World Petroleum Reserves and Consumption

(This page is based on various presentations given by Chris Kendall and freely quotes data from information assembled by the Energy Information Administration of the DOE, (http://eia.doe.gov/) and the Wall Street Journal).

WHERE DOES IT COME FROM?
Petroleum (crude oil), like gas and coal, is a fossil fuel, so called since it formed in the geologic past. Petroleum, as with the other fossil fuels, is a finite resource. It is formed from the accumulation of pelagic plants and aquatic organisms in the oceans and in large lakes prior to and during continental break up. This organic matter cracks and forms petroleum after being buried and subjected to the elevated temperatures and pressure of the interior of the earth. The petroleum then migrates through the adjacent rocks and becomes trapped between sand and/or shells.  Petroleum, like the energy sources of natural gas and coal, is a non-renewable resource.

WHERE IS PETROLEUM CURRENTLY LOCATED?
The current world-wide proven Reserves are estimated to be over 1,000 bbls of Crude Oil; 664bbls of these Reserves are located in Middle East (mostly Arabian Gulf countries) and the remaining third or so of these Reserves are located on and around Africa, N and S America, Europe and the Far East.  If the current rate of oil consumption (approx 84.1 mbls a day) is maintained then there are only 32 years of Reserves for cheap hydrocarbons left within the earth's crust. However if these Reserve estimates are extended beyond the more cheaply exploited sources of Crude Oil and Natural Gas, and include Coal, Tar Sands, Oil Shales and Methane Hydrate then it should be noted that that the use of these exploitable resources, though more costly to access than conventional crude and natural gas, may extend well into the next century.

HOW BIG IS A BARREL?
Throughout the remaining portions of this page the word barrel is frequently used. This term is considered by some to be a confusing unit of measure. As the DOE indicate a barrel's capacity is often determined by those who use the term, and by what it contains.

For example:

1 barrel (bbl) of petroleum or related products represents 42 gallons.

1 barrel of beer (US, liquid) represents 31.5 (36 in Britain) gallons.

When a barrel is called a "drum" this is referring to a container that holds 55 gallons!

DOE suggest 1 barrel going over Niagara Falls is big enough to carry a man!

A Vital Statistic
(1,000 Million = One Billion) How long will the current world reserves last?
The numbers related to the expected rate of draw down of reserves given below are based on a current world consumption of 77mb/day and an US consumption of 20mb/day. Thus since the current consumption of petroleum is rising by an estimated 3% per annum the figures are underestimated.

CURRENT (April 26th 2008) PRICE OF A BARRELL OF OIL: $135.90/bls

CRISIS WITH RESPECT TO CHEAP ENERGY FOR TRANSPORTATION AND HEATING

According to Energy Information Administration (as of 2007):

DANGER! MONOPOLISTIC COMPANIES ARE TAKING EACH OTHER OVER!

Major U.S. Oil Companies
ExxonMobil
ChevronTexaco
BP Amoco
RoyalDutchShell
USX
Phillips
Conoco

These companies handle such enormous capital that they now are forced to behave like conservative banks when it comes to risking their capital. Consequently they would rather purchase existing reserves than indulge in wildcat drilling for large oil fields. Similarly as these giants take over other companies and downsize, they release personnel essential for the labor-intensive environment associated with hydrocarbon discovery and its efficient production. This reduces their capability to make rational decisions on hydrocarbon prospects, fewer people to handle larger amounts of data.

It is an unfortunate fact that it takes from 7 to 20 years to see a return on the upfront investments required for hydrocarbon exploration. There is13 to 1 success ratio for a "wildcat" well and a 3 to 1 return on ones investment over 20 years; if very very lucky this may increase to 6 to 1.

CRISIS OF CONFIDENCE AND CRISIS OF ATTITUDE
While large companies become very conservative it is recognized to find large oil fields the risk envelope needs to be pushed; however the risks have become too big to do this!!!  One probably would make a better investment in an insurance company where the return is instantaneous and up front, or a mom and pop grocery store?

Costs in 2000

Monopolistic companies make decisions that have huge economic impact. So if they make a mistake the impact of any mistake is greater and since few people are involved in the decision-making it is easier to cover up this mistakes with the result a poor situation may be worsened.   However if companies are smaller, there are more of them, and with the resulting more diverse attitude to exploration they spread the risk!! Let the mavericks go for it!!

Interestingly HE Ali I Naimi (click for text of speech), the Minister of Petroleum and Mineral Resources of Saudi Arabia has indicated that the all-inclusive cost of production in Saudi Arabia is less than $1.50/b, while the global average cost is about $5/b and in some areas more than $10/b. Thus he notes that the costs for Saudi Arabia less than 10 cents per barrel to discover new reserves, while the cost in some other areas of the world can be as high as $4!!!!

HISTORY OF PETROLEUM EXPLORATION

Early exploration for hydrocarbons quickly developed monopolies (Rockefeller and his control of production and transportation of petroleum). Later at the turn of the century there was uncontrolled exploration and discovery of petroleum that lead to a free enterprise system which enabled the grand expansion of the USA industrialization and the demise of the railroad and the use of cheap transport and the motor vehicle. Today there is now a return to monopolies and the potential for stagnation.

The age of free enterprise associated with Petroleum exploration began at the start of the 20th Century in the USA when on January 10th 1901 Spindletop was drilled close to Beaumont Texas. The 1st three wells were capable of flowing 68 million barrels a year or 185,000 daily, the total Russian production. Spindletop produced more in a day than the rest of world combined. Exxon, Texaco, Shell, Gulf, Magnolia were founded as a direct result of the discoveries at Spindletop and Rockefellers grip was broken. Banking still tried to control the operation but they were unable to lease the complete acreage over Spindletop, with the result that wells were even drilled on the streets in blocks a few feet across. Uncontrolled free enterprise was precipitated and an every person for himself or herself attitude. This drove industrialization of the USA (cars became the mode of transport etc. etc).

Oil became the commodity for military success. Germany in the Second World War controlled the oil of Romania and had hoped to acquire Baku in Russia and the Persian Gulf (then in the control of the British Empire).

BP, an important agent of the British Empire, was active in the ME and retained control of the PG till the USA maneuvered themselves into Saudi Arabia. In 1933 Chevron acquired a lease to explore in the area and in 1938 Steineke found oil at the Dammam dome. In 1939 Chevron had production and exported the first oil, beginning the golden age of US involvement with foreign exploration for cheap oil.

OPEC countries
The Organization of Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, in September 1960, to unify and coordinate members' petroleum policies. OPEC members' national oil ministers meet regularly to discuss prices and, since 1982, to set crude oil production quotas. Original OPEC members include Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Between 1960 and 1975, the organization expanded to include Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), and Nigeria (1971). Ecuador and Gabon were members of OPEC, but Ecuador withdrew in December 1992, and Gabon followed suit in January 1995. EIA estimates the current eleven OPEC members account for roughly 40% of world oil production and about 77% of the world's proven oil reserves. Currently the Organization of Petroleum Exporting Countries (OPEC) is composed of the member countries of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Setting a floor of $22 a barrel The OPEC 10 has been proactive in making production quota cuts in anticipation of market conditions that could weaken prices for its oil, particularly weakening oil demand. OPEC has revised its projections of world oil demand growth downwards on concerns that global economies, led by the U.S., are weakening. EIA has also lowered its projection for world oil demand growth to 1 million barrels per day in 2001, down from 1.2 million barrels per day in the previous Outlook, because of lowered expectations for world economic growth in 2001.

Not a single instance in 2001 that the price of the closed as low as $22 per barrel - the floor of OPEC's target. The OPEC 10 (OPEC minus Iraq) took the unusual step of agreeing to a 1 million barrel per day (b/d) quota reduction and Mexico would cut its oil exports by 70,000 b/d. OPEC has encouraged other non-member producers such as Russia, Norway, Oman, Angola and Kazakhstan to join its price support moves, but none has agreed to cut production!

Non-OPEC countries
Produced 60% of the world's oil in 2000. Of the top ten oil producers in the world in 2000, only three (Saudi Arabia, Iran, and Venezuela) were OPEC members. Non-OPEC oil production has been increasing steadily since 1993, with the United States, Russia, Mexico, China, Canada and North Sea countries Norway and the United Kingdom as the most prolific producers. Non-OPEC countries also possess most of the world's capacity for refining crude oil into petroleum products such as gasoline and heating oil.

Despite this wide diversity of world oil suppliers, OPEC does retain the majority of the world's proven oil reserves and controls a significant portion of world oil trade. As of January 2001, about 80% of the world's proven oil reserves are held by OPEC countries. Many major non-OPEC oil producers are also very large consumers, resulting in very low exports (or, in the case of the United States, requiring further imports to satisfy over 50% of domestic consumption). OPEC holds the vast majority of the world's excess oil production capacity, with total non-OPEC spare production capacity estimated at 500,000 bbl/d, most of which is attributed to down-time for maintenance. OPEC, especially Persian Gulf OPEC members, has the world's lowest oil finding and lifting costs.

Non OPEC oil is liable to price collapse e.g. the ex Soviet Union is particularly vulnerable to this etc Never the less consumption grows 3% annually

Current causes of rising oil prices
Shortages related to increased consumption (China and India's increased energy needs and industrialization of third world)
Shortage related to lack of capacity to produce more (Saudi Arabia basic production rates at max, Russia's production rates falling, Nigeria's unofficial civil war, Iraq's civil war and insurgency against US occupation expressed by pipe line breakage)
Inflation of oil prices related to collapse of dollar's value (Fed interest rates, tie of the local currency of the Gulf States and that of Saudi Arabia to the value of the US dollar, inflated costs of drilling new wells, inflated costs of new drilling platforms)
Speculation on the future price of oil (affected by Iranian naval small boats percieved to be interfering with shipping in the Gulf region, US's percieved military threats from Iranian irregulars, pipeline severance in Iraq and Nigeria and Columbia and Bolivia, Saudi Arabian storage of future production in ground rather than in holding tanks)

Alternatives to Cheap Crude Oil
Tar sands and oil shales (large capital expenditure) whose price of production is now competitive to oil
Biofuels (large capital expenditure and maintenance) requires heavy government subsidies to maintain
Nuclear (cheap and efficient but carries negative baggage related to potential radioactive pollution as at Winscale (Selafield) in Britain, and the byproducts of nuclear weaponry associated with such countries as Israel, Pakistan and India) but price now competitive to oil
Hydro (cheap and efficient) but though price now competitive to oil but not enough capacity
Wind (large capital expenditure and maintenance) requires heavy government subsidies to maintain
Solar (large capital expenditure and maintenance) requires heavy government subsidies to maintain
Thermal energy from earth’s interior (large capital expenditure and maintenance) requires heavy government subsidies to maintain

CHOKEPOINTS

Over 30 million barrels/day pass through the relatively narrow shipping lanes and pipelines discussed below. These routes are known as chokepoints due to their potential for closure. Disruption of oil flows through any of these export routes could have a significant impact on world oil prices.

These choke points point to the need for the major consumer of petroleum, the USA, to maintain some sort of military presence close to these areas.

And still we only have 1,000 billion of reserves that at 84.1 million/day, suggests there could only be some 32 years of production remaining. There are still substantial reserves of gas and coal but the age of cheap tranportation driven by cheap oil are numbered!!!