by Chriss W. Street
The U.S. Energy Information Agency (EIA) just reported that United States â€œproven reservesâ€ of crude oil in 2012 jumped by 15.4% to 29.2 billion barrels. This new official level is onlyÂ about13% of the declared reserves of Saudi Arabia.
But U.S. oil companies follow conservative accounting standards for legal and tax advantages in stating reserves that understates by as much as 90% the amount of that will be extracted from their wells. OPEC cartel members are notorious for inflating their reserves for political purposes, and Saudi Arabia was recently outted byÂ WikiLeaksÂ for overstating their reserves by 40%. American crude oil reserves are already greater than Saudi Arabiaâ€™s, and the U.S. lead will continue to expand.
Worldwide oil reserves are published by theÂ U.S. Energy Information Administration (EIA)Â each year. The 12 member Organization of Petroleum Exporting Countries (OPEC) dominates EIA totals by claiming to hold about 75% of all global reserves. America is officially listed asÂ 11thÂ in reserve size; behind Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran, Russian Federation, Venezuela, Mexico, and Canada. With the exception of the U.S., Russian Federation, and Canada, all the other â€œleadersâ€ are members of OPEC.
But the U.S. must conservatively report â€œProven Reservesâ€ as the sum of the â€œbook assets.â€ The CEOs of each American company are required under U.S. Securities and Exchange Commission rules that carry potential civil and criminal liability to attest that a rigorous evaluation with a â€œhigh standard of evidenceâ€ has determined their proven reserves are â€œknown to be economically and technologically extractable at the present time.â€ Companies are also incentivized to understate reserves to maximizeÂ oil depletion tax creditsÂ that delay income tax payments.
OPEC members in contrast operate as â€œNational Oil Companiesâ€Â that are state-owned monopolies that control all oil development within a country. Unlike private companies, theÂ World Energy Outlook 2010Â warned that NOC â€œreserveâ€ statements:
often a lack of transparency in the way reserves are reported: many national oil companies in both OPEC and non-OPEC countries do not use external auditors of reserves and do not publish detailed results.
The OPEC Secretariat located in Vienna reports each cartel membersâ€™ stated reserves in theÂ OPEC Annual Statistical Bulletin. Under the reportâ€™s â€œQuestions on dataâ€ footnote, the Secretariat states they welcome questions, but â€œOPEC regrets that it is unable to answer all enquiries concerning the data in the ASB.â€ OPEC membersâ€™ excuse for not providing independent reserve audits or appraisals is â€œoil reserves are state secrets.â€WikiLeaksÂ published 2011 intercepts of secret cables to the U.S. embassy in Riyadh by the senior geologist at Aramco, Saudi Arabiaâ€™s national oil company, warning that the kingdomâ€™s crude oil reserves may be overstated by â€œnearly 40%.â€
To act as a cartel and keep prices up, OPEC manipulates world oil supply by allocating crude oil production quotas among its members. The quotas were originally set in 1980 by the size of each memberâ€™s stated reserves. ButÂ according to EIA, many members hyped stated reserves by 40% to 200% when they joined OPEC to maximize quota allocation for crude oil production [below]:
|OPEC Member||Prior Reserve||Quota Based Reserve||Percent Increase|
|Iran||48.8 billion barrels||92.9 billion barrels||Â 90.4%|
|Iraq||47.1 billion barrels||100.0 billion barrels||Â 112.3%|
|Kuwait||66.7 billion barrels||92.7 billion barrels||Â 39.0%|
|Saudi Arabia||172.6 billion barrels||Â 257.6 billion barrels||49.3%|
|United Arab Emirates||33.1 billion barrels||98.1 billion barrels||196.4%|
|Venezuela||25.0 billion barrels||Â 56.3 billion barrels||125.2%|
None of the OPEC members pretend to adhere to minimal accounting standards in stating reserves. Iraq in October 2010Â announced it was raising stated reserves fromÂ 115 billion barrels to 143.1 billion barrels; Iran responded a week later by raising their reserves from136.6 billion barrels to 151.2 billion barrels. The United Arab EmiratesÂ since 1997 hasreportedÂ 97.8 billion barrels in reserves. Every year since 2008, KuwaitÂ hasÂ reportedÂ 104 billion barrels and Algeria has reportedÂ 12.2 billion barrels in reserves. Despite being the largest OPEC producer every year, since 1991 Saudi Arabia hasÂ reportedÂ reserves varied slightly between 260 to 267 billion barrels. The bottom line is OPEC reserves statistics are vastly overstated.
Forbesâ€™Â contributorÂ Ryan Carlyle, Sub-sea Hydraulics Engineer, stated that U.S. â€œcorporate reserves estimates are consistentlyÂ 1.5x to 5x lowerÂ than the eventual â€œultimate recoveryâ€ figure at field abandonment.â€ The â€œratios are going even higher with current oil prices,â€ and new technology will push eventual oil recoveries in many fields up by 1,000% over current â€œproven reserves levels.â€ He also stated oil companies do not add reserves until development projects are complete and full production is achieved.
Oil consumption in the U.S. rose by 90% between 1911 and 1918. When the U.S. Bureau of Mines discovered the oil companiesâ€™ reported â€œproven reservesâ€ was equal to only 11 years of demand, they issued the first warning America was about to hit â€œpeak oilâ€ production in 1919. One Senator was so fearful of a â€œgasoline famineâ€ he demanded the Navy convert back from oil to coal. Distilling shale oil â€œlocked up in the mountains of Colorado, Utah and Nevadaâ€ was offered as an alternative, but in February 2007 the IEAÂ expectedâ€œadditional cost and technological challenges surrounding production of nonconventional [shale and tar sands] sources make these resources more uncertain.â€
Mark Twain was right about oil when he said â€œhistory rhymes,â€ because U.S. oil companies are currently reporting â€œproven reservesâ€ equivalent to onlyÂ 11 years of demand. But American â€œproven reservesâ€ vastly understate how much oil will be produced from existing wells. Fracking technology made shale oil very profitable to produce and has driven a 60% increase in domestic crude oil production over the last three years. EIA estimates U.S. oil production will expand anotherÂ 30%Â by 2016; while annual gasoline consumption peaked in 2007 and will be down 18% by 2025.
Saudi Arabia pumped billions of barrels of oil in the last 25 years, yet their â€œreservesâ€ jumped from 172.6 billion barrels in 1989, to 257.6 billion barrels in 1990 and are stated at267 billion barrelsÂ today. Taking a 40% haircut for the kingdomâ€™s overstatement means Saudi Arabiaâ€™s reserves are 160 billion barrels and falling. With U.S. crude oil reserves at 150 billion barrels in 2012 and passing 205 billion barrels in 2016, America again has the largest crude oil reserves in the world.