What Are Oil Reserves?

Oil reserves are large deposits of oil located underground throughout the world. The most important to the economy are proved reserves because they have a 90% chance that the oil will be pumped out using current technology. Reserves are primarily located in the Middle East, Canada, Venezuela, Russia, and the United States. Reserves are one factor in the price of oil, along with oil production and overall demand.

What Are Oil Reserves?

Oil reserves are an estimate of how much oil can ultimately be recovered, which includes undiscovered or "yet to find" reserves. This broad definition is also called "ultimately recoverable resources." Reserve estimates are based on the probability of finding reserves in certain geological areas. It also assumes new types of technology will make it economically feasible to extract the oil. 

Discovered oil reserves is the estimate of future production from known fields. There are three categories. These are based on how likely it is the oil can be recovered using current technology.

• Proved reserves: There is a greater than 90% chance that the oil will be recovered.
• Probable reserves: The chance of actually getting the oil out is greater than 50%.
• Possible reserves: The likelihood of recovering the oil in place is at least 10% but not greater than 50%

Keep in mind that part of an oil field's probable and possible reserves get converted into proved reserves over time.These discovered reserves are just a small part of the oil in place. It's just not technically feasible to get most of the oil out in any given field.

Proved Reserves

Of the three categories, the most commonly used is proved oil reserves. That's where analysis of geological and engineering data demonstrates with reasonable certainty to be recoverable from known reservoirs. Only the oil that is commercially viable under current economic conditions is counted. If oil prices rise or new technology makes costs lower, then more fields become viable.

Reasonable certainty means that either actual production or conclusive testing has occurred. The testing includes drilling. If not, then the site must be adjacent and similar to areas that have been drilled. The size of the field is determined by the edges where the oil contacts adjacent gas or water formations.

Oil is not counted as proved if engineers are uncertain that it can be recovered under current economic conditions. Engineers also don't count it if it's in completely untested areas.

Oil Sands Reserves

The ability to extract oil sands for a reasonable cost has increased the amount of proved reserves. Most of it, totaling about 165 billion barrels, is in Alberta, Canada. The United States imported just over 1.6 billion barrels from these fields in 2019. 

Oil sands are sand mixed with a thick substance called bitumen. The bitumen must be heated before it can be used as oil. Two tons of sand must be mined, using three to four barrels of water, to get one barrel of oil. The process is controversial because it uses a lot of energy and water and leaves a scar on the environment that can be seen from space.

How Oil Reserves Work

Reserves are the graveyards of prehistoric plants and tiny marine organisms. Their remains settled at the bottoms of ancient oceans and lakes 541 million to 65 million years ago. Layers of sediment covered them, increasing the pressure and temperature. That changed the chemical composition into oil. Since we use it faster than its being created, oil is considered a non-renewable resource.

Most of the big fields in the proved oil reserves are in the Middle East, Venezuela, Canada, and Russia. Here's the number of barrels of proved oil reserves in 2019 for the top 10 countries according to the BP Statistical Review:

The list alone doesn't give the whole story, because of the relationships between the countries. Most of them produce more than they use, so they export to importers or those that use more than they produce. They use the U.S. dollars earned from the sale of oil ("petrodollars") to fund government services.

To increase their negotiating power, some oil exporters banded together to form the Organization of the Petroleum Exporting Countries (OPEC) in 1960 to manage world supply and influence prices. OPEC's 13 members hold 80% of the world's proved reserves. The biggest importers of oil in the world are the United States, China, and the European Union. Over the past decade, OPEC has regulated the price of oil to respond to market conditions, including the emergence of shale-based energies.

U.S. Reserves

After years of stagnation, U.S. reserves are now growing again thanks to higher oil prices that make new technologies cost-effective. Horizontal drilling and hydraulic fracturing can extract oil from shale and other "tight" formations or those with very low permeability.

Also, the United States maintains the world's largest strategic petroleum reserve at 714 million barrels. The reserve exists to keep the economy running smoothly when there's a crisis or shortage. Since it is not open for production, it's not included as part of the U.S. proved reserves. 

Relationship of Reserves to Production

To export a lot of oil, a country must have large reserves; political stability; and expertise to extract, refine, and ship the oil.

For example, Venezuela has the world's largest reserves, but political unrest and poor management of the country's oil industry have hampered its production. As a result, it's not even on the list of top 10 oil producers. Since most of the government's revenue depended on oil, the country's economy has descended into chaos.

Here are the 2019 top 10 oil-producing countries, according to the BP Statistical Review of World Energy:

Why Oil Reserves Matter

Oil reserves are one of the factors affecting oil prices. Supply, as measured by oil production is also important, and is demand.

These factors are reflected in the price of oil futures contracts in the commodities market. They are agreements to buy or sell oil at a specific date in the future for an agreed-upon price. That's why oil prices change daily; it all depends on how trading went that day.

The oil price forecast has shown much volatility because of the changes in oil supply, OPEC’s actions, and global demand.

Traders look at all three factors, only one of which is reserves. They also look at oil production, which depends on decision-makers in Saudi Arabia, Kuwait, Venezuela, and Russia. The most important factor is demand, particularly from the world's largest user, the United States.

Oil Reserves and Climate Change

When oil is burned, it emits greenhouse gases. Carbon dioxide and other gases act like a blanket that traps the sun's light and heat.

Burned oil and other carbon emissions have contributed to a rise in the earth's average temperature of more than 1 degree Celsius since 1880. This global warming has caused the climate to change. Some of its effects are rising sea levels, extreme weather, and ocean acidification.

A s a result, there's a growing call to switch global energy supply to renewable energy sources like wind and solar to solve the global warming crisis. If successful, this movement could make the amount of oil reserves irrelevant.