How an oil glut could swiftly turn to an oil shortage
By Jordan Blum
July 22, 2018
Oil industry analysts and executives fear a looming global supply crunch is on the horizon, even as Texas and other parts of the nation keep churning out more oil than ever.
U.S. oil prices could spike from about $70 a barrel now to levels not seen since mid-2014 when oil hovered above $100, analysts say. That would be great for Houston’s oil-rich economy, but only until skyrocketing gasoline prices and supply disruptions spawned a global economic slowdown.
“It’s even more worrisome in a time like this when you have significant geopolitical risks coming from different spots in the world.” said Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact in Washington.
Of particular concern is a shortage of global spare oil capacity, Webster said. Many oil-producing countries are on the decline, while others are pumping out almost as much as they possibly can. There’s little remaining margin to boost production if supplies dwindle.
The world’s three largest oil producers — Russia, the United States and Saudi Arabia — are all increasing their outputs this summer, which sent U.S. oil prices from a 45-month high of more than $74 a barrel in mid-July down below $70 per barrel this week. To keep prices low, the White House is even considering releasing more oil from the nation’s Strategic Petroleum Reserve, which happened last in the aftermath of Hurricane Harvey.
These moves, however, leave Russia and the Organization of the Petroleum Exporting Countries with little remaining quick-start oil supplies that can be churned out in an emergency at a time when there’s varying levels of instability and conflict in oil-producing countries like Venezuela, Libya, Nigeria, Iraq and Iran.
That’s why U.S. energy companies aren’t particularly worried about July’s dips in oil prices, analysts said.
In recent years, the oil and gas sector has sounded alarm bells about so-called “peak demand.” That’s the theory that global oil consumption could plateau soon with the switch to renewable energy and electric vehicles. But now there are increasing predictions that demand could actually outpace crude supplies starting in the next year or so.
The U.S. exceeded 11 million barrels a day in oil production for the first time ever last week, placing its crude volumes slightly behind Russia and just ahead of the Saudis. While these three nation’s produce about 33 percent of the world’s oil, that leaves bigger question marks behind the remaining two-thirds where there are higher degrees of uncertainty than usual.
OPEC agreed to hike its oil production in June, but that mostly amounts to the Saudis picking up the slack for declines from other OPEC nations like Venezuela, Libya, Angola and the anticipated dip from the Saudi’s chief rival, Iran. Any big Iranian crude export decline is yet to come because the details of sanctions and waivers are still being finalized since the Trump administration opted to withdraw from the Iran nuclear accord.
The International Energy Agency reported this week that global energy investments fell by 2 percent last year down to $1.8 trillion — a third straight year of decreasing investments — while spending on the electricity sector surpassed oil and gas production dollars for the second straight year.
These declines were triggered largely by the recent oil bust that sent crude prices plummeting from more than $100 a barrel in mid-2014 down to a low of $26 per barrel in February 2016. Prices have rebounded since and energy companies have learned to cut costs and earn profits with oil in the $60 range, but worldwide oil and gas spending is yet to catch up.
Global oil demand each year has grown by roughly 1.5 million barrels a day of late. But higher crude prices coupled with ongoing fears of worldwide trade wars — led by the U.S. and China — could cause a slowdown in economic and oil demand growth.
Rather than spend money on the long-term, multibillion-dollar mega projects in deep ocean waters, companies are more often opting for quicker, cheaper drilling efforts in areas like U.S. shale, especially West Texas’ booming Permian Basin.
“There was an implosion in major project investments, and exploration spending has evaporated,” said Bill Herbert, a senior energy analyst at Piper Jaffray & Co. in Houston.
That’s an ominous sign for crude oil supplies in the few years ahead, starting as soon as 2019, he added.
“The elephant in the room that people aren’t paying attention to is the rapidly decreasing spare productive (oil) capacity,” Herbert said, especially within the OPEC cartel, which the world has counted on for decades to help manage supply-and-demand balances and pricing.
Many oil and gas companies like global energy services leader Schlumberger have warned of the need for greater oil and gas project spending for more than a year. Schlumberger CEO Paal Kibsgaard reiterated those worries Friday. He specifically cited Venezuela, Iran and Libya, but he argued that at least 15 countries are witnessing production declines.