Does OPEC Really Have the Oil That It Claims?
How much oil does the world have left? This has been one of the most pressing energy questions confronting us for decades. Petroleum, after all, is the world’s most critical source of energy and currently remains irreplaceable because it has no large-scale substitute. Yet, oil is a finite commodity, a non-renewable resource that is sure to “one day run out.” As such, analyzing the future availability of oil will remain central to our energy-environment discussion.
In November 2016, OPEC decided to remove 1.2 million b/d of oil from the glutted global market to help increase prices, a move that has been augmented by a Russian-led coalition that cut 0.6 million b/d. Since then, OPEC has once again reinforced its influence over the international oil market. Oil prices are up 40 percent since to ~$70 per barrel.
Indeed, OPEC still produces 40–45 percent of the world’s oil, and has proven to be anything but the “toothless tiger” that U.S. shale legend Harold Hamm claimed it to be in 2014. But looking forward, OPEC’s real power could be the fact that it controls 72 percent of the world’s proven oil reserves, as last reported by BP in June. For decades now, OPEC has held at least 65 percent of global reserves.
Yet, there are still very serious questions as to how much oil OPEC actually has.
The mystery dates back to the 1980s. This was when OPEC first installed a policy to link its production quotas for individual members to the amount of reserves that member reported. Not surprisingly, with higher production allowing for higher revenues, reserve totals for OPEC members had mysteriously surged within a few years. At the time, members were jockeying to pick the right year to get a higher production quota, so reserves didn’t increase all at the same time. Importantly, there was no drilling program in any of these countries that would have explained such a boom in reported reserves.
With oil sales being the primary source of income, OPEC would have no problem exaggerating reserve counts for political clout. Production quotas are strategically allocated to control the flow of oil to the global market and manipulate the price.
It’s a sleight of hand that has been easy enough to pull off. OPEC and its national oil companies are not subject to independent audits for oil reserves like oil producers in the U.S. — where the Securities and Exchange Commission confirms such claims of publically traded companies. And unlike OPEC, if U.S. producers were to join forces to restrict supply, they would face collusion charges from the federal government.
By contrast, OPEC reserves are unverified and self-reported by members. The world must therefore simply take their word for how much oil they possess. OPEC members won’t allow any detailed audit of their oil fields by independent groups because they claim that reserves are a state secret, a questionable assertion since members still release these numbers to BP and other reporting agencies.
For instance, Saudi Arabia recently decided to delay or potentially even cancel IPO plans to list 5 percent of its national oil company, Aramco, on a major stock exchange. My position is that one reason why Saudi Arabia did so was to avoid being finally subjected to an independent audit of its reserves.
It’s also worth noting that Venezuela’s proven oil reserves more than tripled from 2006 to 2011 to nearly 300 billion barrels. It was during this time that BP started to recognize the heavy and extra-heavy crude deposits in the country’s Orinoco Belt, as reserves were “quantified and certified by third-parties.” Today, however, this hard-to-develop stockpile appears even farther out of reach, given Venezuela’s ongoing economic and oil production collapse. This has been exacerbated by the country’s decision to nationalize the oil sector, pushing away the investment and technical expertise of the foreign companies needed to develop the region.
Reserves, however, are not the ‘be all, end all” in determining how much oil the world has left. Reserves are just subsets of the much larger oil resource, and they typically grow with higher prices and the constant evolution of extraction technologies. The fact that reserves are constantly in flux casts doubt on reports from Kuwait (101.5 billion barrels) and UAE (97.8 billion barrels), for instance, that their reserve totals have stayed exactly the same for the last 20 years. That’s geologically impossible.
What does this mean for the U.S., the world’s largest oil consumer and producer? The serious questions surrounding the veracity of OPEC’s reported reserves highlight the need to ready ourselves to produce as much oil as we can in the years ahead. Increased self-reliance for such an indispensable fuel is a pillar of U.S. energy and national security. The possibility that OPEC might not have as much oil as it has been claiming — combined with a lack of new production investments due to the price collapse since 2014 and always rising global demand — means that future prices could be higher and more susceptible to spikes.
New oil discoveries in 2017 were the lowest they’ve been since the 1940s. We have a continuous need for new oil investments: The International Energy Agency estimates that the U.S. will need to average a $120 billion per year infusion in new domestic supply for decades to come.
Jude Clemente is the Editor at RealClear Energy.