Oil Economics: Changing global trends – demand & supply dynamics

Last Thursday, July 27, 2017, the Georgetown Chamber of Commerce and Industry launched its 2017 Business Magazine at the Marriott Hotel. Speaking at that function, ExxonMobil’s Operations Manager in Guyana announced that the Government of Guyana will receive revenue from day one of production. This column, however, noted with interest the inherent ambiguity of his statement, which led to only one plausible inference: that is to say, the only revenue the GoG will receive from day one is the 2 percent royalty.
Computing 2 percent royalty at the current price, which is about US at a production level of 100,000 barrels per day, it works out to roughly US.5M annually; not an exciting figure.
Turning to the essence of today’s piece: The global oil market has been at the centre of economic news over much of the past years. When one examines the degree of vast developments and richness with which oil rich countries in the Middle East, such as Dubai among others, have attained, this has certainly validated the notion of the magnitude of economic prosperity, wealth and development this resource can bring to a country and its people.
Notwithstanding, the global oil market has undergone significant changes over the last 10 or 15 years. Underscoring this evolution, two changes in particular have had profound impact on the economics of the oil market. The more significant stems from the United States (U.S) shale oil revolution — the rapid growth of onshore oil production in the US, typically using hydraulic fracturing techniques to extract oil from shale and other types of so-called tight rocks. The second major change has to do with increasing global concerns about carbon emissions and climate change. The momentum for increased actions is growing – with specific reference to the Paris Accord, or the recently concluded meeting with major global leaders, which saw the US withdrawing support for the Paris deal. Ironically, as the US withdrew their support, without much delay, many other countries, including China, strengthened their support in this regard. If this sense of urgency translates into policies, this could have significant implications for the long run demand for fossil fuels.
It is worthwhile to mention that while perusing and synthesising the current body of literature that sought to address the future outlook and projections of oil prices, it was found that those analysis that were conducted by oil companies themselves projected that global oil price will increase at a rate of 1.25 percent annually, in line with a shift in demand from West to East — India and China — and will largely be driven by the global transportation sector.
Conversely, the inherent flaw with these analyses is that they ignored the impacts climate change policies will have on oil consumption, and also technology is another key factor that will be a major threat to sustainable oil prices in the future. Already, there are developments in the creation of electric cars, for example, and these developments will be accelerated and have real implications in respect to the oil prices.
The first basic principle of oil is that it is an exhaustible resource. Total stock of recoverable oil resources is assumed to be known, and the main focus is on the optimal pace at which these resources should be exhausted. But empirical evidence has shown that, in practice, estimates of recoverable oil are increasing all the time, as new discoveries are made and technology and understanding improves. Moreover, they are increasing at a more rapid pace than existing reserves are consumed. Over the past 35 years, in very rough terms, the world has consumed over 1 trillion barrels of oil. Over that same period, proven reserves of oil have increased by more than 1 trillion barrels. Put differently, for every barrel of oil consumed, another two have been added.
With reasonable certainty, total proven barrels of oil which can be economically recovered from known reservoirs are almost two and one half times greater today than what they were in 1980. But what is of critical importance at this point in time are the growing recognition and concerns about carbon emissions and climate change, which means it is increasingly unlikely that the world’s reserves of oil will ever be exhausted.
To conclude for today, putting today’s discussion into perspective in respect to what all of this means, it is that these trends and developments will have a bearing on the world market price for oil, and it is likely not going to be an upward trajectory.