OPEC’s Paper Barrels
We have been hearing and reading? the word “OPEC” a lot over the last several years; it is typically portrayed as some secretive organization on a mission to raise oil prices and cost us more money. (Many might argue this is not far off from the truth) For younger generations that were not around during the 1970’s oil embargo, the clout and power of OPEC will seem like a new thing, although it is not.
What is OPEC?
OPEC is an acronym, which stands for the “Organization for Petroleum Exporting Countries”. The organization is intergovernmental and member countries include Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Libya, United Arab Emirates, Algeria, Nigeria, Ecuador and Angola.
OPEC was formed at the Baghdad Conference, September 1960 by; Iran, Iraq Kuwait, Saudi Arabia and Venezuela. They were later joined by 9 more Countries, with Indonesia suspending its membership in 2009 and Goya terminating theirs in 1995.
OPEC’s goal is to unify petroleum policies among Member Countries. It is estimated that OPEC member countries control 42% of world crude oil production and have 80% of world crude oil reserves.
Table 1.1 Top 10 Oil Reserves/Billion Barrels
- Saudi Arabia – OPEC 264.59
- Venezuela – OPEC 211.14
- Canada 178
- Iran – OPEC 137.01
- Iraq – OPEC 115
- Kuwait – OPEC 101.50
- United Arab Emirates – OPEC 97.80
- Russia 74.3
- Libya – OPEC 46.42
- Nigeria – OPEC 37.20
*OPEC 2009 Statistical Bulletin, BP Statistical Energy Review 2011
World Top 10 Oil Production by Country
Table 1.2 Top 10 Oil Production/Million Barrels Per Day
- Russia 10,270
- Saudi Arabia – OPEC 10,007
- United States 7,513
- Iran – OPEC 4,245
- China 4,071
- Canada 3,336
- UAE – OPEC 2,849
- Kuwait – OPEC 2,508
- Iraq – OPEC 2,460
- Nigeria – OPEC 2,402
*BP Statistical Energy Review 2011
It is easy to recognize the clout OPEC holds in a global context:. When you look at the top ten countries in the world with the largest oil reserves, eight of them are OPEC members. Similarly, when one looks at the world’s top ten oil producing countries, six of them are OPEC members.
There are many glaring differences between sovereign oil companies (state-owned companies, which control the oil production present in the vast majority of OPEC member countries, as well as in Russia and China) and the independent oil companies (IOC) that we are accustomed to in North America and Europe. This draws a comparison between political ideologies – like nationalization of industries under a dictatorship or a communist system, compared to capitalism found in a democratic and free society.
The biggest difference and my main point for discussion today is transparency.
These OPEC countries, through their national oil companies allow no outside, third party audits of their stated reserves or true production. The biggest IOC’s in the world, such as Exxon Mobil, Shell, BP, Conoco Philips, Chevron, Total, Suncor, etc., all have yearly independent reviews of their production, reserves and exploration success (and failures)
The reason the global community should be concerned about realistic estimates of OPEC reserves, is because this group of countries hold such a large percentage of the entire world’s oil reserves – approximately 80%. If these reserves were overstated or exaggerated, it would result in the misleading of all stakeholders, including governments, citizens, and corporations. This deception could have a severe impact of future oil supply shortages, and subsequently on our modern way of life, and the cost of energy.
The term “paper barrel” is an industry phrase which commonly refers to a barrel of oil that someone has booked in their reserves but will very likely never flow and likely does not exist. No one knows with absolute certainty if OPEC truly has what they claim to have, but if they would like to reinforce their iron grip on world oil markets, why not allow independent reserve appraisals, and provide access to the outside world, to well production reports? This would prove beyond any doubt that OPEC’s reserves were real and accurate, and further enhance their control of global oil markets.
OPEC Oil Reserve History
There are several mystifying reserve increases in OPEC history with no underlying new discoveries of oil fields large enough to justify the outlandish increases in reserves. Let’s look at the history of OPEC member oil reserve reporting:
•In 1980 OPEC changes the production system to be partially based on reserves
•Iran went from 58 billion in reserves in 1980 to 93 billion in 1986
•Iraq went from 59 billion in reserves in 1982 to 100 billion in 1987
•Kuwait went from 68 billion in reserves in 1980 to 93 billion in 1984
•UAE went from 30 billion in reserves in 1980 to 97 billion in 1986
•Venezuela went from 20 billion in reserves in 1980 to 55 billion in 1985
•Libya and Nigeria were the only 2 countries without this miraculous reserve growth
•Complete Ownership of Saudi Aramaco was transferred from independent oil companies Texaco, Standard Oil of California, Standard Oil of New Jersey, and Socony Vacumn to the Saudi government in 1980. At that time, Saudi Arabian reserves were 168 Billion. By 1988 reserves were up to 255 billion barrels, with no new major oil finds announced.
•Saudi Arabia reserves have been almost unchanged in the last 2 decades despite having produced roughly 60 billion barrels. All of the major Saudi Arabian oil fields that account for the vast majority of their total production were found 30-60 years ago including Ghawar, the world’s largest oil field. The most obvious question is: With no new major discoveries announced, how have they maintained their reserves?
•Many OPEC member’s reserves have been unchanged for years, despite no announced new discoveries and billions of barrels produced.
The hypothesis that OPEC reserves could be overstated by as much as 50% is well known to many industry observers, but largely ignored by the general public. Of the top ten countries with the world’s largest oil reserves (see table 1.1 above), only two countries, Russia and Canada are not OPEC members. And of these two countries, Canada’s reputation for safety, ethics, and clean responsible production far surpasses that of Russia. Not to mention that Canada’s friendly reputation with every super power in the world, and it’s fair, responsible democratic system, which proved to be very sturdy in the global downfall of 2008 that crippled other economies around the world (namely, the United States).
Paper Barrel Consequences
If you think you have a lot more of something then you actually do (ie. oil) , and this commodity is a necessity for every facet of life ( See this poster for a list) plus you have increasing demand and depletion from existing production, the possibility prices are going to sky rocket becomes more and more likely. This is the simple rule of supply and demand – when supply decreases, and demand increases, prices can increase infinitely. If this happens, every petroleum dependent society is going to go into a severe economic retraction and have to quickly secure enough oil to quench their thirst. Energy shortages could mean restrictions on travel, trade, transportation and our entire way of life. Oil is needed to produce gasoline or diesel for trucks and cars, jet fuel for long distance travel, bunker fuel for cargo ships and in instances were oil is burned for heat and/or electricity generation, such as in older homes in Eastern Canada it becomes a matter of having heat in the winter or freezing! The issue which will arise from transportation problems, will result in, food shortages, as well as shortages in other goods required for survival, such as medications or drugs, equipment, etc. . All of the things we are used to will be in short supply.
This is one element to the argument that the USA and Canada need to be planning and improving our own future and securing supplies for our energy security. We need to continue to develop the Alberta Oil Sands as an alternate source to OPEC oil.
OPEC Oil Reserves, Are they Real or Simply just Paper Barrels, What do you Think?
Sources: EIA, IEA, OPEC, Twilight in the Desert by Matt Simmons, CAPP, BP Statistical Review