July 14, 2008 | posted by Michael Baxter in Oil |

Have you ever watched that Channel 4 TV programme Deal or No Deal? If you have, you may have realized that the probability that individual contestants will win the maximum £250,000 is different from the probability that the banker will give away £250,000.

The reason is this. Individual contestants play the game once. There are 22 boxes; one contains £250,000. There is a one-in-22 chance of them winning the big prize.

The banker, by contrast, knows that if he plays this game every day, and each contestant goes all the way to the end, he will give away an amount of money equal to the total sums of money available, divided by the amount of boxes – this is in fact £25,712.16 per contestant.

But for the contestant, playing the game just once, the odds are different. In fact, the contestant would expect to take away between £750 and £1,000, because there are exactly the same number of boxes containing money above these amounts as there are below.

The point of this anecdote is this: we are not good with probability. It is not something we intuitively understand

Take as another example, peak oil.

There are 1.2 trillion barrels of proven oil reserves in the world. That is enough at current consumption to last 40 years. But, according to Richard Pike, president of the Royal Society of Chemistry, this is a very misleading figure, and this is why.

Each oil company estimates proven oil reserves for each oil field. The reserve is defined as proven if the company has a 90 per cent confidence in its estimate for that field’s capacity.

So, the various authorities, such as IEA, which work out global oil reserves, take all these proven estimates for each field and add them together.

So that means there’s 1.2 trillion barrels of proven oil reserves. How confident can we be of this? Ninety per cent, right? Wrong. In fact the laws of maths would suggest that total reserves are likely to be much much higher than that. And the probability that is so, is much greater than 90 per cent too.

Why is that so? Well, actually, when you think about it, it is obvious. If you have a ten sided dice with numbers one to ten, you know there is a 90 per cent chance you won’t get, say, the number ten. But if you throw that dice ten times, the chances of getting ten tens is in fact 0.1 to the power of ten. An incredibly small number.

It is the same with proven oil fields. The chances that each and every oil field in the world does in fact only have this proven level of oil is tiny.

“Part of the oil industry is perfectly familiar with the way oil reserves are underestimated, but the decision makers in both the companies and the countries are not exposed to the reasons why proven oil reserves are bigger than they are said to be,” said Dr Pike.

But there is more reason to doubt all the predictions of gloom on the supply of oil. Oil flow is more a matter of infrastructure, such as refinery capacity, for example, than how much oil there is. Dr Pike says, “No matter how much oil you have in the ground, if you don’t have facilities, the limits to your production at any one time are constrained.” He said it is “like having an enormous tank with one tap.”

Dr Pike says oil flow may well peak soon, because we don’t have the facilities. Even so, he says, oil will be available for many years.

“The bad news,” says Dr Pike, “is that by underestimating proven oil reserves we have been lulled into a false sense of security in terms of environmental issues, because it suggests we will have to find alternatives to fossil fuels in a few decades…We should not be surprised if oil dominates well into the twenty-second century. It highlights a major error in energy and environmental planning – we are dramatically underestimating the challenge facing us.”