For much of the past decade, the mantra “the easy oil is gone” could be heard throughout the industry, not just from peak oil advocates. The idea was that the industry was now having to go to ever-harsher environments and tolerate increasing political risk in order to obtain the needed supplies, which translated into higher costs and, thus, prices. However, this belief is more wrong than right.
The notion that oil used to be ‘easy’ is often presented as Jed Clampett ‘shootin’ at some food’ and oil bubbles up from the ground, or, more accurately, images of gushers sending oil skyrocketing into the air, emblematic of both the amount and pressure of the oil discovered, a sign that exploitation of the resource is immature. In the U.S., and much of the world, such gushers are unusual, partly because engineers now control the flows from the beginning rather than letting it run free.
But somehow this translated into the easy oil disappearing roughly in 2003, when oil prices began to rise from $20 to, ultimately, $140 a barrel in 2008. Few questioned why the change would be so sudden and coincidental with the strike in Venezuela and Gulf War II, both of which removed millions of barrels a day from the oil market for an extended period.
Needless to say, producing oil from East Texas or Southern California seems like it must have been much easier than drilling in 5,000 feet of water for a high-temperature, high-pressure deposit. On the other hand, talking to veterans of the industry yields a different picture: former President George H. W. Bush is known to chide ‘youngsters’ by talking about how tough he had it starting out, painting pumps in the California desert. Presumably a brush rather than a remote-controlled robot.
There are two particular aspects of oil supply that tend to confuse observers. First, for long stretches of time, much supply growth is concentrated in a few places: supply does not rise evenly around the world. Yet those who are pessimistic about supply often point out that most growth is occurring in a few countries, or that many countries are “in decline,” without understanding that this is normal and does not portend either a peak or tight supply in the future.
In the table below, growth by countries in different periods are shown, focusing on the main producers. In the 1990s, a big part of the gross increase (by country) occurred in the North Sea—Norway and the U.K. After the 1998 oil price (and ruble) collapse, oil from Russia and the former Soviet Union more generally became the main source of new supply from 1998 to 2008. More recently, the U.S. and Canada have made the primary contributions.
The other factor is the difference between gross and net supply additions, or more specifically, the extent to which some areas are declining or not, and how that impacts the net change in supply. This is important because when oil prices are low, or resource nationalism is impeding access to supply, the net growth in supply tends to be lower as declining areas offset the expanding ones. From 1990 to 1998, only the U.S. showed major production declines (excluding the Soviet Union, where production fell as consumption collapsed along with the economy), but from 1998 to 2008, only five countries—Indonesia, Mexico, Norway, the U.K and the U.S.) accounted for 4 mb/d of declines, offsetting half of the increase from other major producers.
The table below shows how these numbers add up. (The ‘special cases’ alluded to in column one is the Former Soviet Union and in column three are Syria, Oman, Sudan and Yemen, where political upheavals cut production.) In the 1990s, when prices were supposedly low, the net increase in non-OPEC production was much stronger in part because—outside of the FSU—few countries were experiencing declining production.
What now? Despite the perception of many that current prices are “low,” the reality is that they are easily sufficient to support the majority of prospective oil development projects, not just ones that have large sunk costs. A subsequent post will go into some detail about where this oil will be coming from.
