Energy: The "Yes, We Can!" Man Says "No, We Can't!"

During last night’s debate, Candidate Barack Obama perpetuated one of the most pernicious memes of the current energy debate, one that lets the candidate of “Yes, We Can!” wrongly declare “No, We Can’t!” when it comes to energy policy.

The meme: The U.S. consumes 25% of the world’s petroleum, but contains only 3% of the world’s reserves. Therefore, there is no point in trying to drill our way out of our current energy dilemma. Or so the defeatist thinking goes.

The confusion is an understandable one, but this is your chance, Dear Reader, to be more informed than at least one U.S. Senator and Democratic nominee to the Office of the President.

In a nutshell:

“Oil Reserves” are to “Oil Resources” as “A Bushel of Apples” is to “An Orchard”“RESERVES” vs “RESOURCES”. Words, Just Words, to quote the Anointed One. But in this case, the words have very different and specific technical meanings, and therein lies the confusion.*RESERVES* refers to “Proved Reserves”, those quantities that are “reasonably certain” (like, at the 90% level of certainty) and expected to be recovered from existing wells and known fields, assuming current prices and operating practices. RESERVES have already been found and are comparatively well-quantified. In essence, reserves are the apples that have already been discovered, harvested and are waiting to be consumed.

As it turns out, RESERVE estimating methodology in the U.S. is conservative compared to the rest of the world. Reserve estimating is a financial enterprise, with the rules set by the SEC, not the DOE. Reserve disclosures are for the benefit of stockholders and in most cases are performed by independent third party geological and engineering firms. In the age of Sarbanes-Oxley, companies are loath to play fast and loose with reserve estimates.

Eighty percent of the world’s reserves are owned by National Oil Companies, who have zero oversight and no compunction about overstating their RESERVE estimates if it fits their domestic and foreign policy objectives.

*RESOURCES* – Those quantities that are estimated to be present and may some day be recoverable independent of price and technical constraints. Resource estimates are based on a smattering of data and large doses of conjecture, extrapolation and SWAGs. They are inherently prone to wide ranges of uncertainty. An example is the 85 billion-odd barrels of resources estimated on the Outer Continental Shelf — much of it is unknown and essentially unknowable unless and until we gut up and start drilling assessment wells.

To complete my analogy, RESOURCES are the apple orchard — but we don’t know how big it is, how many trees it contains, what their yield might be, or even if they’re all apple trees!

So, we have lots of RESOURCES that could become RESERVES if we had the national will. But we have chosen to keep our RESOURCES in a LOCKBOX. This, ladies and gentlemen, is circular logic: We use our low RESERVE numbers as an excuse not to explore and define our RESOURCES, and potentially turn them into more RESERVES.