D.Manggala (March 17, 2004)

As part of my class assignment and also inspired by Fortune’s article “Can China Keep the Lights On?”, I did a small research about the current oil reserve and production of four countries (from many countries) that has production rate above 500 thousands barrel per day (China, Indonesia, Saudi Arabia, and United States) and then try to see how the R/P ratio affects each government’s oil/energy policy.

Here, I picked four countries:

China: the fastest growing economy in the world; so does its oil demand.

Indonesia: This is the country that may soon be a net oil importer (?). Its oil production is decreasing while demand is increasing.

Saudi Arabia: the largest exporter of oil as well as the biggest oil reserve owner.

United States: the largest economy in the world and also the biggest oil importer.

Please see the table below:

Country	Oil Reserve [billion barrels]		Oil Production		Reserve/Production	Oil Demand		Demand Growth
	Oil & Gas Journal	World Oil	[million barrels per day]		R/P ratio in years	[million barrels per day]		Projection
	Jan 1, 2003	Year-End 2001	2003	2002	(using 2003 data only)	2003	2001	2001-2025
China	18.250	29.500	3.41	3.39	14.7	5.58	4.98	3.30%
Indonesia	5.000	9.165	1.17	1.27	11.7	N/A	1.05	2.6%*
Saudi Arabia	261.800	261.650	8.85	7.63	81.0	<2.00	1.45	2.1%*
United States	22.446	21.500	8.84	9.00	7.0	19.98	19.65	1.70%
World	1,212.881	1,017.763	79.18	76.33	42.0	78.40	78.13	1.80%

Sources: Energy Information Administration Website [1]

* demand growths for Indonesia and Saudi Arabia are based on regional growths: Asia and Mid Eastern respectively.

Given the nature of the ratio,  dividing reserve (in barrels) by production rate (in barrels per day that can be manipulated to get barrels per year) we can understand that the R/P ratio represents the time (in years) of the remaining oil left in a particular country. For instance, the R/P ratio shows that Arab Saudi has 81 years more years to produce its oil using the current production rate to pump up its current reserves; the US only has 7 years more.

To analyze the connection between the depletion rate and the economic structure or political situation, we need to assess it country by country [2] :

China:

Since 2003, China is the second biggest oil consumer (after the United States) which demands 5.59 million barrels/day (bpd), far above its oil production (3.41 million bpd), so China is a net oil importer. The high economy growth of China has made this country became a big energy consumer which oil demand growth is projected at 3.3%; this also has made China is an important player in world oil market. China’s R/P ratio is 14.7 years and it seems its government policy will maximize its own oil production to fill the domestic demand. In addition, in efforts to anticipate that high demands, the Chinese oil companies (Sinopec, CNPC, and CNOOC) have aggressively acquired some oil fields in Kazakhstan, Venezuela, Sudan, Peru, Iraq, and Indonesia. Currently China has just started its strategic petroleum reserve to anticipate the uncertain condition in world oil supplies.

Indonesia:

Indonesia is one of OPEC member and the fourth biggest population in the world. Its oil production is declining (1.17 million bpd in 2003) while the demand is increasing because the high population and a starting economic recovery after the 1997 financial crisis. It is predicted that Indonesia will be a net oil importers in the near future. Even though its R/P ratio is quite low, 11.7 years, Indonesia’s policy is to produce at its maximum level using the advantage of high oil price because it needs the devisa from oil. However, because of some technology and technical problems as well as political instability, Indonesia cannot produce at its optimum capacity (its production is about 300 thousands bpd under OPEC quota).

Saudi Arabia:

Saudi Arabia is the largest oil producers which has the largest oil reserve in the world that make Saudi is the most important country in world oil market and also by its leadership in OPEC. Its R/P ratio is 81 years which reflects its high reserve over the current production rate; its oil supply (8.85 million bpd in 2003) is far above its domestic demand (which below 2 million bpd in 2003) that makes Saudi Arabia is the biggest oil exporter in the world. Its producing strategy is to produce in a very conservative and very controlled way as an effort to control the oil price as well as to maintain its reserve due its high dependence on oil as the biggest contributor on  its economy- almost 40% of its Gross Domestic Products (GDP). Saudi Arabia is an important oil supplier of the United States and both of these countries have a strong relationship related to oil business.

United States of America:

The United States of America is the biggest oil consumer in the world and the second biggest population in the world (after China). Its current reserve is only 7 years that reflects its vulnerability in the world oil market. The U.S producing capacity (8.84 million bpd) is far below its demand (19.98 million bpd) and it largely depends on oil imports, especially from OPEC. Despite its high demand, the U.S is very conservative in its oil producing and tries to save its domestic oil reserve by aggressively acquiring many oil reserves in foreign countries through many big U.S companies such as ExxonMobil and ChevronTexaco. In addition, its Strategic Petroleum Reserve (SPR), as of May 2003, has 600 million barrels which is the largest oil storage in the world. The U.S also has considered using the reserve under the Arctic National Wildlife Refugees (ANWR) as an alternative to fill its big energy demand. Furthermore, an energy task force led by Vice President Dick Cheney has been formed to develop a strategic plan related to energy due to US high consumption in energy.

Based on specific analysis on all those four countries, it can be concluded that the each country has different strategy in producing oil (depletion rates) that depends on each government’s energy policy which not necessarily depend on its proven reserve.

The differences in R/P ratio, however, do not affect the users’ marginal cost as well as consumers’ behavior in using oil. The reasons are:

Firstly, the oil price mostly depends on world supply-demand condition (or world R/Ratio), not on country condition; as long as the oil world supply-demand is similar to the current condition, the world price would be approximately the same. Therefore, there is no strong relationship between R/P ratio and users’ marginal cost. Even for developing countries like Indonesia, the fluctuation in oil price does not affect to big changes in users marginal cost because the oil price is subsidized by the government.

Secondly, the Reserve and Production are dependent of price and technology. It means, the reserves could change (increase) when the oil price is increasing or there is new technology. There are some anticipated new technologies in enhanced oil recovery such as surfactant or vibration technology in addition to steam or water flood technology.

It will be interesting to see what will happen in the future, not only in oil specific industry, but also in energy (gas, nuclear, others) especially between United States and China. These two countries soon may demand more than half of world’s current available energy; and it may shape the future of our world…