As the world climbs out of one of the worst recessions in decades, access to a historically key contributor to economic expansion remains in question. Oil production, a past catalyst to economic growth has remained flat since 2005, despite one of the greatest calls for supply in its history. In the face of economic recovery, strained supply, and growing demand, oil prices are likely to rise.
Causes of oil production plateau
The reasons for this production plateau are manifold. Lack of easy access to new supply, declining reserves, and a reduction in capital available for new projects have all placed severe constraints on world oil supply growth in recent years. And, despite a number of new sources, the volume of demand combined with an ever-increasing rate of depletion is likely to extend the oil supply plateau into the foreseeable future.
Lack of sufficient new wells to increase supply
But even more telling is a drop-off in the production of new wells over the coming years. According to megaprojects reports, over the next three years (2010-2012), there is barely enough new oil coming online to meet a projected depletion rate of 4 million barrels per day each year, much less increase production. Beyond 2012, new oil megaprojects drop substantially. So the potential increases that a related drop in oil supply will occur from 2013 onward unless unforeseen new oil projects come online.
New efficient vehicles to balance expanded production?
Such constrained supply is also likely to strain credit markets and economies as they attempt to grow out of the worldwide recession with the potential for price shocks increasing in proportion to growth. New fuel efficient, hybrid, and plug-in hybrid electric vehicles are expected to gradually replace vehicle inventories. But this replacement will take years to complete. Furthermore, increases in general world automobile production from places like Europe and Asia should keep world liquid fuels demand flat or growing for the next 5 years barring a second economic downturn.
Access to oil supply shifting east
Along with an erosion of oil supply worldwide in the face of increasing demand, a major shift in access to and use of liquid fuels is reshaping world oil markets. New demand centers and capital centers in Asia and the Middle East are pulling supply away from the OECD and US as oil producers consume more of their own fuel and China and India continue to grow and expand their economic spheres of influence into major oil regions.
US influence has helped maintain stability, not comparative advantage
US intervention in the Middle East has allowed it to maintain hegemony of a key oil producing region and to stabilize world oil exports. But that position remains tenuous and other countries in Asia are increasingly able to circumvent this hegemony by exploiting favorable trade relations. Most notably, China has been involved in selling military equipment to Saudi Arabia in exchange for greater share in its exports markets.
Key related facts:
1. Chinese oil imports are now at 4.5 million barrels per day, almost half the US value. This figure represents an increase of about 700,000 barrels per day from last year.
2. World oil demand fell 1.63 percent in 2009 to 84.31 mbpd and is forecast to increase 0.9 percent to 85.07 mbpd in 2010.
3. Total world oil production is currently around 84.77 mbpd off from highs of around 85.94 mbpd in 2008 (EIA data).
4. World emergency spare capacity is sitting at around 3.9 mbpd, more than in recent years but not as high as the 5.5 mbpd prior to 2003 when the demand shocks began.
5. From this data we can surmise that oil supply has not significantly grown or shrunk since 2005 and we remain on a production plateau. During the same period, the cost of production has increased and the related energy return on energy invested has decreased.
6. Biofuels production has risen significantly as a fraction of all oil produced totaling 1.45 million barrels per day with 700,000 barrels per day alone produced within the US (EIA), roughly equivalent to estimated peak production from ANWR.
7. OECD oil consumption has fallen precipitously from an average of 48.5 million barrels per day in 2006 to 43 mbpd now. But much of this fall-off has been consumed by increases in demand from Asia and the Middle East (EIA).
8. World auto sales took a smaller hit than expected in the recent recession with the US market losing major share in the face of gains in Europe and China. China had sold 10.38 million automobiles in its markets alone by September, for the first time replacing the US as the world’s largest national automobile market. Continued automobile sales at this level support a significant growing fuels demand in the coming years with US automobile sales forecast to recover.
9. World hybrid-electric vehicle sales continue to rise but do not, as yet, represent a large fraction of the market. In the coming years, hybrid-electric vehicles are expected to capture larger portions of the market even as plug in gas-electric hybrids are introduced. The result should be some mitigation of demand with impacts increasing in the out years.
10. Nominal demand shows the OECD took a huge hit with 10 million barrels per day in demand destruction against a $22 barrel of oil. This substantial demand loss resulted in constraints on economic activity that likely contributed to recessions in the US and Europe. Increases in nominal demand destruction should be expected in the event of a second price shock and/or economic downturn.