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A 4.5-Million-Barrel Per Day Oil Shortage Looms: Wood Mackenzie

A 4.5-Million-Barrel Per Day Oil Shortage Looms: Wood Mackenzie

A report by Wood Mackenzie has warned the world may face a daily oil shortage of 4.5 million barrels by 2035. The amount represents around 5 percent of global consumption estimate of the International Energy Agency (IEA) for 2016. In other words, a true crisis is looming—and for the moment, there is no apparent way around it.

The most obvious reason is that energy companies don’t want to spend money on exploration when prices are so disappointingly low. Many of them simply can’t afford to spend on exploration if they want to survive in today’s price environment. Ironically, their long-term survival can only be guaranteed by further exploration spending.

A lot of costly projects have been shelved since the summer of 2014 when oil prices started falling, with the initial investments basically written off. Reviving these projects will cost more money. Where this money will come from is unclear—there is no certainty where oil prices are going in the near term, let alone any longer period, and the European Commission today forecasted $41/barrel oil for the rest of this year and just over $45 for 2017. Related: OPEC’s No. 2 Under Serious Threat From Political Instability

Another part of the answer to the question, “How did we get ourselves into this mess?” has to do with the knee-jerk reaction of E&Ps in times of crisis. That knee-jerk reaction is generally “fire at will”. Layoffs in oil and oilfield services are piling up at speed, well into six-figure territory to date. Cost-cutting has become the daily mantra of oil companies, and it’s easy to see why.

Oil dived more than 75 percent over a year and a half – that’s a hard blow to withstand. However, those laid off as part of the E&Ps’ coping mechanism will not sit around and wait to be rehired at the first opportunity. They will, and do, look for work elsewhere. So, the energy industry is facing another shortage that will help determine the ultimate one: a shortage of manpower.

The third part of the problem is reserves replacement. New exploration is not just a form of art for art’s sake, or a means of expansion to boost bottom lines. It’s an essential part of the operations of an oil business. Oil is finite, and in order to stay profitable, an oil company needs to maintain a consistent rate of reserves replacement. Related: Weak Data, Strong Dollar Pressure Crude Lower

And here’s more bad news: Last year, the seven biggest oil companies in the West only replaced 75 percent of their reserves. This is seriously bad news, especially combined with the fact that many new discoveries made in the last four years have disappointed.

Wood Mac’s exploration research vice-president told Offshore magazine that “In the last four years the industry has seen disappointing - largely gas prone - exploration results, with the volume of liquids discovered annually falling from around 19 billion barrels between 2008 and 2011 to 8 billion barrels between 2012 and 2015.”


What’s more, Latham said that he expected new exploration investment to average $40 billion globally over the next three years. That’s less than 50 percent of what E&Ps invested between 2012 and 2014. Related: Oil Prices Fall Back as Rally Hits a Ceiling

Is there a solution? Efficiency improvements could help in the short to medium term. After all, there are still quite a lot of reserves available and if efficiency improves, they could be utilized more fully.

For the long term, however, Big Oil – any oil – needs to open its coffers and scrape what’s left in them to pay for new exploration and keep its fingers crossed that the results are good.

Another way forward is going into renewables. However, despite global ambitions for a renewable revolution, this is not likely to happen. The move to renewables is, and will continue to be, more of an evolution and a slow one at that. Diversifying into renewables is a logical way to use available opportunities.

The global oil industry is changing—not of its own will, but nevertheless radically. Wherever oil prices go from here, E&Ps will need to find new ways to stay on top of things. Many of them will inevitably go under. Those that survive will be the lean, flexible ones.

By Irina Slav for Oilprice.com

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  • JHM on May 03 2016 said:
    Not a problem. About 6 gigafactories will cover this. They'll produce over 600 GWh of batteries per year enough to put 120 million electric vehicles on the road every ten year and offset demand for more than 4.5 mb/d of motor fuel. Here's the kicker: they only 6 gigafactories will only cost about $30B.

    So Tesla found your next big virtual oilfield. It's right there in Sparks, Nevada. Exploration companies might do well to search for minerals needed for the Gigafactories of the post-petroleum world.
  • John Scior on May 03 2016 said:
    That headline makes one think something perhaps like next month or next quarter this looming crisis will manifest itself. Then we read about this year 2035 lming event and I think about the Global Warming prophets exclaiming , " the sky is falling the sky is falling !" With everyone thinking vast tidal waves of Ocean sweeping them off their lazyboys like the proverbial flood while images of Al Gore grinning on their big screens saying , "I told you so, I told you so !! " flash as they are swept out to sea.
    I believe you expressed it best, "there is no certainty where oil prices are going in the near term, let alone any longer period. " I'm sure one would need a pretty big crystal ball to see 19 years ahead. With population rising and developing countries emerging into their own industrial ages, demand for oil will certainly rise. The newer emerging markets may not be able to afford electric vehicles or biofuel based cars. With all the low hanging fruit pretty much picked and being depleted, the fundamentals of supply and demand point to higher and higher prices. Much like a whaler wondering what the next source of lighting will be , we are at the nexus of what will be the dominant replacement for petroleum. Is it LNG, biofuels, methanol from coal ?? Or perhaps the CO2 doomsayers will win and we drive electric vehicles powered by batteries charged by the sun or wind ??? Oil has a way to go before it is replaced. Simply by the fact there is so much infrastructure already invested in this technology.
    As we have to climb higher on the ladder to pluck the remaining fruit of petroleum, look far and wide and surely a new winner will emerge. my speculation is something that will slot in nicely with the existing infrastructure. I really don't think an event 19 years down the road is realistic. As the price climbs higher, it will make more sense to explore for oil. Shale fracking will more than likely be the next fruit to be plucked. It really doesn't make sense to invest in a taller ladder, ( i.e. explore for more reserves ) when the supply side is currently in surplus.
    In the meantime boys and girls, get your suntan lotion ready and keep your liferafts at the ready. If the climate doomsayersare correct, the ocean is creaping up on us at fractions of an inch per year.in 80 years it will be 1 foot higher. Oh, and the global temerature is going to scortch us all at a rate of 5 degrees rise per century. The sky is falling, the sky is falling !!!! We're running out of oil and soylent green is people !!!
  • aaron on May 04 2016 said:
    "...4.5 million barrels by 2035. The amount represents around half of the global consumption ... for 2016..."

    A 4.5 million b/d shortfall is ~10% of the daily consumption in 2016, not 50%. It's still a big number, but certainly not half.
  • aaron on May 04 2016 said:
    Sorry, 5% not 10%. My math is off as well!
  • Daniel on May 04 2016 said:
    Good. The fossil fuel pollution party is over ash so sad. tell fat barbie the suv is up for sale
  • Amvet on May 05 2016 said:
    The damage to the global oil industry was done by low prices. Oil prices have nothing to do with supply and demand they are controlled by futures trades by banks and firms that do not use oil. None of these market control crooks are prosecuted by our corrupt judicial system.

    Some details: (1) Over half of global oil is used by developing countries and demand in these countries is increasing. (2) Production data from OECD countries is relative up to date, but the data from the majority of producers is usually late and not very accurate. Punch line, the global oil production glut is not supported by data, just by guesses by groups that want a low oil price.
  • Roy on May 05 2016 said:
    And the guy who found that new oil (me) is going to do quite well in about 2 years.

    As for your comment, JMH....Tesla's gigafactory will be obsolete soon after it opens. Good luck with that.
  • Joe Shabado on May 05 2016 said:
    looms? 19 years from now?
  • RussianJew on May 05 2016 said:
    Since 2014 it was obvious for all oilprice.com contributors that oil price was was "a brilliant Saudi move to kill off Russian economy in general and Russian oil in particular", isn't that right? Do current forecasts include disappearance of Russian oil from the market? I think it is an important parameter for forecasting. And why did experts stop to mention it in their pieces?
  • Brett Ingham on May 08 2016 said:
    My general take from this article, as a trader, is that the general trajectory of oil in the next two decades will be up. No big surprise there. But the alarm is that it may be WAY up, like $500 per barrel in two decades. Well, that's a hell of a lot higher than today, including inflation. In the meantime, it remains a trader's market, and from week to week it always will be, for oil. Boys, it's a roller coaster. Learn how to profit from the ride, or get off.
  • Oilhand Manners on May 09 2016 said:
    Wood McKenzie needs a rectal check. As an oil driller, we are a reactive market, so my question is what criteria did you review? Do you realize you can no longer take the number of working rigs into account? In North Dakota only.....there are 1000's of wells drilled, but not completed, and the number is INCREASING!

    Next question....what criteria did you use for 2025 data, and is it supportive??
  • Bill Simpson on May 19 2016 said:
    With the average decline rate of 6% a year, and with exploration budges having been cut a lot, a major oil shortage will hit long before 2035. I will be surprised if we make it much past 2023 without a massive financial crisis, far worse than the 2008 one.
    You may wonder how an oil shortage will cause a major financial collapse. It is actually simple physics. You need energy to do work. Economic activity involves doing work. If you can't get, or afford, the energy you want, you can't do all the work you want to do. That means the economy must shrink from less work getting done. They call that a recession.
    Normally, a recession isn't a big deal. They are part of the normal business cycle.
    Unfortunately, since the 2008 financial crisis, we are not in a normal financial situation. Interest rates, normally lowered by central banks to stop a recession from deepening into a depression, are already near zero. Going into negative interest rates does little good.
    The big problem will come from the record level of debt nearly everywhere. A shrinking economy from an energy decline will cause many bankruptcies. They could take out the banks and other lenders. Expect governments to try all kinds of unusual things to prevent the recession from deepening into a depression. Watch for a decline in global oil production. The crisis will begin soon after it begins to shrink.
  • Zorro6204 on May 23 2016 said:
    You gotta be kidding. Twenty years from now the only use for oil will be for chemicals and maybe air travel, something the low-cost residual fields can handle for $20-30 (in today's money). Anyone who thinks we'll still be relying on oil for transportation that far out has their head stuck in a well.
  • steve johnson on May 30 2016 said:
    Irina, Oil is finite, makes no sense geologically. Oil is an economic commodity whose value is entirely man made. You will run out of money long before you run out of drilling targets...or petroliferous material in the ground.

    Yes, oil distribution globally may best be expressed as some kind of distribution but the distribution is not random. It can be addressed as a randomized target but only if you have "bounded" the problem at hand. A randomized approach using...say a Monte Carlo assessment of probability can involve multidimensional issues using definite integrals with complicated boundary conditions such as marbles in a pocket but oil is not like marbles and it is not always in pockets. Even if it tends to be in pockets...oil production more like dredging mud in the mississippi river. You can try to control it but in the end...it controls you.

    Natural distributions such as oil are divergent and discontinuous. Finite Oil considerations are like "peak oil" considerations....it is is not sufficiently powerful to assess "reality".

    M. King Hubbert apparently did not try to stretch the horizons of exploration when he developed his "Peak Oil" theory for the benefit of politicians and regulators. His theory was based on an "agenda".

    And...just because oil is only found within the Earth does not make it a "finite" resource...it is more like a "Cantor" distribution....there is more oil between the oil patches than there are oil patches. Some would argue "fractal" patterns model oil distributions...but it is not helpful to merely argue a fractal distribution is "finite".

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