The HSBC report further noted that global oil discoveries have been declining and that 81% of the world liquid production is already in decline.
Shale Oil and OPEC May Not Be Enough
Former Energy Information Administration (EIA) head Adam Sieminski warned of a decade of disorder:
“Maybe we are going to be less volatile now because shale can feed into rising demand. I’m thinking that the decade of the ‘20s is going to be one of difficulties. That’s why I call it the decade of disorder. We’re not getting enough capital investment now, I don’t know that shale is going to be able to do it all.”
There are some who suppose that OPEC has enough spare capacity to flood the market and keep oil prices in check. But Ed Morse, Citibank’s Global Head of Commodities Research, warned that OPEC may be pumping at maximum capacity and that there is a risk of a market squeeze due to under-investment by OPEC countries:
“Fear in the market has been that OPEC production will rise dramatically, however, there could be a supply gap emerging, which could point to a tighter market. We’re seeing more and more evidence that it’s not the international oil companies, it’s not the independent oil companies that are lagging new investments, but it’s OPEC countries lagging, particularly those five [Libya, Nigeria, Venezuela, Iran and Iraq].”
But the risk isn’t just from lack of investment. On the topic of new global oil discoveries, in December, Norwegian research firm Rystad Energy reported that oil companies discovered less than seven billion barrels of oil and gas in 2017 — the lowest number on record. Rystad indicated that this would only replace 11% of 2017 oil and gas production, and that the last time the world discovered enough oil and gas to completely replace that year’s production was 2006.
Since the beginning of the shale revolution a decade ago, the world has discovered 110 billion barrels of oil. Meanwhile, consumption has totaled 360 billion barrels. This 250 billion barrel deficit between discoveries and consumption seems sure to grow in the years ahead, given recent oil discovery trends.
It is understandable why people would be complacent about this scenario. After all, didn’t the world face similar risks a decade ago, only to have shale oil save the day? But it isn’t clear that there is another “shale oil miracle” that is ready to save the day. There are indeed more high-cost oil resources out there that can be developed, but these projects take a long time to complete. That’s why we can look out two to three years and see an impending supply crunch. The longer investments in the industry remain depressed, the more unavoidable this scenario becomes.