No Oil Discoveries? No Problem!

| About: The United (USO)

Summary

Lowest oil discoveries in 70 years alarming to some.

Saying it means higher prices "inevitable.".

Fail to consider proven reserves v. future production.

Why spend money exploring if enough has already been discovered?

New oil discoveries are at a 70-year low. And some market observers are screaming "the sky is falling." They claim that a reduction in production and rise in price is therefore "inevitable."

But, according to BP's 2016 Statistical Review of World Energy, the world has 50 years of proven reserves at current production rates. So why spend a lot of money looking for more oil when you already know where it is? "Considering the reduction in the prices, you have to be looking to every dollar you are spending," Pedro Parente, CEO of Petroleo Brasileiro SA, said. "It can't continue forever, because then what we'll see is a spike in prices in the future."

Or can it?

Proven Reserves

"Global total proved oil reserves in 2015 fell by 2.4 billion barrels (-0.1%) to 1697.6 billion barrels, just the second annual decline in our data set (along with 1998). Reserves have nonetheless increased by 24%, or 320 billion barrels, over the past decade; and are sufficient to meet 50.7 years of global production."

BP defines proven reserves to be "those quantities that geological and engineering information indicates with reasonable certainty can be recovered in the future from known reservoirs under existing economic and geological conditions."

The largest additions two decades ago were in the U.S. and Canada due to the commercialization of shale and oil sands production methods.

Additions

Additions

Billion Barrels

1995

2005

2015

1995-2005

2006-2015

World

1126

1374

1700

248

326

North America

127

234

238

107

4

South & Central America

84

104

332

20

228

Europe and Eurasia

141

140

155

-1

15

Total Middle East

663

756

804

93

48

Africa

72

111

129

39

18

Asis Pacific

39

41

43

2

2

Click to enlarge

Source: BP Statistical Review of the World.

Because the definition of proven reserves includes that they be economically recoverable, the price of oil will, in theory, move this number up and down. It is not clear how fine-tuned this estimate is.

I don't think it needs to be very accurate. There is a large margin of safety. Below is a graph that shows the Energy Information Administration's 2016 annual forecast of cumulative world oil production from 2016 through 2040, as compared to proven reserves at the end of 2015. If NO new discoveries are made, the world will produce only 57% of reserves.

Click to enlarge

Conclusion

The world will be shifting away from petroleum consumption over the next 50 years to reduce carbon emissions. The U.S. and China both ratified the Paris agreement today. I believe the transition from oil will happen much faster than most, but reserves should be adequate for 40-50 years--at least. In the interim, there will be a transition to natural gas.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.