Blog/Fossil Fuels,Technology

Entering the era of abundant oil

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Rather than witnessing peak oil supply or oil scarcity, we are now seeing a flood of new oil supplies across the world. Rather than worrying about where all the oil we will need in the future is going to come from, we are now talking about when global oil demand will peak. The timing of this is impossible to predict but what is clear is that we are entering the era of abundant oil and that is a paradigm shift for the whole energy industry as well as global geopolitics.

Peak oil used to be seen as the point in time when the production of oil would reach a maximum before starting to decline. This would happen because new oil supplies were impossible or too expensive to be extracted and the general view was that, once the point of peak oil had been reached, oil prices would rise sharply, which would in turn have a devastating impact on the global economy. This theory has subsequently been shown to be wrong thanks in large part to technological improvements which have enabled the cost effective and incredibly fast extraction of vast new oil resources from shale, tar sands and deep seas.

Today, peak oil is less about oil supply and more about peak oil demand, the point in time when oil consumption reaches a maximum as new technologies such as electric vehicles become better and more cost effective than oil based transport technologies. Some commentators such as Goldman Sachs are talking about peak oil demand as early as 2024. However, the exact point is difficult to predict because of the complex array of factors which determine both the demand and supply for oil. However, the combination of more plentiful supply and lower than expected demand does mean that we are now entering the era of abundant oil.

In this type of market environment, where supply is greater than demand, normally what happens is that prices fall as the low-cost players attempt to gain market share by trying to drive competition out of the market. Saudi Arabia attempted this strategy in 2014 which is a large part of the reason why the oil price fell from $90 to a low of $30 in January 2016. This price fall did in turn impact the costlier US oil production which fell from 9.6m barrels a day in April 2015 to 8.5m barrels in September 2016. However, prices have since risen, largely because of the Saudi Arabia brokered OPEC deal to cut oil production, and US oil production is now above April 2015 levels, with the oil price just under $70.

Why this happened is critical to understanding what will next happen with the oil price. The economies of Saudi Arabia and many other major global oil producers are so dependent on oil that they need oil prices above $50 just to balance their government books. And this will probably become the base price for oil going forward until these economies reduce their economic dependence on oil. It is thus not a surprise that King Salman of Saudi Arabia, and the crown prince, Mohammed bin Salman are restructuring the Saudi economy, and with their new Vision 2030, they are making attempts to develop an innovative and sustainable economy. They are doing so because they believe in the era of abundant oil, and they know they need to reduce the full cost of a barrel of oil to their economy, so that they can then extract as much oil out of the ground as soon as possible, as the alternative would be to leave it in the ground forever.

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