Telling the truth about oil

The headline story from this year's Oil and Money conference in London should be headlined:  "Former Saudi Oil Bigwig Exposes Overstated Reserves, Predicts Major Price Increases." 

We've already reported some news from this conference — OPEC ministers saying high oil prices aren't their fault — which is true, but they sloughed off the blame on the ever-handy scapegoats of "speculators" and "geopolitical tensions" instead of the real reason — supply just can't keep up with demand.

But the aforementioned former Saudi oil bigwig is addressing the matter pretty bluntly:

Sadad I. Al-Husseini, an oil consultant and former executive at Aramco, Saudi Arabia's national oil company, gave a particularly chilling assessment of the world's oil outlook. The major oil-producing nations, he said, are inflating their oil reserves by as much as 300 billion barrels. These amount to hypothetical reserves that are "not delineated, not accessible and not available for production."

A lot of production in the Middle East is from mature reservoirs, and the giant fields of the Persian Gulf region, he said, are 41% depleted.

Mr. Husseini just blew the lid off 20, maybe 30, years of OPEC obfuscation.  It's been that long since OPEC began setting production quotas for its member nations based on estimated reserves in the ground.  Not coincidentally, after that standard was set, estimated reserves in OPEC countries began rising — a lot.  It's a shame Mr. Husseini didn't take the next bold step and declare whether his own country's oft-stated reserve estimate of 267 billion barrels is anywhere near accurate.  But this is a big step forward regardless.  And his projection of where oil prices go from here is sobering:

Global oil and gas capacity is constrained by mature reservoirs and is facing a "15-year production plateau," Mr. Husseini said. He predicted that supply shortages will continue to add $12 to the price of oil for every million barrels a day in additional demand. Global demand, now at some 85 million barrels a day, was on average 10 million barrels a day lower in 1999.

Assume for a moment that demand continues to increase at the same rate is has since 1999.  (I know, there's no guarantee of that, but for the sake of back-of-the-envelope math, just play along.)  That's 1.25 million barrels every year.  So $90 now becomes $102 next year, $114 in 2009, $126 in 2010.

Mr. Husseini is the second former executive of a national oil company in the Middle East who's coming clean about the world's diminished capacity to produce oil.  The first is an Iranian expert who keeps up a correspondence with Outstanding Investments editor Byron King and has declared Peak Oil came and went in the summer of last year.  For more on where Byron sees the oil market going, and the very best ways to profit, check out his latest special report.