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Robert Rapier

Robert Rapier

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Are We Sleepwalking Into The Next Oil Crisis?

One school of thought is that future oil demand is set to decline because consumers will have better options. Many in this “peak demand” camp believe that the growth of electric vehicles will soon make oil obsolete.

That’s a relatively painless view of the future and is consistent with much of our past experience. Old technologies are frequently replaced by newer, better, and cheaper technologies.

I have written previously on why I don’t believe this version of future oil demand will unfold anytime soon. In a nutshell, if you “do the math,” it becomes clear that it will be years before EVs can take a meaningful bite out of oil demand.

Meanwhile, some organizations are sounding the alarm that rather than a peak demand scenario, we may soon face a peak supply scenario. Or at the least, the loss of global excess spare capacity. The last time this happened, oil prices rose above $100 a barrel.

Words of Warning

In January 2017, Saudi Arabia’s energy minister Khalid A. Al-Falih warned CNBC that he foresaw a risk of oil shortages by 2020:

“I believe if the investment flows that we have seen the last two or three years continue in the next two or three years, we will have a shortage of oil supply by 2020. We know, from what we have seen in the last couple of years, that prices around the current level and below are not attracting enough investment. We know the level of natural decline that existing production is undergoing, and we know that demand is picking up at 1.2 to 1.5 million barrels a year. So between increase in demand and natural decline, we need millions of barrels every year to be brought to the market, which requires massive investment.”

In March 2017, the International Energy Agency published its market analysis and forecast report, Oil 2017. In the report, the IEA warned that the global investment slump of 2015 and 2016 already poses a risk to future oil supplies and that 2017 global spending didn’t look encouraging. Oil supplies are growing in the U.S., Canada, and a few other places around the world, but the IEA report concluded that this growth could stall by 2020 if spending doesn’t pick up. Related: Europe’s Biggest Gas Field To Close Over Quake Risk

The report projects that if current trends continue, spare production capacity in 2022 will fall to the lowest level since 2008 (when oil prices nearly reached $150/BBL). On the topic of EVs, the IEA estimated they will only displace small amounts of transportation fuel by 2022. Further, the IEA said that it doesn’t foresee peak oil demand anytime soon.

Halliburton, the world’s largest hydraulic fracturing service provider, reiterated the IEA’s forecast last summer at the World Petroleum Congress in Istanbul. Mark Richard, a Senior Vice President with the company, said that the $2 trillion in spending cuts in the global oil industry over the past few years would impact the price of oil around 2020. Richard added, “Sooner or later, the market is going to catch up. You’ll see some kind of spike in the price of oil. Maybe somewhere around 2020-2021, but it’s got to catch up sooner or later.”

The British multinational bank HSBC gave similar warnings in its Peak Oil Report 2017. The report noted that the oil market is currently adequately supplied, but spare production capacity could soon shrink to just 1 percent of global supply, bringing the risk of disruption and the subsequent volatility back to the oil markets. HSBC noted that oil demand continues to grow at more than one million BPD every year, and they didn’t see a peak demand scenario before 2040.

The HSBC report further noted that global oil discoveries have been declining and that 81 percent of the world liquid production is already in decline.

Shale Oil and OPEC May Not Be Enough

Former Energy Information Administration (EIA) head Adam Sieminski warned of a decade of disorder:

“Maybe we are going to be less volatile now because shale can feed into rising demand. I’m thinking that the decade of the ‘20s is going to be one of difficulties. That’s why I call it the decade of disorder. We’re not getting enough capital investment now, I don’t know that shale is going to be able to do it all.”

There are some who suppose that OPEC has enough spare capacity to flood the market and keep oil prices in check. But Ed Morse, Citibank’s Global Head of Commodities Research, warned that OPEC may be pumping at maximum capacity and that there is a risk of a market squeeze due to under-investment by OPEC countries:

“Fear in the market has been that OPEC production will rise dramatically, however, there could be a supply gap emerging, which could point to a tighter market. We’re seeing more and more evidence that it’s not the international oil companies, it’s not the independent oil companies that are lagging new investments, but it’s OPEC countries lagging, particularly those five [Libya, Nigeria, Venezuela, Iran and Iraq].”

Plummeting Discoveries

But the risk isn’t just from lack of investment. On the topic of new global oil discoveries, in December, Norwegian research firm Rystad Energy reported that oil companies discovered less than seven billion barrels of oil and gas in 2017 — the lowest number on record. Rystad indicated that this would only replace 11 percent of 2017 oil and gas production, and that the last time the world discovered enough oil and gas to completely replace that year’s production was 2006. Related: The Petrodollar Isn’t Dead Yet

Since the beginning of the shale revolution a decade ago, the world has discovered 110 billion barrels of oil. Meanwhile, consumption has totaled 360 billion barrels. This 250-billion-barrel deficit between discoveries and consumption seems sure to grow in the years ahead, given recent oil discovery trends.

It is understandable why people would be complacent about this scenario. After all, didn’t the world face similar risks a decade ago, only to have shale oil save the day? But it isn’t clear that there is another “shale oil miracle” that is ready to save the day. There are indeed more high-cost oil resources out there that can be developed, but these projects take a long time to complete. That’s why we can look out two to three years and see an impending supply crunch. The longer investments in the industry remain depressed, the more unavoidable this scenario becomes.

By Robert Rapier

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  • Mamdouh G Salameh on April 02 2018 said:
    With oil prices ebbing and flowing against a background of OPEC and non-OPEC production cuts and US shale oil production inching up, nobody is paying enough attention to the fast-approaching oil supply gap.

    Many experts are predicting a supply gap and rising oil prices by 2020. This is due in large part to an oil investment drought marked by three years of consecutive decline in oil prices, a statistic that has no precedent in the oil industry. And to complicate matters further, the rate of new oil discoveries is at its lowest level in more than 70 years.

    Furthermore, global investment in upstream exploration from 2014 to 2020 will be $1.8 trillion less than previously assumed, according to leading US consultants IHS.

    By 2020, 15 mbd of new oil supply may be needed to meet a projected annual average rise in global oil demand of 1.59 million barrel a day (mbd) and also offset an annual natural depletion rate in global oil production estimated at 5% or 4.8 mbd, virtually equivalent to losing the current output of Iraq.

    According to the IEA, the world needs $44 trillion in investment in global energy supply between now and 2040 to meet the coming global energy needs with 60% or $26 trillion allocated for oil and gas production and supply.

    The current global oil demand is not only so robust but is also projected to grow by an estimated 1.7-2.0 mbd in 2018 and also in 2019. Even a contribution from US shale oil production and a possible rise of 1.5 mbd in Iraqi oil production by 2020/21 will not be enough to offset a natural decline of 4.8 mbd annually let alone satisfy rising global oil demand.

    Even the introduction of 50 million electric vehicles (EVs) by 2024 as some experts are projecting or 320 million EVs by 2040 as BP is projecting will only reduce global demand by 0.83 bb 03.38% in 2024 or by 5.28 bb or 5.28% in 2040.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • snoopyloopy on April 02 2018 said:
    Any substantial spikes in the price of oil will inevitably lead to an uptick in the purchase of EVs, especially since the scenario looks like it will coincide with the time frame in which most companies have announced that they will be bringing their first dedicated EVs to market.
  • Amit on April 03 2018 said:
    Yes, but we all know that Saudi and Russia are still not producing as per capacity. What will happen to oil price if they go full capacity production? It won't take OPEC much time to ramp up if they want.
  • petergrt on April 03 2018 said:
    I have a few quips with the article:
    1. Insofar as investment in exploration is concerned, it looks only at the absolute USD level. The fact is that that USD is now buying as much as 50% more exploration than it did just a couple of years ago. So, while the investment in in USD is down substantially, the actual investment is down significantly less.
    2. The proliferation of EV's is being grossly underestimated - did you know that VW sells all electric versions of some of their most popular models? I didn't until I noticed a few in my garage. Furthermore, while Europe is lagging behind in EV's it is exploding with CNG - compressed natural gas. Anyway, the impact of the EV and CNG will be felt sooner than later, as the biggest users of gas and diesel are the first to convert.
    3. New discoveries - oil shale has been discovered in Argentina, China, Russia and other places, and if they can capitalize on the US experience and technology, the World will be awash in light crude. Furthermore, while everyone is focused on the implosion of Venezuela, no one seems to take into account a real possibility of political overthrow and consequent 'rediscovering' of the World's largest proven crude reserves . . . . .
  • Corvettekid on April 03 2018 said:
    (1) Enhanced EURs from existing wells means that you get more out of wells than 30-40 years ago. This is "free" oil.

    (2) Deepwater and shale have just been scratched.

    (3) Iran, Iraq, Nigeria, Brazil, Russia -- all ramping up supply.

    (4) EVs cut millions of barrels of demand beginning in 2025.

    (5) Recent peak was less than $140 peak in 2008. Supply ramps up much faster today (2-3 years) than in 1970's and 1980's (7-10 years)

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