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President Bush had barely finished explaining how his plan to spend less than a billion in new money would end U.S. addiction to Middle Eastern oil before Saudi Arabia and the rest of OPEC fired back.

If the U.S. reduced its dependence on Middle Eastern oil, the Organization of Petroleum Exporting Countries would be forced, with deep sorrow certainly, to abandon plans to invest billions in developing new supplies of oil.

President Bush's plan to reduce U.S. demand for Middle Eastern oil would result, producers warned, in a global crisis in oil supply.

Yeah, right. As lines in the sand go, this one certainly sounds dramatic, but it's empty posturing. In fact, as full of too-little-too-late promises as President Bush's Jan. 31 State of the Union address was, I'd give the nod to OPEC's performance over the president's for creativity and sheer chutzpah. As empty threats go, this is a doozy.

OPEC's Grand Experiment

As addicted as the U.S. may be to Middle Eastern oil, the oil producers, especially Saudi Arabia, are even more addicted to continued U.S. oil consumption. The Saudis, the Kuwaitis, the Nigerians and the rest of OPEC can't afford to stop investing in new production any more than the U.S. can afford to go cold turkey on Middle Eastern oil.

Look at the world from the perspective of the Saudis and the other OPEC oil producers.

To them, 2005 -- the year of $60-to-$70-a-barrel oil -- was a huge and successful experiment. For years, oil producers had kept their target price for oil relatively low: The official OPEC price band for crude oil was $22 to $28 at the time of the organization's Dec. 12 meeting. OPEC has kept the target so low because it worried that high oil prices would cut global demand for oil. OPEC has also worried that high oil prices would spur the development of alternative energy resources, such as Canada's oil sands, and alternative energy technologies such as nuclear and solar.

So OPEC watched with some concern as war in Iraq, hurricanes in the Gulf of Mexico, unrest in Nigeria and turmoil in Russia drove the price above $70 a barrel. And OPEC breathed a sigh of relief when prices above $60 a barrel didn't stop global economic growth in its tracks, didn't lead to crash programs of energy conservation and didn't force OPEC's customers to develop alternative fuel sources.

Now that the world has proven quite able to live with $60-to-$70-a-barrel oil, OPEC is quite happy to go along. The official target band may not move for some time, even though the more aggressive OPEC members, such as Iran and Venezuela, have called for official production cuts and higher official price targets.

So far, OPEC isn't inclined to go on record in favor of higher prices. The organization will be quite happy to blame the price increase on market forces, Chinese demand and Western speculators for as long as possible. But the target price is now clearly above $50 a barrel, no matter what OPEC says officially.

Power Rankings

Despite much higher oil prices, not all is well in OPEC's world. Like the rest of the world, OPEC has a supply-demand problem. For oil-consuming nations, that problem expresses itself as a huge increase in the cost of oil. For OPEC, and particularly for the Saudis, the problem is the potential for a loss of control over the global oil markets.

Right now, OPEC still calls the tune in the global oil market -- and not just because it's the source of 40% of the world's oil, although that certainly doesn't hurt.

And Saudi Arabia isn't the most powerful country in OPEC just because it produces more oil than anyone else in the world, although that certainly isn't a bad foundation for power, either. The Saudis, at 10.4 million barrels a day at the end of 2004, aren't that far ahead of No. 2, Russia, at 9.3 billion, or No. 3, the U.S., at 8.7 million.

Power in today's oil market involves two questions:

Is your production rising or falling in the long run? Right now, non-OPEC production is falling in comparison with OPEC production. That puts OPEC in the driver's seat. (At least until Canada's oil sands projects start full production.)

In the shorter run, do you have any excess production capacity that can add oil to the global markets at crunch time? When global supply is running just barely ahead of demand, as it is at the moment, countries with excess production capacity, the marginal producers, have tremendous market power and the ability to set prices.

Right now there's really only one country in the world with any surplus production capacity. That's Saudi Arabia. And that puts the Saudis in a position to defeat Venezuela's proposals on price and to overrule Iran on quotas.

But this power -- for Saudi Arabia and for OPEC -- isn't guaranteed for the long term. It's based on the ability of the countries in the organization as a whole to increase production to meet demand, so that oil consumers don't have a reason to get more aggressive about finding other sources of energy. And for the Saudis, in particular, it's based on their ability to increase production so that the country remains the global source of excess production capacity.

Meeting those goals won't be easy. And it will require massive investment in the region's oil reserves.

Drilling for the Dregs

Even if you don't believe in peak oil -- the theory that global oil production either has peaked or will soon peak -- the problems facing the global oil industry, OPEC and Saudi Arabia are immense.

The current generation of peak-oil theorists, building on the work of the late M. King Hubbert, predicts that world oil production will decline -- slowly at first and then more quickly -- as the rate at which new oil is discovered falls behind the depletion of current proven reserves.

Buttressing the theory are signs that some of the biggest proven reserves are indeed showing their age. For example, the U.K., which has been a net exporter of energy for the last two decades, thanks to the huge oil and gas deposits discovered in the North Sea about 35 years ago, became a net importer of natural gas in 2005.

Oil analysts estimate that the U.K. has pumped between 50% and 75% of the available oil and gas in its North Sea fields. From its peak at the end of the 1990s, United Kingdom oil production has fallen by roughly 30%.

I think it's too early to tell if the

Peak Oil theory is right -- and to predict when the peak might come. Another part of the theory, however, seems to me undeniably accurate. Peak Oil theories predict that production from a field will peak and start to fall long before all the oil is extracted, since the more easily pumped oil deposits are extracted first, and that extracting the remaining oil will get increasingly more difficult and more expensive.

Want proof? Just ask

Royal Dutch Shell


. The company just reported disappointing fourth-quarter results that showed the company continuing its recent trend of replacing just 70% to 80% of the oil it pumps each year through new discoveries.

The company has vowed to get replacement figures up to 100% by 2008, but that's going to take a good bit of money. Spending on exploration and development will climb to $19 billion in 2006. "The theory of peak oil," CEO Jeroen van der Veer, told investors and analysts, "that oil production has peaked, is correct if you look at easy oil close to markets, like West Texas and the North Sea. But think about deep-water drilling, think about the Arctic."



think about deep-water drilling and Shell's projects on Russia's Sakhalin Island, and I see big increases in the cost of finding and producing oil.

The Saudis and the rest of OPEC aren't exempt from this process. About 50% of Saudi Arabia's current reserves are locked up in just eight fields, including the giant Ghawar field -- the world's largest, with remaining reserves, by official Saudi oil industry count, of 70 billion barrels.

Ghawar, however, is quite old, and while reserves remain huge, production rates are declining as it gets harder and harder to extract the oil. The Saudi state oil company Aramco says that production from Ghawar and other old fields is falling by 800,000 barrels a day. (Outside critics say the depletion rate is much higher.)

But whatever the correct figure, the Saudis clearly need to spend big bucks just to maintain current production. So in March 2005, for example, the Saudis announced contracts to foreign firms to develop new fields that would start production between 2006 and 2009 and that would add 2.7 million to 3.1 million barrels a day to production. The cost: $8 billion.

Keys to the Kingdom

The Saudis -- and other OPEC members -- have the cash to spend much more than $8 billion to find and develop new fields and to improve the technology at existing fields in order to retrieve a higher percentage of the oil in proven reserves. Spending those billions would keep OPEC and the Saudis in control of global oil markets.

Not spending those billions would gradually move OPEC and Saudi Arabia out of their current position of control. Losing control of the global oil markets isn't exactly an option that the ruling regimes in these countries can face with equanimity. After all, it's only oil revenue that keeps the ruling families in power in much of this region and that funds the regimes in Nigeria, Iran and Venezuela.

You judge exactly how likely it is that the folks who rule the OPEC countries will risk their own fortunes and lives by cutting investment in their oil resources.

Even if it would give them the satisfaction of showing President Bush who's boss.

At the time of publication, Jubak did not own or control any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.

Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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