Friday, February 11, 2011

Saudi Arabia’s Oil Reserves Overstated by 40%

Saudi Arabia’s Oil Reserves Overstated by 40%

Many people including CNBC’s Steve Liesman have been criticizing NIA’s recent food inflation report, claiming that agricultural commodity prices only make up a small portion of the price of a finished food product in the supermarket. The truth is, when you see a 50% surge in nearly all agricultural commodities in six months, it will translate into much higher prices in the supermarket. At first, wholesalers and retailers will take a hit on their profit margins hoping that commodity prices will come back down, but after what NIA estimates to be a six month lag time, the full effects of rising agricultural commodities will be seen at your local supermarket and NIA conservatively estimates that the U.S. will see 10% food price inflation in the first half of 2011.

Besides the cost of agricultural commodities, the second largest cost that makes up food prices is oil. Oil is used not only for the farming of agricultural commodities and the production and packaging of food, but also shipping food to your supermarket. Oil prices have lagged behind agricultural commodities in recent months, but oil’s inevitable spike back above $100 per barrel that NIA predicted (and was wrong) would occur in 2010, could be just around the corner.

Major news is out today that cables from WikiLeaks show that a senior Saudi government oil executive claims that Saudi Arabia’s oil reserves have been overstated by 300 billion barrels or nearly 40%. Saudi Arabia is the world’s largest oil exporter and according to the WikiLeaks cables, the U.S. fears that Saudi Arabia does not have enough oil reserves to prevent oil prices from skyrocketing.

Apparently, it was said by an executive at Aramco that they couldn’t reach a 12.5 million barrel per day capacity to keep a lid on oil prices, but could only possibly reach a 12 million barrel per day capacity in 10 years. This same executive also said that “peak oil” production could be reached as early as year 2012.

This may be the catalyst needed to drive oil permanently above $100 per barrel and gas prices to $5 per gallon. NIA remains very bullish on oil stocks for the long-term. They have been out of favor since late-2008, but could be back in play very soon.

NIA previously suggested on April 23rd, 2009, the ETF “DIG” at $22.65 as the best way to play oil stocks and it has since risen by 141% to $54.61. However, DIG is still way off of its high seen in May of 2008 of $131.08 and therefore still has much more upside potential.

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