Slick Argument

by Don Boudreaux on March 15, 2011

in Energy, Myths and Fallacies, Regulation

Roland Hwang is quoted in today’s edition of USA Today arguing that

America consumes roughly one-quarter of the world’s oil, yet we are home to less than 2% of the globe’s proven oil reserves.  So much for ‘drill, baby, drill.’  Even if we were to drill a hole everywhere in the country that has oil and drain every drop, we’d have enough to last us just about three years.

Whatever good arguments there might be for not easing restrictions on drilling, Hwang’s isn’t among them.  The reason is that the size of any nation’s proved oil reserves is in part an artifact of that nation’s policies on drilling.  Here’s how the Society of Petroleum Engineers defines “proved reserves”:

Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations.

So the very fact that Uncle Sam prohibits drilling on, say, ANWR keeps America’s proved reserves lower than they would be without this prohibition.  The current small size of proved petroleum reserves, therefore, cannot legitimately be cited as a reason not to ease drilling restrictions.

Also, as Greg Staff points out by e-mail, “volumes reported as ‘proved reserves’ will go up and down with the per barrel price of oil.”

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Methinks1776 March 15, 2011 at 11:57 am

“volumes reported as ‘proved reserves’ will go up and down with the per barrel price of oil.”

and also with changes in available technology.

Noah March 15, 2011 at 11:58 am

Isn’t Proven Reserves officially defined by the SEC?

Don Boudreaux March 15, 2011 at 12:02 pm

The SEC has policies that limit oil-company disclosures about reserves to “proved reserves.” I’m unfamiliar, though, with the details. And I don’t know if the SEC uses a different definition of “proved reserves” than the one used by the Society of Petroleum Engineers. Doubtful, but possible.

Methinks1776 March 15, 2011 at 12:04 pm

The definition Don posted is in the notes of every petroleum producer’s Q and K, so I’m guessing the SEC has accepted that definition.

Noah March 15, 2011 at 12:38 pm

Methinks the oil industry has accepted the SEC’s definition.

Methinks1776 March 15, 2011 at 12:50 pm

:)

Usually, the SEC let’s the industry define these terms and picks from the available definitions. The lawyers at the SEC wouldn’t know an oil derrick from a monkey bar.

Ryan Vann March 15, 2011 at 1:18 pm

“The lawyers at the SEC wouldn’t know an oil derrick from a monkey bar.”

Hilarious.

Methinks1776 March 15, 2011 at 12:54 pm

“let’s” = “lets”

SheetWise March 16, 2011 at 9:13 am

Yes — it would be nice if the site had a preview function, or an edit function that responded for a couple minutes.

John Hudock March 15, 2011 at 12:43 pm

The other problem with the argument is that it uses an old finance trick of compareing usage (an income statement item, if you will) with reserves (a balance sheet item), fooling you into thinking “Ooh, 2% is a small number and 25% is a much bigger number so I’ve made some sort of point”. But the only point can be made with actual quantities.

Say total world reserves are 100 trillion barrels (all of these numbers are completely fictitious to make the point), so US reserves at 2% would be 2 trillion barrels. If world oil usage is 4 billion barrels /year and the US is a consumer of 25% then the US would consume 1 billion bbl/yr. Which would take the US 2000 years to consume its “proven” reserves.

kyle8 March 15, 2011 at 2:03 pm

Yes his so called argument doesn’t even pass the smell test. Since he gives only percentages of two different numbers(and questionable ones at that) and no absolute amounts.

BUT even if he were correct, his argument still would not make since. If we drilled for all of our known reserves we would increase global supply and decrease the price of the commodity by that amount regardless of how long it lasts. It would still be the right thing to do.

Hwang must be the product of a bad public school.

kyle8 March 15, 2011 at 3:04 pm

sence not since, Spelling is my Hwang up.

JohnK March 15, 2011 at 1:33 pm

The argument I get from people saying “drill baby drill” is that oil prices would go down if we drilled our own.
Since oil is a global commodity, wouldn’t we have to raise the global supply to affect the global price?
That doesn’t seem likely, even if the government lifted all restrictions on drilling.
Even if we turned on the spigot of every known oil deposit in the country, couldn’t OPEC nullify that increase in global supply with a wave of their hand?

Not that I’m against drilling, I just don’t see how doing so would lower the price of crude.

Methinks1776 March 15, 2011 at 1:52 pm

Drilling in the United States may or may not increase supply enough to lower price. OPEC may or may not lower production to increase price. All of that depends on a lot of variables from changes in demand for oil to Saudi Arabia’s national budget.

All else held constant, an increase in oil supply should lower the price. whatever happens to price, government restrictions are ridiculous.

kyle8 March 15, 2011 at 2:06 pm

The other argument is less money would go towards nations that don’t like us too much. A large increase in supply would do that as well as lower prices. And if we were turned loose to tap all of our domestic supply then the supply would increase by a rather significant amount.

JohnK March 15, 2011 at 2:33 pm

Since oil is a global commodity, us using our own oil will not mean nations that don’t like us much will not be able to sell their oil. They may get less of our money, but they will still get paid.
So I don’t buy the argument that exploiting domestic oil will somehow have an effect on Chavez or Ahmadinejad.
If we tapped all our oil it could increase global supply, but that is not guaranteed since OPEC could cut production accordingly.

What stinks here is that the burden of proof is flipped.
It should be up to those who want to restrict drilling to prove why there should be no drilling. But that is not the case. It is up to those who want to drill to plead their case to those who say no.

This means the opposition can simply move the goalposts to “win” every argument.

kyle8 March 15, 2011 at 3:06 pm

no, if the supply were increased then those nations would get less money in absolute measurement due to the law of supply and demand.

kyle8 March 15, 2011 at 3:09 pm

Or let me state, that I don’t think it possible for Opec to cut the supply enough to make up for our increased production. They don’t have that much slack capacity right now. Futhermore there is still the argument of a greater market share for domestic producers and an increase in domestic jobs.

That argument would have no value if it increased the price in order to drill domestically, but since it would probably lower the oil prices then it is a valid argument.

Observer Guy1 March 15, 2011 at 1:44 pm

Nearly every car on the road today runs on gas. 25 years from, the overwhelming majority of cars will still run on gas. Where do we get gas? Oil.

Policies restricting domestic exploration and drilling make no sense, when this action simply off-shores the exploration and production to unfriendly countries who care nothing about the environment.

Face it – the Obama administration wishes to destroy the fossil fuel industry and replace it with his version of Green technology.

mfsmit March 15, 2011 at 1:47 pm

The US produces a much higher proportion of its proved reserved on an annual basis than most every other country out there. The US’ reserves-to-production (R/P) ratio is about 4. Saudi Arabia is about 29, Venezuela 72, Canada 10.

The US accounts for 9% of production, despite having only 2% of reserves.

Oh, and its more accurate to say that proved reserves vary with the oil price that oil companies’ use to determine field economics. Most operators are using a price well below the current spot price to evaluate field economics.

W.E. Heasley March 15, 2011 at 2:31 pm

Hwang argument has many fatal flaws, one being that “proven reserves” is different than total reserves from the petroleum producer aspect. That is, petroleum producers don’t want to know what total reserves are, they merely want know proven reserves. Why? Proven reserves is a price component.

For example, suppose that total reserves were known and the number found was enough for 1 million years. The resource has suddenly become way abundant. But if we only know or care to know the proven reserve then supply is finite and hence scarce.

Apparently Hwang has been studying COUP economics (Crazy Old Uncle Paul economics). Does that make Hwang a Coupian or a Coupon?

Geofffrey Brand March 15, 2011 at 2:33 pm

This is the most common mistake by people who do not know what reserves are.

Reserves are what are proven econimic by drilling. They are NOT how much oil we have left. We actually have more reserves in 2009 than we had in 2008. We found more oil than we produced.

In fact lower reserves might be an indication that we are doing BETTER. It is similar to just in time inventory in manufacturing.

קלאב הוטל March 15, 2011 at 3:38 pm

Wow I learned a lot this article. Thank you.

קלאב הוטל March 15, 2011 at 3:39 pm

Wow I learned a lot this article. Thank you Don.

Mr. Econotarian March 15, 2011 at 4:13 pm

Moreover, US net oil imports is less than 50% of US oil consumption:

http://www.eia.doe.gov/emeu/25opec/sld002.htm

Geofffrey Brand March 15, 2011 at 5:09 pm

We actually imported more than 50%..

Somewhat creative accounting by the Energy Information Administration.

For 2010
U.S. production was 5.5 million barrels per day
U.S. natural gas liquids was 2 million barrels per day
or a total of 7.5 million barrels.

We imported 9 million barrels per day of crude.
(refined product imports and exports cancel each other out)

The EIA counts ethanol and refinery gains as the U.S.

PS. A refinery gain is when you refine 20 barrels of oil you get 21 barresl of ligher gasoline and other products. Since you are refining both U.S. and imported crude it seems “unfair” to call all of the gain domestic.

muirgeo March 15, 2011 at 4:16 pm

The bigger question is who owns ANWR. None of us do but all of us do. Who the hell does any economist or free market person think they are to tell us we need to drill this pristine enviroment to satify some addiction to oil or supposed economic or market need? You have no greater right to it based on your economic argument than others do based on their moral or environmental arguenment. And all the evidencce suggest the economic argument is pretty shallow… at best buying us a few more years or saving us a few more cents at the pump.

Oh and I pre-emptively call BS on your concern for the pump price and its effect on the poor… you all don’t give a shit about the poor.

http://politicallyright.files.wordpress.com/2008/07/anwr-left1.jpg

W.E. Heasley March 15, 2011 at 5:33 pm

The bigger question is who owns ANWR. None of us do but all of us do. Who the hell does any economist or free market person think they are to tell us we need to drill this pristine enviroment to satify some addiction to oil or supposed economic or market need? You have no greater right to it based on your economic argument than others do based on their moral or environmental arguenment. And all the evidencce suggest the economic argument is pretty shallow… at best buying us a few more years or saving us a few more cents at the pump. – muirgeo [doesn’t consider spell check as a viable option]

Hmmmm. Quit the notional argument. Upon further review:

“………who owns ANWR. None of us do but all of us do.” So ANWR is a collective. -Or- Is ANWR a collective because as an authoritarian you have deemed it so?

“..addiction to oil”. Ah, add some verbal virtuosity.

“…supposed economic or market need”. Ah, coercive collectivism trumps the free individual. Very notional.

“Who the hell does any economist or free market person think they are to tell us we need to drill this pristine environment… “. Hence any and all drilling ends pristine environments. Further, muirgeo is the purveyor of what is pristine and not pristine. Wow! Categorical notional-ism.

“And all the evidence suggest the economic argument is pretty shallow…”. Empirical economic arguments are now notional. Moreover, economics is deemed “shallow” by the purveyor of notional propositions. Is that New Speak?

Muirgeo: You need to seriously explore the use of spell check. Also, you should seriously consider withdrawing your application to the Harvard Debate Team. Finally, you should consider Venezuela as a viable option for homesteading.

muirgeo March 16, 2011 at 1:22 am

“………who owns ANWR. None of us do but all of us do.” So ANWR is a collective. -Or- Is ANWR a collective because as an authoritarian you have deemed it so?” WEH

OK if I am wrong then who owns it… who gets the rights to it? Please do tell. You don’t have an answer do you?

Ken March 16, 2011 at 9:57 pm

The government, NOT the public. If I owned, as in we all own it, I can do whatever the hell I want, but the government owns it, meaning that government bureaucrats have the rights to decide whatever happens there.

Dumbass.

John V March 15, 2011 at 5:36 pm

“The bigger question is who owns ANWR.”

No. It isn’t.

muirgeo March 16, 2011 at 1:24 am

Well I was talking about for people who are deep thinkers, who delve more into the crux and details of matters and are not simple knee-jerk reactionaries. So for you…yeah.. you’re right.

John V March 16, 2011 at 9:31 am

No. And no.

Ken March 15, 2011 at 5:38 pm

“The bigger question is who owns ANWR. None of us do but all of us do. Who the hell does any economist or free market person think they are to tell us we need to drill this pristine enviroment to satify some addiction to oil or supposed economic or market need?”

Since we all own it, including all economists and free market people, I think any and all of us have that right to tell anyone we want about it.

The really bigger question is why do we all own it, turning it into a tragedy of commons? Why hold off some remote area people like you posture about, but about which you don’t really care?

“And all the evidencce suggest the economic argument is pretty shallow ….”

Of course your arguments are never shallow (see below). Who the hell really cares about ANWR? You surely don’t and neither do environmental hacks. You and your clownish posse simply use it as a talking point, but you could care less if a sink hole opened and swallowed it.

“Oh and I pre-emptively call BS on your concern for the pump price and its effect on the poor… you all don’t give a shit about the poor. ”

And of course you care about them lots, by supporting policies that objectively make their lives worse off by making things more expensive. By ignoring any savings ahead of time, you ignore any need to justify your policies for making life worse for poor people.

John V March 15, 2011 at 5:39 pm

“Oh and I pre-emptively call BS on your concern for the pump price and its effect on the poor… you all don’t give a shit about the poor.”

No. You don’t give a shit about the poor. The only thing you give a shit about is supporting a way of thinking, and the policies that flow therefrom, that make you think you look like you give a shit about the poor.

Methinks1776 March 15, 2011 at 6:22 pm

Never mind the “addiction” to oil. How about your addiction to smearing your streams of unconsciousness all over this blog. Any chance of curing your from that addiction, Muridog?

kyle8 March 15, 2011 at 7:12 pm

I care a hell of a lot more about the poor than you do, since you want the poor to remain poor, with a no growth economy, high energy prices, and very high consumer prices due to protectionism.

You freaking HATE the poor.

W.E. Heasley March 15, 2011 at 5:48 pm

Ken and John V.:

It appears the “greater collective” wants to boot muirgeo.

Oh dear!

Can we frame the booting of muirgeo as “for the children”?

Ken March 15, 2011 at 6:23 pm

What are you talking about? I am not part of a “greater collective” nor have I ever claimed to be. I am an individual providing insights into logic and fact to another individual (muirgeo above and you here) on how to think clearly and logically.

Try to think more clearly so you can write clearly. When reading the above all I think of is a man with a terribly fuzzy mind trying to be clever, but sounding stupid.

W.E. Heasley March 15, 2011 at 6:30 pm

Ken:

Try re-reading what I wrote.

Methinks1776 March 15, 2011 at 6:30 pm

So, I take it you didn’t pick on Mr. Heasley’s humour, Ken?

W.E. Heasley March 15, 2011 at 6:46 pm

Yeah, what super-woman said!

Ken March 15, 2011 at 8:15 pm

I am humorless towards those I don’t know online. I don’t have much interaction with Heasley nor do I make it a habit of reading his comments.

I have no idea if Heasley is attempting to be funny or really that stupid; after all many on this site are earnest when saying such stupid things.

Methinks1776 March 15, 2011 at 9:36 pm

Well, that’s understandable. But, now you know that Mr. Heasley is fluent in sarcasm and you can enjoy!

Gil March 15, 2011 at 10:57 pm

Domestic production of oil? That’s “keep our jobs here” and “only buy ‘made in the U.S.A.’” protectionist drivel!

John V March 16, 2011 at 11:14 am

It’s interference with supply and demand.

Ken March 16, 2011 at 2:12 pm

You really are a troll.

Protectionism in the name of “keep jobs here” is about reducing choice and increasing price for consumers. Along the same lines preventing drilling for oil in the US is about reducing choice and increasing price for consumers.

You seem to think there is some logical inconsistency from those who extol the virtues of free trade AND domestic drilling. The deficiency is your brain power though. Freely trading with whomever you want is one side of the libertarian ideology while the other doing what you like with your own person and property, including drilling for oil.

Big government is about restrictions: restricting with whom you can trade and restricting what you can do with your own property and even restricting private property by making such land “public” a terribly Orwellian term.

You fool.

missyup acmioasa March 16, 2011 at 1:17 am

I personally am sick to death of lawyers and their self serving slick BS.

Somathil

Linda Seebach March 17, 2011 at 1:50 pm

There are an estimated trillion barrels of potentially recoverable shale oil in the American west, but it is under federal land and Congress is barring research into whether new methods developed by Shell can be scaled up consistently with environmental concerns. When Shell officers came to the Rocky Mountain News in Denver, they had completed a proof-of-concept demonstration (cooking the rock in place to produce liquid oil and natural gas). They said they believed that the method would be profitable as long as the price of oil stayed about $30 a barrel, and much cleaner than extracting oil from Candian tar sands.

That was in 2005, and industry analysts estimated 15 to 20 years before commercial production could start. The oil companies weren’t asking for subsidies, just for permission. How far along are we? Not at all.

andrea lareau March 18, 2011 at 2:03 am

Thats a lot information here of slick arguments I personally am sick to death of lawyers and their self serving slick BS. Their tell them anything to win mentality lawyers are trained in.
http://skinnyfiberfacts.com

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