What can the Saudis do to help relieve your financial pain at the pump? In the light of developments in the international oil market and soaring petroleum prices, the Saudi Arabian minister of Petroleum and Mineral Resources issued the following statement:

Saudi Arabia is closely monitoring developments in the international petroleum market and seeks to stabilize the market and curb an escalation of prices that could be detrimental to the growth of the global economy, particularly that of developing countries.In its desire to make available adequate production capacity as soon as possible, Saudi Arabia will use Abu Safah and Qatif fields, which are now on stream, to increase the Kingdom’s production capacity to 11 million barrels per day by intensifying drilling in producing fields. …The kingdom, as we have declared on several occasions, is fully prepared and well equipped to meet the oil requirements of its customers for any additional quantities of oil. The kingdom is also ready and capable of making up for production shortfall occurring anywhere in the world.

Great news: It looks like oil prices may be about to fall.

Oops. Actually, the above Saudi statement was made back in 2004, when oil was less than $40 per barrel.

So what went wrong? The “fully prepared and well equipped” Saudis were supposed to up production to a whopping 11 million barrels per day in order to make up for any global production shortfall, ensuring low oil prices and encouraging global economic growth.

But according to legislation now submitted to Congress, Saudi Arabia is only producing 8.5 million barrels a day. Should the Saudis refuse to increase supply, Congress is threatening to block military equipment sales to the Arab kingdom.

Assuming the information being presented to Congress is correct, it begs the question: Is the world’s largest oil exporter not producing to stated capacity because it can’t, or because it won’t?

Saudi Arabia is expected to supply a quarter of the world’s added production over the next few years. And because it is the only major producer that claims it has significant excess capacity, the answer to that question could have serious ramifications for America and the world.

If current Saudi Arabian oil output is at or near its maximum and cannot be substantially expanded, then a global oil crunch is only a matter of time.

Saudi Arabia is very secretive about its oil extraction details, but what is known is that the total amount the kingdom exports has been declining. According to the Atlantic, production in October 2007 was down a million barrels per day as compared to October 2005.

The Saudis claim these were planned cuts in response to weak demand. But this answer is suspect. The big drop in production began in the spring of 2006, and since then oil has continued to rise from $60 per barrel to its current price near $115. So the claim that no one wanted to buy Saudi Arabia’s excess light crude hazards the sheikdom’s credibility.

Although some analysts accept Saudi oil claims, the falling production numbers are giving credence to rumors that Saudi Arabia’s aging Ghawar oil field may be entering an irreversible slowdown. This would have a massive effect on Saudi production, since Ghawar is the largest oil field in the world and the one that has produced more than half of all Saudi oil.

Rumors indicate that the Saudis are using massive seawater injections in Ghawar’s oil reservoirs to maintain aquifer pressure (to drive oil to the surface) and therefore oil production. When this late-stage strategy is used, it is usually only a matter of time before oil production begins to more rapidly decline and the percent of water mixed in with the oil, called the “water cut,” increases.

Responding to those rumors at February’s cera Week energy conference, Abdallah Jumah, chief executive of Saudi Arabia’s state-owned oil company, said, “All of this talk about Ghawar declining, we really don’t give a lot of attention to it.” Jumah also specifically noted that the water cut from the field was currently about 27 percent, not indicative of massive water injections.

The 27 percent figure in and by itself is not all that interesting, since the Saudis do not release data; it cannot therefore be independently confirmed or denied. But the fact that Jumah chose to comment about it at all is noteworthy.

When you have secretive oil cartels throwing figures around to alleviate fears about their oil production sustainability, it could indicate the problem is deeper than the Saudis want to let on. After all, Ghawar is one of the oldest and most intensively developed oil fields in the world.

Jumah also said that Saudi Arabia plans to expand oil production capacity to 12 million barrels per day by the end of 2009. But he then warned that the planned expansion might not occur at all due to global economic uncertainty and the fact that the United States has embarked on a policy of developing alternative energy sources such as corn ethanol that could reduce oil demand. In light of Saudi Arabia’s apparent oil production declines, one might wonder if these explanations are real, or just excuses to cover production failures.

President Bush, for his part, has indicated that he is skeptical of Saudi Arabia’s ability to meaningfully increase oil production.

In a January 15 interview, the president was asked what he might say to the king of Saudi Arabia to lower oil prices, and he responded, “If they don’t have a lot of additional oil to put on the market, it is hard to ask somebody to do something they may not be able to do.”

Here is where it really gets interesting. If President Bush and the skeptics are right, and Saudi Arabia can’t ramp up oil exports, then the veracity of Saudi Arabia’s true oil reserves and long-term oil production capability are also brought into question. How much oil does Saudi Arabia really have? Is its water cut only 27 percent? Can we trust any of its figures?

If for some reason Saudi Arabia has overestimated its oil production capability, what then should the true market value of oil be? In light of this, can we expect oil prices to be biased to the up side in the future? Should the world be preparing for more imminent shortages?

But let’s assume that Saudi Arabia is telling the truth and can increase its current production of 8.5 million barrels per day of oil to its stated capacity of 11 million barrels at will, but for some reason won’t. What would its motivation be?

The common answer is, to reap increased profits. Reduced oil volume means higher oil prices and higher profits. But does this oft-quoted answer make sense?

After the oil embargo in the 1970s which sent oil prices sky-high, Arab nations quickly learned that high oil prices could backfire. Back then, high prices led to oil conservation, increased oil exploration, and conversions to alternative forms of energy. Consequently, the high embargo prices led to increased supply and reduced demand—which in turn helped cause oil prices to pretty much fall for the next 20 years until they bottomed out at around $9 per barrel in 1999.

Would Saudi Arabia purposely risk destroying oil prices for the next decade or more for just a few years of high profits? It seems unlikely—unless it thought that the odds of a global ramp-up in oil production were remote and that global oil production was heading for a protracted slowdown. In this case, reduced demand due to conservation and alternative energy usage would be offset by reduced total oil supply. Thus, Saudi profits would remain, and conserving reserves would become strategic.

So which is it: Can’t or won’t?

Either scenario presents a dim outlook for future energy supplies. The Saudi oil reality is probably somewhere in between both scenarios. The Saudis can probably increase production somewhat if they choose to, but their excess capacity is probably much lower than many hope.

A world in which reliable Saudi Arabian oil becomes a question mark could quickly become … disorderly, to say the least.

If speculators ever believe the Saudis can no longer quickly dump large quantities of new oil on the market to quench demand and drive down prices, the price of oil would go through the roof. Worse, it would set off a mad scramble for resources among the oil-have-not nations of the world. Certain Arab countries might even fear that Western nations would attempt to take their oil if they felt that global oil production could no longer meet their needs.

So in the end, although the question between can’t and won’t remains imperative, the reality the world is forced to deal with is this: They are not.

For analysis concerning who will end up controlling oil supplies, read “The Battleground” and “Stoking the Engines of Empires.”