AP/Hasan Jamali
The oil industry only discovered about 2.7 billion barrels of new supply in 2015, a tiny fraction of the annual average for the past fifty years. The dismal result was one of the worst performances from the oil industry in decades. 2016 could be even worse.
The 2015 figure is about one tenth of the annual average dating all the way back to 1960, according to Wood Mackenzie. Shockingly, 2015 saw the least amount of oil discovered in a calendar year since 1947. But with the massive spending cuts extending into 2016, this year the industry is on track to discover even lower volumes. As of the end of July, the global oil industry has only reported 736 million barrels of new oil discovered.
Of course, with oil prices trading at less than $50 per barrel, many of the oil fields around the world that have yet to be explored are not economically viable. New discoveries are “at rock bottom,” Nils-Henrik Bjurstroem, a senior project manager Rystad Energy AS, told Bloomberg. Rystad Energy published similar findings earlier this year, concluding that 2015 was the worst year for new oil discoveries in over sixty years. “There will definitely be a strong impact on oil and gas supply, and especially oil.”
The shortfall in upstream investment could be a presage of a supply crunch somewhere down the line. The oil industry has slashed about $1 trillion in investment for the period between 2015 and 2020, Wood Mackenzie said a few months ago.
The supply gap will only grow over time as demand continues to rise. The EIA expects oil demand to expand to 105 million barrels per day (mb/d) by 2026, up from just 94.8 mb/d this year. Obviously, forecasts that far out are inevitably off the mark, but the estimate at least gives the sense of the problem. If demand continues to increase by more than 1 mb/d annually, as it has for a long time, the oil markets could quickly swing from supply glut to a deficit. Bank of America Merrill Lynch already predicts a deficit next year of about 800,000 barrels per day.
Normally, a supply deficit would lead to higher prices, which would incentivize companies to bring supply back online and balance the market. But large-scale drilling in deepwater – the types of projects that have been scrapped during the oil price downturn – take many years to develop. Projects cancelled over the past few years would not have come online until the end of the decade at the earliest. The pain is not being felt all that much today, but will only start to bite in the future. Krisitin Faeroevik of Stockholm-based Lundin Petroleum told Bloomberg that it will take “five to eight years probably before we see the impact” of today’s cancellations.
Estimates vary, but some say supply could fall short by about 4 mb/d by 2018-2020 compared to previous estimates from 2014. For an oil market only suffering from a surplus of less than 1 mb/d currently – and only as much as about 2.5 mb/d at its worst – a supply drop off of that magnitude could be enormous. Sure, crude oil and refined product inventories will take time to get worked off, but once that buffer is gone, the global economy could find itself a little short on crude oil. Prices would subsequently spike because the projects that have been cancelled won’t come back online at a moment’s notice.
Of course, this all assumes that demand will inevitably rise at the consistent pace of 1 mb/d per year or so. While oil demand has consistently increased practically every year for the past century, leaving aside economic recessions, the future is not as certain – the oil market is starting to see the outlines of an existential crisis. Electric vehicles and renewable energy are starting to take a bite out of oil’s market share. And the EV revolution could cripple the oil industry sooner than many think.
If EVs permanently cut into oil demand, that would head off the oil price spike that is in the offing because of the supply cuts. But if EVs fall short and oil demand continues to rise, the massive cutbacks in drilling will mean that the oil industry will be unable to keep up in a few years’ time.
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