“Venezuela has the world’s largest oil reserves…”
How many times have you read this line? Too many to count? While it’s plainly true, it’s also deeply misleading. It ignores a glaring fact about the gobs of oil under our soil: most of it will never see the light of day. I’m about to take you through the numbers, so buckle up:
Let’s assume that in 2016 Venezuela produces 2.4 million barrels of oil per day (these are round numbers, deal with it.) Of these 2.4 million barrels, some 600 thousand barrels go to Chevy Caprices from 1980, (i.e., domestic consumption). That leaves 1.8 million barrels per day for exports, which is roughly $26 billion per year at $40/barrel – assuming we get paid in cash for oil exports!
Since oil is 95% of Venezuela’s exports, and we have no savings left to unsave, we have $26 billion to import what we need to function as a country, compared to $45 billion/year since 2008. To me, that means that to go back to “normal” imports-wise, we would need to increase export revenues by more than 70%!
All things equal, this means increasing oil exports by 70%, from 1.8 million barrels per day to 3.1 million barrels per day, and oil production by more than 50%, from 2.4 million barrels per day to 3.7 million barrels per day (which by the way, is roughly what Venezuela produced in 1998…).
Will we be able to sell this oil at $40/barrel forever though?
Before answering this question, let’s travel to the future. Imagine it is the year 2100. It’s been 70 years since the world reached peak oil demand in 2030. Electric cars took over Detroit and the world is running on solar, wind, hydro, hydrogen and some gas rather than oil or coal. The little oil demand left around the world comes from petrochemicals, from back up fuel and from few poor countries that are still trying to catch up. This caused a collapse in oil prices to let’s say $10 per barrel, with no prospect of ever picking up.
It should be obvious: the notion that we can sustain current production levels for over 200 years is absolutely wrong. The most likely outcome is that within the century, we will virtually stop producing oil and leave a good share of those reserves (and revenues) forever underground.
So what should we do if our main export has an expiry date?
Russia and Saudi Arabia know. Rather than working with OPEC to hike prices, they’ve protected their market share by maxing out production and driving out higher-cost producers. They’re trying to extract all they can can as fast as they can and at the lowest possible cost.
To avoid leaving billion of barrels of reserves (and $$) untapped, we should do the same.
So what does a massive production hike actually look like? Let’s assume that the current production level of conventional oil (1.2 million barrels per day) is somehow maintained flat through a combination of enhanced oil recovery techniques, development of the proven reserves and some exploration. That leaves the real production growth to the Faja. The Faja would need to more than double production from 1.2 million barrels per day to 2.5 million barrels per day. To put it in context, we would need to double the five Faja projects in operation that were conceived in the 90s. Achieving this would allow us to produce 3.7 million barrels a day, satisfy the domestic demand of 600 thousand barrels per day, leave 3.1 million barrels per day for exports that @ $40 per barrel would in turn allow for imports of $45 billion (in line with the recent history average).
Sustaining a production level of 3.7 million barrels per day flat over the next 84 years yields 113 billion barrels. But hold on a second, Venezuela has 300 billion barrels in reserves right? So even if we take on the mammoth task of producing 113 billion barrels through the year 2100, we would have produced less than 40% of our reserves and had left underground 186 billion barrels of reserves!
That lazy line about the world’s “largest oil reserves” has begun to disfigure our conversation about oil. Until we realize that the most likely outcome is that a big share of it will stay underground. If we want to have a chance as a society, to realize the oil wealth that lies underground, we need to move, and quickly, as we are running against the clock here. We must instill the sense of urgency in our society and in the political class to act boldly and decisively.