Are we facing an impending oil shortage?
Oil prices plunged dramatically from mid-2014 from a high of USD107 per barrel to a low of USD30 per barrel from the beginning of 2016. Oil prices recovered some lost ground and currently fetched a price of USD55 per barrel.
The fall in oil prices caught many oil producers by surprise. Since then, major upstream oil companies have severed or deferred their investment plans for oil discovery and extraction. The uptick in shale gas production in the US also partly contributed to the oil supply glut.
This short term supply glut does not bode well in the long term, where a shortage in oil supply may surface due to the scaling back of oi production related investments.
An impending oil shortage?
Saudi Aramco's CEO Amin Nasser, the head of the world’s largest oil producer by per barrel production capacity, has hinted that the scaling back of approximately US$1 trillion oil production investment may very well cause a supply shortage in the coming years as economic activity picks up pace.
This view is also shared by CEO of Enquest where the sharp fall in investments will cause a severe undersupply for oil in the coming years. If oil exploration and production investment does not pick up pace, there could be a high possibility of a price surge as supply falls short of rising oil demand.
To be sure, this is not a new insight.
This view of a coming crude oil supply crunch at the end of 2020 first surfaced as early as November 2016, when the IEA (International Energy Agency) warned that drastic fall in investment in new oilfields will cause global oil supply to dwindle, resulting in an imbalance as demand increases. Based on data collected since 2000, energy investments fell to all time low since 1950s of approximately USD6.5 billion per annum from an average of USD15 billion. Should investment in renewable energy fall short of production targets, crude oil undersupply will cause a boom in future crude oil prices.
In fact, crude oil demand has been rising steadily on a slow upward path and does not bode well for oil price bears who predict low oil prices for the foreseeable years. While fuel consumption has faltered in recent years, China and India still has many more years of future growth and would remain key users of global oil. In fact, India’s oil consumption growth rate outpaced China at 7%. India and China are expected to consume 4.13 million and 11.5 million barrels of oil per day in 2017. Energy demand will remain strong for years to come with increasing transport activities and manufacture of petrochemicals products all looking to gobble up world crude oil supply.
On the other hand, the IEA thinks that world oil supply may have found a balance. The uptick in prices since the lows of US$30 per barrel has made more oilfield investment viable as oil inventories fall, prompting executives at large oil firms to give the capital spending budget the go-ahead to capture future demand.
That being said, geopolitical risks could still surface disrupting the production among oil producing nations. While this is not indicative of long term price trends, prolonged supply cuts may exacerbate the underinvestment in oil production situation.
So what should we do?
The current oil price slump and the overly pessimistic view of future energy usage and demand may very well spark another cycle for oil shortage and a scramble for investments into new oilfields and other energy sources. Users of oil must be vigilant on their hedges and can not be too complacent on the view that oil prices will remain low for long. At the same time, producers would have to plan investments for the long term in order to balance oil supply and demand.