Geology vs technology: in a few years the world will face an oil shortage

According to the forecast of the largest American transnational banking corporation Morgan Stanley, Brent oil will reach $100 per barrel in the III quarter of this year.

At the same time, global oil inventories will decline by the end of 2022 after a significant drop in the previous year. At the same time, reserve capacities in the world will also fall to 2 million b / s from the current 3.4 million b / s, MS analysts write. Investment in capacity expansion in the oil sector is expected to decline by 30% by the end of the decade as market attention shifts to green initiatives.

Previously, the bank's experts believed that demand for oil would begin to decline when prices approached $90 per barrel. Now they believe that this will happen with higher oil prices, as the consumption of petroleum products remains stable. For example, jet fuel demand is expected to grow by 1.5 million b/d this summer.

MS' outlook is in line with Goldman Sachs, which also said this week that it expects Brent to rise to $100 a barrel by Q3 2022.

Analysts believe that the reason for the production plateau will be the development of oil reserves in American fields, which will lead to a decrease in production efficiency and an increase in its cost. This process has already begun. And it is also associated with a noticeable slowdown in technological progress, and this, in turn, should affect the growth of the global economy. NES professor and author of the Technology vs. Geology channel Alexander Malanichev predicts the situation for the near future:

“Let's turn to the detailed description of oil production in the US shale fields, which since 2014 began to play the role of the second, after OPEC+, regulator of the global oil market.

The maximum volume of shale oil production in the United States was reached in December 2019, and amounted to 9.4 million barrels per day. In 2020, a collapse in demand and a drop in the price of oil due to COVID-19 led to a decrease in production by 17%. Interestingly, it fell by about the same amount as the demand for oil on the world market fell in April 2020.

Subsequently, an improvement in the price environment caused an increase in production, which began in mid-2021. But while it remains 10% below the maximum.

The EIA forecast implies that in 2022 production will recover by only 94% from the maximum, with an average annual price of WTI oil of $71/bbl.

However, the current oil price is above the forecast level, which indicates the possibility of achieving higher production levels in the US. A model calculation shows that even at a WTI price of $80/bbl. By the end of 2022, U.S. shale production will reach the above all-time high. The current value of the price exceeds this level, and I see the possibility of its further growth.

This means an upward trend in US oil production for at least the next 2 years. What will be beyond this horizon?

According to a forecast made in 2017, US shale oil production will peak in 2026 at 11-12 million barrels per day. The reason for production plateauing will be the depletion of oil reserves in American fields, which will lead to a decrease in production efficiency (see the chart in the next post) and an increase in its cost.

Unfortunately, progress in organizational and technical solutions for oil production in the United States does not make it possible to compensate for the deterioration in the geological conditions of hydrocarbon occurrence. The growth in the efficiency of production technologies known since the first half of the 20th century has slowed down (hydraulic fracturing, horizontal drilling, etc.). This corresponds to the general idea that there is a limit to the effectiveness of a technological solution. The way out of the situation will be not incremental, but revolutionary changes in technology.

According to the EIA, the decrease in the efficiency of production in the United States continued throughout 2021, which is a harbinger of peak oil production. The last one happened in 1971. Just like 50 years ago, but for the second time, geology is expected to win over the technologies that spawned the US shale revolution. The question is for how long?

So far, such a scenario has not been taken into account by analysts, some of whom believe that in the coming years, the United States will account for every second barrel of oil that meets the increase in demand.

For the global oil market, a decline in US production means an increase in the dominance of OPEC+, an increase in oil prices and stimulation of inflationary processes that slow down the growth of the global economy. Thus, according to Lukoil's forecasts, in the "Transformation" scenario, the average USD inflation over the next 30 years may exceed 8% per year, which significantly exceeds the historically recorded figure in the 1970s during the oil shocks.

These are the possible consequences of stagnation in the development of oil production technologies, even in the context of an accelerated energy transition”.