How much oil is there really?
There's good reason to cast a cold eye on estimates of proven reserves. By indifference or design, there's simply no source for reliable information.
What is the "right" price for a barrel of oil?
Japan's oil minister has said, based on fundamentals, that the price of crude should be $60 a barrel, not the $130 to $140 we see today.
During congressional testimony, five oil-industry CEOs each gave estimates of where oil "ought" to be, with results ranging from $35 to $65 a barrel up to $90.
Even the implacable Saudis are reportedly about to increase production by half a million barrels a day, a sign that they are concerned that the current price is too high.
A strategic resource
Think of the host of financial and economic statistics available to you every day: stock prices, unemployment data, company results, foreign exchange prices, GDP growth rates, etc. Market information is precise. Government statistics, while a little fuzzier, are complied and computed in a generally consistent fashion.
But oil is in a completely different category: It's a strategic resource bought and sold internationally. Many countries, either by indifference or design, simply don't provide reliable information.
Price is a result of both demand and supply;
The International Energy Agency, a prime source of oil-related information, was caught off guard by the surge in oil prices, so it decided it needed to get a better grip on capacity. The IEA is only partway through a survey of the world's biggest oil fields, yet says it expects to show a significant reduction in estimated reserves. But even when concluded, this project will be far from reliable. For starters, OPEC, which is estimated to control two-thirds of the oil reserves and to provide 36% of oil production worldwide, is largely unresponsive to IEA inquiries.
And cooperation doesn't always translate into insight. For instance, Iraq recently claimed it has as much as 350 billion barrels of oil, triple its proven reserves and more than even oil kingpin Saudi Arabia has. Is this claim completely crazy?
No one knows for sure; Iraq is relatively unexplored, with only 2,000 oil wells versus more than 1 million in Texas.
Seeking to resolve this debate, investment research firm Sanford Bernstein performed satellite analysis of the oil field, reviewing high-resolution images dating back to 2001. The water-injection methods used by the Saudis produce surface depressions when oil reservoirs become depleted.
Bernstein found no signs of surface collapse. Instead, it found some areas slightly elevated, which could indicate use of high-pressure recovery, an advanced extraction technique. It concluded that only one of the oldest sections was in decline.
That report was dismissed as "junk science" by industry analyst and peak-oil theorist Matthew Simmons.
Indeed, some old oil hands argue that the entire method for computing reserves is fundamentally flawed.
Richard Pike, president of the Royal Society of Chemistry, who spent 25 years in the petrochemical industry, contends in an article in the Petroleum Review that published estimates are less than 50% of their actual level. As The Independent summarized his argument:
"Companies add the estimated capacity of oil fields in a simple, arithmetic manner to get proven oil reserves. . . . However, mathematically it is more accurate to add the proven oil capacity of individual fields in a probabilistic manner based on the bell-shaped statistical curve used to estimate the proven, probable and possible reserves of each field. This way, the final capacity is typically more than twice that of simple, arithmetic addition."
Pike is no oil-industry shill and contends that producers understand this issue but prefer to show lower totals, to help support higher oil prices. Some economists think they can cut the Gordian knot of the oil supply/demand debate. Paul Krugman (along with others) has argued that if the spot-market price exceeds the level at which production meets end-user demand, inventories will rise -- a far easier measurement to track than trying to estimate world demand and supply.
Yet 2008 oil supplies remain within recent historical ranges, which would mean that current prices reflect fundamental forces.
