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Witness OPEC's Breakup

Big Oil Blues

Written by Keith Kohl
Posted November 6, 2012 at 6:01PM

It's almost over, I promise...

The massive influx of calls, ads, and spam mail have made the last few months a bit taxing. The good news is after this week, you have two years to prepare yourself for it to happen all over again when the campaign cycle starts back up.

But there's another group that's on the verge of panic — and they aren't the ones asking you for donations or votes...

It's not the $2.6 billion in yearly oil subsidies they're afraid of losing. That comes out to a pittance compared to what they really lost.

What they want more than anything else is control. And unfortunately for Big Oil, that's no longer available.

Fight for Control

Truth be told, Big Oil has been in panic mode for years.

At one point, Exxon and friends had their pick of Saudi oil fields. This was back when the supermajors controlled the Middle East's oil industry. Big Oil execs could split up the hundreds of billions of barrels of crude however they liked.

Today it's an entirely different game.

As I showed you earlier this year, Big Oil isn't so "big" anymore (click chart to enlarge):

small NOC image

They're no longer calling the shots — and they probably never will be again.

For decades, we've seen the supermajors move out of the world's largest oil fields. “Move" out might be putting it gently; they were pushed, squeezed, even thrown out at times.

And while Big Oil may not be very big compared to the world's National Oil Companies (NOC), can we even consider them “oil”?

The answer to this question gets even murkier when you break down their production...

Take ExxonMobil, which was overtaken by PetroChina as the world's largest publicly-traded oil producer in 2011, as a perfect example of where they're headed. Half of the company's reserves and production isn't even oil — it's natural gas.

As most of us know, the natural gas bet hasn't paid off. Thanks to dirt-cheap prices, Exxon's earnings tumbled 7.1% last quarter.

Maybe they do have a reason to worry over losing oil subsidies. And things get worse for XOM: Their oil and gas production is dropping by 5.9% and 9.3%, respectively.

It turns out the only strategy left is to buy their production. We saw it several years ago with their $40 billion XTO buyout, the billions they spent in the Canadian oil sands, and more recently, the $1.6 billion deal for Denbury's Bakken assets...

It almost makes you feel sorry for them. Almost.

Save some sympathy to go around, because companies like ExxonMobil aren't the only ones panicking. The very same NOCs that wrested control from Big Oil will have a difficult time staying on top.

Witness OPEC's Downfall

It will take a lot to bring down an organization that controls over 90% of the world's oil reserves.

But it's going to happen... and the implosion will come from within.

It won't be an Arab Spring; the Saudis have proven beyond a doubt that all it takes is a huge amount of cash to calm the masses and avoid a crisis.

And let's be honest here: Saudi Arabia is the one country keeping OPEC afloat — and one of the few countries left in the world that can actually increase oil production (no matter how poor quality their spare capacity turns out).

OPEC's downfall will come from the fact that the Saudis are developing their own full-blown addiction to crude oil.

Every single barrel that goes to feed rising Saudi demand takes away a barrel for export.

It may seem like a trivial amount right now, but if we've learned anything from our own history, it's that steadily increasing demand can add up quick.

Which OPEC member will pick up the slack if the Saudis' worst fears come true and the country becomes a net oil importer within the next twenty years?

Hard to say. The majority of the 12-member group is tapped out:

OPEC tapped out.

When Saudi exports dry up, is it game over?

Fortunately for us, it won't be. In fact, you don't have to look far to find investment gems in the U.S. oil and gas industry...

My latest report details specific plays growing here at home to help limit our exposure to Saudi oil. Keep an eye out for it in the next few weeks.

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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