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Opinion: Why oil prices must go up

by Nick Cunningham for

It may be difficult to look beyond the current pricing environment for oil, but the depletion of low-cost reserves and the increasing inability to find major new discoveries ensures a future of expensive oil.

While analyzing the short-term trajectory of oil prices is certainly important, it obscures the fact that over the long-term, oil exploration companies may struggle to bring new sources of supply online. Ed Crooks over at the FT persuasively summarizes the predicament. Crooks says that 2014 is shaping up to be the worst year in the last six decades in terms of new oil discoveries (based on preliminary data).

Worse still, last year marked the fourth year in a row in which new oil discoveries declined, the longest streak of decline since 1950. The industry did not log a single “giant” oil field. In other words, oil companies are finding it more and more difficult to make new oil discoveries as the easy stuff runs out and the harder-to-reach oil becomes tougher to develop.

The inability to make new discoveries is not due to a lack of effort. Total global investment in oil and gas exploration grew rapidly over the last 15 years. Capital expenditures increased by almost threefold to $700 billion between 2000 and 2013, while output only increased 17% (see IEA chart).

Despite record levels of spending, the largest oil companies are struggling to replace their depleted reserves. BP reported a reserve replacement ratio—the volume of new reserves added to a company’s portfolio relative to the amount extracted that year—of 62%. Chevron reported 89% and Shell posted just a 26% reserve replacement figure. ExxonMobil and ConocoPhillips fared better, each posting more than 100%. Still, unless the oil majors significantly step up spending they will not only be unable to make new discoveries, but their production levels will start to fall (some of them area already seeing this begin to happen). The IEA predicts that the oil industry will need to spend $850 billion annually by the 2030s to increase production. An estimated $680 billion each year—or 80% of the total spending—will be necessary just to keep today’s production levels flat.

However, now that oil prices are so low, oil companies have no room to boost spending. All have plans to reduce expenditures in order to stem financial losses. But that only increases the chances of a supply crunch at some point in the future. Put another way, if the oil majors have been unable to make new oil discoveries in years when spending was on the rise, they almost certainly won’t be able to find new oil with exploration budgets slashed.

Long lead times on new oil projects mean that the dearth of discoveries in 2014 don”t have much of an effect on current oil prices, but could lead to a price spike in the 2020’s.

All of this comes despite the onslaught of shale production that US companies have brought online in recent years. US oil production may have increased by 60 to 70% since 2009, but the new shale output still only amounts to around 5% of global production.

Not only that, but shale production is much more expensive than conventional drilling. As conventional wells decline and are replaced by shale, the average cost per barrel of oil produced will continue to rise, pushing up prices.

Moreover, with rapid decline rates, the shale revolution is expected to fade away in the 2020’s, leaving the world ever more dependent on the Middle East for oil supplies. The problem with that scenario is that the Middle East will not be able to keep up. Middle Eastern countries “need to invest today, if not yesterday” in order to meet global demand a decade from now, the International Energy Agency’s Chief Economist Fatih Birol said on the release of a report in June 2014.

In fact, half of the additional supply needed from the Middle East will have to come from a single country: Iraq. Birol reiterated those comments on February 17 at a conference in Japan, only his warnings have grown more ominous as the security situation in Iraq has deteriorated markedly since last June. “The security problems caused by Daesh (IS) and others are creating a major challenge for the new investments in the Middle East and if those investments are not made today we will not see that badly needed production growth around the 2020s,” Birol said, according to Reuters.

If Iraq fails to deliver, the world could see oil prices surge at some point in the coming decade. Despite the urgency, “the appetite for investments in the Middle East is close to zero, mainly as a result of the unpredictability of the region,” he added.




Adding to the myth that oil is scarce and running out. There is an unlimited supply of oil, the only issue is production cost. Yes the marginal cost, or the cost of the next barrel, increases. However, that has always been true from the first barrel produced.

The major oil companies have not and will not publicly disclose their actual reserves. Its a closely guarded secret known only to senior management. If you carefully read any such disclosure from a major, you will find all kinds of caveats.

On the other side of the equation, worldwide demand is declining and unlikely to increase as fuel efficiency technology kicks in.


This is a pretty good summarization of the situation. Oil prices don't have to go up, but they will. The truth is that economically recoverable oil is becoming more and more scarce. We are running out of economically recoverable oil. Gasoline prices near $4 a gallon will help with future exploration, but it will also help renewable sources, which do not become more expensive with time, but rather become less expensive with time. There is no worry about having enough energy, the only worry happens when you insist that it be oil. Oil limits our world now and if we don't recognize that then it will limit us in the future too.

Personally I think the old world bankers who still dominate the world economy are so in love with war and destruction that they lament the inevitable destruction of oil, thus their reluctance to invest in the coming future technologies. They may somewhat fear that they will lose control of markets, and they may, but mostly they love the war. It's so much fun to be the hand that sweeps away nations as if God, and they will miss that.

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With autonomous BEVs coming in just a few years after 2020 and US oil shale production still growing on a monthly basis despite 50 USD per barrel I am less worried about oil than I have ever been. I still think it is unfortunate that the Saudis have let the oil price fall this fast to such a low level. Clearly, 50 USD is very painful for the high cost conventional oil drilling in the US. This is evident from the 40% annual drop in vertical and directional drilling rigs that are drilling in conventional oil fields. The 13% annual drop in horizontally drilling rigs that are drilling in oil shale is less dramatic a decline because it has become the lowest hanging fruit in the oil industry.

Source for increases in us shale oil production

Source for drops in various US drilling rigs


Solar energy can be collected, stored and transformed into H2, NG, Diesel, Jetfuel, Gasoline etc.

There is enough solar energy to fill the energy needs at least 1,000 to 100,000 times.


I think that we can't predict the price of oil because the price go up and down each day. Production is hard to predict but they have more tools than ever to discover oil and extract it, they rely more and more on higher technology. If ever they succeed in inventing cheap abundant new generation nuclear they can use electricity to make synthetic gasoline or other fuels so it will lead to a massive surplus of gasoline and I will drive my car to the other end of the country.

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