Tales of woe about the future oil supply don’t match reality
Oil executives doth protest too much about a looming crude shortfall.
For the last several weeks, some in the oil and gas industrial complex have started pushing a narrative where the lack of investment today will produce an oil shortage tomorrow and generate economic havoc. If investors do not put their money into oil and gas now, the story goes, $150 a barrel crude will follow. In their wildest dreams. No one can blame people who make their money from energy for telling such tall tales. After all, their job is to attract investors to drive up share prices, increase spending, create jobs and presumably make more money. These very-interested parties predict that strong demand, depleting wells and lack of investment in new rigs will lead to a shortfall.
A more objective analysis, though, tells another story.
Global oil demand this year will average 100.2 million barrels a day, according to the U.S. Energy Information Administration. That’s almost perfectly balanced with production.
The market is only balanced, though, because the Organization of the Petroleum Exporting States, Russia and nine other national producers took 1.5 million barrels a day off the market in 2017.
Most analysts believe that Saudi Arabia alone has an additional 1.5 million barrels in spare capacity. Other national oil companies have more, though no one is quite sure how much.
Oil demand grew by 1.6 million barrels a day in 2017, but drillers in the U.S. met most of that new demand, according to the International Energy Agency. Demand growth in 2018 and 2019 is expected to average another 1.4 million barrels per day, each year. Higher prices are responsible for most of the slowdown.
Economic growth is the critical influencer of future demand, especially because China, India and other less-wealthy countries
are the only growing oil markets. Analysts who predict strong demand growth tend to also predict economic growth of 4 percent a year in emerging markets, which is a big assumption.
Non-OPEC supply, meanwhile, is expected to grow by 2 million barrels this year and 1.8 million barrels next year, most of it coming from the United States. That means there is more than enough supply and spare capacity to meet growing demand, shrinking output from aging wells and potential supply disruptions, such as Venezuela’s economic collapse.
One wild card is Iran, which exports about 1.2 million barrels a day. President Donald Trump has threatened sanctions to shut down those exports, but it is not clear that Iran’s two biggest clients, China and India, will cooperate.
The world has enough oil for the next three years, but what about the next five? The worrywarts say we need hundreds of billions of dollars of investment now to avoid a shortage in 2023. But energy producers are nimbler than ever.
The U.S. land rig count only lags a week behind oil price. U.S. drillers have perfected the hydraulically fractured horizontal well to the point where they can complete one in less than two weeks with a breakeven price of $55.
Offshore drillers have simplified their processes and lowered breakeven prices on some deepwater wells to $50 a barrel. Norway’s Equinor, formerly known as Statoil, says it lowered breakeven prices from $100 to $27 on some wells.
The Gulf of Mexico holds 4 billion barrels in proven reserves, according to the Energy Information Administration.
Both national and major oil companies have demonstrated they can react quickly to market conditions. Don’t underestimate them.
Infrastructure companies are also responding, adding pipeline capacity to the Permian Basin. Others are proposing offshore oil terminals to load very large crude carriers full of exports.
ESAI Energy, an independent industry analysis firm, reports there is plenty of supply available through 2023.
“There is a misperception that a supply crunch is imminent,” said Sarah Emerson, an analyst at ESAI Energy. “In a five-year horizon, the potential for nonOPEC supply growth is impressive. This will have a bearing on the degree to which OPEC will have to dip into spare capacity to offset disruptions.”
The industry will always need to invest in new exploration and production, but the current situation is far from dire.
The real problem facing oil companies is their stock price. While the price of oil is up 52 percent year over year, oil company stocks are up only 31 percent, reflecting investor reluctance to get back into an industry that destroyed $120 billion in capital after the 2014 oil bust.
Investors are reasonably demanding caution before executives make final investment decisions for exploration and production. Any number of unexpected events could boost supply or wipe out demand. Those trying to stoke panic are setting the industry up for another bust.