It used to be that the main concern about oil was finding enough of it in the ground to meet world demand. Since at least 1914, experts have been warning that the world’s oil supply is nearly tapped out.1
Although there is a school of thought that continues to insist that we’re still right around the corner from the last drop of oil, its adherents are in the minority. Most experts believe there is still plenty of oil in the ground. So why then have we seen the price of a barrel of oil double since 2004?2 Don’t blame it on nature. Most of our current oil woes, as well as fears about its future cost and availability, are man–made.
The Capacity for Capacity
Current world oil production is about 86 million barrels a day.3 Although oil production has grown by about 2.3% per year since 1965, this growth rate is expected to dwindle.4 Yet global demand for oil and petroleum products shows no sign of abating. By 2030, the world is expected to need anywhere from 100 million to 120 million barrels of oil a day.5
However, a range of experts, including leaders of oil-producing nations and oil company executives, maintain that the oil industry does not have the capacity to supply much more than 100 million barrels per day, and it won’t for many years, if ever.
Although there may be enough oil in the ground to conceivably supply that many barrels, there isn’t enough infrastructure to deliver it. Soaring costs of raw materials have slowed investment in new oil rigs and other equipment. Years of low oil prices have led to underinvestment in training geologists and other skilled workers, and in new technologies to extract oil from inhospitable locations.
For example, one expert estimated that to be prepared to supply 90 million barrels per day to meet demand forecasted for 2010, the industry should have spent $350 billion in 2005. But the industry spent only $225 billion in 2005.6 This means that the groundwork for temporary shortages and price spikes may already be laid.
Another example: Many of the world’s oil fields are mature and their production is declining. The industry needs to add eight million barrels of daily production just to offset the declining production — and this estimate doesn’t include any growth in demand.7
Politically or Technically Out of Reach
Domestic oil exploration and production are politically unpopular in the United States.
Environmental concerns have managed to foil repeated attempts to pass federal legislation that would allow drilling in the largest oil field ever discovered in the United States, Alaska’s Arctic National Wildlife Refuge, where the mean estimate of recoverable oil is around 10 billion barrels.8
A moratorium puts about 85% of the outer continental shelf surrounding the United States off–limits to exploration.9
If oil companies’ estimates are accurate, oil production in the Gulf of Mexico is expected to increase by 1.2 million barrels by 2015, the first increase in domestic production in 20 years.10
The cost of finding and developing a deepwater oil field in the Gulf of Mexico quadrupled between 2000 and 2005.11
Geopolitical Tensions
The Organization of Petroleum Exporting Countries (OPEC) is a cartel of 12 nations that supplies 40% of the world’s daily oil needs and possesses about 78% of the world’s proven reserves.12 Some OPEC nations, particularly those in the Middle East, have a history of political conflict, both among themselves and with other nations. When unrest threatens to flare, the oil market, which operates based on futures contracts, may fear a supply interruption, which in turn makes existing oil supplies more valuable, regardless of whether the threat materializes.
This might sound like a lot of doom and gloom, but as John F. Kennedy once said, “Our problems are man–made, therefore they may be solved by man…. No problem of human destiny is beyond human beings.”13 Watching how the world grapples with how to bring oil from the ground to the economy could reveal important clues about the direction your portfolio should take.
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