What are Oil Reserves?

What are oil reserves? Nobody knows. OPEC Rules divi up the production cap according to stated reserves, so when they adopted that rule, declared reserves jumped without any new oil finds, and no-one ever accepts that their reserves have been depleted at all by the fact that they are taking some out. 

Chris Rick wrote and asked me this question:

“I reckon we use about 30bn barrels a year. It said that Canadian tar sands were now considered a valid reserve and contributed a 150bn increase. However Shell reckon there is 2tn barrels there.
I also note that the OPEC countries declared reserves have all stayed the same over the last 10 years or so or gone up.
The last estimate I looked at had world oil reserves at 1,300bn. Taking a big pinch of Sulphur that gives us 20 years…or if I listen to Shell then 40 years. (If economic growth can continue then, come on down Dr Bartlett, and those numbers are much smaller.)
Of course it will be a bumpy road to get there, but does that look right to you?”

My reply:

What are oil reserves? Nobody knows. OPEC Rules divi up the production cap according to stated reserves, so when they adopted that rule, declared reserves jumped without any new oil finds, and no-one ever accepts that their reserves have been depleted at all by the fact that they are taking some out.

The tar sands are a great example, because you have to use a lot of energy to pump steam into them to extract the heavy oils: the amount that’s recoverable thus runs from “how much would I bother to recover if I can get $60 a barrel for the outcome?”, which I’d guess roughly equates to the 150bnB estimate, to “how much can I get out without actually using more energy to get it out than I get out?” – which would be the 2tnB end.

The bigger problem is not the totality of reserves, but the maximum possible flow rate of production (some of which is constrained by availability of processing resources). Current world oil supply is around 89mbd. Current demand is a little higher:

The balance is currently being made up by bringing in various tankers from the sea (really!) and depleting official and unofficial reserves. That 4Q2011 result of 89.6mbd is probably the most that can be achieved without spending a lot of money on new refineries etc, which no-one is really doing, because in reality too many of them believe that the refining capacity would be mothballed because there is no more capacity to actually get the stuff out of the ground/sea. The higher the price gets, the more viable it is to get marginal reserves out, hence the flexibility of many reserve numbers BUT nobody has found any really big new oilfields for several decades.

90mbd=33bbpa, so you weren’t far out.

The reserves we have will last much longer than either estimate, because it will take longer than 40 years to get it all out – but the flow rate at the end might be down to say 10mbd, which is just a tad short of demand.

Back to the problem: if supply can’t meet demand, the oil reserves problem is NOW, not in 10/15/20/40 years time. GDP growth depends on the energy demands of that growth being met. There is a long-term trend in energy intensity efficiency of around 1.5% (ie it takes that much less energy each year to support a given level of economic activity). So, any growth in WORLD GDP of more than 1.5% means more demand for oil (and other stuff). The BRICS account for more than that on their domestic demand growth without anyone else in the world joining in.

SO – if we can’t increase the flow rate of supply, the price has to go up until it damps off demand – ie until almost all economic growth stops. My handy calculation from 2008 said that price is around $150 for WTLI, $165ish for Brent – which was somewhat proved out in late 2008 …

So, expect that price again in 3Q12. And sustaining at that price would push the reserve numbers up – and maybe set in train some production infrastructure investment (but not if we overshoot and crash again, which is the more likely possibility).