Don’t Bank Our Future on Oil We May Not Have

April 5th, 2011 at 8:02 am | 13 Comments |

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Over the weekend, I noticed that an op-ed in Investor’s Business Daily took me to task for citing “proven” oil reserves in my FrumForum post, The GOP’s Oil Drilling Pipe Dream.

The author, an economics professor at George Mason University (GMU) named Donald Boudreaux, makes the case that government estimates of “proven” or “proved” reserves are irrelevant because the estimates of “unproven” reserves are so much higher.

Different agencies and groups have slightly varying definitions of “proved” reserves, but the Central Intelligence Agency (CIA) sums it up nicely:

Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with a high degree of confidence to be commercially recoverable from a given date forward, from known reservoirs and under current economic conditions.

Estimates of “unproven” reserves mostly refer to “undiscovered, technically recoverable oil.” In other words, oil that geologists estimate might be in the ground and recoverable using existing or reasonably foreseeable technology. Such estimates are intriguing, but too speculative to take to the bank. They do not take into account the quality of the oil that might be there or the economic profitability of production.

Such numbers can change as we learn more. For example, while the United States Geological Survey (USGS) has dramatically increased its mean estimate of undiscovered, technically recoverable oil in North Dakota and Montana’s Bakken Formation from 151 million barrels to 3.65 billion barrels, the same agency recently revised comparable estimates for the National Petroleum Reserve-Alaska (NPRA) downward from 10.6 billion barrels to 896 million barrels—roughly 10 percent of its 2002 estimate.

Considering that the U.S. currently consumes roughly 7 billion barrels of oil per year, the notion that we can bank our energy future on unproven reserve estimates represents little more than an imprudent roll of the dice.

Then, of course, there is economics. A significant fraction of undiscovered oil reserves, assuming that they really exist, are in remote locations and consist of heavy oil, both of which are not profitable to produce if prices are low. How high does the price of a barrel of oil need to be before this oil could be economically produced? Is it $100 per barrel? $150 per barrel? We are not talking about cheap or easy oil.

Cheap and easy oil, to the extent that it remains, is mostly located outside of the United States.

Anyone who claims that unproven reserves are the answer to high gas prices is either uninformed or trying to hoodwink the public.

Mr. Bourdreaux, echoing a common refrain of petro-peddlers like Sarah Palin and Congressman Joe Barton (R-TX), contends that government restrictions are the only thing preventing our nation from producing all of the oil we could ever need.

It is a claim driven far more by special interests and political agendas than by anything approximating reality.

Unproven reserves are just that, unproven.

While the amount of proven reserves will fluctuate based on the price of oil, new discoveries, and technological advancements, the current proven reserves estimates remain the most prudent guide for making decisions about our energy future—along with the knowledge that oil is a finite resource.

In addition to being more certain, proven reserve numbers exist for all of the major oil producing countries.  We can see how we compare with other nations and better assess our economic and strategic vulnerabilities. That is not the case for unproven reserves.

In making policy decisions, we must evaluate  the risks of perpetuating dependence on oil and exposing our economy and security to price spikes and supply uncertainties caused by events over which we have little control.

Mr. Bourdreaux teaches at GMU, whose team nickname is the Patriots. I think that true patriotism requires us to pin our country’s energy future on something more reliable than unproven reserves.


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13 Comments so far ↓

  • PracticalGirl

    I appreciate the article and its points

    I think that true patriotism requires us to pin our country’s energy future on something more reliable than unproven reserves.

    Absolutely. I also have a nagging feeling that leaving these reserves in the ground is more of a blue chip for the future than extracting them (at great expense, if possible at all) is a solution for the present. Wouldn’t it be more savvy for the US to bring a Manhattan Project-like effort to developing/bringing to market renewable energy sources and “banking” our reserves for the countries who will need either it or our technology in the future?

    Concentrating on our untapped oil “reserves” is a bit like the companies who offer wild discounts on dial-up Internet when anybody with an iPad can drag it out of thin air. We need to get ahead of the curve and coast, not behind it and push.

  • Carney

    GMU is a strongly libertarian school. Libertarians and free market conservatives have an emotional desire to reject oil alternatives and promote oil, for several reasons:

    1) They fear the expansion of government regulation and other intervention in favor of alternatives as part of an overall phenomenon of expanding government power at the expense of the voluntary sector and, ultimately, of overall prosperity and individual liberty

    2) They are coasting on an outdated mindset dating from a time when the USA dominated the world oil market. Admitting that we no longer and will never again do so feels like anti-American pessimism.

    3) They often have close ties to the domestic oil industry – personally knowing its participants and seeing them as sympathetic, salt-of-the-earth, real Americans doing useful work. By contrast they lack such personal ties with alternative advocates, seeing them as enemies of liberty, parasites feasting off the hard work of others, distorters of what would otherwise be an aesthetically pleasing purity in the marketplace

    What these people need to realize is that oil is neither free market nor American. It’s socialist and foreign. OPEC has at least 78% of world oil reserves and the USA has less than 3% (less than 2% according to the CIA). This brutal fact of world geology and geography cannot be over-emphasized.

    Magnifying its effect are other facts. Our oil (heavy sour crude) is much less desirable than their oil (light sweet crude). Our oil is much more expensive and difficult to extract than theirs – the Saudis’ extraction costs are an order of magnitude smaller than ours.

    And since OPEC accounts for a disproportionately low share of world oil production (around 40%) and domestic sources account for a disproportionately high share of our oil consumption (coincidentally around 40%), we are racing through what little we have as the great greedy miser OPEC hoards its huge stash and grudgingly permits a trickle to enter the market. Thus, each year, our share of remaining world oil reserves goes down, and OPEC’s goes up – and its grip on our throat tightens.

    OPEC’s domination of oil is permanent and unfixable. It uses this control to artificially under-produce to artificially increase the price in a giant, brutally regressive “tax” on the entire rest of the world, including us. Since cars have been (foolishly) allowed to be made and sold that are “locked in” to only being able to use oil-derived fuel, that makes the entire world transportation sector, and the entire world economy, a helpless captive market of the OPEC cartel, forced to pay whatever price OPEC demands if anything or anyone is to move. (Even ships and trains which once used coal now rely on oil.)

    If Obama had pushed a tax increase of hundreds of billions a year to pay for some liberal scheme like universal college, it would be torches and pitchforks time among the free market crowd. And yet when foreign socialist government-monopoly petro-tyrannies impose such a “tax” on us and spend our money lolling in luxury, buying domestic support with handouts, brutally repressing dissent, corrupting world institutions and governments (including ours), spreading pro-terror extremism, and even funding and arming terrorists and armed movements at war with us, the same “free market” crowd yawns.

    Since (with sufficient refining) all oil is fungible and the world oil market effectively behaves as a single entity, even “domestic” oil enriches the enemy by removing that oil from being available on the world market, and enables our enemies to charge that much more for the now-more-scarce oil that is still available.

    Every time you swipe your credit card at the gas pump you are enriching men plotting and carrying out attacks on our soldiers overseas and us here at home.

    So ALL OIL FUNDS OUR ENEMIES. ALL OIL IS ENEMY FUEL.

    • pnwguy

      Carney:

      You speak with clarity and resolve on this issue, but you’re one of the very few conservatives I ever read that haven’t been bamboozled by all of the “drill baby drill” rhetoric. Why do you think that is? What political disease does the GOP have that makes them obtuse to the reality about the petroleum situation for the US? And what do you see as a solution to that disease?

      • Carney

        Thanks for the kind words.

        I wish I could say I was unusually open minded. It’s just that my awakening on this issue came from a man I was already predisposed to find credible. I’m a space nerd and was thus a fan of Dr. Robert Zubrin, author of “The Case for Mars”, a book laying out a plan and rationale for human exploration and settlement of Mars. For more, Google up the documentary: “The Mars Underground” (available in 5 parts on YouTube). I was inspired by his idealism and impressed by his low-cost, practical, no-nonsense, brass-tacks approach, and followed his writings closely.

        When he branched off into non-space issues in a seminal article in the (now-defunct) AEI magazine The American Enterprise, I was interested but not fully sold. Then I read his follow up, a full length book, “Energy Victory”, and was persuaded. See his talk at the Authors @ Google conference at YouTube (search for the terms Zubrin and Google).

        I think conservatives are best persuaded by downplaying environmental issues and stressing the economy and especially national security. More inoculation against “you’re just a green!” dismissiveness can be had by pointing to support for using fossil fuels such as natural gas and coal to make methanol.

  • djenkins

    Kudos to Carney for an excellent post! It should be an op-ed major newspapers across the nation.

    As for pnwguy’s question, we need more traditionalist conservatives speaking out for prudence and stewardship in our energy policy. The problem is that radical libertarians, such as those on talk radio, have redefined “conservatism.” What they preach is not actually conservatism. What they promote is a “let me do what I want” and “if it feels good do it” attitude that is actually very liberal. The origionally conservative notions of responsibility to society as a whole and stewardship of our resources is not part of their radicalism. They need to be challenged from the right.

    • pnwguy

      David:

      I agree. Carney’s exposition there is some of the best written evaluation of our circumstances by any conservative I’ve read. And he would probably get banned from Redstate or some other conservative blog as soon as he posted it there. That is the sad thing. There is little deviation tolerated from dogma on this topic it seems (and plenty of others too). It HAS to be all the liberal/Demo-rats fault, somehow.

  • pnumi2

    Carney

    If all oil is enemy fuel, does it follow that it is good the planet is running out of it?

    I would say that our enemies know our dependance on oil and are using it against us. It is time for all the trading nations on earth to come together, husband the remaining supplies without jeopardizing the world economy and develop a satisfactory alternative.

    “We must all hang together, or assuredly we shall all hang separately.”

  • Apollo42

    Speaking as an engineer, there are two ways to deal with a consumable resource: 1) find more of it, 2) use less of it. It appears that the whole focus of one of the parties is to get more of what is becoming an increasingly smaller and unstable commodity.

    There are a number of businesses, note BUSINESSES, who have decreased their consumption of energy and turned to alternate sources of energy not based on oil. The word from them is that their energy costs are stable or falling. The rest of us chumps are spending more each month. An intelligent conversation about individual and national behavior is in order.

    To this end, I propose that we focus not on drilling, but on efficiency and do more development of alternates to oil. And, for heavens sake, let’s not go back to incandescent bulbs! A single bulb doesn’t amount to much, but a nation full of bulbs would allow us to take a significant number of power stations out of service.

  • LOVUSA

    There are a lot of good points in this piece and there are some good comments here as well. As a life long oil and gas professional, I have a few observations to express that I think are important. The first is about the effect of booking or claiming to have reserves has on the oil and gas market. This is important if you are to understand the motives by those making the claims. When publicly traded oil companies claim to have large amounts of reserves they are doing so to demonstrate how strong they are in an effort to entice people to buy their stock and drive up the price. So they often claim to have more than actually exists. Speculators on the other hand often produce information trying to convince the world that there is less reserves than in reality in order to drive the price of oil higher in an effort to make profit. The difficult thing for both parties is that they frequently shoot themselves in the foot. Recently, large natural gas producers began leasing large areas of land and claiming to have tremendous amounts of reserves. This initially caused their stock prices to go way up. The problem came when the market began to believe that there were now huge amounts of natural gas reserves and that supply would be tremendous for the future. The price of natural gas fell and the companies lost billions of dollars. Speculators have historically ran into the same problem when claiming that reserves were small. Initially the price of oil goes up but then the economy cannot accept the high price and begins using less oil. Thus the price falls and there are great losses to speculators. Governments around the world do the exact same things with there claims when trying to make people feel more or less secure. I have personally seen there claims be much further off than even the private ones. The fact of the matter is that no one knows how much is there.

    Given that we are on such a hook with oil, I think that we should do everything to increase domestic production possible. By suggesting this, I am encouraging a practice that would cause myself severe financial damage, I am being very frank. The alternative sources are, in my opinion, very far down the road. It will be two or more generations before our dependence issue could be solved by them. I do not believe we have that long considering the problems in the Middle East. We need to reduce the risks associated with dependence on Middle Eastern oil while the alternatives are developing. I don’t think that there is any good reason to limit domestic production. The reasons I hear are purely political and put us all in not only financial jeopardy but physical jeopardy as well. The necessary money to finance alternative fuels is here now. They will come but it will take time.

  • djenkins

    LOVUSA, I would be curious if you draw any limits around what constitutes “everything possible” to increase domestic oil production. Are there any places that should be off limits to drilling? Should we drill in Yosemite National Park if we find oil there? How about in the coral reefs of Key West?

    My point is that there are values to lands and waters that extend beyond whatever oil may lie beneath the surface. Bristol Bay, Alaska for example produces 40 percent of our nation’s seafood (salmon, Halibut, King Crab, Cod etc.) and supports a multi-billion dollar sustainable fishing industry that is far more valuable than the value of the oil projected to be there. Should we risk that for oil development?

    The problem with a heavy focus on domestic development is these other values get lost in the rhetoric. There is also a tendency, as you pointed out, to oversell the amount of oil we might find. That can breed complacency about taking the steps we need to wean ourselves off of oil. Shifting our energy dependence away from oil requires a lot of political will. How do we get that political will if politicians are under the illusion that we can drill our way to energy independence?

  • think4yourself

    Interesting article and posts. Political liberals generally have a knee-jerk reaction of no drill period, while political conservatives are all drill all the time.

    I think we ought to work seriously for energy independence in a variety of fronts. Technology can be a game changer across the board (massive increases in how to access formerly unreachable oil, refining methods; as well as the development of alternative sources of energy). However, conservation should not be a dirty word for conservatives – as Apollo42 noted, it’s just good business.

    About 10 years ago California was in the midst of an energy crisis (Enron, etc.) with energy prices spiking daily due to market manipulation. The governor at the time pleaded with the citizens to conserve energy and he was roundly laughed at for doing so. However, during that summer California lowered their energy consumption by 15%! I personally didn’t feel that those sacrifices were very difficult. If we could do the same nationally (15% consumption decrease) and increase domestic production by 20% and switch to alternative energy (wind, solar, fuel cells) by 20% over the next 10 years we would reduce our reliance on foriegn energy sources by over half. This would be good for US businesses (save money, more US jobs), good for consumers (save money), good for our national policy (reduce dependence on the Middle East, Venezuela, Russia, etc.) and good for the environment. It’s time for the moderates to stop allowing the radicals on both sides of the equation from sucking up all the oxygen in the dialog.

    • balconesfault

      Political liberals generally have a knee-jerk reaction of no drill period, while political conservatives are all drill all the time.

      For the most part, you’ve captured the sentiments of potentially the majority of “conservatives” in America – but I think your depiction of liberals is a strawman argument. I know very few liberals who would ban all drilling – certainly they would restrict certain environmentally sensitive areas from drilling, remove federal incentives for drilling, and push some of the external environmental costs back onto drillers – but a very few would ban drilling. Unless you contend that restricting drilling in sensitive areas, removing federal incentives, and pushing external environmental costs onto drillers would effectively kill the industry.

      In which case we’d need to rethink the whole thing.

      What everyone has to accept as a reality is that we’re not going to reduce our dependence on the Middle East, Russia, and Venezuela simply by drilling more. It’s a wholly flawed premise, seemingly willfully ignorant of the last 40 years of energy history in America. Supply goes up, price goes down, Americans double down on investments (larger vehicles, homes with more distant commutes) that lock us structurally into higher consumption … and our reliance on foreign sources is quickly back to where it was, with the added issue that domestic production needs to maintain the higher levels or our reliance on foreign sources will have to increase to meet the new demand.

      Let’s face it … as nice as the idea might be, the “right” isn’t going to challenge the oil industry. Too much money flows into GOP coffers from the petro-giants, a condition that’s just going to increase in the aftermath of the Citizens United decision. The ground troops that helped turn the House in 2010 were heavily heavily financed by the Koch brothers. The GOP can afford to push back on the oil lobby as much as the Democrats can afford to push back on big labor. The primary difference is that we’ve actually seen the Dems make compromises that limited big labor’s power (such as Free Trade agreements) … we have and will never see the GOP push back against big oil.

  • djenkins

    balconesfault, you may be right about some Republicans (Joe Barton comes to mind…but so do some Democrats, such as Mary Landrieu), but there is apparently a growing movement on the right to end all energy subsidies. I believe Grover Norquist’s group supports some version of this.

    Never say never.