First published in the Evening Standard, 9 November 2007
With the markets hypnotized by the approach of $100 oil, analysts are pointing the finger at all the usual suspects: speculators, the OPEC bogeyman, the weak dollar, soaring consumption in China and India, and geopolitical tensions. All play a part but the real cause is altogether less palatable. The world is running short of oil, and this time it is likely to be permanent.
For all their power and profits, the world’s biggest oil companies are in trouble. These days they struggle to replace the oil they produce each year with fresh discoveries – but not for lack of trying. A recent study by analysts John S Herold showed that the world’s 230 biggest oil companies raised their upstream spending by 45% to over $400 billion in 2006, but that oil and gas reserves inched up by just 2%. And many companies cannot even sustain their current levels of production. Output at BP and Shell is lower today than in early 2005.
None of this should come as a surprise since much of the oil producing world is what they politely call ‘mature’. After 150 years of rising oil production, in which the biggest and most productive fields were exploited first, the industry is now having to run flat out just to stand still. According to the International Energy Agency, for every $4 invested in the upstream business, only $1 goes towards satisfy growing demand, and $3 goes to make up for the declining output of existing fields.
Oil production is already falling in 60 of the world’s 98 oil producing countries – including once mighty producers such as the United States, Mexico, Norway, Indonesia and the UK, where North Sea production peaked in 1999 and has already fallen by well over 40%. Aggregate oil production in the OECD peaked in 1997 and has been in decline ever since. It is almost unanimously agreed that oil production in the entire world except for the twelve members of OPEC will peak soon after 2010. ExxonMobil chief executive Rex Tillerson told me recently that non-OPEC production growth would be all over in “two to three years”. So from early in the next decade, by common consent, it’s all down to OPEC.
OPEC has promised to raise production by 500 thousand barrels per day from this month but many doubt they can increase their capacity much further, because experts believe the cartel has comprehensively overstated its reserves since the mid-1980s. Just last week Sadad al-Huseini, who until recently was the head of production at Saudi Aramco, said that the world’s ‘proved’ reserves had been falsely inflated by 300 billion barrels.
All of which has led a growing band of senior oilmen including Lord Oxburgh, the former chairman of Shell, and Thierry Desmarest, current chairman of Total, to conclude that global oil production could soon peak and go into decline. At which point oil prices could double from current levels, sparking an economic and social crisis to put the sub-prime meltdown in the shade.