Email of the day (2)
Comment of the Day

July 13 2012

Commentary by David Fuller

Email of the day (2)

On crude oil supplies:
"A blog on the FT website regarding new sources of oil that may be of interest to the collective - conclusion: don't necessarily extrapolate the US experience to the rest of the world due to political factors."

David Fuller's view Thanks for this interesting article. I have posted it in the Subscriber's Area but here is an excerpt from the Executive Summary:


Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 mbd. Factoring in depletion rates of currently producing oilfields and their "reserve growth" (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date - as shown in Figure 1. This would represent the most significant increase in any decade since the 1980s.

I find this plausible and more or less in line with Fullermoney's long-term forecast for energy supplies.

However, Nick Butler who has plenty of oil-industry experience after 29 years with BP, is considerably more cautious in his reply on behalf of the FT.


Long-term forecasts of this type inevitably include a considerable amount of creative guesswork and often wishful thinking, particularly regarding trend extrapolation as every experienced investor knows.

So let us take a look at the major known supply variables: 1) following the 'peak oil' scare of earlier decades we now know that vast quantities of shale oil / tight oil can be developed commercially, although there is plenty of controversy over the methodology, not least concerning fracking; 2) similarly, these same techniques have been producing natural gas from shale formations, and gas is emerging as a favoured fossil fuel because it burns more cleanly than oil, let along coal; 3) we know that the latest technologies can commercially extract oil from fields previously believed to be dry or inaccessible; 4) we also know that solar energy is at the forefront of a massive, worldwide and government subsidised drive to create renewable sources of energy, and their contribution to supply can only increase; 5) lastly, new nuclear has the proven potential to be a major source of clean energy, although it remains controversial.

For demand variables, we need to rely mainly on trend extrapolation; 1) oil consumption has plateaued in OECD countries, partly due to the factors mentioned above and also because of weak GDP growth; 2) so-called emerging market consumption of oil is surging in line with their GDP growth, rising populations and rapidly increasing middle classes; 3) all evidence to date suggests that populations in these growth economies aspire to the same energy-consuming lifestyles that we take for granted in the west.

The known unknowns that are likely to affect oil supplies and particularly energy consumption are: 1) global GDP growth; 2) governance; 3) regulation; 4) wars; 5) climate change.

The above is really an outline to which subscribers may wish to add or subtract factors. The weighting given to each of the above is certainly debatable, not least in an ever changing world. Therefore your guess is as good as mine.

My view is that the price of crude oil will continue to fluctuate because it is a freely traded commodity. Surges in the oil price (Brent & WTI) will remain a headwind for global GDP growth, with upward spikes causing recessions or at least slower economic growth, as we most recently saw in 2008, 2011 and earlier this year. Conversely, lower oil prices will continue to support economic recovery and growth, subject to monetary policy, as we recently saw in 2009/10 and will hopefully see before yearend 2012.

Nevertheless, when I weight all this up, in an uncertain world, I remain hopeful that energy supplies, including crude oil, will outstrip demand more often than not in future years, generally underpinning better GDP growth than we see today. As a 'glass half full' person, I also think that the accelerated rate of technological innovation that we are witnessing will continue. Thanks for this interesting article. I have posted it in the Subscriber's Area but here is an excerpt from the Executive Summary:


Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd.

After adjusting this substantial figure considering the risk factors affecting the actual accomplishment of the projects on a country-by-country basis, the additional production that could come by 2020 is about 29 mbd. Factoring in depletion rates of currently producing oilfields and their "reserve growth" (the estimated increases in crude oil, natural gas, and natural gas liquids that could be added to existing reserves through extension, revision, improved recovery efficiency, and the discovery of new pools or reservoirs), the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date - as shown in Figure 1. This would represent the most significant increase in any decade since the 1980s.

I find this plausible and more or less in line with Fullermoney's long-term forecast for energy supplies.

However, Nick Butler who has plenty of oil-industry experience after 29 years with BP, is considerably more cautious in his reply on behalf of the FT.


Long-term forecasts of this type inevitably include a considerable amount of creative guesswork and often wishful thinking, particularly regarding trend extrapolation as every experienced investor knows.

So let us take a look at the major known supply variables: 1) following the 'peak oil' scare of earlier decades we now know that vast quantities of shale oil / tight oil can be developed commercially, although there is plenty of controversy over the methodology, not least concerning fracking; 2) similarly, these same techniques have been producing natural gas from shale formations, and gas is emerging as a favoured fossil fuel because it burns more cleanly than oil, let along coal; 3) we know that the latest technologies can commercially extract oil from fields previously believed to be dry or inaccessible; 4) we also know that solar energy is at the forefront of a massive, worldwide and government subsidised drive to create renewable sources of energy, and their contribution to supply can only increase; 5) lastly, new nuclear has the proven potential to be a major source of clean energy, although it remains controversial.

For demand variables, we need to rely mainly on trend extrapolation; 1) oil consumption has plateaued in OECD countries, partly due to the factors mentioned above and also because of weak GDP growth; 2) so-called emerging market consumption of oil is surging in line with their GDP growth, rising populations and rapidly increasing middle classes; 3) all evidence to date suggests that populations in these growth economies aspire to the same energy-consuming lifestyles that we take for granted in the west.

The known unknowns that are likely to affect oil supplies and particularly energy consumption are: 1) global GDP growth; 2) governance; 3) regulation; 4) wars; 5) climate change.

The above is really an outline to which subscribers may wish to add or subtract factors. The weighting given to each of the above is certainly debatable, not least in an ever changing world. Therefore your guess is as good as mine.

My view is that the price of crude oil will continue to fluctuate because it is a freely traded commodity. Surges in the oil price (Brent & WTI) will remain a headwind for global GDP growth, with upward spikes causing recessions or at least slower economic growth, as we most recently saw in 2008, 2011 and earlier this year. Conversely, lower oil prices will continue to support economic recovery and growth, subject to monetary policy, as we recently saw in 2009/10 and will hopefully see before yearend 2012.

Nevertheless, when I weight all this up, in an uncertain world, I remain hopeful that energy supplies, including crude oil, will outstrip demand more often than not in future years, generally underpinning better GDP growth than we see today. As a 'glass half full' person, I also think that the accelerated rate of technological innovation that we are witnessing will continue.

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