On Sun, 27 Jun 2004, Doug Henwood wrote:
> >But are we to dismiss the recent statement by one of the oil majors, in
> >response to talk about diminishing oil supplies, that the reserves are
> >good for another 40-50 years?
>
> You may be referring to the BP annual energy review, which reports 41
> years of oil remain at current levels of use. It's been about that level
> for years now.
There are couple more points worth noting about the most recent BP review, which just came out last week.
The most surprising is that it announced that world oil reserves rose by 10% last year. And that production increased more than consumption in 2003, despite China on the demand side, and Venezuela, Iraq, Shell, etc. on the supply side.
In other words, based on the numbers, current prices are entirely a function of distribution glitches, inventory bottlenecks and panic buying. What seems basically to have happened, according to BP, is that OPEC cut production sharply in the sharp economy that followed 9/11, got the bright idea to pull down inventories, and got burned and fell behind the curve. The excess of production over consumption during 2003 has gone into replenishing those inventories.
Dedicated malthusians had to dig absurdly deep to find something, anything they could represent as a confirmation of their fantasy that this year will go down in history as the year we hit the wall. The only thing they could come up with was that the increase in reserves wasn't the result of new exploration, but rather of unproven reserves being rebooked as proven.
But this objection is entirely in bad faith. Changing unproven fields to proven has always been the main mechanism by which proven reserves are increased. It's exactly the part of reserve increasing that we count on. It's exactly why reasonable people say you shouldn't worry about it being 40 years because it's always been 40 years: it's because most of new proved reserves come from places we already know where to look. It's not just a booking thing, it costs money (though not as much as new exploration). People do it when they need to and not before. 40 years worth is the equilibrium resevoir that results from companies and countries adding to them when they need to for market financial reasons.
The last gasp of the Malthusians is to say that the reason the exploration portion of the increase in proved reserves has gotten smaller is because there was less exploration in the 90s and less investment in it. That's true, but it indicates exactly the opposite of what they think. There wasn't less exploration because people were giving up and had no ideas left. There was less exploration because oil prices were low, just as any economist would predict. And now those same economists would predict, exploration will increase. Exploration is the big risk/big return side of increasing reserves. It's like lotto. More people play it when the jackpot is big than when it's small.
Now, if after 5 years of these prices exploration finds haven't increased, then maybe there will be some basis for talk. But so far, everything is following exactly the pattern of the last 150 years of the oil business: low prices --> lower supply --> higher prices. So far the next step in the chain has always been higher supply. There is not a single reason to think it won't be this time too. Some year the stopped clock will be right. But there is not a single sign that this is the year.
Even the hysterical fears about running out are cyclical. They are exactly like the mass delusion that this time the bull market is different. As regular as the rain.
People often compare what is happening now to the highest peak in the oil price, in 1979. It's a good comparison (and not only because real prices are only half as high now as they were then, which induces a bit of perspective). Both the 1979 spike and this one were caused by panic buying induced by political events. And the 1979 spike, which caused the highest worldwide production until now, was followed in a few years by the worldwide oil glut of the mid-1980s. Everyone seems to forget that part.
Michael