OPEC Lies

OPEC is meeting in Vienna right now.

Oil ministers and their staff from 12 member nations are sitting around a grand conference table, debating some proposals to cut production, and deciding instead to keep pumping oil flat out 28 million barrels per day. No surprises. No shocks to the world.

But OPEC is living in a fantasy land.

It has no control over the witches brew of geopolitical troubles that are threatening the three OPEC members with the largest oil reserves: the outbreak of civil war in Iraq … terror attacks on oil facilities in Saudi Arabia … and the specter of a nuclear confrontation hanging over Iran.

Nor can OPEC control the rebels in another major OPEC member country, Nigeria. Last month, the rebels cut Shells output by 455,000 barrels per day 20% of Nigerias output.

And now an attack on a pipeline belonging to Chevron has cut production by another 13,000 barrels per day, as the rebels vow to widen their attacks still further. The Nigerian government is responding by importing Chinese weapons and gunboats. So, things could go from bad to worse rather quickly.

Worst of all,

OPEC Is Hiding A
Giant-But-Silent
Monster in the Room

Im talking about the fact that many of the organizations members may not have nearly as much oil as they claim to have.

You see, most of the worlds remaining conventional oil reserves are buried under Middle Eastern sands. Come hell, high water, or al Qaeda, the big oil consuming nations of the world will probably continue to buy ever-increasing amounts of crude from the Middle East countries, simply because theyre the ones with most of the oil.

But Ive got a question for you: How much higher would oil prices be if each of those countries had only half as much in oil reserves?

How could that be possible? Heres the answer: In the 1980s, OPEC decided to fix its members production quotas based on reserves. So if you were an OPEC member, the more you could goose up your estimated reserves, the bigger the quota youd get.

Well, surprise, surprise everybody suddenly discovered they were sitting on bigger reserves than they had previously reported:

In 1984, Kuwaits proven reserves miraculously jumped from 64 billion barrels to 90 billion.
In 1987, Iraqs reserves amazingly doubled from 47 billion barrels to 100 billion.
And in 1989, even Saudi Arabias reserves, the largest of all, suddenly grew from 170 billion barrels to 258 billion.

And it didnt end there. Despite constant pumping over the last ten years, these countries have discovered enough new reserves to replace their production and more.

Iran said improved recovery methods raised its oil reserves from 96 billion barrels to 132.5 billion barrels. Saudi Arabia claims 264.3 billion barrels; Kuwait, 101.5 billion, and Iraq, 115 billion.

What do I think about all this?

I Think OPEC Members Are
Lying Through Their Teeth

And Im not alone. One expert who knows a lot more about this than nearly anyone is Dr. Colin Campbell, a retired geologist who has written extensively about it for the Association of the Study of Peak Oil & Gas (ASPO).

Recently, Dr. Campbell laid out his own estimates for the five biggest OPEC producers.

Compare them to the official estimates (compiled by petroleum company BP) and the difference is downright scary.

He believes Saudi Arabia has only 61% of its claimed reserves … Iran 52% … Iraq 53% … Kuwait 55% and … the UAE, only 45%!

All told, the actual OPEC reserves are only 55% of the reserves that OPEC claims it has, according to Campbell.

Why the big difference? Campbell bases his estimates on geological evidence. The official estimates are whatever the country says they are.

No, Im not joking! If youre waiting for Saudi Arabia to allow outside auditors to independently analyze its oil reserves, dont hold your breath.

How big is this problem? Just consider this factoid:

Kuwaits Overstatement Alone May Be TWICE
The Total Oil Reserves of the United States

Last month I told you how, according to Petroleum Intelligence Weekly (PIW), Kuwaits oil reserves may be only 48 billion barrels, less than half the official estimates, and even lower than Campbells own figures.

The amount in dispute is equal to more than twice the total estimated oil reserves of the U.S. (22 billion barrels). And PIW made that estimate after getting a peek at internal Kuwaiti records.

Thats right an amount equal to double ALL the oil reserves in the U.S. may be missing.

Meanwhile, Kuwaits own oil minister admits that production at Kuwaits biggest oil field has peaked. Kuwait Oil Company Chairman Farouk Al-Zanki told Bloomberg that the peak output of the Burgan oil field is 1.7 million barrels per day, not the two million barrels per day previously forecast.

And yet the country continues to pump as fast as humanly possible. It even cheats on its OPEC production quota.

But then, all the OPEC members who can cheat do cheat.

Whats really interesting is that three OPEC members, Indonesia, Iran and Venezuela, cant meet their OPEC quotas: Their production is falling.

Indonesia has already fessed up to irreversible oil production declines.

Maybe the drop in the other two are just due to bad management … or maybe the worlds peak oil production is a lot closer than anyone thinks it is!

You have to wonder: If the oil reserves are running out, why dont the OPEC members admit it? Oil prices would probably rise $10 per barrel overnight, and theyd be rolling in dough.

But think about that for a minute: OPECs political power depends on being a cartel that can deliver stable oil production. Without that, oil consuming nations would likely enact strict conservation measures … the world would start scrambling after alternative fuels … and as the new fuel sources are developed … OPEC would get consigned to the dustbin of history. To say nothing of the social upheaval OPEC members would face if their already restless populations thought the oil was running out.

Thinking Ahead …
It Doesnt Look Good

Even if OPEC can keep delivering on its promised supply, were facing other problems.

In the U.S., total domestic energy demand is projected to increase at an average annual rate of about 1.4% in 2006 and 2007.

Western oil companies can always look for more oil, right? Sure. But getting it out of the ground is another matter entirely.

Chevron and Exxon Mobil are spending $250 million to search for oil and gas at a record six miles beneath the Gulf of Mexico. Thats so deep that their drill bits and pipes are already at the limit of their structural design temperatures reach 600 degrees.

And theyre going deeper! Last week, Chevron asked Transocean Inc. to build a rig capable of drilling 7.5 miles down.

Its understandable why they drill there. The U.S. Minerals Management Service (MMS) estimates there are 71 billion barrels of oil reserves in the Gulf of Mexico, 56 billion of which is in deeper waters.

And thats where BP made a discovery called Thunder Horse, a giant field estimated to have more than 1 billion barrels of oil, the last giant discovery in the Gulf of Mexico, seven years ago.

But That Brings Up
Two Big Problems

Problem #1. Despite all the searching, international oil companies are finding less and less oil.

Since 2000, discovery rates have dropped by 40%!

The last really big discovery in the world: The Kashagan oilfield in Kazakhstan.

The average size of the seven biggest oil fields scheduled to begin production this year by publicly traded companies is 728 million barrels, according to Deutsche Bank AG analysts. That will drop by about half next year.

Problem #2. The Gulf of Mexico is a hurricane stomping ground.

It wasnt Katrina or Rita, but another hurricane named Dennis that nearly sank Thunder Horse, sending it listing dangerously and delaying production for months.

And while we may have a short-term supply surplus, the next hurricane season is less than three months away, and we still havent recovered from the last ones.

More than 100 platforms were destroyed and almost 200 pipelines were damaged by Hurricanes Katrina and Rita. Six months later, Gulf of Mexico oil production is still down 25% and natural gas production is off 20%.

Yet hope springs eternal. The Minerals Management Service hopes that, by the end of the year, about 2 million barrels of oil a day will be produced in the Gulf, compared with the 1.5 million produced before the storms last year.

And What About
the NEXT Hurricanes?

Too many people still dont get it. For example:

The way we look at it, two hurricanes through the center of oil and gas production, thats a once-in-100-year, or 1,000-year occurrence, said Manuel Mondragon, assistant vice president of W&T Offshore, an oil and gas exploration company, in a recent press report.

Oh really? Max Mayfield, director of the National Hurricane Center, is warning that the next hurricane season may be worse than the past two.

The reason is the advent of La Nia unusually cold Pacific Ocean temperatures that spawn more hurricanes in the Atlantic. And global warming certainly doesnt help, either.

In fact, the World Meteorological Organization says that it is seeing warning signs that La Nia is developing right now ahead of schedule!

It is unprecedented in the historical record for a La Nia of substantial intensity or duration to develop so early in the year, The WMO warned.

Bottom line: The more hurricanes pound Energy Alley in the Gulf of Mexico, the more were going to need OPEC oil. And that brings us back to where we started, with the high probability that our friends in the Persian Gulf dont have nearly as much oil as they say they do.

Its not a pretty picture. But you can bet that U.S. companies will try to drill their way out of this. After all, the worlds three largest oil companies Exxon Mobil, BP and Shell last year reported a collective net income of almost $84 billion.

Thats the equivalent of every man, woman and child in the world each handing the oil companies $13. Since a lot of people in the world dont drive, your share may be larger.

The companies can use that money to look for oil. And thats good news for select energy stocks especially the ones that are going to do the drilling.

Two Ways to Play the
Energy Supply/Demand Squeeze

I like the Guinness Atkinson Global Energy Fund (GAGEX). It was best of its class last year, and it is truly a global energy fund, with top holdings including Sasol, Petrochina, Royal Dutch Shell, EnCana, Repsol and more.

The fund has an expense ratio of 1.45%. It is up 4.75% so far this year and returned a stunning 64% last year way ahead of the industry average of 38%. It has no load, but charges a 1% fee if you redeem it in the first 30 days.

To really focus on drillers, you might want to look at the Oil Service HOLDRs (OIH), an exchange-traded fund which tracks the oil services industry. It returned 43.7% in the last year not too shabby.

And oil services could easily outperform going forward as the quest for new supplies of oil kicks into overdrive.

Now for the really good news: Larry Edelson says the best trading vehicles to crank up your leverage are the LEAPS on undervalued oil shares. These give you the advantage of limited risk and the outsized returns that come with leverage. But he has only 157 slots left, and theyre going to sell out quickly.

For more information, call 877-719-3477.

Good luck and good trades,

Sean Brodrick

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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