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The Big Energy Lie, Revisited
Posted on May 10, 2011
Your President has been telling you things that simply aren’t true. Things like “We can’t drill our way out of our energy problems.” Or “Oil and gas are the fuels of the past.” Or “The U.S. consumes 25% of the world’s oil, but controls only 2% of the world’s reserves.”

Well, that last one may be technically true, but it is used to convey a falsehood. In a post called The Big Energy Lie (Dec. ’09), I attempted to explain the deception. In this post, I’ll attempt to show you graphically in terms that the lay person should understand.

KEY CONCEPT #1: “Reserves” are not “Inventory”

This graph depicts the history of U.S. oil reserves and production over the last 25 years. In 1986, reserves were estimated to be nearly 27 billion barrels. In 1986, we produced 8.7 million barrels a day, or an annual total of 3.2 million barrels. The ratio of reserves to production is 8.5 years — often incorrectly reported in the press with alarm: “We have only 8.5 years of reserves left! We’re running out of oil!”

If this were true, we’d have run slap out of oil in 1995. The dashed line on the graph shows the cumulative amount of oil produced since 1986. Sure enough, by 1995 we had produced over 27 billion barrels, and we still had reserves in the ground of over 22 billion barrels.

Fast forward to 2010: we’re still producing 2 billion barrels a year, and we still have over 20 billion barrels in the ground. In fact, we’ve produced 58 billion barrels since 1986, over twice the 1986 reserve total.

Magic!

Well, not really.

Imagine if you managed a shoe store. On January 1, inventory shows you have 10,000 pairs of shoes on hand, and you sell 500 pairs per day. Would you forecast that you would be completely out of shoes in 20 days?

Only if you can’t replenish supply. (Or if you’re a former community organizer really crappy manager.)

In oil and gas, reserves are replenished by drilling new wells. (Reserves can be added other ways, too, but the ultimate key is drilling.) By drilling, “resources” are upgraded to the much more restrictive and valuable category “reserves”. And the U.S. has plenty of resources to draw from. We should be encouraged by the fact that, even with a period of persistently low product prices and relatively low drilling activity from 1986 to 2004, the reserve base has only declined by a little over 20% in 25 years.

KEY CONCEPT #2: “Reserves” are only estimates.

Oil and gas reserves often cannot be estimated with a great deal of precision. Even if the recoverable quantity were known accurately, by definition reserves must be economic to produce. That means that changing economic conditions (especially changes in oil and gas prices) will effect the estimated reserve quantity. When prices are higher, wells can be produced that would otherwise be plugged.

Bottom line, reserve estimates change all the time.

The dark green bars show the rate of oil production over the 25 years. The gold bars show the year to year change in reserves. Production causes reserves to decrease, but new additions from drilling can offset production. Reserves can also be revised — up or down — due to geologic and engineering studies, or changes in economics as described above.

One more graph — the “Reserve Life Index”, or Reserves to Production Ratio. We saw that it is often misinterpreted to represent how many years of production remain. Our national R/P ratio has grown over the last 25 years, perhaps a reflection of better technology or higher prices.



There you have it. Our relatively low reserve number is not an indication that “we’re running out of oil!”, it’s merely a wake-up call that we need to get busy and shore up our domestic supplies. The only thing we are running low on is the political will to do it.

Cross-posted at RedState.com.



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