Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Oil Reserves

What it is:

Oil reserves are estimates of the amount of crude oil in a specific area.

How it works (Example):

Let's say Company XYZ is an oil company that is actively engaged in detecting and drilling for oil. It has discovered an oil field at the bottom of a small part of the Indian Ocean. Company XYZ sends some geologists to the area, who do a variety of measurements and calculations. They determine that the area holds about 50 million barrels of oil, or 50 million barrels in oil reserves.

There are three kinds of oil reserves. Proven reserves are oil reserves in which the probability of recovering the oil is at least 90%. Probable reserves are oil reserves in which the probability of recovering the oil is at least 50%. Possible reserves are oil reserves in which the probably of recovering the oil is less than 50%. Saudi Arabia, Venezuela and Canada have the most proven oil reserves in the world. In the U.S., the largest reserves are in Texas, Alaska, California and North Dakota.

Why it Matters:

Oil companies and countries report the amount of oil reserves in their properties. However, oil reserves only count if they're able to be extracted using existing technology. Accordingly, if Company XYZ were to determine that the oil under that patch of the Pacific Ocean was 150 miles below the ocean floor (making it impossible to reach), that oil does not count as oil reserves. If oil prices spike or new technology comes along, however, the spot under the ocean could become classified as a new oil reserve because it is more feasible to obtain the oil.

It is important to note that oil reserves are always estimates. It is impossible to know exactly how much oil the earth holds. Scientists do know, however, that the supply of oil is finite.

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