I spent a lot of time in 2015 warning that at year-end we would see a huge decline in crude oil reserves. As I have explained in the past, the reason I expected this is because of the relationship between proved oil reserves and oil prices. This relationship is important for understanding oil reserves. Some articles that recently began making the rounds made certain conclusions from this paper – A global energy assessment – in which some subtleties about oil reserves have been lost. So let’s review.
An oil resource refers to the total amount of oil in place in the particular area. Generally, most of a resource can’t be technically recovered, but the resource refers to the amount that could potentially be recovered. These estimates can go up and down, but the resource is what could be recovered at 100% recovery based on current estimates.
As an example, it is estimated that the Bakken Shale centered under North Dakota contains several hundred billion barrels (bbl) of oil (the resource). However, what is technically and economically recoverable in the Bakken has been estimated at less than 10 billion barrels (<10% of the resource).
The portion that is technically AND economically recoverable at prevailing oil prices may be classified as proved oil reserves. (The same concept applies for natural gas). This means that proved reserves are a function of prevailing oil prices. This qualifier is often misunderstood.
This post was published at FinancialSense on 05/11/2016.