World Oil Supply In Transition

Kelley, Wayne L.; Bishop, Richard S.

The world is not ‘running out of oil' but there is concern about supply rate.

Historically, estimates of global oil supply are based on volume and/ or demand. Today, the combination of technology and increased price have added large volumes to the reserve base but much of these additions are ‘high cost' oil. At the same time, excess production capacity has shrunk from 15 million BOPD to around 4 to 6 million BOPD. The cost to add new production ranges from approximately $25 billion per million BOPD to over $50 billion per million BOPD. The result is a ‘two tiered' market of low cost oil (e.g. giant onshore fields) and high cost oil (e.g. deep water fields) but a largely single price for oil.

These changes have occurred within the last decade and the consequences are beginning to emerge. The most visible is the tightening of supply and its vulnerability to interruption. This tightening is not likely to ease due to both limitations of low cost production and the high cost of adding supply. We estimate that the giant fields/ the low cost producers are approximately 50 percent depleted and expansion of their production rate would be modest. OPEC has estimated its cost to add production at around $50 billion per million BOPD. Furthermore, even though reserve volumes have grown, the time and cost to add production has increased significantly.

This means that supply is evolving from one with flexibility to ‘just in time'. The impact on price driven by demand instead of low cost will become more significant as excess supply shrinks and low cost production cannot be expanded.

The economic consequences of these changes are significant. For example the increased price causes a large transfer of wealth to exporters and creates a concentration of liquidity. The EIA estimates that over $500 billion per year is flowing into the Gulf Region which, especially when leveraged, can impact the global financial system. Oil is the second largest industry in the world and price significantly impacts the global economy.

The consequences of this dynamic and increasingly complex system of oil supply is to appreciate that forecasting global supply today must include consideration of: logistics (how fast can Industry find and extract oil), capital at risk (how much will private enterprise invest in high cost or politically unstable areas) and politics (sanctity of contract, access). Examples of rates of adding supply and constraints will be shown.

AAPG Search and Discovery Article #90163©2013AAPG 2013 Annual Convention and Exhibition, Pittsburgh, Pennsylvania, May 19-22, 2013