A report by Wood Mackenzie has warned the world may face a daily oil shortage of 4.5 million barrels by 2035. The amount represents around 5 percent of global consumption estimate of the International Energy Agency (IEA) for 2016. In other words, a true crisis is looming—and for the moment, there is no apparent way around it.
The most obvious reason is that energy companies don’t want to spend money on exploration when prices are so disappointingly low. Many of them simply can’t afford to spend on exploration if they want to survive in today’s price environment. Ironically, their long-term survival can only be guaranteed by further exploration spending.
A lot of costly projects have been shelved since the summer of 2014 when oil prices started falling, with the initial investments basically written off. Reviving these projects will cost more money. Where this money will come from is unclear—there is no certainty where oil prices are going in the near term, let alone any longer period, and the European Commission today forecasted $41/barrel oil for the rest of this year and just over $45 for 2017. Related: OPEC’s No. 2 Under Serious Threat From Political Instability
Another part of the answer to the question, “How did we get ourselves into this mess?” has to do with the knee-jerk reaction of E&Ps in times of crisis. That knee-jerk reaction is generally “fire at will”. Layoffs in oil and oilfield services are piling up at speed, well into six-figure territory to date. Cost-cutting has become the daily mantra of oil companies, and it’s easy to see why.
Oil dived more than 75 percent over a year and a half – that’s a hard blow to withstand. However, those laid off as part of the E&Ps’ coping mechanism will not sit around and wait to be rehired at the first opportunity. They will, and do, look for work elsewhere. So, the energy industry is facing another shortage that will help determine the ultimate one: a shortage of manpower.
The third part of the problem is reserves replacement. New exploration is not just a form of art for art’s sake, or a means of expansion to boost bottom lines. It’s an essential part of the operations of an oil business. Oil is finite, and in order to stay profitable, an oil company needs to maintain a consistent rate of reserves replacement. Related: Weak Data, Strong Dollar Pressure Crude Lower
And here’s more bad news: Last year, the seven biggest oil companies in the West only replaced 75 percent of their reserves. This is seriously bad news, especially combined with the fact that many new discoveries made in the last four years have disappointed.
Wood Mac’s exploration research vice-president told Offshore magazine that “In the last four years the industry has seen disappointing - largely gas prone - exploration results, with the volume of liquids discovered annually falling from around 19 billion barrels between 2008 and 2011 to 8 billion barrels between 2012 and 2015.”
What’s more, Latham said that he expected new exploration investment to average $40 billion globally over the next three years. That’s less than 50 percent of what E&Ps invested between 2012 and 2014. Related: Oil Prices Fall Back as Rally Hits a Ceiling
Is there a solution? Efficiency improvements could help in the short to medium term. After all, there are still quite a lot of reserves available and if efficiency improves, they could be utilized more fully.
For the long term, however, Big Oil – any oil – needs to open its coffers and scrape what’s left in them to pay for new exploration and keep its fingers crossed that the results are good.
Another way forward is going into renewables. However, despite global ambitions for a renewable revolution, this is not likely to happen. The move to renewables is, and will continue to be, more of an evolution and a slow one at that. Diversifying into renewables is a logical way to use available opportunities.
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The global oil industry is changing—not of its own will, but nevertheless radically. Wherever oil prices go from here, E&Ps will need to find new ways to stay on top of things. Many of them will inevitably go under. Those that survive will be the lean, flexible ones.
By Irina Slav for Oilprice.com
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So Tesla found your next big virtual oilfield. It's right there in Sparks, Nevada. Exploration companies might do well to search for minerals needed for the Gigafactories of the post-petroleum world.
I believe you expressed it best, "there is no certainty where oil prices are going in the near term, let alone any longer period. " I'm sure one would need a pretty big crystal ball to see 19 years ahead. With population rising and developing countries emerging into their own industrial ages, demand for oil will certainly rise. The newer emerging markets may not be able to afford electric vehicles or biofuel based cars. With all the low hanging fruit pretty much picked and being depleted, the fundamentals of supply and demand point to higher and higher prices. Much like a whaler wondering what the next source of lighting will be , we are at the nexus of what will be the dominant replacement for petroleum. Is it LNG, biofuels, methanol from coal ?? Or perhaps the CO2 doomsayers will win and we drive electric vehicles powered by batteries charged by the sun or wind ??? Oil has a way to go before it is replaced. Simply by the fact there is so much infrastructure already invested in this technology.
As we have to climb higher on the ladder to pluck the remaining fruit of petroleum, look far and wide and surely a new winner will emerge. my speculation is something that will slot in nicely with the existing infrastructure. I really don't think an event 19 years down the road is realistic. As the price climbs higher, it will make more sense to explore for oil. Shale fracking will more than likely be the next fruit to be plucked. It really doesn't make sense to invest in a taller ladder, ( i.e. explore for more reserves ) when the supply side is currently in surplus.
In the meantime boys and girls, get your suntan lotion ready and keep your liferafts at the ready. If the climate doomsayersare correct, the ocean is creaping up on us at fractions of an inch per year.in 80 years it will be 1 foot higher. Oh, and the global temerature is going to scortch us all at a rate of 5 degrees rise per century. The sky is falling, the sky is falling !!!! We're running out of oil and soylent green is people !!!
A 4.5 million b/d shortfall is ~10% of the daily consumption in 2016, not 50%. It's still a big number, but certainly not half.
Some details: (1) Over half of global oil is used by developing countries and demand in these countries is increasing. (2) Production data from OECD countries is relative up to date, but the data from the majority of producers is usually late and not very accurate. Punch line, the global oil production glut is not supported by data, just by guesses by groups that want a low oil price.
As for your comment, JMH....Tesla's gigafactory will be obsolete soon after it opens. Good luck with that.
Next question....what criteria did you use for 2025 data, and is it supportive??
You may wonder how an oil shortage will cause a major financial collapse. It is actually simple physics. You need energy to do work. Economic activity involves doing work. If you can't get, or afford, the energy you want, you can't do all the work you want to do. That means the economy must shrink from less work getting done. They call that a recession.
Normally, a recession isn't a big deal. They are part of the normal business cycle.
Unfortunately, since the 2008 financial crisis, we are not in a normal financial situation. Interest rates, normally lowered by central banks to stop a recession from deepening into a depression, are already near zero. Going into negative interest rates does little good.
The big problem will come from the record level of debt nearly everywhere. A shrinking economy from an energy decline will cause many bankruptcies. They could take out the banks and other lenders. Expect governments to try all kinds of unusual things to prevent the recession from deepening into a depression. Watch for a decline in global oil production. The crisis will begin soon after it begins to shrink.
Yes, oil distribution globally may best be expressed as some kind of distribution but the distribution is not random. It can be addressed as a randomized target but only if you have "bounded" the problem at hand. A randomized approach using...say a Monte Carlo assessment of probability can involve multidimensional issues using definite integrals with complicated boundary conditions such as marbles in a pocket but oil is not like marbles and it is not always in pockets. Even if it tends to be in pockets...oil production more like dredging mud in the mississippi river. You can try to control it but in the end...it controls you.
Natural distributions such as oil are divergent and discontinuous. Finite Oil considerations are like "peak oil" considerations....it is is not sufficiently powerful to assess "reality".
M. King Hubbert apparently did not try to stretch the horizons of exploration when he developed his "Peak Oil" theory for the benefit of politicians and regulators. His theory was based on an "agenda".
And...just because oil is only found within the Earth does not make it a "finite" resource...it is more like a "Cantor" distribution....there is more oil between the oil patches than there are oil patches. Some would argue "fractal" patterns model oil distributions...but it is not helpful to merely argue a fractal distribution is "finite".
such a shortfall will result in prices climbing well past the $100/bbl benchmark; presumably past the $200/bbl benchmark. anyone with any appreciation of the role oil plays in the survival of mankind (locomotion, fertilizer, plastics, lubricants, chemicals, civil construction, sealants, etc.) understands this is not going to work out well.