• 5 hours Permian Still Holds 60-70 Billion Barrels Of Recoverable Oil
  • 10 hours Petrobras Creditors Agree To $6.22 Billion Debt Swap
  • 14 hours Cracks Emerge In OPEC-Russia Oil Output Cut Pact
  • 18 hours Iran Calls On OPEC To Sway Libya, Nigeria To Join Cut
  • 20 hours Chevron To Invest $4B In Permian Production
  • 21 hours U.S.-Backed Forces Retake Syrian Conoco Gas Plant From ISIS
  • 23 hours Iraq Says Shell May Not Quit Majnoon Oilfield
  • 3 days Nigerian Oil Output Below 1.8 Million BPD Quota
  • 4 days Colorado Landfills Contain Radioactive Substances From Oil Sector
  • 4 days Phillips 66 Partners To Buy Phillips 66 Assets In $2.4B Deal
  • 4 days Japan Court Slams Tepco With Fukushima Damages Bill
  • 4 days Oil Spills From Pipeline After Syria Army Retakes Oil Field From ISIS
  • 4 days Total Joins Chevron In Gulf Of Mexico Development
  • 4 days Goldman Chief Urges Riyadh To Get Vision 2030 Going
  • 4 days OPEC Talks End Without Recommendation On Output Cut Extension
  • 4 days Jamaican Refinery Expansion Stalls Due To Venezuela’s Financial Woes
  • 4 days India In Talks to Acquire 20 Percent Of UAE Oilfield
  • 5 days The Real Cause Of Peak Gasoline Demand
  • 5 days Hundreds Of Vertical Oil Wells Damaged By Horizontal Fracking
  • 5 days Oil Exempt In Fresh Sanctions On North Korea
  • 5 days Sudan, South Sudan Sign Deal To Boost Oil Output
  • 5 days Peruvian Villagers Shut Down 50 Oil Wells In Protest
  • 5 days Bay Area Sues Big Oil For Billions
  • 5 days Lukoil Looks To Sell Italian Refinery As Crimea Sanctions Intensify
  • 5 days Kurdistan’s Biggest Source Of Oil Funds
  • 6 days Oil Prices On Track For Largest Q3 Gain Since 2004
  • 6 days Reliance Plans To Boost Capacity Of World’s Biggest Oil Refinery
  • 6 days Saudi Aramco May Unveil Financials In Early 2018
  • 6 days Has The EIA Been Overestimating Oil Production?
  • 6 days Taiwan Cuts Off Fossil Fuels To North Korea
  • 6 days Clash In Oil-Rich South Sudan Region Kills At Least 25
  • 6 days Lebanon Passes Oil Taxation Law Ahead Of First Licensing Auction
  • 7 days India’s Oil Majors To Lift Borrowing To Cover Dividends, Capex
  • 7 days Gulf Keystone Plans Further Oil Output Increase In Kurdistan
  • 7 days Venezuela’s Crisis Deepens As Hurricane Approaches
  • 7 days Tension Rises In Oil-Rich Kurdistan
  • 7 days Petrobras To Issue $2B New Bonds, Exchange Shorter-Term Debt
  • 7 days Kuwait Faces New Oil Leak Near Ras al-Zour
  • 8 days Sonatrach Aims To Reform Algiers Energy Laws
  • 8 days Vitol Ups Cash-for-Oil Deals With Kazakhstan To $5B
Alt Text

How Will Venezuela Deal With A PDVSA Default?

Venezuela’s state-run PDVSA is moving…

Alt Text

Does This Oil Price Rally Have Legs?

Last week, crude oil prices…

Alt Text

The Boring Truth About Oil Prices

Oil markets look likely to…

Dwayne Purvis

Dwayne Purvis

Dwayne Purvis, P.E. is a reservoir engineering and management consultant based in Texas.  Find commentary and free resources at www.dpurvisPE.com. Besides writing and speaking on…

More Info

Is Another Bust Looming Over The Oil Industry?


Notable authorities such as the EIA, the IEA, OPEC and BP forecast growth of demand for oil in their base case scenarios through the end of their forecast periods. These same organizations failed to predict, and even to fully recognize after the fact, the start of declining demand in the United States and the OECD when those occurred more than a decade ago. Royal Dutch Shell broke ranks from other industry players last fall when its chief executive officer opined that global demand could reach a maximum in the next five to fifteen years. Given the nature of the demand plateau and the historical failure of authorities to predict its advent, it is time for the oil industry to begin planning and watching for the turn.

Global demand growth has been slowing over the last decades, and it is forecast to grow at around 1 percent or less into the future. The actual year-to-year figures, though, are volatile. Large-scale movements like increasing efficiency, decreasing costs of alternatives, and effects of policy changes can be slow to unfold, difficult to see, and very difficult to predict. If today’s optimistic outlook persists, then the industry is likely to be caught by surprise when demand shifts. Oil prices will not be inherently lower during the very long future decline of oil, but the nature of the cycles will change, especially the first cycle in which demand fails to grow.

Before that happens, oil prices seem set up for boom. The extraordinarily low oil prices of recent years caused investments in future supply to be cut too much. Though current and futures prices have sustained a reasonably consistent band since last summer, worldwide reinvestment has not stepped back up. At this point, an effective floor seems to have been established in the minds of the industry. Outside of the U.S. there is widespread effort, if unevenly shared, to increase prices. Investment confidence has improved somewhat from independent producers, but many countries seem to lack the ability to respond and timely. Indeed, they seem unable in some cases even to spend appropriate maintenance capital. The IEA has warned that the lack of investment is likely to lead to a shortage in the early 2020s, but it doesn’t take an econometric model to see that. Related: OPEC Can’t Stop The Beat: U.S. Adds 10 Oil Rigs

Markedly higher prices, should they arrive, could provide the last push on top of underlying decay. Producers may rush into development even as consumers back out of use. If supply increases while demand plateaus or declines in absolute terms, then the oil industry will see the worst down cycle in memory.

In past cycles, demand maintained its growth, more slowly in higher prices then stimulated anew with lower prices. In the end, though, demand will stop moving up at all. Factors unrelated to price will dominate, and demand will, at best, hold a virtual plateau. What is more, OPEC is likely to continue their management of the market to their own advantage.

When demand does turn, there will be only one path to balance—decreased supply. That is, marginally economic production must be plugged, and investment must slack off so much that the underlying decline of existing production can pull down the total supply figure to meet demand and to work off accumulated inventory builds. For OPEC, which has some of the lowest production costs in the world, this turning point creates an opportunity to gain market share and to solidify pricing power. It benefits key and leading members of OPEC to allow a deep and long depression of prices—long enough to allow the world to recognize that demand has turned, to plug high-cost production and to redirect large portions of investments.

The underlying decline of existing production is in aggregate 5 to 6 percent per year with normal levels of maintenance capital. If demand were growing 1 to 2 percent or more each year as it has in the past, then each year’s investments have replaced 6 to 8 percent of total demand. If demand instead declines 1 percent per year, then investments must replace only 4 to 5 percent of total demand each year, and that total demand benchmark will itself decline, eventually return to levels markedly lower than today. Related: Wall St. Gears Up For The World’s Biggest Oil Trade

The industry may overshoot again on the down side, and cycles may continue even as demand lies flat or falls. This and subsequent gluts will, like the peak demand glut, be resolved by drops in production. Booms will be shorter, and the busts may be longer. On the other hand, having ceased better control of the market, OPEC may try to establish and maintain a reliable and modest long term price to abate the decline in demand.

In any event, the nature of the business will change. The public markets will no longer value companies for their growth stories in oil. Growth for energy companies will come instead from natural gas, which will be a global commodity by that time, or from alternative energy sources. Those who stick with liquid hydrocarbons will be treated like the natural gas companies of recent years—out of favor and focused on margins.

The planning and decisions of our business require drawing conclusions about the future of oil prices. Often the best we can do is to watch alertly as existing and novel trends unfold. Widespread awareness of the possibility of plateau demand can affect planning and thus, perhaps, change the way that we experience the transition to a world of declining demand.

By Dwayne Purvis for Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment
  • Jhm on April 10 2017 said:
    Hey, it sounds like that oil shortage could hit just as market share for EVs goes from 5% to 25%. That would be a super boost.
  • EdBCN on April 16 2017 said:
    It seems likely that the rebalancing that brings the next big price rise will coincide roughly with a period in which EV's market share, and investor awareness of the potential disruption posed by EVs, will be increasing rapidly. Would that then depress investment even longer than would otherwise be the case at that point in the market cycle? I think by the end of this year it will start to be widely apparent that the strongest market case for EVs isn't in replacing gas-sipping little cars, but rather gas-guzzling trucks and busses. That should put a scare in the oil markets.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News