Middle East: The Certainty of $100 Oil

Editor's Note: This is the fourth in an exclusive series of columns Chris Edmonds will be filing from a 10-day business trip through the Middle East.

BAHRAIN -- It may sound crude, but everything in this region they call the Arabian Peninsula revolves around oil.

Our tour of Middle Eastern nations has exposed rich culture and people passionate about their heritage and the future. It has also provided a glimpse into an intensely diverse history that has presented nations with devastating challenges and enlightening opportunities. While we await our time in Kuwait, Jordan and Egypt as we conclude our trip, there is one common thread that ties all these nations together.

Oil.

And, the undisputable fact is that crude oil is becoming more scarce and what's left is becoming more difficult to find.

On Wednesday we met with a number of oil consultants and experts that provided the primary data points:

1. Of the top 38 oil fields in the Arabian Gulf, 41% of the reserves are depleted. While there were originally 605 billion barrels, today there are only 360 billion barrels left, many of which will be difficult to recover.
2. The world's largest oil field, the Saudi Ghawar field is over 55% gone with recovery of the remaining 45% significantly challenged and much more expensive.
3. Kuwait's Burgan field, the second-largest field in the world, is in steep decline. While Kuwait says it can boost production to 2 million barrels per day, anything above 1.7 million bpd appears unlikely.
4. While Iran says production should reach nearly 5 million bpd between 2010 and 2015, credible estimates suggest production of 3.8 million bpd today is likely close to peak production. Projects suggest production by 2015 will likely be lower than current levels.
5. Global oil reserves are likely overstated by at least 300 billon barrels.
6. All major oil fields in the Arabian Gulf have been discovered. While incremental discoveries are possible, future new production will likely come from small fields that are less productive, incrementally more costly and potentially more prone to rapid depletion.
7. The one area of potential hope is the Red Sea which has not been explored and developed. However, drilling is more expensive and technically challenging than the Persian Gulf and onshore Arabian Peninsula.

In conclusion, nobody we met with believes there is much that can be done to stop current production declines. Furthermore, without a change in global consumption trends, there is little that can be done to stop the current ascent in crude prices. In fact, using $70 as the 2007 approximate base price, one expert thinks current supply and demand projects suggest oil prices will rise an average of $12 per barrel per year for the foreseeable future. Given current pricing that suggests $100 oil within the next 12 to 18 months.

One other note from arguably one of the most credible oil policy thinkers in the world. These experts noted that even if we wanted to begin to develop the Red Sea and other new energy production horizons, the lack of human capital would be a serious impediment. The lack of trained geologists, engineers and other important skilled labor should be of critical concern. From today, it would take at least five years to find the people, develop a plan and begin to initiate a program to exploit new resources.

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At time of publication, Edmonds had no positions, although holdings can change at any time.

Christopher Edmonds is managing principal at Energy Research & Capital Partners, an energy investment firm and an affiliate of FIG Partners. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.