Fact-Checking Jim Rogers on Oil

Jim Rogers is any news network's dream of a guest talking head. In addition to the colorful bowties he sports, the legendary commodities investor also has a habit of shooting from the hip and providing eye-grabbing headlines.

On the subject of the Federal Reserve, for example, he's called Chairman Ben Bernanke a nut and an idiot, saying he doesn't understand economics and that he should be fired. Tell us how you really feel, Jim.

Oil going into orbit
Rogers provided another cherry of a headline for the BBC last week, saying oil "will probably go over $200 a barrel." He didn't provide a specific date (it's been said that one of the keys to successful financial forecasting is to never give a target price and a date), but the forecast was made in the context of a 10-year time frame.

While I don't deny the possibility that oil could crest $200 at some point in the future, and would be very interested to see what this would do for my investment in Evolution Petroleum (AMEX: EPM  ) , I do have a bone to pick with one of Rogers' underlying justifications for his price target. This is his contention that "the world is running out of known reserves of oil."

That would be big news, if true. But according to the best data we have, Jim Rogers is wrong on this point.

Whatever you think of BP (NYSE: BP  ) as an operator, its annual Statistical Review of World Energy is a pretty solid source of data on the world's energy resources. It's also free, which is a plus for cheapskates like me. I pulled up the latest copy, released last June, and here are the global oil reserve figures for the last two decades:

Year End

Total Oil Reserves (billions of barrels)

1989 1006.4
1999 1085.6
2009 1331.1

Source: BP Statistical Review of World Energy, available as a PDF here.

It's hard to square these numbers, which show a 32% gain over the last 20 years, with Rogers' statement about the world running out of reserves. I find it impossible to believe that the commodities guru hasn't studied these numbers. I think it's more likely that he just doesn't believe them.

In OPEC we trust?
If that's the case, maybe he's right to be skeptical. OPEC reserves, as reported, made up 77% of global reserves in 2009. Cartel members are notorious for cheating on their quotas, so it wouldn't be surprising to learn that their reported reserves have also seen their fair share of fudging. It's probably a mistake to take those reported figures at face value.

There's also the issue of BP's inclusion of natural gas liquids like propane and butane in its calculations. These byproducts of natural gas production are valuable -- indeed, they're exactly what keep firms like Range Resources (NYSE: RRC  ) profitable at low gas prices -- but are not interchangeable with crude oil in any practical sense. The figures presented above are in fact total liquids reserves, not just crude oil reserves. I'd very much like to see crude broken out separately from other liquids.

Maybe Jim Rogers has his own set of "shadow stats" on oil reserves -- one that calls self-aggrandizing OPEC members' bluffs, and shows a decline in conventional crude oil reserves over the past two decades. If such a data set exists, I would love to see it. For now, my going assumption is that global reserves are on the rise, albeit with a shift toward extra-heavy crude (such as the massive deposits in Venezuela's Orinoco belt), Canadian oil sands (courtesy of new partners Suncor (NYSE: SU  ) and Total (NYSE: TOT  ) , among many other players), and natural gas liquids, if we're counting those.

The Foolish bottom line
If oil does spike to $200 in the next decade, it will be the result of an acute supply shock brought on by human folly, rather than a depletion of oil reserves in the ground. In this Fool's opinion, the real upside risks for crude lie above ground.

Total is a Motley Fool Income Investor recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute owns shares of Evolution Petroleum. Check out his CAPS profile or follow his articles using Twitter or RSS. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool owns shares of Evolution Petroleum. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2011, at 4:32 PM, Zade wrote:

    Matthew Simmons wrote in his book on Peak Oil (Twilight in the Desert) that we haven't had clear statistics on oil reserves since the majors were tossed out and replaced by Saudi Aramco in Saudi Arabia. He makes a good case for their fields not producing at the rates they claim they can. The easy oil has been found and prices will need to go a lot higher to pay for the increasing expenses to find the more hard to get oil.

  • Report this Comment On January 26, 2011, at 5:55 PM, nerferLZ wrote:

    We won't run out of oil entirely, but we are running out of the oil that is cheap and easy to produce. The remaining oil is more expensive and harder to produce in quantity. Even if there are massive fields under the Brazilian ocean, they can only afford to put so many floating platforms and the miles of pipe needed for each well. It takes considerable time to develop these deposits as well.

    If Saudi Arabia has so much oil remaining, why is Russia now the leading producer? I don't trust OPEC's reserve numbers very much at all. They were pretty clearly manipulated back in the 80's for their quota allowances, and haven't changed much since.

    Oil started 2008 at about $90/barrel, same as we are now, despite easing our way out of a recession and the price gyrations of mid 2008 into 2009. A little economic recovery, some inflation over the next 9-10 years, and $200/barrel is very possible. Probable even, and I don't think it will be a "spike".

  • Report this Comment On January 26, 2011, at 6:06 PM, AvianFlu wrote:

    A friend of mine is a geophysicist. His job is to fly around in a helicopter and decide where to drill for oil. He told told me that we have about 25 years worth of oil left in the world. He told me that 30 years ago. Just thought you'd want to know.

  • Report this Comment On January 26, 2011, at 7:12 PM, lctycoon wrote:

    If countries pass laws increasing costs of production for oil and we keep up with this QE garbage plus China and India continue to grow, I wouldn't be at all surprised to see $200 oil in the next ten years.

  • Report this Comment On January 26, 2011, at 11:10 PM, mrsister wrote:

    Is oil a finite resource? If so it is unlike wood which grows continuously. If it is composed of ancient decaying organic matter like plants -- wouldn't it be continuously renewing? If the source material is dead plants, algae, or microorganisms (this seems to be the common scientific consensus) - it seems like we'd have a steady supply for eons to come.

  • Report this Comment On January 27, 2011, at 12:30 PM, RobertC314 wrote:

    mrsister,

    You are correct that oil is essentially ancient organic matter. However, the keyword there is "ancient". It takes millions of years to create an oil field, and only a few months to use that oil up.

    If a tree took a thousand years to grow we wouldn't consider it a renewable resource.

  • Report this Comment On January 27, 2011, at 2:35 PM, Melaschasm wrote:

    $200 ten years from now is not a crazy idea, although inflation plus growth in China and India are likely to be the biggest drivers of higher prices.

  • Report this Comment On January 27, 2011, at 8:19 PM, mrsister wrote:

    to Robert C:

    It tmay take millions of years -- but it's a process that is perpetual, i.e. It may take a million years for organic matter to transform into oil -- but it doesn't happen only once every million years!

    It happened a million years ago (say, as evidenced by the current presence of oil), but it also happened one day short of a million years ago, two days short of a million years ago, etc. etc. until the present day.

    So there should be some new oil from something organic that died one day short of a million years ago -- being created tomorrow. There's algae, plants, and plankton dying today so that means there will be oil a million years from today. I venture to say that organic matter has been dying on a perpetual basis -- so the oil should keep coming due like an annuity account filed eons ago....

    If trees took a thousand years to grow, but had been growing for thousands of years - they'd be pushing through the surface every day -- until -- even if the process was halted today-- they kept pushing through the surface for a thousand more years

  • Report this Comment On January 28, 2011, at 1:38 AM, ValuePEG wrote:

    MrSister, actually I would have to state that both you and Robert C are both technically correct.

    The hitch in the get a long is that we've been using up reserves that were collected over millions of years at a rate far greater than the replenishment rate which must be exceedingly low by all analysis.

  • Report this Comment On January 28, 2011, at 3:29 PM, mrsister wrote:

    ValuePEG - I agree that's the best way to state it:

    That we are using up reserves faster than the replenishment rate.

    The well could never run dry except on a short term temporary basis -- so the talk of "running out" of oil is overblown, seeing as how fresh reserves are constantly coming due.

    I've never seen any basic charts on use rate/vs. replenishment rate. I'm not sure if this is known - if it is a closely guarded "trade secret", or if there is any consensus on the math.

    Why aren't more executives, politicians, and investors talking about lowering our oil intake by using more natural gas? There's an abundance of cheap natural gas - and companies like LNG are spending billions to import... then export, it.

    There seems to be funding available for naural gas infrastructure and an excess of cheap supply.

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