Correcting Rush on The Big Energy Lie

Rush Limbaugh is on a rant right now about the Big Energy Lie – President Obama’s assertion that:

“We can’t just drill our way out of this problem — while we consume 20% of the world’s oil, we only have 2% of the world’s oil reserves,” he said. [Source.]

Rush confused the issue with regard to the definition of reserves, suggesting that it has something to do with how much oil has been produced to date. It does not.

Reserves are the amount still in the ground that have been found by drilling efforts to date, and are expected to be produced with current technology, at current prices.

Reserves have been around 10 years of production ever since I can remember. That’s because energy companies measure their success by their ability to “replace production” – that is, if they produce a million barrels, they need to replace it with a million barrels of reserves. It’s like a current inventory.

Or like a checking account.

Imagine if you had $3,000 in your checking account. If you spend $1,000 per month, does that mean you will run out of money in 3 months?

Only if you stop working. And only if you have no other assets.

To extend the analogy, imagine if you had $200,000 in a brokerage account and another $300,000 in an IRA. Your Aunt Martha might leave you half her lottery winnings in her will.

Few would consider you “poor” because the numbers indicate you will burn up your current account in 3 months.

The energy equivalent to the brokerage account, the IRA and Aunt Martha’s will in my example is termed “resources”. Resources have yet to be discovered, are difficult to quantify and aren’t available right now, but there is a reasonable expectation that they will be available in the future. Strategic decisions about future supply should take resources, not reserves, into account.

Unfortunately, there’s lots of confusion on the subject of “reserves”, which are a specific term of art with particular meaning to accountants and engineers. Focusing on reserves will always lead one to the conclusion that — oh noes! — we are about to run out of supply.

That’s The Big Energy Lie.

One thing Rush gets right, though, is that the Administration is more than willing to confuse the issue to its political benefit.

Cross-posted at stevemaley.com.

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