It’s the same old oil industry

By Bill Kovarik
As a very young news reporter in Washington DC in 1979, I was invited to one of those  think tank “luncheons” where everyone chatted amiably about world oil reserves and the imminent collapse of the Persian Gulf.

Not surprisingly, all the speakers agreed that a shut-down of the Persian Gulf would be catastrophic and must be prevented at all costs. That is, all the speakers except one smiling Venezuelan named Alirio Parra, who was then oil minister.  The bottom line was: Don’t worry. Venezuela has more oil in the eastern Orinoco than all the Middle East. And, he strongly implied, your petroleum geologists should be more honest with you.

I remember the shouts of outrage from the assembled policy wonks, one of whom yelled that there was “a journalist here” in the same tone that a Victorian preacher might caution:  “ladies present.”

The friendly oil guys at my table tried to steer me right. Everyone knows that Venezuelan heavy oil is not actually oil.   Nor is Canadian tar sands juice really oil, either. After all, everyone knows that the Middle East had two thirds of all the world’s oil.

As I was leaving, a USGS scientist named Bernardo Grossling took me aside.  It’s all in how you define an oil reserve, he told me confidentially.  If you only count “proven” reserves, then the oil industry is right. Two thirds of proven reserves are in the Middle East.

On the other hand, if you want to just consider oil in the ground,  the Venezuelans were right. There’s far more in Canada and Venezuela than in the Middle East.

It all hinges on who decides what is actually listed as a proven reserve.  If the oil industry is allowed to decide what is a “fact,” then that is what we will base our policies on.

In retrospect, it’s an example of one of the more painful lessons of  history:  that money and politics and industry influence can seriously distort scientific information.

Ask any old timer. We all remember the gas lines, the “Oil Crisis,” and the Middle Eastern wars.  Those wars were necessary, we were told, because the Middle East had two-thirds of the world’s oil.  Not just two thirds of one special category of oil created by the oil industry. Oh, no. ALL the world’s oil. Every bit of it that was known.  Every media outlet in the world swallowed that one hook, line and sinker.  Which is why the US just HAD to go to war in the Middle East, to protect the lifeblood of the world’s commerce.

So how do we now account for the recent sudden abundance of oil?   The Post says  the “center of gravity” for  world oil resources has shifted, The Guardian says we were just  wrong on peak oil and that the “facts have changed.”

But who decides what is a “fact?”

If the facts have changed, what has not changed is the oil industry  itself.

Yes, the good old boys of Standard Oil that journalist Ida Tarbell exposed in 1904.  Our friends behind the Teapot Dome oil scandal of 1924. Those nice guys  who who fueled up Nazi submarines with their oil tankers on the high seas in 1940-41. You know, the fellows who gave  leaded gasoline technology to the Nazis and blocked synthetic rubber production in the US, hoping, apparently, to end up on the winning side of World War II.  Our grinning friends who tried to convince us that farm fuels were bad for your engine and bad for the economy in the 1970s, and that we should leave all that complicated policy stuff to them and not worry our pretty little heads about it.

Yeah — those guys. Now they’re telling us  that the market has only suddenly discovered Canadian and Venezuelan oil.

The  truth is that the choice was not between a ghastly war and severe oil shortages. The choice was between a ghastly war and slightly more expensive gasoline. It cost a dollar less to commute every day. Was the war worth it?  The depths of moral depravity encompassed in this question are difficult to fathom, but they go a long, long way down.

“I was misinformed,” Humphrey Bogart famously says in Casablanca, and everyone laughs.  We were misinformed by the world oil industry and the US Energy Information Administration and other governmental agencies.

It wasn’t very funny to the US Geological Survey.  Scientists there had another set of “facts” on the ground.

proved.BP.reserves proved.versus2

The two charts (above) are a good place to begin.   The first was created by BP in 2002, and the big green bar on the right hand side represents  Middle Eastern oil reserves. Obviously, it dwarfs the rest of the world.

The second chart has data from the USGS  World Petroleum Assessment and Analysis of Nov. 28, 2000 that contrasts fairly sharply with the oil industry’s perspective.

The problem was not simply that BP and the rest of the oil industry  slanted the data towards the Middle East.

The problem is that this first chart represents the ONLY data available outside of a few very specialized circles.  The BP annual world oil assessment, and similar reports from Shell and Exxon and the federal Energy Information Administration, never referred to the USGS. They never let on that there was any question about world oil reserves.  They all said that the Middle East had two thirds of the world’s oil. There was no other point of view available.

Of course the USGS could have done something about it.  Back in 2005 I asked a high level USGS official why the agency did not inform the media, and he said:

          “The USGS is not a political agency.”

The USGS official didn’t get that question very often because the journalists thought that the Middle East had two thirds of ALL of the world’s oil.  The Department of Energy and the oil industries all said so.  From Mother Jones to the New York Times to Fox News, from the 1970s to just last year,  everyone  writing news or dealing with public policy seemed to believe that the world’s supply of future oil  would necessarily gravitate around the Middle East.  It was  “The” Prize.

So our entire energy policy from the 2oth century through to about 2012 was based on one simple technological misrepresentation.  This deserves a place of honor in the great and crowded museum of misdirections, mendacities and public relations triumphs.

The glass of beer analogy

A few years ago, Dr. Colin Campbell of the Association for the Study of Peak Oil used this analogy:”Understanding [oil] depletion is simple. Think of an Irish pub. The glass starts full and ends empty. There are only so many more drinks to closing time. It’s the same with oil. We have to find the bar before we can drink what’s in it.”

But the analogy of a  tankard of beer is only appropriate if we are thinking about individual tanks of gas.  A better analogy to the world oil industry would involve a street full of  pubs and a network of warehouses and distilleries.  The price keeps going up because the proprietors of your pub claim to be running out of beer. You can see for yourself, they say, the shelf is almost empty. The Ministry for Pubs says its worried and gives each of the pubs a generous beverage  depletion allowance and other tax breaks. And the ministry loudly trumpets the  promise that it will eventually ease our dependence on beer while quietly cutting alternative beverage research.

Of course, the best kept secret in town is a huge stockpile of barley, yeast and hops in the warehouse across town.  If you even bothered to ask about it in the 1970s or 80s, they’d tell you that it wasn’t “proven” beer.  It was only “potential” beer or even “undiscovered” beer.  Meanwhile, of course, we had to have a strong army to fight to secure our “proven” sources of beer.

Resource wars and world oil reserves 

The logic of the fights over world oil, especially the 1992 and 2003 invasions of Kuwait and Iraq,  went something like this:

Premise 1: The world needs oil. It is the lifeblood of commerce.    Premise 2:  Two thirds of  ALL  the world’s oil is in the Middle East.  Oh, and by the way, there are terrorists there.   Conclusion: The US  has to wage war to ensure that this oil is accessible to the world.

So, if you buy the premise, you buy the conclusion.  Few people ever questioned the alternative premise — that there were might be other sources of oil in the world or even alternatives to oil.

Of course, the invasions of Kuwait and Iraq   were not officially acknowledged as being related to oil reserves. They were officially all about Iraq’s invasion of peaceful Kuwait, or Saddam Hussein’s weapons of mass destruction.  But of course it was well  understood by anyone paying attention that these were actually resource wars.

It’s not that the facts were suppressed in order to go to war. Nobody was forced to believe BP, ExxonMobil, Shell, Chevron, and the US Energy Information Administration and the International Energy Agency and OPEC. Nobody was forced to believe Daniel Yergin when he told us that the Middle East was “The” Prize. Hey, the guy won a Pulitzer, fer gosh sakes, although it would be nice to call that one into question some day.

So a more reasoned view might be that in our haste to protect a resource that seemed threatened,  we did not develop alternative sources of information about alternative sources of energy.  We didn’t understand the world oil industry. In fact, we trusted them, and it was a big mistake.

One of humanity’s biggest mistakes, it may yet turn out, because the firestorm we unleashed is still burning.

So what’s a “proven” reserve? Does it matter?

The embarrassing scientific reality is that petroleum geologists never really thought that the Middle East had two – thirds of all the world’s oil.   It was only two thirds of a special category called “proven” oil reserves.

Any geologist will tell you that it’s wrong to focus on “proven” reserves when you consider long-term strategic goals. As Standard Oil  geologist  Wallace Pratt said in 1944, it is a “fallacy … [to] cite proved reserves as a measure of available future supplies.”

Yet this is exactly – exactly – what has happened.  And the fallacy animated US policy in the Middle East for decades.  Why?

To begin with, the issue is (prepare yourself) highly technical.  A “proven” oil reserve is not the opposite of an “unproven” reserve. That’s a false dichotomy, although it seems natural enough. Still, oil fields that are not “proven” are often well characterized by seismic tests and sample drilling.

Along with “proven,” the technical categories of oil reserves that geologists use include:  identified, probable, recoverable, potential, and unconventional.  In 2007, industry-affiliated geologists adopted two new categories — contingent resources and prospective resources to account for anomalies in the old proven reserve system.  

Economists, analysts and stock brokers stick to proven reserves  because the economics of a proven reserve can be plotted down to the penny.  Proven reserves are a category that help guide investors who need to know just how easy the oil will be to find and what it will take to lift from the ground.  They need to know how light and pure the oil is, how much it will cost to refine, how close the oil is to the marketplace. Oil reserves that fall below a standard index of affordability are not called “proven” reserves under Securities and Exchange Commission rules,  and they are not developed because no one wants to lose the money it would take to develop them.

Conventional wisdom has it that investments are based on the world’s proven oil reserves. But it is probably more accurate to say that oil company investments and friendly country policies are what make reserves “proven.”

Proven reserves can be remarkably elastic over time.   Geologist M.A. Adelman noted in his book The Genie out of the Bottle that a special WWII mission to Persian Gulf estimated Saudi Arabia’s oil reserves at 16 billion proved and 5 billion probable. This was 1944.  Thirty years later, those same fields were estimated at 42 and 74 billion. In 1984, geologists estimated  another 199 billion barrels of probable reserves in the Gulf region. Today the proven reserve figure is about 265 billion according to OPEC and BP.

For the entire Middle East, the proven reserve figures are around 650 billion barrels, or about two-thirds of a world total of around one trillion.  But petroleum geologists have long known this is far too “conservative” an estimate, and too heavily slanted to the Middle East.

There is no doubt that the traditional hostility between Latin American nations and the oil industry, once at least nominally American,  had been a factor holding back oil reserve estimates in Venezuela and Mexico.  Nor is there any doubt that the under-counted Latin American reserves would have upset OPEC production quotas if they had suddenly been counted in the 1980s and 90s.

So by using the economic definition of an oil reserve, as opposed to the scientific definition, the oil industry in effect pulled a slight of hand and reset the premise of the world geo-strategic energy debate.   No doubt it was misleading, and intentionally so. Usually, even the word proven was dropped from most news articles and government agency reports about world oil reserves. So people naturally thought that the Middle East had two thirds of ALL the world’s oil, and nobody in government or the oil industry took it upon themselves to challenge that notion.

The usual explanation, repeated in this Wikipedia article, is that “the total amount of unconventional oil resources in the world considerably exceeds the amount of conventional oil reserves, but are much more difficult and expensive to develop.”

“Much” more difficult?   The fact is that Canadian and Venezuelan tar sands and heavy oils require only a fraction of their total sale price to upgrade.  And the narrowness of the categories of conventional oil have blinded us to its overall abundance.

So now, in 2013, we have the information equivalent of the BP gulf of Mexico blowout or  the Fukushima disaster.

We now know the vast extent of the Marcellus Shale gas reserves and the Canadian oil sands and the Arctic reserves.  We now know that there were trillions and trillions of barrels of oil in the geosynclinal trough from the Orinoco River to the Falkland Islands.

Imagine if we had known that in the 1980s and 90s.  The sad thing is, we did. Or at least, the scientists did.

Bottom line:  One of the most important  lessons of history is that interested industries can control the premises of  information and set the terms of the debate. They can submerge the science.  If anything, this underscores the need for better scientific information about major resource policies and geostrategic planning.

And one last point: Never again should we trust the oil industry with information about vital public policy issues.

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