Show Me the Oil!

“So many wishful thinkers are hoping, praying and betting on the idea that Saudi Arabia will come to the rescue. They think the world’s top exporter should be able to boost capacity enough to bring U.S. oil prices below $40… Sorry, it ain’t gonna happen, folks.”

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Just recently, Deutsche Bank’s oil strategist, Adam Sieminski, said that oil prices may temporarily rally “toward $100 a barrel,” if an accident, disaster or sabotage reduces supplies from two major oil-producing countries at the same time. He’s right. But the scary thing is that the oil price will move higher, even without any disaster or sabotage. Even in a perfect world of uninterrupted supplies, the booming global demand for oil will push its price toward $50 a barrel, and eventually to $100. Check out these oil stats from three of the world’s biggest oil consumers:

China’s refineries have processed 17.2 % more crude so far this year than in 2003, while crude imports have soared nearly 40% from last year. India’s crude oil imports are expected to rise by 11% in 2004-2005 as demand rises by nearly 4%.

Here in the United States, demand is up 3.4% so far this year. Meanwhile, average daily imports of crude oil have jumped to a record-high 11 million barrels a day.

On the supply side, OPEC is pumping at its highest level since 1979 and has said it will raise production to 30.5 million barrels per day next month. And yet, prices still rise.

The world needs more oil capacity, pronto!

“We expect oil demand will be around 2 million barrels per day more, in 2005 versus the average in 2004,” warns International Energy Agency executive director Claude Mandil. “So we need something like 3 million barrels per day of additional capacity globally to avoid another year of high prices.”

Asked whether he expected OPEC to raise official production quotas at its next meeting on September 15, Mandil said, “I don’t think OPEC can do a lot immediately, because they produce more than what is needed. The best thing for the OPEC meeting would be a pledge for immediate investment in additional capacity.”

So many wishful thinkers are hoping, praying and betting on the idea that Saudi Arabia will come to the rescue. They think the world’s top exporter should be able to boost capacity enough to bring U.S. oil prices below $40… Sorry, it ain’t gonna happen, folks.

Saudi Arabia is the only OPEC producer with any significant spare capacity. OPEC producers are already pumping near 25-year highs. Simply put, the well is running dry. Cartel production is near its highest since December 1979, just below the 29.76 million it pumped in November 2000. Demand is simply swamping available capacity, and that means high oil prices are here to stay.

Recently, the Department of Energy said crude stockpiles fell to the lowest level in five months, and the situation is unlikely to improve anytime soon. The cheap, easy places to find oil are already being pumped; new sources will be both expensive and hard to read.

Remember that film Jerry Maguire and how oft-repeated line “Show me the money”? Well, I say, “Show me the oil.”  Quite simply, the “proven reserves” are swiftly disappearing. Let’s review. Remember the Shell Oil charade? In January, Royal Dutch/Shell Group cut its estimated reserves by 20%… Yes, 20%. The chagrined company went on to say that it had overstated its “proven” oil and gas reserves by 3.9 billion barrels. That’s no small thing — that total is equal to 13% of proven crude oil reserves in the United States. Oh, and to add insult to injury, in March Shell cut its reserves again — by another 250 million barrels.

Shell isn’t the only Pinocchio oil company; El Paso Corp. said in the second quarter that it would cut proven natural gas reserves by 41% and take a $1 billion charge on its books. But wait, there’s more: don’t forget about British Petroleum. BP removed oil and gas equal to 2.5% of the company’s estimated reserves from its books at the end of 2003. Now, that may not sound like a lot, but when you do the math, 445 million barrels of oil simply disappeared.

Even more troubling, billions of barrels of phantom reserves may still be sitting on the books. According to Oil & Gas Journal, back in the 1980s some OPEC members boosted their “proven” reserves, too.   Kuwait’s reserves jumped from 64 billion in 1984 to 90 billion in 1985… Iraq’s reserves more than doubled from 47 billion in 1987 to 100 billion in 1988…  But the grand prize goes to Saudi Arabia, whose reserves soared from 170 billion to 258 billion in 1990. Funny, that even though these countries are pumping at full capacity, the reserve numbers have stayed constant over the last 10 years. How does that work?

Most likely, OPEC countries artificially boosted their reserve estimates in order to maintain their production quotas within OPEC. But if the oil that we think is there isn’t really there, we’ve got a problem.

Remember, the United States imports at least 11 million barrels oil a day of and refined petroleum products to meet only 60% of domestic demand, and one in four of those barrels comes from the Middle East. In other words, if the Middle East countries revise their reserves downward, $3-per-gallon gas may look cheap. And $50 or $75 barrels may be cheap. And yes, even $100 per barrel begins to look like a possibility.

According to Merrill Lynch, each 1-cent rise in gas prices sucks about $14 billion a year from consumer spending. Since 9/11, higher oil prices have taken more than $400 billion out of consumers’ wallets.   That’s keeping consumers from purchasing automobiles, clothes and countless other consumer goods.  And we are trading at over $50 a barrel. Imagine what things will be like when oil hits $75 or $100 a barrel. The possibility is turning into reality, and it may be here sooner than you think.

by Kevin Kerr

Kevin Kerr’s unparalleled expertise in futures and commodities has made him a regular contributor to news outlets like CNN fn, CNBC and CBS Marketwatch, where he’s been quoted in over 500 articles.