‘It’s running out.’
‘There will soon be none left.’
‘The world is heading for disaster.’
‘Peak oil is upon us.’
It’s a nice, if somewhat scary idea. It’s the idea that the world is about to run out of oil.
It’s also complete junk. The fact is, the world currently has more oil in reserves than anyone could possibly have imagined…
We’ve explained before how things have shaped up in the oil market in recent years.
For years folks in the US warned about a looming oil crisis. They said it would be the trigger for an economic collapse as either the world ran out of oil or the Middle East effectively held the US to ransom by withholding oil supplies.
Then the oil price began to climb — $40, then $50, then $60, then $100, then $140. You may even remember that during the commodities boom Goldman Sachs’ chief commodities analyst forecast an oil price of $200 a barrel.
And yet, what happened? To say that nothing has happened wouldn’t be true. But has there been a global energy disaster? No. And why is that?
As we say, the world’s proven oil reserves have never been bigger. Here’s the proof…
Peak oil keeps getting further away
Part of the reason for the record high reserves is precisely because the oil price is so high.
It encourages explorers to look for more of the stuff.
And with oil at US$100 per barrel, previously uneconomical oil zones become viable. This and the development of new technology have made it possible for oil companies to exploit the vast shale oil and gas resources.
That has been a boon for the US oil industry over the past 10 years. And soon enough it could provide a similar boon in the UK and China as both countries seek to exploit their shale resources.
By the way, we’re not saying reserves are higher just for the sake of it. We’ve got the proof.
Yesterday, oil giant BP plc [LON:BP] released its Statistical Review of World Energy report. The report gives a neat overview of proven oil reserves by country for 1993, 2003, 2012 and 2013.
To put that in perspective, the current proven reserves mean that at current supply and demand levels there is around 50 years of proven oil supply.
That assumes explorers don’t find one more drop of oil.
What’s that we hear? Is that more hollering about Peak Oil?
Before the Peak Oil fanatics get too loud, check out the number for 1993. In that year, world crude oil production was around 60 million barrels per day. At that rate of demand, the oil reserves would have run out in 47 years — in 2040.
Not only has crude oil supply and demand increased since then, eating into the reserves, but reserves have actually increased. That has further extended the lifetime of the world’s oil reserves.
But that’s only half of the story.
The Orinoco Belt
In 1993 the proven reserves from Canada’s Alberta oil sands was only 32.3 billion barrels. Today the proven reserves are 167.8 billion barrels.
Then there’s Venezuela’s Orinoco Belt. In 1993 there weren’t any proven reserves. Today the Orinoco Belt has 220.5 billion barrels of proven reserves. That would further extend Venezuela’s position as the location of the world’s largest oil reserves.
And the best thing is neither the oil sands nor the Orinoco Belt reserves are in BP’s list of total reserves. Add those reserves to the other proven reserves and it means another 11 years of potential oil production.
What’s that about Peak Oil and the risk of it running out?
All the talk seems to suggest that oil just has to run out at some time. And maybe it does. We guess there are few things with an infinite supply.
But what if that ‘some time’ isn’t for another 200, 400 or even 1,000 years? What if that ‘some time’ isn’t for several millennia?
All of that is possible.
Oil reserves are a ‘capital’ story
The simple fact is you’ll probably never get more than 50 or 60 years of proven reserves at any one time anyway.
This is all part of the supply and demand equation and the ability of explorers to access capital to explore for oil.
An explorer or producer can only prove reserves if they have the will and the cash to do so. Most markets only have a limited amount of capital available to do this.
If the capital for exploration were infinite, then explorers probably would find every last single drop of oil in the ground. Then you’d know exactly how much remained and how long it would last.
But capital isn’t infinite. Investors tend to seek out the projects with the best chances of success and pour their resources into those projects. This creates a trickle-down effect.
If investors can’t get into the best project — maybe because the valuation is now too high — they’ll look for the next best project. This happens until investors consider the only remaining projects to be too speculative, and so they allocate their capital elsewhere.
That leaves the speculators (large and small) to punt on the rag-tag bunch of small-cap explorers. Some make it, but most don’t. But if you manage to get on board with the company that makes it, you can achieve extraordinary returns.
If you want to invest in oil, there’s plenty of it around. It’s just a case of finding the best available projects.
As for ‘Peak Oil’, forget about it.