On October 16, Foreign Policy published an article written by Ed Morse and Amy Jaffe entitled “The End of OPEC,” in which they argued that emerging technology and American production of tight oil and gas is revolutionizing the energy industry. This transformation, they argue, will allow the United States to “use its influence to democratize global energy markets” and as it does so, “the United States becomes an energy exporter—at competitive prices—[and] that should seal the deal.” The views contained in this article reflect a growing body of published works over the past two years that claims to herald the dawn of “energy independence” for the United States. The fundamentals of global oil supply and demand, however, suggest a very different scenario to us: a supply-constrained future. The consequences of such an occurrence could have severe economic implications for the U.S. and global economies.
America’s view of future world oil supply experienced an abrupt change about two years ago. In this short period of time, the pendulum swung dramatically from a concern over insufficient supplies during the mid-2000s to “energy independence” by early 2011. We believe a hard scrub of the facts shows such optimism was never justified, and combined with an analysis of tight oil production data over the past decade, indicates the potential for near-term supply problems.
The pivot point for the abundance meme probably dates to September 2011, when well-known energy consultant Daniel Yergin published an article in the Wall Street Journal entitled, “There Will be Oil.” In this opinion piece Mr. Yergin denigrated those warning of future imbalance between oil supply and demand as having no credibility and reassured all that to the contrary, “the world has decades of further growth in production before flattening out into a plateau—perhaps sometime around midcentury.” Six months later Ed Morse grabbed headlines around the world with the publication of a Citigroup study which claimed “there is little doubt that the U.S. tight oil play lies at the heart of U.S. energy independence and North America becoming the new Middle East.” The facts about global oil supply we present below, however, suggest claims of “independence” amount to misplaced hype.
According to Forbes, China by itself is expected to increase oil consumption by an additional 4 million barrels of oil per day (mbd) by just 2020. Meanwhile, according to EIA data, during the same time the world as a whole increased its consumption of oil by 13% (2000-2010), OPEC countries as a group increased domestic consumption almost four times faster over the same timeframe (56%): the world’s major oil-exporting countries are consuming ever-increasing amounts of their own oil leaving progressively less available for global export. And given the explosive population growth expected in OPEC countries in the coming decades, this trend is likely to intensify.
Moreover, while countries of the developed world are trending towards lower consumption (owing to a combination of constrained economic activity, conservation and efficiency measures), it will not likely be sufficient to offset the increase in demand from the rapidly industrializing oil-importing Asian giants of China and India and the rising domestic consumption OPEC producers. To compound matters, approximately 80% of the world’s largest conventional oil fields are already in post-peak decline, and as a group suffers between 4.5% to 6% annual production declines—all of which has to be replaced each year just to keep production level.