One of the main factors in determining when Peak Oil occurs and how fast the subsequent decline will be is the amount of proven reserves. As shown below, around 80% of the world’s proven oil reserves are controlled by OPEC.
The control of the world’s oil reserves by OPEC means that most of the future oil supply will come from these countries. OPEC has traditionally tried to control prices by supposedly regulating the supply side of the supply/demand equation. However, over the last year we saw oil reach record highs followed by a steep drop in prices. OPEC’s attempts to stabilize prices by varying production were pretty much useless and it was clear that demand had a far greater influence on price during the price decline.
Does OPEC have the ability to produce more during periods of high demand??? Based on the amount of proven reserves, you would think that OPEC would have the ability to produce large amounts of oil and would do so during periods of high commodity prices such as we have seen in the last 5 years. The following graph depicts the ratio of reserves to production for several countries.
(BP Statistical Review of World Energy 2008)
You can see that the Middle East is producing relatively little oil compared to its total reserves. There are several potential reasons for this:
1) They treat there oil as a “national trust fund” and want to save some for the next generation (how thoughtful)
2) It takes a long time to bring new wells online (possible but some of these fields are over 50 years old and a 10,000’ well can be drilled in about 40 days)
3) They think that prices will increase further in coming decades (likely, but there is significant risk of demand destruction due to new technologies replacing oil)
4) The OPEC countries are inflating there reported reserves
It is likely that the first three points do play some role in the low production by OPEC. However, I think that it is very likely that OPEC is overstating their reserves and that this will become a huge problem as we get further past the peak. In the late 1980’s, many of the OPEC countries made huge step ups in their reserve bases. This was likely due to changes in the cartels production policy which allows countries with more reserves to produce more. This causes incentives for the members of OPEC to overstate their reserves in order to gain more power within the cartel. In addition, there is further motivation to overstate reserves to assuage global fears of about oil supply which may force nations to consider alternatives to oil.
Whatever the case may be, if OPEC countries are in fact overstating their reserves, we will likely see negative effects as this resource is continually depleted.