11/09/2004, 00.00
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Global oil reserves have grown

by Maurizio DOrlando
But, with decreased marginal production capacity, prices have increased.

Milano (Asia News) – There is no lack of petroleum in the world, despite recent, sharp increases in prices and gloomy neo-Malthusian predictions to the contrary, by which future development would be limited due to resources being finite and fossil fuel supplies would not be sufficient to guarantee Western-style well-being for everyone.

According to the BP Statistical Review of World Energy 2004, guaranteed fuel reserves totalled 1.146,3 billion barrels, equal to 156,7 billion tons, at the end of 2003.  As a ration of current annual production, such global reserves would guarantee 41 years of production. This data, as well as research and forecasts of the prestigious MIT, Massachusetts Institute of Technology, prompted Aurelio Peccei and his colleagues at the "Club di Roma" to predict that crude oil supplies are assured for only another 41 years.

Yet, in recent years, global fuel consumption has increased slightly at an annual average rate of about 2,3 per cent, an increase concentrated mostly in developing countries. At the same time however, there has also been a corresponding growth in guaranteed fuel reserves. In fact in 1993 guaranteed reserves stood at 1.023,6 billion barrels and, in 1983, at 723 billion barrels. The ratio between reserves and production has also risen: at the beginning of the sixties it was equal to 20, and in 1970 had risen to 31 (source DeGolyer & McNaughton). This all goes to show that in recent years, increased consumption has been matched by an expansion in petroleum reserves.  Thus, the ratio between identified reserves and annual global production does not mean in any way that, within a certain number of years, petroleum reserves will be exhausted, as the neo-Malthusians would have us believe.

Put simply, we should not worry that there will be no more oil 41 years down the road, in 2045. Going by current data, David Deming of the University of Oklahoma says, for example, there is enough fuel to cover increased global consumption at least until 2100 and perhaps even well beyond that.  One of the main problems lies in the disproportionate geographic spread of oil resources across the world.  But this reality, in conditions of free market trade, does not account in any way for sharply increased prices. If China and the Far East in general are lacking energy supplies, they can import petroleum from elsewhere, especially the Middle East, which has large excesses.

So what is behind the sudden leap in oil prices? The truth is that marginal production capacity has dropped in recent years, due to faulty forecasting.  In other words, even if there are plenty of oilfields, and their whereabouts are, by and large, known, supply is less than potential demand because extra oil cannot be had by simply turning a tap.

To explain better: once reserves are identified through geo-seismic research and exploration wells, discovery wells must be drilled, oil pipelines and loading terminals built. In some cases, refineries must be expanded to accommodate expensive facilities to process heavy crude oil with high sulphur content, in order to produce non-polluting distilled oils required for land, air and sea transport.

All this means that there is a delay of about seven or eight years (in some cases less, in others even more) before resources extracted from an oil field can be available as finished products on the market.  Firstly, this can lead to two results: either there is a buffer in terms of available, but unused, production capacity, to meet inevitable and unforeseen swings in international demand for crude oil and energy; or else we must put up with periodic cycles of fluctuations, even extreme, in prices.  This is precisely the case in China, for example, where the car population has boomed, with an increase of about 80 per cent.

Secondly, there is the need for macroeconomic analysis instruments and consumption predictions capable of providing a highly accurate forecast over 10 years in the future.  At this time, neither has materialised.

As for marginal production capacity readily available, we have witnessed a notable reduction in buffer measures in recent years, so that now practically only Saudi Arabia has significant, though insufficient, quantities, in relation to global petroleum demands.  The reason is, on one hand, that state-owned companies of producing companies have had trouble making necessary investments, due to public budget deficits in the wake of a long period of low crude oil prices.  On the other hand private oil company executives around the world, whose personal income is often tied to stock values, have favoured a short-term, often a very-short-term, approach, under the pressure of quarterly reports required by nearly all stock exchanges.

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