Rising Investment Requirements Show Oil's Irreplaceability

Rising Investment Requirements Show Oil's Irreplaceability

September 2016

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When Wood Mackenzie reported in the Fall that $1.5 trillion in potential global oil projects were uneconomic oil cost $51 a barrel, about what it costs now. The industry is making big cuts in CAPEX and upstream investments, and more than $200 billion in oil and gas investments evaporated in 2015. There’s still about 1.3 million b/d of surplus oil on the global market, and just the other day “OPEC Fails to Reach Agreement on Oil Production Ceiling.”

Future global oil production is now at stake. Some are projecting that non-OPEC supply will contract this year for the first time since 2008. As for the world’s most important incremental producer in recent years, production in the U.S. may drop by 725,000 b/d this year, indicating a monthly reduction of 85,000 barrels a day for the rest of the year. Active crude oil rigs in the U.S. are now just 325, versus 860 in March 2015.

Considering that oil is the world’s most important source of energy, this lack of investment is a global concern. The oil industry is cyclical one, and eventually not developing new supply will catch up with us. Falling oil prices today are setting up an eventual spike up. “Long-term oil shortfall predicted by Wood Mackenzie.”

Although this lack of investment is unlikely to push oil to the $200 mark suggested by OPEC’s Secretary General, $100 oil will bring the U.S. shale oil drillers back because they can relatively quickly react to rising prices, the world really needs to be concerned that less investment now means much higher prices later. “We’ve had plenty of recessions caused by rising oil prices: 1973-75, 1980-81, and 1990-91.”

The U.S. shale industry has been more resilient to sunken prices than many predicted by working to drastically reduce costs. This increased efficiency that has made our oil companies stronger will pay off handsomely in the years ahead. 

In just a couple of years, the average break even price across some of America’s most prolific shale basins have declined 33-55% thanks to a combination of better technology, better practices, and more understanding of shale.

Yet, global oil security is clearly at risk by historic spending cuts and some of the rhetoric coming from our own politicians. The world needs about $300 billion just to sustain current production levels. Key non-OPEC suppliers like Mexico, Brazil, Canada, and the U.S. are facing difficulty in keeping up investments. A major spike looms if investment doesn’t rebound in the next two years.

Barclays' Favorite Oil Companies

 

Indeed, despite COP21 and the constant “end of the oil age” that we’ve been hearing about for so many years, oil is so crucial that we must continually keep investing in it. More people, making more money, using more oil.

Perhaps the best indication of just how important oil is that our best forecasting models continually reach the same conclusion: demand will continue to increase regardless of high prices go.

In fact, this price “inelasticity” of oil demand is well established. To illustrate, over the next 25 years, even if global oil prices INCREASE nearly 150% oil demand will still INCREASE 30%.

Not only does this prove the clear and undeniable lack of substitutes for oil, it also proves that anti-fracking positions are not just a threat to future U.S. oil production but also to global economic growth. From 2014-2035, the U.S. requires a $2.3 trillion investment in oil, per the International Energy Agency.

One staggering statistic will suffice. Expanding by 90 million units a year, there are now about 1,300 million vehicles on the world’s roads and less than 1% of them run on something other than oil. We could reach nearly 3,000 million vehicles that run on oil by 2035. Today, the world consumes 165 million gallons of oil every hour, or an astounding 8 Saudi Arabias worth of oil production every day.

Nothing comes even close to matching oil’s ease of transport and storage, versatility in end-use, and higher energy content, a series of unique characteristics that will keep petroleum the lifeblood of the world. This is why oil is the most traded and valuable commodity market in the world, so vital that its price determines currency exchange rates.

The wind and solar that we love so much don’t do much to displace oil because they provide electricity, while oil’s dominance is in transportation. And in any event, it’s oil’s fracking twin natural gas that could most reduce oil demand most in the transport sector, mainly by fueling trucks and buses.

And again, contrary to the world that you know, most humans are stuck in the backwaters, lacking sufficient access to oil – the enabling force of globalization. The world’s development problem is that we don’t have enough energy, not that there’s too much of it. To illustrate, although Africa has 3.7 times more people than the U.S., it uses just 1/5 the amount of oil.

Thus, our requirement to increase oil investment has actually been increasing very quickly. Oil is THAT critical and THAT irreplaceable, explaining why the “stranded asset” push against oil unwisely ignores the steady drumbeat of new demand.

And the collapse of Venezuela and Nigeria are now demonstrating how the anti-oil and anti-gas movement fails to consider how poor countries relying on oil and gas sales for 70% or more of GDP will be so devastated if their movement succeeds.

So, given that 75% of the total oil investment needed is in the upstream sector, we need to be encouraging both our own producers and those in foreign lands to find and produce more oil, not discouraging or constraining them during very trying economic times.

Global Oil Demand Will Continue to Mount, Even If Prices Surge

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Source: EIA; IEA

Oil’s Irreplaceability? World’s Oil Investment Requirement Keeps Rising

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Source: IEA

 

This article was written by Jude Clemente from Forbes and was legally licensed through the NewsCred publisher network.

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