Shell Petroleum recently made news by cutting its estimate of its proved oil reserves. This won’t affect the overall economy, but it does highlight an oft-misunderstood statistic — “proved oil reserves.”
In 1980, the world’s proved reserves were 650 billion barrels. At 1980 rates of use, these would last 28 years. From 1980 to 2000, we consumed 500 billion barrels. So 150 billion remained, right?
Wrong. In 2000, the world had more than 1,000 billion barrels of reserves. Even though annual consumption had increased by 20 percent, reserves in 2000 equaled 36 years of consumption.
How could this be? Proved reserves depend on technology and oil prices as much as on geology. The official definition is instructive: “those quantities … recoverable … from known reservoirs and under current economic conditions, operating methods.”
The key is “current economic conditions, operating methods.” Proved reserves are oil that one can profitably pump at current prices with existing technology. When prices drop, proved reserves drop, though nothing has changed in the physical quantity of oil existing anywhere. When prices go up, proved reserves similarly increase.
Oil exists in many places in the Earth’s crust. Geologists know of some — the ones that are easy to find with technology at hand. Of all known oil, pumping some costs less than a dollar a barrel, while other wells may cost $50 or more.
If market oil prices are $10, some known oil can be drilled at a profit. Much other oil, however, is not. As prices rise, more crude becomes commercially viable to pump. So, “proved reserves” rise as oil prices rise.
Owning crude deposits has been a bad investment. The price of oil in the ground grew slower than inflation from 1980 to 2000. Finding oil is expensive. Companies waste money finding more oil than they may use in the next decade or so.
Improved technology is the other important factor in growing reserves. Seismic exploration remains the most important way to find crude. It involves sending sound waves into the earth at one point and recording them at others after having passed through differing geological strata. Historically, geologists detonated small explosive charges at one spot while recording at other places with sensors called geophones. Analyzing the graphs was as much art as science.
Improvements in electronics produced more sensitive geophones that could pick up weaker sound waves. Dynamite isn’t always required. A truck that drops a huge weight at intervals can generate enough sound waves to register. “Thumping” at close intervals produces much more useful data than setting off dynamite at greater intervals. Digital recorders produce huge data files that supercomputers analyze to generate sophisticated 3-D plots showing probable oil deposits. Global Positioning System units record sensor locations without the previous expense of surveying.
New drills make much smaller oil deposits more accessible. All this technology means oil that was unprofitable in 1990 may be worthwhile today.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.