Oil price drop could be precursor to supply shortage

Source: Saqib Rahim, E&E reporter • Posted: Monday, May 18, 2015

NEW YORK — The oil crash could be setting markets up for a supply shortfall in a few years, energy executives here said.

Low prices have discouraged so much investment, they said, that by the turn of the decade, the world may find it hasn’t replenished its oil supply — and experience a price spike.

“We’re building up to a shortfall of supply at the same time, if you believe all the forecasting, demand is picking up,” Sadad Al-Husseini, founder of Husseini Energy Co., said yesterday at the Financial Times Energy Strategies Summit. “Where’s that oil going to come from? Shale oil isn’t going to fix that. So you have to pre-invest.”

The idea of surging oil prices may seem unthinkable in a world that’s just seen West Texas Intermediate drop near $40 per barrel and that’s heard talk of $20 per barrel. Oversupply, chiefly from U.S. shale oil, has taken the blame, so oil markets want to see tapered production before prices can rise with any lasting power.

But what happens next? That’s where experts remain of multiple minds. Can the United States become a lasting “swing producer,” swatting prices back down whenever they have the courage to rise into the $70 range?

And if that happens, might it discourage longer-term oil investments?

Carlos Pascual, a senior vice president at IHS and a former top U.S. energy affairs envoy, said the U.S. industry has improved productivity so much in the last nine months that “$70 is the new $100 for North American unconventional.”

“What we know is that at $70, that gives you a full scale of projects that will now become competitive that simply weren’t in the past in North America,” Pascual said. “The potential to continue to make money and see production out of North America, we think, is pretty high.”

Growth in U.S. oil production has only recently turned negative, in response to prices. But IHS predicts it will reaccelerate by 2016.

One risk, he said, is that this delays investments in other global reserves — deepwater, offshore Brazil, West Africa — that have much longer lead times. Post-2020, that could mean a world that finds itself suddenly shorter on oil than expected — and with the United States unable to fill the entire gap alone.

“The scale of the capital that is being pulled out of the industry, the impact it is making on the global supply chain, we are sowing the seeds for the next oil bull market,” said Tony Hayward, chairman of Swiss commodity trader Glencore PLC and former CEO of BP.

Hayward said global oil consumption was around 60 million barrels per day when he started his career in the 1980s. Today it’s 93 million barrels per day and, he said, trending upward. But outside the United States, production is largely falling short of what was hoped — in Iraq and Libya, for example.

“I think it’s a big ask to believe that the U.S. is going to get quickly back to growing at 1 million barrels a day. And if that’s not there, where do you look to for additional supply?” he said. “It won’t be very long … before, if this continues, we will be looking very hard at where new supply’s going to come from,” he said.