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Oil Price Spike Inevitable As New Discoveries Hit Seventy-Year Low

Oil Rig

The oil industry only discovered about 2.7 billion barrels of new supply in 2015, a tiny fraction of the annual average for the past fifty years. The dismal result was one of the worst performances from the oil industry in decades. 2016 could be even worse.

The 2015 figure is about one tenth of the annual average dating all the way back to 1960, according to Wood Mackenzie. Shockingly, 2015 saw the least amount of oil discovered in a calendar year since 1947. But with the massive spending cuts extending into 2016, this year the industry is on track to discover even lower volumes. As of the end of July, the global oil industry has only reported 736 million barrels of new oil discovered.

Of course, with oil prices trading at less than $50 per barrel, many of the oil fields around the world that have yet to be explored are not economically viable. New discoveries are “at rock bottom,” Nils-Henrik Bjurstroem, a senior project manager Rystad Energy AS, told Bloomberg. Rystad Energy published similar findings earlier this year, concluding that 2015 was the worst year for new oil discoveries in over sixty years. “There will definitely be a strong impact on oil and gas supply, and especially oil.”

In another damming statistic from Rystad Energy, the oil industry is very far from even replacing the oil that they are currently producing: in 2016, only about one barrel out of every 20 barrels consumed will be replaced with new discoveries.

The shortfall in upstream investment could be a presage of a supply crunch somewhere down the line. The oil industry has slashed about $1 trillion in investment for the period between 2015 and 2020, Wood Mackenzie said a few months ago.

The supply gap will only grow over time as demand continues to rise. The EIA expects oil demand to expand to 105 million barrels per day (mb/d) by 2026, up from just 94.8 mb/d this year. Obviously, forecasts that far out are inevitably off the mark, but the estimate at least gives the sense of the problem. If demand continues to increase by more than 1 mb/d annually, as it has for a long time, the oil markets could quickly swing from supply glut to a deficit. Bank of America Merrill Lynch already predicts a deficit next year of about 800,000 barrels per day.

Normally, a supply deficit would lead to higher prices, which would incentivize companies to bring supply back online and balance the market. But large-scale drilling in deepwater – the types of projects that have been scrapped during the oil price downturn – take many years to develop. Projects cancelled over the past few years would not have come online until the end of the decade at the earliest. The pain is not being felt all that much today, but will only start to bite in the future. Krisitin Faeroevik of Stockholm-based Lundin Petroleum told Bloomberg that it will take “five to eight years probably before we see the impact” of today’s cancellations. Related: The Magic Number For Oil Bulls Remains In Sight

Estimates vary, but some say supply could fall short by about 4 mb/d by 2018-2020 compared to previous estimates from 2014. For an oil market only suffering from a surplus of less than 1 mb/d currently – and only as much as about 2.5 mb/d at its worst – a supply drop off of that magnitude could be enormous. Sure, crude oil and refined product inventories will take time to get worked off, but once that buffer is gone, the global economy could find itself a little short on crude oil. Prices would subsequently spike because the projects that have been cancelled won’t come back online at a moment’s notice.

Of course, this all assumes that demand will inevitably rise at the consistent pace of 1 mb/d per year or so. While oil demand has consistently increased practically every year for the past century, leaving aside economic recessions, the future is not as certain – the oil market is starting to see the outlines of an existential crisis. Electric vehicles and renewable energy are starting to take a bite out of oil’s market share. And the EV revolution could cripple the oil industry sooner than many think.

If EVs permanently cut into oil demand, that would head off the oil price spike that is in the offing because of the supply cuts. But if EVs fall short and oil demand continues to rise, the massive cutbacks in drilling will mean that the oil industry will be unable to keep up in a few years’ time.

By Nick Cunningham of Oilprice.com

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  • James Wright on August 31 2016 said:
    This certainly looks like one of the options that may occur. Offshore is indeed the only place to look for new and prolific discoveries, and with years of planing to drill exploration wells, the outcome for completion boys to take over within the next 5 to 10 years is more and more obvious. This is a gloomy outcome as far as the oil prices go indeed.
  • Kimberly V. Davis on August 31 2016 said:
    Flattening energy demand – decoupled from growth - is a profound, and unrecognized, component of many energy and economic equations.

    The crash in oil prices has led to abundant discussion about the “glut” – the supply side of the equation. This article examines how exploration has been depressed by low prices.

    But perhaps we shouldn't count on demand continuing to increase - hear me out.

    Both transportation fuel and electricity energy planning are insufficiently recognizing a key factor--the dramatic plateauing of *demand*.

    The flattening of demand can be attributed to two enormous meta-trends that have accelerated in the 21st century: efficiencies have accrued, and, information technology has changed everything about our lives.
    And while this is apparent in the U.S. and other developed countries, there are clear indications the developing world is not going to be taking the same path that Ford and Edison first put us on.
    The energy demand graph below reveals that efficiencies accrue. [see Figure MT-7, energy use per capita and per dollar, http://www.eia.gov/forecasts/aeo/pdf/0383(2014).pdf

    On the electricity side, we turn over “fleets” of buildings through new construction and renovation, all meeting higher energy efficiency standards. Appliances from toasters to huge chillers also become increasingly efficient. Lighting and HVAC (residential, commercial and industrial) have all made huge strides. Taken together, these billions of small measures have sent the growth curve downward, and electricity demand has become de-coupled from both population and GDP.

    On the transportation side, vehicle miles traveled per capita in the US have been falling since 2002. At first, they thought it might be the post-9/11 recession, but the VMT trend has become de-coupled from both population and GDP. CAFÉ standards and the like
    But technology is also cutting in to transportation demand in everyday commerce, information and communications. We think about telecommuting, telework, teleconference – but we now use computers and smartphones for tele-shopping, tele-renting movies, tele-paying bills and banking, tele-downloading movies, tele-paying your taxes and renewing your licenses, tele-chat with friends...Parallel tools and techniques have revolutionized business, commercial, and industrial techniques in exchanging good and services, without as many trucks and gallons of diesel.

    Land use patterns are shifting back to the "livable communities" old cities never abandoned, where people can live/work/shop/play without owning a car - local governments made an intentional shift in this direction, and it's worked. Car ownership among young people has plummeted - they see car ownership as an expensive, polluting risk. With options like zip-car, they opt out of ownership, meaning they walk or take transit or make other plans....

    This is a hugely profound trend. If we do not recognize the demand side of the equation – in planning for both transportation fuels and power plants – we can be headed for a harder landing than would otherwise be the case.

    And much worse, and on a global level - if we continue to believe that slower growth in energy demand is an artifact of economic growth, that will lead to pessimism and possibly “fixes” that are not aligned with the facts.

    Far from being a problem (except for those in the energy industry), flattened and de-coupled energy demand represents savings and efficiencies in our scarce resources which – pegged to the save level of productivity – can be allocated to other needs.
  • geroege on August 31 2016 said:
    The so called" oil oversupply" is a BIG LIE!

    USA alone import MASSIVELY oil from middle east.

    China's oil import has increased! (15-25%)

    USA published all sorts of FAKE inventory reports (probably included the oil they imported from Middle East) and by raising dollar rate to HURT russians and Venezuelians.

    If OPEC make production cut, it'll be a seriously oil DISRUPTION in the world.

    China also bribes Hussein Obama by doing this dirty job!

    When Obama leaves the white house, the oil price will significantly rise!
  • Bill Simpson on September 01 2016 said:
    The tough part will be preventing any drop in total oil output from collapsing the over levered global financial system. A lot of folks smarter than me, are on record as saying that the global credit bubble can't keep expanding forever, as it has since the 1980's. (Google, 'Negative Thinking' by Satyajit Das in MarketWatch and read the last 2 paragraphs. See, 'Credit Supernova!' by Bill Gross for a very ugly graph.) Debt has been growing much faster than real economic output for about 40 years. You can't do that forever. Eventually, something even worse than 2008 comes along.
    Physics dictates that energy is needed to do work. Shrink the amount of energy from oil available, and it doesn't take a genius the figure out that the economy will have to shrink, as liquid fuels become supply constrained. The amount of work a gallon of diesel or gasoline can do is finite. Efficiency only goes so far. You need oil products to mine lithium, and the other elements needed for electric car batteries. And it will be 15 years before electric vehicles make a dent in the overall supply of vehicles. Don't hold your breath waiting for electric airliners, ships, farming machinery, heavy trucks, or railroad locomotives in the USA.
    A shrinking economy is called a recession. With interest rates effectively already at zero, good luck keeping that recession from rapidly turning into something worse than the Great Depression.
    I think the coming fuel shortage, resulting from lack of oil exploration investment today, will be the catalyst Das is looking for. US shale oil won't make up for that future shortage, no matter how many wells are drilled here. There simply isn't enough oil in US shale.
    We will need a lot of oil to satisfy the future demand from the developing world, which contains the majority of people on this planet. Demand for oil won't be going down anytime soon. Maybe in a couple of decades from today, but not in the next decade.
    Watch the crazy financial stuff the governments will try, once the coming crisis begins.
  • wnb on September 02 2016 said:
    So the entire sham of Saudi flooding the markets to preserve market share is almost over and exposed. In fact, since Nov 2014 Russia has taken away market share still through today, and fracking has not failed. Saudi now speaks the words that they are ready to end the fracking war. This is the corporate version, and thus you see it is very important to find humor when you can. Find it here.

    A slightly different version.
    BRICS are selling the dollar and Dedollarizing at 4% a year, the rate at which the dollar is reduced as the world currency reserve and for oil trades. The petrodollar is under attack and collapsing quickly. Kerry goes to Saudi in 2014 and orders Saudi to flood the markets to collapse Russia, the number 1 USA threat to hegemony. A playbook strategy from 20 years ago - last time Russia collapsed around 1998. Feds forced to buy their own dollar as the world dumps them. Monetization of the debt accelerates.

    The IEA is ordered to overstate supply by 800,000 barrels a day in 2015 to enforce downward pressure on oil, and on Russia. To survive, Russia aligns with China both militarily and economically. The ruble does not fail. The Silk Road project takes flight as 100% Eurasian trade markets off the dollar. The USA counters this with TTP and TTIP but both have failed and have been rejected by France and Germany.

    Saudi is headed for total collapse and begins IPO talks. Russia wins Syria and pipelines and oil to Europe. Saudi loses Syrian pipelines and tariffs promised to them by the USA after Syria is won. The USA never expected Russian intervention as a game changer with excellent Russian military might. Saudi-USA relations deteriorate rapidly.

    The USA now retreats to save Saudi from total collapse and Iranian invasion. USA also retreats to save Wall-Street banks from oil hedge counter party payments killing them. Saudi is more hated now than ever, as is the USA for war crimes in Libya and Syria.

    The IMF walks away with new loans in a few oil collapsed nations and puts those few nations back on the dollar for oil trades - a few marbles were won and Venezuela soon. China is the *** major *** winner with HUGE oil reserves now on the cheap and they only stopped importing oil after their ports were bombed. Kerry warned them prior to the bombings. China stopped. Oversupply of oil continues at this point.

    Now here we are present day and in the last two stages of the petrodollar oil cycle. The USA is losing hegemony at about 3-4% a year now, as the dollar is used less in international trade every year and especially oil trades.

    Ultimately, this is the story of the rising East and the declining West. It will not end well for America, sadly. Karma will always circle around and one always reap what one sows. American life without the world currency reserve will be very hard, and very expensive.

    Russia, China, Iran, Turkey (defecting from NATO), Syria, and India all now stronger than before the failed Kerry strategy, while the USA and Saudi much much weaker.
  • Ronald Wagner on September 04 2016 said:
    Natural gas is cheaper, cleaner, and more abundant. Oil should not ever be allowed to become overpriced again. Trucking, ships, and railroads should all be transitioned to CNG and LNG. Even newly designed aircraft could use natural gas. The benefits are cleaner air, continued low priced energy, and saving oil for future use.
  • Andrew Boleh on September 09 2016 said:
    Ronald Wagner:
    You said things without science and engineering in consideration.
    I won't see commericial CNG powered aircraft in my lifetime. You have no idea the extra weight of CNG has on airflight. Even model remote-control airplane jumped to using battery and motor instead of mini tank of natural gas.

    Secondly, we have infrastructure of power grid, not gas line and CNG station. Who's gonna foot the bills for a new multi trillion $ CNG network just for fueling cars?
  • Andrew Boleh on September 09 2016 said:
    Kimberly Davis.
    All those new technology would improve energy utilization efficient but it would not reduce energy demand, maybe only slowdown the increase of energy demand. You miss the part on human behavior. We use more of it if something is cheaper and/or more efficient. Have improvement of gas consumption of 1970's muscle cars to honda's 50 mpg subcompact reduced oil consumption in the past 30-40 years? We now use more electrical devices and applicances, how would that reduce electricity demand? Server farm wasn't even around only 20 years ago. Developing world are now modernizing, you think they are gonna use less energy?

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