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Crisis Strikes Riyadh

A Billion-Dollar Price Tag for Peace

Written by Keith Kohl
Posted October 23, 2012

Ever wonder what the price of peace is?

The Saudis can tell us...

OPEC members raked in more than a trillion dollars from oil export revenues last year, about one-third more than a year prior; Saudi Arabia alone pocketed about $311 billion.

Just how have Saudi princes avoided the worst of the Arab Spring?

Easy. They've resorted to good, old-fashioned bribery.

After their record earnings in 2011, the Saudi government set aside $184 billion to appease any public dissent.

We're talking about drastically boosting spending on education, health care, and other social programs — and that's without mentioning the billions the country already spends to keep gasoline prices under $1/gallon.

But this generosity doesn't come without a cost.

Saudi Arabia is in over its head. And it's not the only one...

In Over Their Heads

Overall, OPEC countries are spending nearly a trillion dollars on energy investments over the next five years.

Saudi Arabia tops the spending list, dedicating $165 billion in future projects (Saudi Aramco alone is spending $35 to boost oil production between now and 2017).

They are increasingly aware of how valuable their oil resources are.

We keep seeing reports that the Saudis want to be 100% renewable-powered, which makes perfect sense considering every extra barrel available for export will increase revenues, allowing their public bribe to continue.

But is there another reason for the Saudis' newfound love of all things green?

Over a year ago, I wrote about the Saudi population boom:

saudi population 10-22

The jump in population has spurred a big increase in domestic energy demand.

Since 2005, Saudi Arabia's oil demand has increased by 50%. They're becoming as addicted to crude as the United States is.

Now throw in the accusations over inflated reserves and the threat of a peak in oil production, and it's all too clear why the Saudis want to limit their exposure to oil.

More Risk, Less Reward

Look, we've seen what happens when a major oil-exporting exporting country doesn't reinvest in its oil resources.

We learned years ago that this lack of investment could lead to disaster.

Chavez's May Day takeover is all the proof we need...

In one day, the Venezuelan government swooped in and nationalized the country's oil resources — and all the assets that came along with them. Companies like ExxonMobil that didn't see this coming were forced to hand over the keys to their rigs and hope the door didn't hit them on the way out.

All in all, Chavez snagged rigs, barges, boats, and terminals from more than 60 companies, awarding them with a tiny pittance in compensation.

But Venezuela's newly nationalized oil industry was unable to kick-start production:

Venezuela oil production 10-22

For the past 12 months, the country's oil output has remained flat at 2.3 million barrels per day.

Maybe it isn't fair to pick on Chavez and the billions of barrels of heavy, poorer quality oil destined to remain in the ground (at least, it will if he doesn't spend some serious cash investing in the country's infrastructure)...

Things are going so poorly for Venezuela that they are now forced to pay their debts in future production. We're talking billions of dollars in Chinese loans that will be paid off in barrels, not cash.

It makes us wonder how China will react when they realize that Venezuela may not be able to boost output.

The truth is the Saudis are in just as much trouble.

I wrote last month about the growing oil demand in Middle East countries over the last few decades.

It's increasing most in countries like Saudi Arabia, a reality that prompted Citigroup's recent report stating the Saudis will stop exporting oil as soon as 2030.

The writing has been on the wall for some time now for their largest fields — including Ghawar, which makes up more than half of the country's total production. (Considering how much seawater they have to pump into it each day, it seems more like the world's largest wishing well than an oil field.)

It's only a matter of time until OPEC comes clean about the state of their oil fields.

Personally, I don't intend to wait around for them to fess up — and investors don't have to...

The absolute best part about North America's oil renaissance is that we don't have to play along with OPEC's game of shady reserves, declining production, and Riyadh's future export crisis... because we don't share these same problems.

For the first time in decades, domestic production is up. Oil-drilling activity recently hit a 25-year high. And U.S. companies are able to go back into areas abandoned long ago and successfully tap remaining reserves.

North Dakota is a perfect example: Companies have known that formations like the Bakken held a tremendous amount of oil since the 1950s, but it was simply too expensive for them to produce.

Now that's all changing...

Mark my words: North Dakota oil production will surpass one million barrels per day in 2013.

This has created an unprecedented buying opportunity for individual investors, one that hasn't existed since the days of Rockefeller and Standard Oil.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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