What is the "right" price for a barrel of oil? Japan's oil minister said, based on fundamentals, the price of crude should be $60 a barrel, not the $130 to $140 we see today. During congressional testimony, five oil-industry CEOs each gave estimates of where oil "ought" to be, with results ranging from $35 to $65 a barrel to $90. Even the implacable Saudis are reportedly about to increase production by half a million barrels a day, a sign that they are concerned that the current price is too high. Yet BP's chief recently said current price levels are warranted, and the oil bulls at Goldman forecast a "super spike" to $150 to $200 a barrel.
How can presumed experts be so divided? Because the data on oil stink.
Think of the host of financial and economic statistics you see every day: stock prices, unemployment data, company results, foreign exchange prices, GDP growth rates. Market information is precise. Government statistics, while a little fuzzier, are complied and computed in a generally consistent fashion.
But oil is in a completely different category: It's a strategic resource bought and sold internationally. Many countries, either by indifference or design, simply don't provide reliable information.
Price is a result of demand and supply; the Wall Street Journal recently explained why it's difficult to get a handle on demand (subscription required). The supply side is just as tricky.
The International Energy Agency, a premiere source of oil-related information, was caught off guard by the surge in oil prices, so it decided it needed to get a better grip on capacity. The IEA is only partway through a survey of the world's biggest oil fields, yet says it expects to show a significant reduction in estimated reserves.
But even when concluded, this project will be far from reliable. For starters, take OPEC, which is estimated to control two-thirds of the oil reserves and to provide 36 percent of oil production and is largely unresponsive with IEA inquiries. And cooperation doesn't always translate into insight. For instance, Iraq recently claimed it has as much as 350 billion barrels of oil, triple its proven reserves and more than even oil kingpin Saudi Arabia has. Is this claim completely crazy? No one knows for sure; Iraq is underexplored, with only 2,000 oil wells versus more than 1 million in Texas.
Here's how arcane the oil guessing game can get. Saudi's Ghawar oil field is the world's largest; it's been pumping out oil since 1951 and holds 7 percent of the world's proven reserves. Overall Saudi production has been falling since 2005, yet the number of rigs in use has tripled since 2004. Why is that? Some analysts believe the increased rigs are intended to compensate for declining production from Gwahar. Others argue that the Saudis are operating strategically, shutting their most productive wells as prices rose and opening smaller wells to better manage supply.
Experts have tried to come up with more independent and definitive answers. The Saudis use water injection to increase oil recovery. Some analyses of the water content from the northern part of Ghawar conclude that the water content has risen from 20 percent in the 1940s to 50 percent now, supposedly a sign that yields are about to fall dramatically.
Seeking to resolve this debate, investment research firm Sanford Bernstein performed a satellite analysis of the oil field, reviewing high-resolution images dating back to 2001. The water-injection methods used by the Saudis produce surface depressions when oil reservoirs become depleted. Bernstein found no signs of surface collapse. Instead, it found some areas slightly elevated, which might indicate use of high-pressure recovery, an advanced extraction technique. They concluded that only one of the oldest sections was in decline. That report was dismissed as "junk science" by industry analyst and peak-oil theorist Matthew Simmons. *