Oil Reserves vs. Oil Prices

When I have discussions with folks about oil prices, supplies, and "peak oil," the conversation almost always requires some digression into the nature of oil reserves themselves.  The most important thing to understand is that men have never, ever even come close to pumpng out all the oil that is in a particular field.  Many, many fields have closed, but that is because the incremental cost to get the oil up and out are higher than expected oil prices.

So, changes in technology and changes in price can and do change expectations of how much oil can or will be recovered from a particular field.  For example, my family has a ranch near Glenrock, Wyoming.  When we first started going up there, the fields were booming.  Then they seemed to be completely shut down for a decade or more.  Recently, they were booming again, due to changes in technology and price.

My point, then, is that world recoverable reserve estimates are different -- for the same fields -- at expectations of $25 oil and $125 oil, but you seldom if ever see the MSM being very intelligent consumers of reserve data.   Michael Giberson addresses this issue in the context of an interesting year-end accounting issue:

Geoff Styles offers a timely discussion of how SEC requirements for reporting oil and gas reserves and current low prices will combine to force a potentially dramatic drop in reported oil and gas reserves as of the end of the year. In brief, current SEC rules require that oil and gas reserves reported on financial statements be limited to quantities very likely to be recoverable at the end-of-year market price for such resources. Given the quite low price expected at year end 2008 - current prices are under $40/bbl while 2007 prices ended over $95/bbl, companies owning oil and gas reserves will report sharply lower amounts of oil and gas in reserve.

Un-savvy investors may be alarmed - where did all that oil go? - and un-savvy political commentators will find the reports as more evidence for peak oil. But as Styles points out, the reserves are not going anywhere, and the resources are still there to be had for a price.

Styles explains that while current SEC rules require reserves reports to be based upon a single day's price, industry practice has long shifted to using less-volatile metrics for reserves evaluation. The SEC has proposed adapting its rules so as to reduce the effects of price volatility on reserves reporting, and Styles says the upcoming dramatic "loss" of reserves demonstrates the urgent need for such a change.

  • TooMuchTime

    I'm assuming all this BS about reporting reserves, etc., has to do with taxes. I guess this is similar to the FIFO and LIFO crap that goes on, too.

    Why not just pass the FairTax and do away with this unnecessary socialist tax scheme?

    Simple is better.

  • http://www.cawtech.freeserve.co.uk Alan Crowe

    The oil companies must have internal tables, showing for example, a billion barrels at $40 a barrel, a billion more at $45, two billion more at $60, and so on.

    If technological improvements move your two billion barrels from $60 to $50, you can look to making $10 a barrel more, in ten or twenty years time. That is the kind of thing that ought to be in the accounts. So I guess the right way to prepare the accounts is with a table showing reserves at a range of prices, $30, $40, $50,... Those persons who think it worth their time can interpolate between tabulated points to estimate the reserve at the current oil price.

    That would keep "bouncy" reserve figures out of company accounts.

  • Brandybuck

    The Kern River Oilfield in Bakersfield is full of a thick tar-like petroleum. It was thought that the field was finished producing a *century* ago. But it came back into production in the 60's by injecting steam into the ground to make the oil easier to pump. If I recall, more oil was pumped out of Kern River in the last decade than during the rest of its history. They're using the same technology to Kuwait for some fields there.

    I worked there briefly earlier this year, and it's a great anecdote to illustrate the basics of resource economics.