JACKSON, WY - Like I mention in Tuesday's Energy and Capital, since 1859, we have consumed 1.5 trillion barrels of oil. And with our forecasted rate of consumption, it will take only 20 years to consume another 1.5 trillion. In the past two years alone we've consumed over 60 billion barrels of oil-and that rate's about to take off.

The number of "giant" oil field discoveries has declined dramatically since the 1960s. The large reserves and production capability of these fields are essential to increase world oil production; the combined output of smaller oil fields serves at best to offset declines in the older giants. Unfortunately, since 1990, there have been few giants discovered in the world-a total of 35-and none of these has a production capability above one million barrels per day.

Before the 2006 "Jack" oil field discovery, which we all know has problems of its own, the last confirmed giant find occurred in 2003 off the Brazilian shore. But the oil found there contains mostly heavy (dirty) oil and is not expected to come on-line until 2011.

Although it's a sizable find, the 700 million-barrel Papa-Terra field lies in almost 4,000 feet of water (Jack is under 7,000 feet of water, and more than 20,000 feet under the sea floor.) Curiously, both the Papa-Terra and Jack discoveries caused Big Oil to jump for joy like a fifth-grader getting a snow day.

The size of the Jack field is still to be determined. But to put the size of Papa-Terra into context, at current global oil consumption rates, that amount of oil is consumed every 8.3 days! The world needs many more giants just to replace the consumed reserves. And we aren't coming close. In fact, we would need 85 Papa-Terras to make up for global consumption over the last two years.

The world's largest oil field, Ghawar in Saudi Arabia, was discovered in 1948 and currently produces approximately 4.5 million barrels per day. With an estimated 60-70 billion barrels in remaining reserves, it could continue producing for several decades, but nothing of its size has been discovered since. The importance of Ghawar and other older giant fields to global oil production can not be overstated.

Twenty years ago, 15 fields had the capacity to produce more than one million barrels per day. Today only four fields can produce that much:

• Ghawar (Saudi Arabia)
• Kirkuk (Iraq)
• Burgan (Kuwait)
• Cantarell (Mexico)

But I'm only getting started. You see, it gets worse-much worse . . .

The Last Domino Is About to Fall

There's an issue that has the world's finest geologists, physicists and investment bankers as nervous as an agoraphobic in Central Park.

These rational and conservative professionals are absolutely terrified by the fact that there soon won't be enough oil to keep the world's economies running. And the fear is spreading faster than the panic after an Orson Welles broadcast.

The reason for their terror starts with an indisputable fact . . .

Oil production follows a bell curve. But demand only increases.

As much as some may dream, oil is not renewable. It works like this:

Every year following the peak of oil production (believed to have happened already by highly respected researchers, geologists and investment bankers like Matthew Simmons), the world's output will go into steady decline. And the rate of decline is staggering . . . as much as 10% a year! And this isn't just a one-field observation. It is true for every oil-producing country and the world as a whole.

Assuming, for simplicity's sake, that the world reached its peak oil production back in 2005, that would mean that by 2025 there would be as much oil produced as there was in 1985. Fine, there was a lot of oil for the world in 1985. Only there's a slight hitch.

By 2025, the world's demand for oil is going to be 60% greater than it is today, while production capacity is thrown back to 1985 levels. This is due to the world's rapidly growing population and increasing industrialization. China's annual oil consumption growth rate of 7.5% and India's of 5.5% are both expected to take a quantum leap over the next decade.

It's easy to see there's trouble ahead. But rising demand is only a tiny part of our problem.

How 72.4% of ALL Statistics Are Made Up on the Spot

Remember the Reagan strategy for bankrupting the Soviets? Well, it's now come back to haunt us.

During that time, something weird was happening in the Middle East. In some miraculous way, the OPEC countries were reporting that their new reserves weren't depleting. In fact, they reported them growing. It's something I like to refer to as "The great oil swindle of the 1980s."

The "official" reserve estimates are reported by government-owned oil companies and are often bloated to suit political and geopolitical interests.

Fact is, many OPEC governments see their respective country's oil reserves as more political than geological. And they use the numbers as a way to add to the value of their "stock" in the geopolitical market.

No one's sure exactly how much more crude OPEC's oil fields still contain. But there's strong evidence to suggest the official oil reserve numbers put out by OPEC governments have been fudged on purpose. Let me explain . . .

Back in 1989, Saudi Arabia claimed to be sitting on a total of 170 billion barrels of oil. But only a year later-without the discovery of any major new oil fields-the official reserve estimate somehow grew 51.2% to 257 billion barrels. Take a look:

Unbelievable indeed.

One has to wonder exactly how any country increases its oil reserves by 87 billion barrels without finding any major new fields.

In fact there's no way they could. The truth of the matter is probably that this increase came from a little "creative accounting."

Saudi Arabia wasn't the only country to significantly-and mysteriously-add to their oil reserves.

Five other OPEC countries also magically added more reserves, virtually overnight. The United Arab Emirates managed to increase their reserves by nearly 200%! Take a look:

Interesting, huh?

It seems OPEC was rubbing the magic oil-lamp and passing it around like a Playboy magazine at an all-boys school. And for a while, the Middle East abacus trick worked like a charm.

But in a 1998 report, the International Energy Agency (IEA) finally admitted to knowing about some of OPEC's wizards cooking their books.

Petroleum Intelligence Weekly found something spine-tingling in Kuwait's filing cabinet on January 23 of last year that would, the very next day, raise oil prices by $2.13 per barrel.

Kuwait, the world's fifth largest oil producer and an upstanding member of OPEC, had less than 50% of the oil reserves that it officially claimed. And that wasn't the bad news.

Their findings reported that Kuwait's now 49 billion barrels of oil didn't distinguish between their proven, possible and probable reserves.

In other words, they were pretty sure they had 49 billion barrels of oil instead of the 99 billion they reported to have. But they don't know how much of that 49 billion barrels can actually be extracted from the field.

Though it's long been suspected, until then no one had caught a glimpse of "the inside story." Still, OPEC claims that they can increase their production to 20 million barrels per day. But how can they increase their output when it's been found that Middle East oil nations, even Saudi Arabia, are pumping oil from known "post peak" fields? There's one answer . . .

The finally installment of The Truth about Oil will be published next Tuesday.

Until then,

Mike Schaefer