Sidebar

The Coming Supply Crunch

The Coming Supply Crunch

The financial crisis that sent shock waves through the global economy is now reverberating in the energy world. Credit is hard to come by, the demand for energy is down, and cash flows are falling. So what will this mean for the future of the oil industry?

The short answer is: not as much as you might think. Even as market analysts everywhere are racing to revise their forecasts, the underlying trends will remain largely unchanged over the medium to longer term. To our knowledge, the International Energy Agency (IEA)’s World Energy Outlook 2008, which was published last November during the most turbulent period of the financial crisis, provided a more detailed assessment of oil-supply prospects than has ever before been released publicly. In the IEA’s business-as-usual scenario, which assumes that policies won’t change, oil demand continues to grow strongly up to 2030. All of the projected increase is expected to come from emerging markets, led by China, India, and the Middle East, while the bulk of the increase in supply is expected to come from OPEC countries. The prospect of accelerating declines in production at individual oil fields will represent a key challenge. Even if global oil demand remained flat until 2030, our analysis suggests that some 45 million barrels per day of additional gross capacity — the equivalent of four times the current capacity of Saudi Arabia — would need to be brought online simply to offset declining production at existing fields.

Thankfully, the world has enough oil to support this growth in output. But here’s where the financial crisis matters: A lack of investment where it is needed, particularly in the short to medium term, has become a key risk to supply. We estimate that global upstream oil and gas investment budgets for 2009 have already been cut about 21 percent compared with 2008 — a reduction of almost $100 billion. There is a danger that investment in the coming months and years will be reduced too much, pushing up decline rates and leading to a shortage of capacity when the economy begins to recover. To complicate matters, rich countries, as they depend on ever more imports from ever fewer sources, are becoming more vulnerable to supply disruptions and sharp price hikes.

In the long run, if governments don’t take stronger policy action, rising consumption of fossil energy will drive up emissions and atmospheric concentrations of greenhouse gases, putting the world on track for an eventual global temperature increase of up to 6 degrees Celsius. At the global level, we will need to use all of our energy options simultaneously. We need to combine greater energy efficiency with increased deployment of renewable and nuclear energy, while minimizing our dependence on using oil, gas, and coal in an unsustainable way.

But even if we succeed, the oil industry won’t be going away; low-carbon technologies won’t replace fossil energy overnight. That’s OK: Not only will there still be demand for oil, but today’s oil industry runs on the type of transferable skills the world needs to shift toward the low-carbon fuels of tomorrow.