There is a pretty simple truth about oil, and that is that there is lots out there, a fact that is not going to change going forward. In fact, quite the opposite. There is probably more upside to production, as well as downside on the demand side, meaning we will likely see low oil prices for the foreseeable future. The likelihood is that we will also see a race to the bottom in terms of the oil price as producers try to pump oil out of the ground and bring it to market as fast as possible. This in turn will lead to stranded assets as oil companies write down high-cost resources which have become too expensive to take out of the ground.
The recent narrative of the oil industry has been dominated by massive increases in US oil production, which has largely resulted in the double-digit oil prices we see today. In fact, we have never seen anything like what the US has achieved in terms of oil production increases over the last decade. Back in 2008, with oil prices at all-time highs of $147, everyone was speaking of global peak oil production and continuing declines in US production. US oil production in 2008 was 6.9m barrels, the lowest in 50 years. Earlier this year, production reached 12.2m barrels a day. If we add the 2m barrels per day increases in Canadian production over the last decade, North America has added more new oil supply than Saudi Arabia’s total production. And let’s be clear, there is more to come!
Not only is North American oil production going to increase further, but so will oil from three of the world’s traditional major producers — Iran, Libya, and Venezuela — which are all producing well below capacity due to a mixture of conflicts, lack of investment, and embargoes. In 1973, together, they produced 11.6m barrels of oil between them, compared to a mere 7m barrels last year. If you add to that the fact that both Russia and Saudi Arabia are also producing below full capacity, as they try to keep the oil price up, you suddenly realize that there could be a massive glut going forward. And, of course, the drilling technology revolution that we have witnessed in the US oil and gas industry will also go abroad, leading to further upside in other countries too.
The demand side of the equation is also very interesting for several reasons. Global demand for oil has grown over the last decade from 86m barrels in 2008 to 99m barrels per day so far this year, with 6m barrels of that growth coming from China, and a further 5m from India and the rest of Asia. Meanwhile, back in the OECD, demand for oil has fallen over this period and it’s probably safe to say that Europe and North America have seen peak oil demand. This has been caused largely by improvements in fuel efficiency in motor vehicles. The most interesting country, though, is Norway where just over 50% of vehicles bought up to the end of September were electric. A good insight into the shape of things to come in other countries?
The other factor that could affect the demand for oil is increasing concerns about the environment. There is increasing consensus across much of the world that human-induced climate change must be dealt with by reducing greenhouse gas emission, which will inevitably lead to a shift to cleaner alternatives such as renewable energy and more efficient electric vehicles. Then there is growing issue of plastic waste across the world, which we are already seeing a backlash against. As a result, it is likely that we will see global demand for oil peak by 2025.
Thus, it came as no surprise to recently hear BP’s Head of Strategy Dominic Emery say: “There’s no doubt that some of those oil resources won’t come out the ground,” as at some point the cost of doing so would no longer make sense.
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