While oil markets are concerned about the immediate hit to demand from the Omicron COVID surge and a looming oversupply, officials at oil-producing countries and industry executives have been warning for months of a supply shortage in coming years unless investment in new projects rises materially. Last year and this year, investment in new oil and gas supply has been lingering at the lowest level in a decade and a half, setting the stage for a supply shortage around the middle of this decade when fewer new projects would have seen the light of day.
The expected lower supply by 2030 would have been great news for the global push toward clean energy and a significant cut in energy-related emissions if it weren’t for the fact that the world still consumes as much crude oil as it did before the pandemic. And it will continue to do so for at least another decade, most analysts and forecasting agencies and organizations say.
Until global oil demand sees a structural decline—not just a pandemic-induced crash—the world will need supply to meet that demand. The current natural gas crunch and energy crisis in Europe offer a cautionary tale of what could happen if supply and storage levels of a major source of energy are lower at a time when demand is rising—price spikes to records, an even higher volatility, and heightened geopolitical tension between major suppliers and large consumers.
Saudi Arabia Warns Of Crippled Supply
Saudi Arabia, the world’s biggest crude oil exporter, has been warning for months that low global investments in new supply in recent years could lead to potential shortages down the road. The International Energy Agency’s (IEA) scenario of no new investment in oil and gas—ever again—if the world were to reach net-zero emissions by 2050 is “a sequel of the La La Land movie. Why should I take it seriously?” Saudi Energy Minister, Prince Abdulaziz bin Salman, said earlier this year.
Last week, the minister warned that global oil production could drop by a massive 30 million barrels per day (bpd) by 2030. That’s around 30 percent of daily global oil supply and around the same share of current global oil demand.
Related: Europe’s Gas Prices Jump To Record As Key Pipeline From Russia Halts Flows
“We’re heading toward a phase that could be dangerous if there’s not enough spending on energy,” Prince Abdulaziz bin Salman said last week, as quoted by Bloomberg. Insufficient investment could lead to an “energy crisis,” he added.
“We have very serious concerns that the world could run short of energy if we are not careful in managing the transition,” Saudi Arabia’s finance minister Mohammed Al-Jadaan also said last week, reiterating recent warnings from other officials and industry executives in Saudi Arabia, including from Saudi Aramco’s chief executive Amin Nasser.
Sure, Saudi Arabia has a vested interest in warning against a rushed energy transition, but it is not the only one—some industry executives in the U.S. have also warned that continued underinvestment could spell trouble for future global oil supply.
Production Capacity Growth In Middle East May Not Be Enough
The oil industry is “massively underinvesting” in supply to meet growing demand, Greg Hill, president of U.S. oil producer Hess Corp, said earlier this year.
The energy sector is not investing enough to meet growing energy demand, including for crude, which could lead to a series of energy crunches down the road, oil expert Daniel Yergin, vice chairman of IHS Markit, told CNBC last month.
Saudi Arabia alone cannot supply the rise in oil production needed to avoid a crunch, Julian Lee, an oil strategist for Bloomberg First Word, wrote in a recent opinion piece on Bloomberg.
That’s despite the Saudi plan to raise its oil production capacity to 13 million bpd by 2027 from 12 million bpd now. The Abu Dhabi National Oil Company (ADNOC) plans to raise the United Arab Emirates’ (UAE) production capacity by 1 million bpd by the end of this decade to 5 million bpd from 4 million bpd now.
Still, this may not be enough, considering that the international oil majors pivot to more investments in low-carbon energy, and some of them—such as BP and Shell—have said their respective oil production has already peaked.
Moreover, the world’s spare capacity is almost exclusively concentrated in the Middle East, a region prone to geopolitical tensions, flare-ups, and conflicts.
Investment Is Still Low
The oil industry continues to underinvest in new supply, while U.S. shale, while set to grow its production in 2022, is likely done with the massive 2-million-bpd annual output surge just before the pandemic hit.
Related: Oil Prices Crash On Renewed Omicron Panic
Upstream oil and gas investment must rise to the pre-pandemic levels of around $525 billion per year through the end of the decade so that the industry can ensure a demand-supply balance, Saudi Arabia-based International Energy Forum (IEF) and IHS Markit say. This year, upstream investment is still depressed for a second year in a row and is estimated at around $341 billion, they note.
Global annual upstream spending needs to increase by as much as 54 percent to $542 billion if the oil market is to avert the next supply shortage shock, Moody’s said in October.
Oil Demand Is Still Going Up
More-than-a-decade low investment in oil and gas would be fantastic news for all the climate goals nearly every major economy has set out, if it weren’t for the simple fact that oil demand is here to stay and rise in coming years.
Peak oil demand is years—if not more than a decade—away, and when it peaks, it is not expected to plunge thereafter but only plateau, most analysts say.
Even the IEA, the agency championing net-zero by 2050, acknowledged in its World Energy Outlook 2021 in October that “The world is not investing enough to meet its future energy needs, and uncertainties over policies and demand trajectories create a strong risk of a volatile period ahead for energy markets.”
“If demand remains at higher levels, this would result in tight supply in the years ahead, raising the risks of higher and more volatile prices. It is not clear that higher prices would trigger supply responses to the same extent as in the past,” said the IEA.
By Tsvetana Paraskova for Oilprice.com
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He was echoed by the chief executive of Saudi Aramco Amin Nasser who told the WPC meeting that admitting publicly that oil and gas will play an essential and significant role during the global energy transition and beyond will be hard for some but admitting this reality will be far easier than dealing with energy insecurity, rampant inflation and social unrest as energy prices become intolerably high and commitments for net zero emissions unravel.
Price shocks, scarcity and energy poverty are on the cards after two consecutive years of underinvestment in the oil and gas industry. This year's investments in the industry would be about $341 billion, which is 35% lower than pre-pandemic investment levels of $525 billion, and that's despite rising global demand for oil and gas.
Oil and gas investment will need to return to pre-pandemic levels and stay there through to 2030 to restore market balance. The energy crisis in Europe and Asia this Winter is a preview of what we can expect in the years ahead.
The Saudi energy minister Prince Abdulaziz bin Salman warned last week that global oil production could drop by a massive 30 million barrels a day (mbd) by 2030 if underinvestment continues at the current level much longer.
Saudi Arabia alone cannot supply the rise in oil production needed to avoid a crunch. By 2030 Saudi Arabia could only produce 5-6 mbd because of a steep depletion in its biggest oilfields.
OPEC has seen its spare production capacity in recent years decline partly because of depleting reserves and mostly because of underinvestment as a result of low oil prices. Nobody can ascertain that OPEC will have any spare capacity by 2030 or, if it does, couldn’t exceed 2 mbd..
US oil production including shale oil will gradually drop to 5-6 mbd within 7-10 years from now.
Still, the bulk of global oil supplies will come from the Arab Gulf region, Venezuela’s Orinoco Belt and Russia’s Arctic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London