BP just released its annual Energy Outlook.
The company is projecting faster development of shale oil, coming mostly over the next few years from the US, than it previously thought. Renewable energy supply will rise more quickly; (heavily polluting) coal usage will fall faster. Most of the action will be in developing nations like China and India. The US will attain energy self-sufficiency in a handful of years, oil self-sufficiency shortly after that.
To me, the most interesting topic the release brings up is not actually contained in the report. It comes from comments by Spencer Dale, BP’s chief economist, during a press conference promoting the new Outlook.
According to the Financial Times, Mr. Dale said that there’s “twice as much technically recoverable oil available as the world is expected to need between now and 2050.”
First, “technically recoverable” means only that all of this oil can be extracted from the ground using current oilfield methods. It does not mean it can be done profitably. In fact, the choice of the word “technically” suggests BP believes that a significant portion is uneconomical at today’s prices.
Second, according to BP, much of this oil is unlikely to see the light of day…ever. That’s because global demand for energy is likely to grow by less than 2% yearly. Most of that will be supplied by renewables and natural gas; oil demand increases by less than 1% annually.
At some point, as the price of renewable energy continues to fall, and absent a decline in the oil price, demand for oil begins to shrink. Since one might imagine that this drop might not take place thirty years, it may be of little practical concern to you and me. However, for OPEC countries like Saudi Arabia, which holds perhaps 100 years worth of economically viable oil, and whose economy is radically dependent on petroleum, this is a significant worry.
Investment implications (assuming BP is correct):
–the oil price is unlikely to go up
–OPEC + shale oil will squeeze out higher cost oil production from the rest of the world
–future shale oil company profits will come as much from lowering production costs as from new finds
–big oil firms probably still have plenty of stranded assets (meaning oilfield investments that have become uneconomical and where recovery of the money already spent is unlikely) on their balance sheets.
However, it is possible, that just as fracking and horizontal drilling has made many assets
economically feasible , newer technologies in the future may make some additional assets economically feasible ?
Few people saw the rise of shale oil happening this quick.
Im curious to see what this does to Mid East politics and stability too.
Hi Bruce! This is a very interesting question. I’m going to reply in my blog post for tomorrow.