Why We May Never See $80 Oil Again

The Holy Grail of Oil

Now on to what really matters in the oil industry: reserves. The long-term value of any oil company rests not on how much oil it sells every year, but instead on the supply of oil it holds. In other words, the key metric is the replacement rate of oil reserves relative to annual production.

For example, ExxonMobil (XOM Quote), the world's biggest oil company, had a reserve replacement ratio of just over 100% in 2007, meaning that for every barrel of oil sold, Exxon was able to find another barrel. Replacing 100% of your production each year would be great for prices if oil consumption were fixed or declining, but that's not the case.

On top of that, the era of easy oil is over. Long gone are the good old days of drilling in your backyard and hitting gushers of oil. The oil of the future is going to come from remote locations with limited access. As a result, the technical challenges of drilling will become much more difficult. That means escalating drilling costs and longer recovery times. According to data provided by BP (BP Quote), proved reserves in nations composing the Organization for Economic Cooperation and Development fell from 113 billion barrels in 1997 to about 80 billion barrels in 2006. The last major confirmed oil discovery happened more than 30 years ago. Major oil outfits such as Chevron (CVX Quote) are devoting increasing amounts of capital looking for oil in more difficult environments.