• 15 hours PDVSA Booted From Caribbean Terminal Over Unpaid Bills
  • 17 hours Russia Warns Ukraine Against Recovering Oil Off The Coast Of Crimea
  • 19 hours Syrian Rebels Relinquish Control Of Major Gas Field
  • 20 hours Schlumberger Warns Of Moderating Investment In North America
  • 21 hours Oil Prices Set For Weekly Loss As Profit Taking Trumps Mideast Tensions
  • 22 hours Energy Regulators Look To Guard Grid From Cyberattacks
  • 23 hours Mexico Says OPEC Has Not Approached It For Deal Extension
  • 1 day New Video Game Targets Oil Infrastructure
  • 1 day Shell Restarts Bonny Light Exports
  • 1 day Russia’s Rosneft To Take Majority In Kurdish Oil Pipeline
  • 1 day Iraq Struggles To Replace Damaged Kirkuk Equipment As Output Falls
  • 2 days British Utility Companies Brace For Major Reforms
  • 2 days Montenegro A ‘Sweet Spot’ Of Untapped Oil, Gas In The Adriatic
  • 2 days Rosneft CEO: Rising U.S. Shale A Downside Risk To Oil Prices
  • 2 days Brazil Could Invite More Bids For Unsold Pre-Salt Oil Blocks
  • 2 days OPEC/Non-OPEC Seek Consensus On Deal Before Nov Summit
  • 2 days London Stock Exchange Boss Defends Push To Win Aramco IPO
  • 2 days Rosneft Signs $400M Deal With Kurdistan
  • 2 days Kinder Morgan Warns About Trans Mountain Delays
  • 2 days India, China, U.S., Complain Of Venezuelan Crude Oil Quality Issues
  • 3 days Kurdish Kirkuk-Ceyhan Crude Oil Flows Plunge To 225,000 Bpd
  • 3 days Russia, Saudis Team Up To Boost Fracking Tech
  • 3 days Conflicting News Spurs Doubt On Aramco IPO
  • 3 days Exxon Starts Production At New Refinery In Texas
  • 3 days Iraq Asks BP To Redevelop Kirkuk Oil Fields
  • 4 days Oil Prices Rise After U.S. API Reports Strong Crude Inventory Draw
  • 4 days Oil Gains Spur Growth In Canada’s Oil Cities
  • 4 days China To Take 5% Of Rosneft’s Output In New Deal
  • 4 days UAE Oil Giant Seeks Partnership For Possible IPO
  • 4 days Planting Trees Could Cut Emissions As Much As Quitting Oil
  • 4 days VW Fails To Secure Critical Commodity For EVs
  • 4 days Enbridge Pipeline Expansion Finally Approved
  • 4 days Iraqi Forces Seize Control Of North Oil Co Fields In Kirkuk
  • 4 days OPEC Oil Deal Compliance Falls To 86%
  • 5 days U.S. Oil Production To Increase in November As Rig Count Falls
  • 5 days Gazprom Neft Unhappy With OPEC-Russia Production Cut Deal
  • 5 days Disputed Venezuelan Vote Could Lead To More Sanctions, Clashes
  • 5 days EU Urges U.S. Congress To Protect Iran Nuclear Deal
  • 5 days Oil Rig Explosion In Louisiana Leaves 7 Injured, 1 Still Missing
  • 5 days Aramco Says No Plans To Shelve IPO
Alt Text

This Key Data Points At Strong U.S. Oil Demand

U.S. Gasoline prices haven’t risen…

Alt Text

Why U.S. Crude Exports Are Booming

U.S. crude oil exports are…

Alt Text

Why Petrol Powered Cars Aren’t Going Anywhere

Internal combustion engines are still…

Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

More Info

Long Term Consequences Of The Oil Price Crash

Offshore rigs KMZ

The World Energy Investment study released by the IEA on September 14 confirmed what analysts have been prophesying for months: the current decline in oil-and-gas investment is the biggest one in half a century. The current bout of low prices has gotten so deep and remained there for so long that capital investment in new projects, and hence new production, has taken a major hit.

But in an era of shifting energy policies, surging interest in renewables and uncertainty over the consistency of demand, what does this drop in investment really signify? And what could it mean, over the long term? There are a lot of factors to keep in mind when taking a look at this new report from the global energy watch-dog.

The IEA found that worldwide investment in energy in 2015 was $1.8 trillion, a fall in real value of 8 percent from 2014. Investment in oil and gas fields, according to IEA’s executive director, by 25 percent in 2015 to $583 billion, with a further decline of $450 billion expected for 2015. The decline in oil and gas, which has otherwise retained the largest share (46 percent) of total investment, was partially off-set by growth in renewables, electricity networks and energy efficiency (see a handy pie chart here).

The largest contributor to the decline was cost deflation, or falls in supply and equipment costs, which accounted for about two-thirds of the total fall in investment.

Other notable aspects of the IEA report: investment in energy efficiency rose by 6 percent and reached $220 billion, a further sign that increased efficiency remains a “fuel” in its own right. The IEA had estimated in October 2014 that energy efficiency could potentially be worth $310 billion worldwide.

Decline in oil and gas investment has been the big story in the US, which has contributed the most to the current slump: investment in 2015 fell by $75 billion, down to $280 billion. Investment in shale, predictably, fell a staggering 52 percent.

Outside of the U.S., however, is a different story. In the Middle East and Russia, where development and production costs remain lower, investment held steady, helping national oil companies to improve their share in upstream investment to 44 percent. In absolute terms, investment in the Middle East remains a low-cost prospect: despite accounting for one-third of global oil production, Middle East investment was only 12 percent of the global total.

Investment in renewables, another big story of the year, reached $290 billion in 2015, or 17 percent of the total. Obviously this means a lot more to natural gas than to oil: wind and solar compete with gas for markets and, Elon Musk’s enthusiasm notwithstanding, electric cars (which could be powered by wind or solar power) have yet to seriously challenge oil-powered transportation.

The IEA was also not terribly enthusiastic about the future of LNG: they predict a serious drop in investment in 2017, which will tighten prices. Related: OPEC Output Freeze Deal To Last One Year, Secretary-General Says

As for coal, the IEA determined that despite falling use in China and the United States, where coal-firing power plants are being replaced by renewables and gas, coal remains the second largest single contributor to the energy sector. With far lower capital costs than gas (and particularly LNG, which requires massive outlays for infrastructure as well as the gas plants themselves), coal remains a cheap and attractive option in India and elsewhere in the developing world, despite a strong potential for LNG and natural gas to seize a larger share of the electricity and fuel markets.

So, the big question: how does this investment report mean for global energy, and the American economy in general? As at least one energy analyst has noted, the current shift in global energy seems likely to upset decades-old geopolitical relationships. Are we in the midst of a similarly epoch-shattering shift in energy economics?

The news from the IEA was joined by an economic revelation of similar importance: that the decline in oil prices since July 2014 has had little or no impact on the American economy. A paper by economists Christiane Baumeister and Lutz Kilian for the Brookings Institute found that in 2015 consumer spending increased by 0.61%, on account of low gas prices. This is the oft-cited surge in consumer spending that accompanies periods of low gas prices.

But Baumeister and Kilian also found that over the same period, investment in oil and gas fell by 0.62%, perfectly off-setting the rise in consumption. As Bloomberg notes, the economic dislocation experienced by massive lay-offs in the energy sector nullifies any boon the consumer enjoys from slightly lower gas prices.

Another way to interpret this: if the price had declined without the accompanying drive in new U.S. oil and gas investment (much of it linked to the shale boom), American consumers would have enjoyed low prices, thousands of American workers and dozens of businesses would not have been exposed to tougher market conditions, and the present doom-and-gloom might have been less prevalent. Related: Natural Gas Producers In Colorado Have A Problem

As Baumeister and Klein note, the impact of the current downward trend in price (which they point out is reminiscent of the crash in 1986, only much, much worse in terms of accompanying decline in investment) is felt to differing degrees depending on whether the national economy is focused more on consumption or production.

The United States, historically the world’s major producer and consumer of oil and gas, will always be uniquely situated during crises in investment. Yet it also means that the American economy is better suited to weather the storm. Dangers that U.S. banks are overly exposed to defaults in the oil and gas sectors, for instance, seem largely over-blown: Bank of America, with the largest exposure to energy defaults, is putting aside heavy provisions in case its loans go bad. Despite potential risks, oil and gas won’t drag the U.S. into another painful recession as real estate did in 2008.

Another big question: does the drop in investment mean the price of oil will swing radically back up, as soon as new production fails to catch up with demand? It’s possible. But note that while the IEA report found investment in renewables and energy efficiency are continuing to grow, that growth has been matched by continued investment in coal, natural gas and oil. Growth in renewables has, in other words, been almost entirely off-set by increases in conventional energy sources.

Much more importantly, however, the IEA estimates that supply will continue to outstrip demand this year and next year by a significant margin. That means we’ll have to wait to mid-2017 at the earliest for markets to balance each other out. So, if the price does vault back up, it doesn’t look likely to happen for at least another year.

As much of the new production maintaining the glut comes from outside of OPEC, it puts added pressure on the oil cartel to reach an agreement when it meets this week. But why freeze production when your competitors look likely to seize market share in the short term? The new IEA bearishness on market balance puts OPEC, as others have noted, in an awkward position.

Thus, there is much to keep in mind about the new trends in falling investment. Doubts continue to surround LNG as the fuel of the future; renewables keeps the wind in its sails, but can’t quite out-run the competition; and coal remains down, but not out, particularly if you’re in an Indian state-run coal titan. Added to that, at last, is the IEA’s sudden fear that demand will stay down: how then can there be a new price spike when no one needs more gas in their cars?

By Gregory Brew for Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment
  • USA on September 22 2016 said:
    Oilprice.com should know better than to use the IEA as a data source - in fact, doing so damages your credibility as an energy information source.

    Just a few samples of IEA 'data':

    Feb. 22, 2016 - Crude Glut Could Take Years to Disappear, IEA Data Show (from the Wall Street Journal)

    Aug 11, 2016 - IEA: Crude Production to Fall Behind Demand (also from the Wall Street Journal). This is the one where the IEA announced that 'Our balances show essentially no oversupply during the second half of the year'. The Wall Street Journal headline was something to the effect: "Oil Glut Gone" according to the IEA.

    Both of the relevant articles can easily be googled.

    Now this author says on Sept 20, 2016, according to the IEA: 'estimates that supply will continue to outstrip demand this year and next year by a significant margin.'

    If I can find this information in 10 minutes of googling, think what you can do with some real research. Please ignore the IEA - they are either manipulating you, or just incompetent (or a little of both).

Leave a comment




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