Sunday, June 7, 2009

Reserves: an Educated Guess or Maybe Not

Resources are an estimate of the total amount of a mineral underground which can technically be removed. Reserves, a subset of resources, are an estimate of what can be removed economically at today's prices. The key word to remember is "estimate."

As you know from Oil 101, there are major issues with commonly stated global oil reserves. Some reserves estimates are no more than wild guesses.

As an example of how mineral reserves estimates can be subject to significant readjustment, the U.S. Geological Survey (USGS) has just completed a survey of an area in which one third of US coal is sourced. As a result of the survey, the USGS is now saying that its estimate of US coal reserves may be significantly overstated.

Sometimes reserves remain unquestioned because the answer may be frightening. Sometimes reserves remain unquestioned because the method used to generate the estimate may be even more frightening. For example, if someone asked, "how does the USGS calculate US coal reserves?":

"Every year, federal employee.....calculates America's vast coal reserves the same way his predecessors have for decades: He looks up the prior year's coal-reserve estimate, subtracts the year's nationwide production and arrives at a new official tally." (Wall Street Journal)
Oil is typically more expensive than coal on a BTU (energy content) basis. As oil is a liquid which can release energy quickly, it is primarily a transport fuel. Oil is only used to generate 7% of global electricity. Coal is an electricity generating fuel used to produce around 40% of global electricity.
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