Opec’s oil shortage

What if half the world’s oil doesn’t exist?

It’s a simple question that sounds downright absurd. But it isn’t absurd at all.

In 2011 WikiLeaks revealed a series of cables between American diplomats in Saudi Arabia and their government. In the messages, senior diplomatic officials advised the US government to take this very possibility seriously.

The former head of exploration at the Saudi monopoly oil producer Saudi Aramco, Sadad al-Husseini, claimed that Riyadh overestimates its oil reserves by 40%. Now Saudi Arabia is the Saudi Arabia of cheap oil, as the saying goes. A 40% overestimation has serious implications for global oil supplies… and prices.

But it isn’t just the Saudis who are suspicious.

In 2006 the Edward Snowden of crude oil reserves, Dr Ali Samsam Bakhtiari from the National Iranian Oil Company, said the same of other countries. Middle Eastern countries’ oil reserves are “about half, or even less than what the respective national governments claim”.

Kuwait was outright caught lying in the same year. A leaked email revealed proven reserves were only half the official number.

It’s not just Opec though. In what may go down as the overestimation of the century, the US Energy Information Administration (EIA) formally revised an oil field’s estimated recoverable barrels down by a whopping 96%. The problem is, it isn’t just any old oil field. It’s the biggest shale oil field in the US.

Around two thirds of the country’s shale oil recoverable reserves can be found in California’s Monterey Formation. At least that’s what the EIA thought back in 2011. The downgrade was worth almost 1.5 trillion US dollars! “The oil had always been a statistical fantasy. Left out of all the hoopla was the fact that the EIA’s estimate was little more than a back-of-the-envelope calculation,” said retired geoscientist David Hughes from the Geological Survey of Canada.


Suddenly the question we started with doesn’t sound so stupid. What if half the world’s oil doesn’t exist?

Why countries overestimate oil reserves

Overestimating your crude oil reserves might sound like a strange thing to do. But it actually makes a lot of sense for some countries. In the 1960s many oil-producing countries banded together and formed the Organisation of the Petroleum Exporting Countries (Opec). They wanted to avoid competing with each other and establish an artificially high price for oil. Just the sort of thing governments ban companies from doing.

Here’s the key: under changes to the agreement made in the 1980s, how much oil a member of the Opec cartel can sell in a given year is partially determined by the amount of reserves they have. Claim to have, that is.

Under these rules, if a country increases its reserves, it can sell more oil faster. More oil in the ground also provides future tax revenue that governments can borrow against. Not to mention bumping sheiks up the all-important rich list.

So the incentive to lie when it comes to reserves is certainly there. And people respond to incentives. That’s economic law. But is this just a conspiracy theory? Guestimating your oil reserves badly – very badly – is one thing. Surely a country can’t just make up its oil reserves and never confirm them?

Well, there are no auditing procedures under Opec. It’s an honesty system. Which is particularly amusing considering the credibility of countries in Opec. As soon as Opec began determining its production quotas based on proven reserves, the member nations announced a flurry of discoveries. Iran’s reserves almost doubled. Iraq’s more than doubled. The UAE’s tripled. Suspicious?

 An oil supply shock and the end of cheap oil

If the oil really isn’t there, what does this mean for you?

Some predictions which take the claims of Bakhtiari and Husseini seriously are very dire. The US Joint Forces Command predicted surplus oil production “could entirely disappear, and as early as 2015”. That’s when the world begins using up more oil than it produces. It didn’t eventuate. But the US military has accumulated an enormous oil reserve to prepare for the eventuality.

But if the oil isn’t there, we aren’t in for a crisis. We’re in for a boom.

A higher crude oil price makes more costly oil fields viable. Companies will drill deeper, further offshore, and explore better technologies. Alternatives to oil will become more viable too.

In short, the capitalist system will weave its magic. As I’m fond of saying, we didn’t run out of stone in the Stone Age, bronze in the Bronze Age, iron in the Iron Age, gold in the Golden Age, paint during the Renaissance, coal during the Industrial Revolution, and we won’t run out of oil. We’ll just move on.

It’s the transition that’s interesting. And it’s where money can be made by investors. Any sort of shock in oil markets can lead to a sudden spike in the price. And, as you now know, the oil industry’s questionable practices mean there are plenty of shocks in the making.

Now it’s not possible to predict exactly when oil markets will begin to reflect reality. It’s impossible to know for sure if the oil really is or isn’t in the ground like countries and companies claim it is.

But you can still invest in the possibility.

How to invest in crude oil and its substitutes

There are two ways to invest based on what I think will happen in energy markets in coming decades. You can invest in the “next big thing”, like natural gas. Or you can make money out of the reliable producers of oil and alternatives already established.

Companies that list on Western stock exchanges have auditing requirements and so they’re less likely to lie about reserves. Companies that have promising exploration tenements are a great option too.

New technologies like thorium, hydrogen and solar are only just emerging as investment options. But one good bet in the midst of an oil shock could be worth a fortune.

 The uncertainty over existing oil reserves will prove the catalyst for seriously powerful gains. So far, reality has struck in California. If reality strikes elsewhere, especially in the Middle East, oil reserves are set to tumble.

Steer clear of the Aramco IPO

 Saudi Arabia is expected to sell off 5% of its state-owned oil company Saudi Aramco. The aim is to raise money to invest in industries outside of oil.

Based on what I’ve just told you, my advice is obviously to steer clear of this one. But the evolving story of the IPO should make you suspicious regardless.

Saudi Arabia’s deputy crown prince valued Saudi Aramco at $2 trillion. That’s far bigger than the biggest oil companies in the world put together. The problem is, his consultants can’t justify the figure, not matter how they manipulate the figures. An independent estimate is around $400 billion.

The point is that the oil industry is a political creature. Investors must be very wary. But then again, politicians are predictable. They lie, especially about oil reserves.



Category: Geopolitics

From time to time we may tell you about regulated products issued by Southbank Investment Research Limited. With these products your capital is at risk. You can lose some or all of your investment, so never risk more than you can afford to lose. Seek independent advice if you are unsure of the suitability of any investment. Southbank Investment Research Limited is authorised and regulated by the Financial Conduct Authority. FCA No 706697. https://register.fca.org.uk/.

© 2021 Southbank Investment Research Ltd. Registered in England and Wales No 9539630. VAT No GB629 7287 94.
Registered Office: 2nd Floor, Crowne House, 56-58 Southwark Street, London, SE1 1UN.

Terms and conditions | Privacy Policy | Cookie Policy | FAQ | Contact Us | Top ↑