Reserves numbers aren't oil's only market perplexity

Bob Tippee

Numbers about the oil and gas market aren't always what they seem to be.

It's forever disturbing, for example, to see elaborate arithmetic performed with reserves data.

Nobody can measure oil and gas reserves. The numbers are estimates based on interpretation—often quite a lot of interpretation—of sparse data about indirect indicators like well and seismic information.

Yet people who don't know better see numbers and assume they represent measurements, as if from some geophysical dipstick. Reserves aren't measurable and probably won't be anytime soon.

Even market factors that are, unlike reserves, at least theoretically measurable can be just as difficult in the vast, complex, and politically influenced oil and gas business.

In its Oil Market Report this month, the International Energy Agency discusses vagaries of numbers representing global oil supply and demand, which of course play no small role in determining oil prices.

IEA calls attention to a category in its monthly oil-balance table called "miscellaneous to balance."

This is the rubber ruler of petroleum economics, an important tenet of which is that supply and demand always balance, net of inventory changes, at some price. The numbers, though, never add up.

The problem isn't the theory but rather the myriad measurements in the equation. Some of them turn out to be nearly as reliant as reserves are on estimation and interpretation. Into this category fall such vital numbers as Chinese demand and inventories outside industrialized countries.

IEA addressed the difficulty in its report because the miscellaneous number reached a hefty 1.3 million b/d in the second quarter.

In addition to the timing disparities and fuzzy-number areas that always bedevil oil balances, IEA said, the growth category of ethanol and biodiesel demand has become a challenge. And many countries still won't publish important data.

Adjusting for estimated errors in the uncertain categories brings the miscellaneous fudge factor down to 300,000-400,000 b/d. That, IEA says, allows analysis to focus on fundamental issues: economic growth, tight diesel and jet-fuel markets, hurricane threats, and geopolitical and project-completion risks.

Just don't forget that the adjustments, no matter how carefully estimated they might be, still can be wrong.

(Online Sept. 15, 2006; author's e-mail:

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