Copyright: Arup/Clough Oil & Gas.  Maari Wellhead platform, Taranaki Basin, New Zealand

+ Consumption will exceed production within the next five years

The Arab Spring and events in Libya are currently having the effect of focusing everybody’s mind on oil prices. The recent surge prompts the question: are oil prices going to reach US$139 a barrel again, and what can we do to stop that? The recent release of oil from the strategic reserves by the International Energy Agency exemplifies this thinking. 

In my view, the events in the Middle East, whilst important, are a red herring. The real problem is not the temporary shortages produced by a political instability, but the long term shortages that may arise from some much more fundamental factors. 

If you look at a curve of oil extraction rates and oil consumption over the past hundred years, it has gone steadily upwards. In fact, it’s been on a quite steep curve for the last 15 years. But some of the biggest oil finds were made around the 1940s and 50s and, since then, there haven’t been as many big finds as you might think. So we’re living on a legacy of huge finds that were made in the middle of the last century and huge finds of that nature have not been repeated. 

Since then, there have been lots and lots of (relatively) small finds, and these are being found in places that are ever more difficult to access (the deep ocean and the arctic, for example). And so the balance of oil that’s in the ground ready to be tapped is made up increasingly by these difficult sources and, consequently, we’re having to run harder to stand still. 

That doesn’t mean to say there’s no oil left in the ground. There may be lots of it. But the difficulty is that you can’t pump it fast enough. We’re currently producing and consuming around 80m or 90m barrels a day, but when we look at all the sources in current production plus all the known future sources, it is very difficult to have any confidence that we could significantly exceed this number and (say) reach 100m barrels per day. 

To many observers, this isn’t a particularly acute problem – with the OECD countries having plateaued in their consumption patterns over the past few years, they can argue that it even leaves headroom for some future resumption of growth. But the flaw in that argument is that the balance of use is shifting. In future the balance is going to shift from the OECD countries to the non-OECD countries. If you factor-in big emerging nations like China, India, Russia and Brazil, it’s not at all difficult to imagine that demand is going to exceed 90m barrels a day in the very near future, and 100m barrels a day in the not-too-distant future.

And that’s the crux of the problem. It is almost certain that consumption will exceed production within the next five years. And that will be a persistent characteristic thereafter in contrast to the sporadic, war-induced, shortages we have seen before. So, prices could soon escalate permanently and that’s what we call the looming oil crunch. 

The oil crunch represents a serious business risk for the UK and, in my view, the government needs to recognise this imminent threat. A plan ought to be in place for something that looks like a pretty obvious emerging problem.

Of course, the development of this plan should be preceded by some stress-tests to the economy to check the effects of long-term high oil prices on various different parts of our economy. This should include the business impact plus social impacts such as energy poverty, care for the elderly, general mobility, and the like. If those tests tell us there’s no problem, we can all stop worrying about it. But if the stress-test tells us differently, we ought to put some mitigations in place double quick.