The largest oil producer on the planet is also the most secretive about their production and reserves. For 50 years Saudi has been the source the world turned to when there was a shortage of oil. Their seemingly bottomless "oceans of oil" were always there when the world needed oil. That situation has changed and there may be fraud in the House of Saud.

Without going into the extensive detail I have outlined in my "Profiting from the Oil Crisis Report" I am going to try and draw the picture for you here. Saudi oil comes from four major fields. When the Saudi Oil fields were run by outsiders, the four major oil companies managed by Standard Oil, their reported reserves were in the neighborhood of 79 billion bbls. Saudi has been producing between 5 mbpd and 9 mbpd for over 50 years with a peak of just over 10 mbpd at one point. That represents production of over 75 billion bbls since inception. Obviously better recovery techniques and additional exploratory wells on the fringes of the major fields have added to the recoverable reserves. However, this is not the full story.

As time has passed additional exploration and recovery efforts in Saudi boosted the reported reserves to something in the 130 billion barrel range according to Saudi Aramco, the nationalized oil company that succeeded the private company that initially developed the fields. Since historical production already exceeds the initial 79 billion bbl estimate we know they are stretching their production using every available means.

In 1985 OPEC went to an allocation program to ration the available production across all its members based on the size of their reserves. Overnight the claimed Saudi reserves jumped to 257 billion bbls, a 50% jump without any additional exploration or additional wells. Other OPEC nations suddenly "found" additional reserves as well. This 257 bb reserve number lasted for nearly 20 years until 2004. As oil prices jumped to the highs of 2004 the Saudi Oil Minster suddenly announced that Saudi oil reserves "could" increase to 461 billion bbls. Again, there were no reports of new fields, new production or any new documentation. Just higher prices on the world market and the need to defuse the current price spike.

In the past whenever the world worried about an oil shortage Saudi always said no problem and opened their valves to produce more oil. Over the last two decades Saudi has refused to release any statistics on production or reserves that could be verified by the outside world. They asked that the world just "trust us". Since they have never failed to produce the supply in the past the majority of the world just shrugged it off and went on thinking Saudi had plenty of oil.

Recent events suggest the oil emperor may have no clothes. Reports are filtering out that show serious problems at their major fields and suggest oil production in Saudi has already peaked. Matthew Simmons, a very well respected investment banker in the energy business, has seen the problems beginning to appear and has launched a concentrated effort to uncover the truth. His excellent book, Twilight in the Desert, explains in detail the various problems with the Saudi oil picture. The book is very detailed, 484 pages and not light reading unless you are an oil engineer, but very enlightening. In an effort to debunk the book a Senior executive of Saudi Aramco actually ended up admitting in December 2006 that some of the claims were true. He said Abqaia was already 73% depleted and Ghawar, the biggest Saudi field was 48% depleted. He also admitted that real reserves were closer to the 130 billion bbl range that stood as gospel for over 20 years. 130 gb not 461 gb as the Saudi Oil Minister claimed in 2004.

Fast forward to the present and the reality is that most of those fields are in worse trouble than previously thought. Saudi has resorted to extreme measures to keep its fields flowing. Water injection is commonly used as fields age to push the remaining oil towards the pumps. As this technique ages the amount of water extracted with the oil increases until it is no longer profitable to pump the oil. Reports coming out of Saudi suggest that they are now getting 9 to 12 bbls of water for every bbl of oil.

The biggest clue that Saudi production is failing is the price of oil. OPEC and Saudi Arabia have always wanted to keep prices in a neutral range to prevent demand drop due to high prices and a rush to drill by other countries. As long as they can be the biggest supplier they are willing to sell it a little cheaper to maintain their market share.

When prices rose over $100 in 2008 all the Saudi claims that they can produce all the oil needed were falling on deaf ears. If they could produce it they would to prevent the price hikes. It is a simple confirmation that they have lost control of their propaganda machine and nobody believes them. They could fix this perception instantly by just flooding the market with oil and driving prices down. Obviously they could not do it. In the summer of 2008 Saudi claimed production would rise to 12.5 mbpd in 2009. As prices rose to nearly $150 the Saudi oil minister said production could rise as high as 15 mbpd in a couple years. All of this excess production talk fell on deaf ears because nobody believes them any more.

This sudden change in perception of OPEC production has sent prices soaring and there was suddenly a real fear that Peak Oil was already upon us. If the Saudi "ocean of oil" has truly sprung a leak then there is NO safety factor in the global markets. With daily global production (pre recession) only 800k to 1.2 mbpd more than global demand there is no room for error. Any problem with production anywhere in the world can remove that cushion instantly. Terror attacks, equipment failure, shipping problems, hurricanes, etc. Once post recession demand returns we could be running on the edge with no room for error.

If the situation continues to deteriorate $150 oil is just around the corner followed very quickly by $2000 and $250. The only thing that will slow those targets is the inability of the American consumer to pay $5, $6 or even $8 for gas. While it is already well over that level in most of the world the American consumer continues to pay under $4 for the privilege to drive about 15 miles. That $4 gallon of gas caused severe problems in the U.S. in 2008 and that will be only about half of what gas could cost by 2012. Yes, half! 

If you are not prepared for the eventual appearance of $8 gas then you need to get prepared soon. Saudi is no longer responsible for our fate. We have to take control of our finances and prepare for the future.