The Saudis May Have Enough Oil

Oil doomsayers have a lot of material from which to spin conspiracy theories, since several big oil countries are secretive about their reserves, which they consider a matter of national security. Recently, oil expert Matthew Simmons accused Saudi Arabia of inflating the size of its proven oil reserves--at about 260 billion barrels, the largest in the world. Simmons claims

the largest Saudi fields are in decline, with no new ones big enough to replace them. His book "Twilight in the Desert" argues that Saudi Arabia is about to run out of oil. And that is just the latest gloomy oil vision, including forecasts of prices of more than $100 a barrel.

Every 20th-century energy crisis has inspired such forecasts and awakened politicians to act, or at least to claim to act. This time around several leaders of oil-consuming countries have urged producers to be more transparent--in the words of British Chancellor of the Exchequer Gordon Brown, to "open their books." What they hope for is detail far beyond the aggregate estimates of national reserves that OPEC nations now provide: geological and economic data on specific fields, exploration results and other technical details, better if certified by international auditors. The politicians' assumption seems to be that open books will clear up the uncertainties and doomsday forecasts that are helping drive up prices.

This amounts to a grandstanding demand for information that does not exist, not in truly reliable form, and will not be forthcoming anyway. Most producing countries consider such requests a threat to their sovereignty and security. Estimating oil reserves is still an unsolved mystery, with several different disciplines and approaches. Even the most serious analyses can vary widely, on both the gross size of a given reservoir and the amount of oil that can be economically recovered in the near future, given existing technologies and prices. Most large producers say that it would be useless to open their books, because their political enemies would always have room to contest the data anyway.

The accusation that the Saudis are inflating their reserves is based largely on an old tale. Between 1984 and 1988, the five largest Persian Gulf oil countries--led by Saudi Arabia--raised estimates of proven oil reserves by 40 percent, or a total of 237 billion barrels. The hikes are generally seen as tactical moves in a struggle to obtain higher production quotas within the OPEC cartel. Since then, the producing nations haven't substantially lowered those estimates, despite all the oil they have been pumping. The implication the doomsayers draw is that OPEC reserve estimates must be increasingly inflated.

Yet the original revisions came after many OPEC countries nationalized the concessions of the big Western oil companies, which had capped output to keep prices high. The oil companies consistently underestimated reserves in order to resist pressure from their host countries to raise output and revenue. All the OPEC countries did in the late '80s was to adopt more realistic estimates. Nor is it surprising that the estimates have remained stable since: rising prices allow producers to shift more oil into the category of economically accessible reserves, and most Persian Gulf states have invested in exploration at a rate designed to replace existing reserves.

The skeptics take for granted that big oil states are thoroughly explored, which is not the case. From 1995 to 2004, fewer than 30 new wildcat [exploration] wells were drilled in Saudi Arabia, compared with more than 15,700 in the United States. The numbers are similar throughout the Persian Gulf.

This state makes plausible the recent Saudi response to its accusers: Oil Minister Ali Al-Naimi said estimates of Saudi "original oil"--the broadest definition of reserves, including proven, probable and possible future reserves--could rise in coming decades to 900 billion barrels, up from 200 billion, due largely to improving recovery technology. And the U.S. Geological Survey's estimate of Saudi Arabia's unexplored reserves is higher than Riyadh's. If anything, the Saudis may be underestimating their reserves. But releasing more detailed numbers won't clarify the reality, or end the controversy.