Saudi Arabian Oil Is Running Out And That Will Affect Long-Term Oil Markets

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Includes: KSA, NE, USO, VDE, XOM
by: The Value Portfolio

Summary

Saudi Arabia is one of the most significant players in the oil markets. The country produces more than 10% of worldwide oil. But things aren't as pretty as they seem.

A significant portion of Saudi Arabia's oil comes from its Ghawar Field which appears to be running out. The country might only have 1/3 of the oil that it says.

There are a number of ways to play this, but I personally prefer either betting on a long-term oil market recovery or against the Saudi Arabian economy.

Saudi Arabia is an Arab country occupying the majority Arabian Peninsula. The country is the fifth largest country in Asia, but is composed mostly of desert with a fairly small population of just over 30 million people. Despite this, the country is continually thrust into the world spotlight thanks to one reason primarily. The country directly controls more than 10% of the world's oil production, and through its prime position in OPEC, has a significant say in worldwide oil prices. And worldwide oil sales are a multi-trillion dollar business.

Saudi Arabia (A Modern Country) - Saudia

As a result, anything that affects the oil environment in Saudi Arabia has a profound effect on the worldwide oil markets. And Saudi Arabian oil, as we will see throughout this article, is running out. This will have a significant impact on the oil markets and greatly increase their prices. And this is an impact that will have a profound and upcoming effect on the oil markets.

Saudi Arabian Oil Reserves

Saudi Arabia has larger oil reserves than any other country in the world. And these oil reserves and their production are part of what makes the country such a significant player in the global oil markets.

Worldwide Oil Reserves - BP Blogspot

Saudi Arabia has 266.8 billion barrels of oil reserves located under those sandy plains. Saudi Arabia currently produces approximately 0.01 billion barrels of this oil per day, meaning that at the country's present rate of production, its oil should last it roughly just over 73 years. While that is significant production, it is important to keep in mind that the country has already been producing oil for that long.

And that means that Saudi Arabia's oil should run out by roughly 2090, barring no other events.

But there remains skepticism about the true size of Saudi Arabia's oil reserves. The country increased oil reserves by 100 billion barrels from 170 billion barrels in 1987 to almost 270 billion barrels by 1989. Since then, the country's reserves have remained unchanged despite the fact that Saudi Arabia has produced almost 100 billion barrels of reserves since then.

And looking at the details, most of the country's significant oil discoveries were made from 1936-70 and no significant discoveries have been reported since then. Looking at a worst case scenario, and removing both the country's increase in reserves from 1987-1989 along with the country's production since then, and the country might only have 70 billion barrels of oil left.

That remaining oil, in the present environment, would last the country just 19 years. And that doesn't keep into account that the oil is likely much less economical to recover in the present oil environment as compared to where it was two years ago. And yet we have seen no amendments in the country's economical oil reserves.

Saudi Arabia Vision 2030 - Alarabiya

And yet, Saudi Arabia, seems to be afraid that its oil is running out. The country has recently announced its ambitious Vision 2030 plan to diversify its economy from oil. The country plans to spend many billions of not into the trillions to diversify the country's economy. The majority of this plan seems to be centered around diversifying the economy through tourism and other forms of investing.

The announcement of this plan and the amount of capital that Saudi Arabia is dedicating to it doesn't sound like a country that anticipates its oil revenue to continue until 2090. It sounds like a country that anticipates its oil revenue to run out in 2036, or 19 years from now, the number you get when you subtract out the recent acquisitions that Saudi Arabia has added to its oil production.

Saudi Arabia Production

Looking past Saudi Arabia's oil reserves and we get a more telling picture of the company's production.

IEA Saudi v. US Oil Production / Prediction - Bnet

Saudi Arabia's production was increasing from the early-1990s to the late-2000s before balancing out. Since then, the country's production has remained rather constant, and it is expected to remain so for the coming decades. This is anticipated to remain so despite increasing oil demand which the country has not been taking advantage of. That shows that the country plans to be holding on to its existing production without taking advantage of growing markets.

Saudi Arabia Ghawar Field - Bakken Boom Or Bust

Saudi Arabia's Ghawar Field is the single largest oil producing field in the world producing approximately 5% of the entire world's oil production. The size of this field and its incredible reserves means that it is essential to the entirety of Saudi Arabia's production and strategy going forward. And that means any problems in the fields reserves bode poorly for the country.

When a reserve is producing, it has a certain aspect to its production called its water cut. Essentially the water cut of a reservoir is the ratio of water produced compared to the total volume of liquids produced by the field. As the water cut of a reservoir increases, that increases the total cost from the well, and makes it more economical.

More importantly, an increasing water cut can mean that the production from the oil is running out.

The Ghawar Field began water flooding in 1965 and by 2003, the water cut for the field had reached 32%. Before that, the water cut was approximately 27%. Since then, the field's water cut has increased significantly with the North Uthmaniyah water cut reaching 46% by 2006. Other details on the fields water cut are hidden, largely by the Saudi Arabian government, however, it is very plausible that the water cut has increased since then.

As we can see here, production from the Ghawar Field along with the water cut show how Saudi Arabian oil might not have as much left as it was originally thought to have had.

Invest

Saudi Arabia's oil reserves and production tell a story of production running out. This production running out will have a significant impact on worldwide oil markets. Now, we will finish up by discussing how to invest to take advantage of this.

There are two different ways you can invest in this, however, given the long-term nature of the oil markets and the effect of this on them, this is a difficult investment to determine. The first choice is to bet against the Saudi Arabian economy. While the country will be able to make up some of this production through its Vision 2030 plan, it will likely not be able to make this all up.

The iShares Saudi Arabian ETF (NYSEARCA: KSA) provides investors with access to the Saudi Arabian economy which has traditionally been closed to investors. Betting against this, either through options or through shorting it, is an expensive but sound long-term bet against the growth of the Saudi Arabian economy.

The other way you could do this is by betting on oil prices, either through an oil market ETF (NYSEARCA: VDE), an oil price fund (NYSEARCA: USO), or a riskier investment on a rapid increase in oil prices, such as offshore drillers like (NYSE: NE) that have taken an enormous hit since the start of the crash. These are all investment choices that you can take and there are a variety of them available, so it really depends on the amount of risk you are going for along with the timeline you have.

Personally, I recommend those looking for a riskier investment to look at offshore drillers such as Noble Corporation or Ensco. And that those looking for a safer investment on growth in the oil environments look at oil majors like ExxonMobil (NYSE: XOM) or bet against the Saudi Arabian economy by shorting the iShares Saudi Arabian ETF.

Conclusion

Saudi Arabia might seem like it has a ton of oil as one of the strongest oil countries in the world. Despite that, the country has significant difficulties coming forward, as it appears its oil is running out, even if it hides it from investors. While the country says it has 270 billion barrels of oil, looking at the numbers further makes it appear as if it might have just 70 billion barrels of oil.

Personally, I think, supported by the Saudi Arabia Vision 2030 plan, the country might have just two-three decades of oil left tops. This minimal remaining oil will have a pronounced effect on the oil markets, something which investors can bet against. This can be done either by shorting Saudi Arabia or betting on an increase in the oil markets. And, overall, for investors who work in the oil markets, this is something important to pay attention, too.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.