Last week I spotted a very interesting chart that Gregor MacDonald tweeted which showed world oil production over recent years excluding the USA. The chart was pretty flat and that got me wondering about the extent to which the world has come to depend upon Light Tight Oil in the USA and, for that matter, Steam Assisted Gravity Drainage (SAGD or oil sands) projects in Canada.
So I went back to the font of all knowledge, the BP statistical review of world energy, and reconstructed the plot with my own little variations on it. For one thing, I added in OPEC's spare capacity, as what I was really interested in seeing was just how much capacity the world had to produce oil. Figures on unused capacity are hard to come by, but the EIA do publish a series of estimates of OPEC spare capacity and it is pretty reasonable to expect that just about everyone else is pumping flat out. Then I thought I would add Canada and the USA together, LTO and SAGD are different in many ways but they both grew in response to higher oil prices.
Finally, I thought I would compare the total world production capacity to BP's figures for oil consumption (less biofuels) to see how the trends had moved. BP do give a pretty healthy warning on their work that supply does not equal consumption but the details of why that is so (other than stock movements) elude me. Related: Oil Markets Coming To Grips With Prices Remaining "Lower for Longer"
No matter, here is the aggregated picture of world oil production capacity vs world oil demand from 1990 onwards with the annual average oil price in 2014 dollars added on for good measure.
(Click to enlarge)
Data BP Statistical Review of World Energy & EIA
You can see two things on this chart, the first is that when capacity exceeds demand, prices are low (and vice versa); the second is that, since about 2005, despite the oil price being rather high, outside North America the world has struggled to add any oil production capacity at all. In fact, since 2010 oil production capacity outside North America has been in decline. If it weren't for the USA & Canada, where production growth has been driven by LTO & SAGD, we would have been in a right pickle. Related: More Rotten News For The Commodities Markets
Here is a closer look at that growth in capacity in North America. It is very dramatic, but what you don't see on this chart is that by the end of this year that growth will have halted and that demand will once again exceed capacity.
(Click to enlarge)
Data BP Statistical Review of World Energy
In the short term, the oil market is in the doldrums and projects are being delayed or cancelled, left right and center. That will mean that, outside North America, oil production capacity will decline even faster and with the growth knocked out of the shale producers and SAGD projects being put on the back burner, it is only a matter of months before demand starts to exceed world oil production capacity again. A nasty recession might put a dent in demand growth and turn those months into quarters, but eventually capacity will wane, demand will wax, and the oil price will climb once again. Related: The Coming Clean Energy Space Race
In fact if traders looked hard at these charts they might wonder if the continued weakness in the 2022 Brent Oil future was a tad overdone. For this time, I think the price response might be even stronger and more sustained than before.
(Click to enlarge)
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By Steve Brown for Oilprice.com
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Steve Brown is a petroleum engineer with over thirty years of experience with BP, Halliburton, Challenge Energy, Petrofac, Exile Resources, Setanta Energy and now The… More
Comments
Please consider the following scenario: Iran sanctions are lifted and USA’s ban on exports are also lifted. Result would be almost 2 MM bbl/day of light oil enters the international crude oil supply – causing Brent to drop but WTI to rise. The gap between Brent and WTI narrows because more USA light shale oil is being bought. Also Iran and OPEC, suppliers of Light Oil, are incurring reduced prices for their exports.
USA economy improve because E&P firms increase number of drilling rigs [jobs increase], USA refiners pay slightly more for Shale Oil but less for import Brent Crude with gasoline staying below $3/gallon.
Richard W. Goodwin West Palm Beach FL
The analysis I see here makes the same mistake that many do, in that it looks at oil as a normal commodity. Yes, when demand exceeds supply the price will rise, but only when the consumers of the commodity can afford that price rise. So this analysis works as long as there's sufficient wealth to support the higher-priced commodity. This has always been the case with oil too, until now.
The problem is that conventional oil plays a crucial role in the creation of economic wealth. As Mr. Brown observes, conventional oil production is flat, and has been since 2005. That's what caused the initial price rise, which in turn allowed non-conventional North American oil to be tapped.
The problem with non-conventional oil is that so much industrial effort is required to extract it (as represented by a much higher base cost) that it doesn't have a great deal of effect on wealth creation, if any.
The result is a dramatically slowing world economy, and the abandonment of non-conventional oil (including ultra-deepsea oil) as being too expensive to afford.
So it appears that the price of oil cannot rise without increasing amounts of conventional oil to fund it. And there are no increasing levels of conventional oil available.
My guess is that we may never see sustained periods of high oil prices again.
https://medium.com/solutions-journal-summer-2015/a-trillion-bucks-says-you-ll-sell-your-wheels-d4562be9d3d7
"On the societal front, the rise of peer-to-peer networks, smartphones, apps, and the sharing economy (think AirBnB, Uber, Lyft, Car2Go, ZipCar, and many others) are changing perspectives on whether we own and how we access and use assets like cars and houses. Plus, as a nation we’re driving less. Among Millenials there’s a distinct departure from the car-centric worldview of their Boomer parents, with vehicle ownership and even driver’s license rates on the decline. Meanwhile, total vehicle-miles traveled (VMTs) peaked in 2007, and per-capita VMTs have been declining even more sharply since."
Stuart - You are right that the lack of cheap conventional oil will stunt world growth. But the only mechanism for the world economy to know that there isn't an abundance of inexpensive oil is a high oil price. So I agree with much of what you say, save for your conclusion which is I think precisely backwards.
Kimberley, to the extent that these vehicle sharing technologies accelerate the adoption of electric cars that will mitigate some oil demand, but in general the technology will enable more transport and hence more fuel consumption. On top of that the middle classes in India and China and Brazil will want access to transport and that will drive transport fuel growth whether there is vehicle sharing or not. As to your link, the whole idea of ride sharing is a sideshow, people don't like sharing space with strangers if they can pay a little more and have a personal space.
Research the Project For The New American Century group, a Zionist-controlled think tank in Washington.
Wake up Americans; your country has been destroyed and looted by organized Jewry, just as they have done to countless nations throughout recorded history.
It is people like YOU and your hate language who hurt OUR country. You should focus your anger toward Saudi Arabia and what their policies are doing to destabilize the world.
It is entirely possible.