by David Fessler, Investment U Energy and Infrastructure Specialist
Monday, February 14, 2011
As if there wasn’t already enough evidence that we’ve passed “Peak Oil,” the now infamous WikiLeaks gives us even more proof.
The controversial site recently released (formerly) secret, little tidbits about Saudi Arabia’s oil monopoly, Aramco, and how much oil it really has.
More accurately, it’s focused more about how much oil the country doesn’t have…
WikiLeaks is now circulating confidential cables, indicating that the Saudis have overstated their oil reserves by a massive 40%… or about 300 billion barrels.
The warning to Washington came by way of a 2007 conversation between the U.S. consul general in Riyadh and geologist Sadad al-Husseini, the former head of exploration for Aramco.
al-Husseini essentially admitted that Aramco’s stated 12.5 million-barrel-a-day output, which is needed to keep prices from escalating, couldn’t be achieved.
The confidential cables, dating between 2007 and 2009, described Saudi Arabia reaching 12 million barrels per day in a decade. Trouble is, global production will peak long before then – possible as soon as next year.
According to al-Husseini, whenever it does happen, Aramco will lose its control over oil prices. If so, global, energy-dependant consumers and big oil alike will suffer.
You see, the Saudi oil industry overstated its reserves to attract foreign investment from the likes of:
- Royal Dutch Shell (NYSE: RDS.A)
- Lukoil (Pink: LUKOY)
- Sinopec Shanghai Petrochemical Co. (NYSE: SHI)
- Eni S.p.A. (NYSE: E)
- Repsol YPF, S.A. (NYSE: REP)
Chances are, none of these firms received the cables sent to Washington, such as the one that reported:
“According to al-Husseini, the crux of the issue is twofold. First, it’s possible that Saudi reserves aren’t as bountiful as sometimes described, and the timeline for their production not as unrestrained as Aramco and energy optimists would like to portray.”
Unfortunately, that wasn’t all that Washington learned about Saudi Arabia’s oil situation…
The Bigger Picture Doesn’t Look any Brighter
Another leaked report stated:
“In a presentation, Abdallah al-Saif, current Aramco senior vice-president for exploration, reported that Aramco has 716 billion barrels of total reserves, of which 51% are recoverable, and that in 20 years, Aramco will have 900 billion barrels of reserves.
“al-Husseini disagrees with this analysis, believing Aramco’s reserves are overstated by as much as 300bn barrels. In his view, once 50% of original proven reserves has been reached … a steady output in decline will ensue and no amount of effort will be able to stop it. He believes that what will result is a plateau in total output that will last approximately 15 years, followed by decreasing output.”
While that view might sound extreme, the U.S. consul says al-Husseini “is no doomsday theorist.” Quite the contrary, in fact, considering his education and experience in the field, which is why “his predictions [should] be thoughtfully considered.”
Seven months later, the consul still had the same opinion:
“Our mission now questions how much the Saudis can… substantively influence the crude markets over the long term. Clearly, they can drive prices up, but we question whether they… have the power to drive prices down for a prolonged period [any longer].”
Sounding The Peak Oil Alarm…
al-Husseini isn’t the only one sounding the “Peak Oil” alarm. Fatih Birol, the Chief Economist for the International Energy Agency (IEA) believes crude production could peak around 2020.
Perhaps the best quote, however, comes from Jeremy Leggett of the U.K. Industry Taskforce on Peak Oil and Energy Security:
“We are asleep at the wheel here: choosing to ignore a threat to the global economy that is quite as bad as the credit crunch, quite possibly worse.”
I couldn’t agree more. In a world that continues to be heavily dependent on oil, this is not good news. But for individual investors, it opens up several highly profitable opportunities.