Proved Oil Reserves in the U.S. Declined by 19%
According to data released by the Energy Information Administration (EIA) in January, proved oil reserves in the United States declined 19% in 2020, from 44.2 billion barrels to 35.8 billion barrels. The data shows that just 3 billion barrels of proved crude oil reserves were discovered in the United States, with 1.2 billion barrels added through accounting adjustments. 8.8 billion barrels of proved reserves were lost due to net revisions while 3.8 billion barrels were consumed. The net change is a negative 8.4 billion barrels accounting for the 19% decline.
Proved reserves are estimated volumes of oil that are determined by a thorough analysis of geologic and engineering data which indicates with a reasonable certainty that the oil is economically recoverable under current operational conditions. Simply put will the oil company make a profit if it undertakes the cost of developing and operating the well. If the cost of developing and operating the well exceeds profit projections the oil in the ground will not be counted as a proved reserve. If the analysis indicates that bringing the well into production will be profitable, then it is counted as a proved reserve.
The loss of 8.4 billion barrels is the largest loss of proven reserves since 2010. The primary reason for the loss in proven reserves is due to the postponement of oil field development drilling by Exploration and Production (E&P) companies. Oil companies have indicated they intend to return money to investors by increasing dividends or through stock buy backs rather than utilizing it through capital expenditures (capex) to develop oil fields. The lack of capex will, in our opinion, lead to future shortages based on current demand. Data from the EIA indicates the U.S. is consuming 21.9 million barrels of oil per day. That equates to nearly 8 billion barrels per year. A significant amount of oil is used for things other than transportation. In fact, thousands of everyday consumer items and medicines would not exist if not for oil.
Unless E&P companies rapidly change their strategy of curtailing capex we believe that shortages are in the offing which will continue to keep oil prices at higher levels along with many consumer goods which may provide long-term investment opportunities.
If you would like to learn more about potential investment opportunities, we invite you to talk with someone who works for a company that knows and understands the global energy business.
Cavanal Hill Investment Management, Inc. is an SEC registered investment adviser and a wholly-owned subsidiary of BOKF, NA a wholly-owned subsidiary of BOK Financial Corporation, a financial holding company (“BOKF”). BOKF, NA serves as the custodian for the Cavanal Hill Funds. BOKF holdings also include the distributor for Cavanal Hill Funds, Cavanal Hill Distributors, Inc., member FINRA. Cavanal Hill Distributors, Inc. is a wholly-owned subsidiary of BOK Financial Corporation, and an affiliate of BOKF, NA and Cavanal Hill Investment Management, Inc.
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