OPEC's Inconvenient Truth

Jim Brown
Printer Friendly Version

OPEC won't tell you the truth about their future production. They won't even tell each other the truth about current production. This makes the world's dependence on them for our future energy needs a true exercise in faith.

All of the world's energy forecasting organizations have been drinking the Kool-Aid for decades. The International Energy Agency (IEA) and the Energy Information Administration (EIA) along with Cambridge Energy Research Associates (CERA) have been preaching the OPEC lie for so long they can't switch to the truth because they would lose what little credibility they have left.

These organizations all publish production forecasts for decades into the future. They take current production add in demand growth and magically project where oil production will be 10-20 years from now in order to supply that demand growth.

That is the equivalent of a parent measuring their 16-year-old son and calculating how much he has grown on average each year. Then taking that average growth rate and projecting how many more years he will have to grow in order to gain a spot in the NBA. Just because you need to average six feet, seven inches to even be considered in the NBA has nothing to do with the son's past growth or future growth hopes. He will grow based on his genes and diet and not based on a projected height requirement for the NBA.

These organizations calculate the demand growth and then allocate the theoretical new production across all the oil producing nations based on a percentage growth model. The shortfall is then assigned to OPEC. If demand growth in 2015 was expected to be 2 mbpd and the rest of the world could only be expected to add 500 kbpd then the 1.5 mbpd shortfall would be assigned to OPEC. The cartel magically came up with the needed production in the past so in theory they will always come up with it in the future.

The problem of course is OPEC's upper limit. You may remember in 2008 they hit that limit and could not produce enough light oil to fill demand and prices soared to $147. They had plenty of oil but it was not light sweet crude. All the surplus oil was heavy/sour Arabian crude that refineries did not want.

OPEC claims to have five million barrels of excess capacity today. That 5 mbpd includes the 4.5 mbpd of productions cuts they made in 2008. The world still believes that production capacity is still there just waiting for OPEC heads to turn it back on. The truth is that over 2 mbpd of that production cut is already flowing into the distribution system because compliance with the cuts is only 53% today. That leaves about 2.3 mbpd of "capacity" still offline plus whatever additional capacity still exists. You will never see in an OPEC announcement a breakdown of how much of that capacity is sweet crude and how much is sour crude. All of that remaining production cut is not sweet crude.

The forecasting organizations don't care. They work on a broad-brush level and push numbers around and ignore the details. They are looking at the big picture not the boring and insignificant details. You know, details like where will the oil really come from two years from now and what kind of oil will it be?

The OPEC truth is the last three years production from existing fields has declined. The IEA estimates global decline rates of 4.5% to 7% depending on how realistic they need to be in any given report. OPEC is generally thought to have about 30 mbpd of actual production capacity give or take a couple million depending on how you value Iran and Iraq and their production well below theoretical capacity.

Depletion of 4.5% on 30 mbpd is 1.35 mbpd per year. That means on the low side they lose 1.35 mbpd in capacity every year from existing fields. Today that is not a problem because there is a surplus of roughly 3.0 mbpd in OPEC. However, it does mean they have to FIND and PRODUCE an extra 1.35 mbpd every year just to maintain that 30 mbpd capacity. In order to grow capacity they have to FIND and PRODUCE more than 1.35 mbpd.

The rest of the world produces roughly 58 mbpd of oil and all energy liquids. Global production is said to be around 88 mbpd but 8-9 mbpd is things like natural gas liquids (NGLS), condensate, etc. It all figures into the mix and the 88 mbpd number is commonly referred to as oil but it is really a mix. Using the 4.5% depletion rate on the 88 mbpd means the world has to FIND and PRODUCE an extra 4 mbpd of new oil every year just to stay even. Today I am only focused on OPEC.

When the world is growing the increase in demand is roughly 1.5 mbpd per year. That means the world has to FIND and PRODUCE 5.5 mbpd of new oil every year just to stay even. Since the rest of the world does not have that capacity the "call on OPEC" increases by that 1.5 mbpd of new production every year according to the forecasting agencies.

OPEC officials always claim they will have plenty of oil for future demand but they never identify where that oil will come from. There is no list of countries with an annual increase by their name through 2030, which is the window the forecasting organizations use for their estimates.

In the last 75 years the largest oil fields on the planet were discovered and plotted in the Middle East. Some of these giant fields have been producing for over 60 years. In all that time they have only grown production to 30 mbpd and they had the biggest fields on the planet to work with. However, the forecasters want us to believe that by 2030 OPEC will double their ACTUAL production in the next 20 years. They have to increase production by 28 mbpd because our spreadsheets call for it. Unfortunately the spreadsheets don't know anything about geology, capital expenditures, politics, depletion, war, terrorism or just plain untruths.

OPEC nations lie in public so often about their own reserves and production that OPEC officials have to rely on outside sources, underground spies and tanker trackers to obtain decent production information. The entire OPEC cartel is built on a foundation of untruth. OPEC quotas are based on reserves and "production capability" so there is an inherent desire to inflate those numbers.

OPEC itself does not want the truth to come out because it would cause a dramatic change in world energy policy. If developed nations really believed that OPEC could not supply our needs 5 years from now they would be in panic mode to get us off of oil as our drug of choice. OPEC does not want the world to go on an energy diet. They know that it will take a very long time to switch once the truth comes out and it is in their best interest to keep that truth hidden for as long as possible because it will cause much higher prices for them once they can no longer meet the demand. They are stringing us along to the best of their ability.

Our energy future rests on a dozen countries that lie to each other but present a single face to the world. The forecasters take these fictitious numbers and plug them into their spreadsheets along with our projected future demand and produce a rosy forecast for world energy in the future. This is not a fairy tale with a happy ending.

The forecasters will still be predicting higher production to meet higher demand until suddenly the truth appears when there is not enough oil to go around. They will modify their spreadsheets and produce different numbers but the only number that will matter to us is the price at the pump. That cannot be changed with a modification to a formula on a spreadsheet. This is the real inconvenient truth. We will wake up one morning to a world that is short on oil and OPEC will still be saying there is no shortage. This is the true "never ending story" that will not have a happy ending.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter