Exxon joins OPEC in warning of oil supply crisis

Traders and analysts have been overwhelmingly bearish on oil over the past few months. With a few exceptions, everyone seems to expect demand to fall and prices to fall. However, the opposite may turn out to be the case.

OPEC has been warning about this for years. Various cartel officials have sounded the alarm that underinvestment in new oil supplies will eventually translate into a future supply squeeze that will push prices significantly higher. Exxon now joins OPEC in these warnings.

In its new edition Global perspectivethe US supermajor has predicted that both oil and gas will continue to be vital elements of the world’s energy mix in 2050, with oil demand remaining at more than 100 million bpd after growth peaks and gas demand also remaining , strong because electricity consumption in the Exxon forecast. it will be 80% higher in 2050 than it is now.

Perhaps Exxon’s most disappointing prediction concerns electric vehicles and their effect on oil demand. Here’s what Exxon had to say about electric vehicles:

“If every new car sold in the world in 2035 were electric, oil demand in 2050 would still be 85 million barrels per day. It’s the same as it was in 2010.”

This contrasts with virtually every other forecast about EVs and their impact on oil demand, which those other forecasters see as devastating – even though the major growth in EV sales so far, even in China, has not stopped with true increase in oil demand. .

One could argue that Exxon’s vision is of a world that the company wants to see in the future so that it can continue to make money from the sale of hydrocarbons and hydrocarbon derivatives. It’s the same argument they would use for OPEC’s warnings of underinvestment in oil and gas.

However, it is not a particularly strong argument. An oil and gas shortage would be very welcome for both Exxon and OPEC. Scarcity tends to create prices, and higher prices invariably mean higher profits, as we saw in 2022. The other thing that shortages lead to is political and social instability, and that would not be welcome for big companies like Exxon – hence the warning and it is a grim one.

According to the supermajor, global oil production faces a natural decline at a rate of around 15% annually over the next 25 years. For context, the IEA sees the rate of natural decline at 8% annually. Exxon points out, however, that the faster rate of decline is a result of the shift to shale and other unconventional oil production, where depletion occurs faster than in conventional formations.

“To put it in concrete terms: without new investment, global oil supplies would fall by more than 15 million barrels per day in the first year alone.” This is a scary prospect because “At this rate, by 2030 oil reserves would drop from 100 million barrels per day to less than 30 million – that’s 70 million barrels less than what it is necessary to meet the demand every day”.

In other words, if investment in new oil and gas production dries up, the world will soon face not just a supply crunch, but the mother of all supply constraints. According to Exxon’s report, the effects of this tightening will see severe power shortages and disruptions to daily life, oil prices could rise by as much as 400% – twice what they rose during the Arab oil embargo of the 1970s That, in turn, would lead to an increase in unemployment, where rates could reach 30 percent, Exxon said.

Of course, this will not happen. Long before such massive tightening materializes, there will be calls for more production, often from the same people who are currently calling for an end to all new oil and gas investment, as the IEA’s Fatih Birol did briefly time after AIE. published its roadmap to net zero in 2021.

In that roadmap, the IEA said the world did not need new investment in oil and gas after the end of that year because demand for oil and gas had fallen. A few months later, amid falling supply and rising prices, Birol called on oil and gas companies to invest in more production and cut prices. In AIE Oil Market Report for October 2021, the agency noted rising energy demand and insufficient supply, noting that “Decreasing global spare capacity underscores the need for increased investment to meet continued demand.”

So it appears that Exxon may be on a more accurate track than the IEA, and the rest of the bearish forecasters have been fixated on China’s monthly crude imports and fuel exports. The supermajor may not be overstating the future that awaits the world if oil and gas investment stops. Fortunately for all of us, investment in oil and gas will not stop, despite calls and threats from government activists to force them to stop. Threats will remain threats. Energy security always transcends ideology.

By Irina Slav for Oilprice.com

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