saudi Decline

This is an excerpt from the financial newsletter Outstanding Investments by Byron King. It just underlines in a dramatic way what we already know. As I have already posted, we are waiting for the other shoe to drop and make this problem into a major crisis.

What this article establishes is that the shoe could well be the Saudis. Others are expected while this will make it obvious that the OPEC reserve picture is a complete lie.

Can we plan for 2,000,000 bbls less production over the next year? It may still not be next year, but there is as yet no cushion anywhere. It is now going to happen sooner or later.

The Saudis may have 50 billion barrels left. That is how big the actual lie has been. Also the rumors on the water cut out of the kingdom are very disquieting. It smells like reductions are eminent just like occurred in Mexico.

It could be that the only available fresh oil production is really sitting in Iraq.

As this letter makes clear, we are set up for oil price shocks over the next decade, with resulting recessions. The source does not matter, but the failure of the Saudis will hit the hardest.

The cupboard is bare and nobody knows it

Americans used to run Aramco, the huge oil company that manages the Saudi fields. But in 1979, the Saudis booted us out and took over.

And then a funny thing happened...

The Saudis started keeping everything a secret.

No one knows for sure how much oil they've got in the ground, or how much they produce each year or how much they could produce if they wanted to push it to the max.

It's all secret. Experts try to figure out how much oil the Saudis sell by monitoring tanker traffic in and out of the world's ports. That's how little we know for sure.

But wait, it gets worse!

After the Saudis took over, an even funnier thing happened...

Their figures for proven reserves kept going up and up and up — even though they didn't find any major new oil fields!

In 1979, the Saudis adjusted proven reserves upward by 50 billion barrels. Then eight years after that, their proven reserves magically grew by another 100 billion barrels.

Their estimated reserves increased by 150% in nine years — to a total of 260 billion barrels. And they didn't find a single major new oil field!

And here's the funniest thing of all...

For the last 17 years, they've claimed they own 260 billion barrels of proven oil in the ground. The figure never goes down, even though they pumped out 46 billion barrels during that period.

Let me see...260 minus 46 equals 260. Saudi math!

Based on these bogus figures, the Saudis claim they can produce as much oil as the world wants for the next 50 years. As recently as 2004, they claimed their reserve estimates are actually conservative.

That's why most of the world's governments and intelligence services believe the Saudis could pump 20 million barrels of oil a day if they wanted to. Trouble is, we've got no proof except their say-so.

If it were true, we wouldn't have a thing to worry about. But it's not.

It's horse hockey

Before Aramco's American owners were shown the door in 1979, they told Congress that Saudi Arabia had proven reserves of 110 billion barrels. There have been no major new discoveries, so 110 billion barrels was probably about right. And since then, about half of that has been used up.

So why do the Saudis insist everything is just fine and they have 260 billion barrels of reserves?

One reason is they wanted to discourage non-OPEC nations from looking for more oil or switching to alternatives.

It was a devious plan, and it worked perfectly.

But that wasn't the only reason the Saudis lied about their reserves. They did it because everyone does it! Everyone in OPEC, that is.

The Biggest Lie of All: OPEC's Imaginary Oil

In the 1980s, OPEC's claim of total reserves magically leaped from 353 to 643 billion barrels without a single major discovery. Industry experts call it the quota war.

You see, OPEC had to limit how much oil each member could sell, because prices were too low. The quotas were based on... each member's oil reserves!

That's right: The amount of oil OPEC would let a member pump depended on how much that member had in the ground. So it paid for OPEC members to claim the biggest reserves they could. And that's what they did.

The Saudis alone jacked up their estimate by about 100 billion. Kuwait added 50% to its reserves in one year, 1985. Venezuela doubled its reserves in 1987. Iraq and Iran doubled their estimates, too.

What's more, OPEC members did like the Saudis and kept their reserve estimates the same year after year, as if no oil were being pumped out and sold.

Everyone claimed to have a bottomless well.

Now, if you're like me, you prefer to base your financial decisions on the real world, not on a fantasy.

Let's look at how much oil there really is...

In the 1970s, when Western managers were still in charge, they believed for a time that Saudi output could reach 20 million barrels a day. But by the time the Americans lost control in 1979, they figured the peak would be 12 million.

They also predicted that peak production would last only 15-20 years. 1979 plus 20 is 1999. We're past the peak, if these men were right. But we already know they were too optimistic.

The truth is that Saudi production never got to 12 million. "In all probability, output peaked in 1981 at an unsustainable level of about 10.5 million barrels per day," according to Matthew R. Simmons, a leading oil industry authority.

And yet the lies go on...

In 2004, Saudi officials claimed they boosted production to 9.5 million barrels per day and maintained that level for five months.

It's almost sure they were lying. The International Energy Agency is the group that keeps an eye on these things for the developed, oil-importing countries. The IEA could find no sign the Saudis were selling more oil.

As far as anyone can tell, they pump only around 5 million barrels a day, and that's all they've pumped for years.

It's déjà vu all over again

In spite of being lied to at least once, the IEA, the U.S. Department of Energy and other forecasters believe the Saudi claims. ALL their projections of our energy future ALWAYS assume the Saudis could produce 15-20 million barrels a day.

The lies have worked. Not only do Western politicians believe them, but so do many oil industry experts and investors with huge amounts of money at stake. They've been had.

We went through three recessions from 1973-1983.

Care for a repeat?

Our whole economy is at risk. Your investments are at risk. Your retirement plans are at risk.

America has been so prosperous the last couple of decades, a lot of people forget what the energy crisis of the '70s was like. Let me remind you: The price of a barrel of oil shot up 400%. Long lines formed at gas stations practically overnight.

Folks had to pay four times as much for a gallon of gas, and there came a week when one out of every five gas stations in the United States had no gas to sell at any price.

The U.S. had three major recessions within 10 years after the first oil crisis in 1973. And those recessions were deep, with double-digit unemployment, double-digit interest rates and double-digit inflation.

Think 10-12% unemployment.

Think 15-18% mortgage rates.