There are incentives for OPEC countries to lie about their production and reserves. Combined with some strange figures published by OPEC countries, and the fact that there isn’t any third party vetting of these, there is a lot less oil in the ground than what they claim..
How much oil do Opec countries really have?
Monday, August 3, 2009 3:51 IST
World over, oil is a major source of energy. But naysayers predict it maybe not too long before we run out of this all-important fuel.
However, since the mid-80s, the Organisation of Petroleum Exporting Countries (Opec) has been acting as a swing oil producer of the world. Meaning, Opec produces only that much as to fill the gap between the global oil demand and production by non-Opec countries.
Over the years, the swing production arrangement resulted in Opec having a lot of idle capacity, which helped Opec to gain control over oil prices. Whenever the inventory level of oil stocks in industrialised nations, particularly the members of Organisation of Economic Cooperation and Development (OECD) went up, Opec reduced output.
This artificial scarcity that Opec manages to create did not allow oil prices to fall.
The same idle capacity has been used to pump extra oil into the market to prevent dramatic price rises during times of unexpected supply interventions. Most of this idle capacity is in Saudi Arabia, the largest member of the Opec.
“This encouraged the belief that Opec could always be relied upon to make up the difference between non-Opec supply and global demand, whatever the circumstances. Economists, oil analysts and government officials all succumbed to the reassuring view that the ‘call on Opec’ could expand almost indefinitely,” writes David Strahan in his book The Last Oil Shock — A Survival Guide to the Imminent Extinction of Petroleum Man.
“The view persists that Opec can continue to plug the gap between failing non-Opec supply and growing demand for decades to come. Production forecasts from Shell, Exxon, the International Energy Agency (IEA) and the US Department of Energy’s statistical arm (the Energy Information Administration, or EIA), all assume that most demand growth from now on will be satisfied by a massive increase in Opec production.”
The agencies come up with such an optimistic forecast based on the publicly available information on Opec. “The publicly known ‘facts’ about Opec are these: its eleven members have proved reserves of more than 900 billion barrels of oil, 75% of the world total; the key Middle Eastern countries are still relatively well explored and have the potential for huge new discoveries, with Saudi Arabia alone claiming 150 billion barrels of ‘yet-to-find’,” Strahan writes.
However, the writer doubts that these numbers reflect anything but reality. “In all likelihood, none of these statements is accurate and all could be wildly misleading…The reason is simple. One of the key criteria for deciding an individual country’s quote within Opec is its current level of production and this gives all members an incentive to inflate the numbers they report,” the author explains.
He further quotes Henry Groppe, an energy consultant as saying, “If you can get the others to believe your production is greater than it is, if there’s a bigger pie to be allocated, then you’re going to get a bigger piece of it, and if Opec as a whole needs to cut back, then you can just reduce paper production.”
This logic, however, only explains the production inflation part of it — i.e. Opec countries claim to produce a lot more than they actually produce. But what about the reserves? Do these countries actually have the kind of reserves the publicly available data suggest they have?
Strahan says, “In the mid to late 1980s…Opec was discussing a proposal to change the criteria by which quotas were allocated to include the size of each country’s reserves.
The new rule was never actually introduced, but the prospect that it might be, seems to have galvanised Opec countries into suspiciously large revisions. In 1985, Kuwait’s proved reserves…leapt by almost half, from 64 giga barrels (billion barrels) to 90 giga barrels, and in 1988 they rose again to 92 giga barrels.
The same year, Abu Dhabi’s proved reserves almost tripled to 92 giga barrels, matching Kuwait exactly, and then Iran raised the bidding by one, increasing its proved reserves from 49 to 93 giga barrels, while Iraq more than doubled, from 47 giga barrels to around 100 giga barrels, and Venezuela also jumped by over 100% from 25 giga barrels to 56 giga barrels.
Finally in 1990, Saudi Arabia raised its proved reserves by a whopping 88 giga barrels, from 170 to 258 giga barrels. So in the space of five years, Opec reserves had risen by 305 billion barrels, despite the fact that no significant discoveries had been made.”
Such big increases in reserves most independent observers find difficult to believe. Even more suspicious is the fact that these reserves remained constant for years to come.
“More suspicious yet, many of the new reserve figures subsequently remained unchanged for many years despite the fact that Opec countries were producing billions of barrels every year,” writes Strahan.
Given these facts, Opec has lesser reserves than it claims to have and hence is “no longer the swing producer, but pumping full-bore, just like everybody else.”
The moral of the story is that the world actually has a lot less oil than it believes it does.