Inconsistent with the theory that oil will soon be in short supply and become a limited asset, production is expected to outweigh demand by 2020, causing a disproportional relationship between supply and demand, according to Leonardo Maugeri, senior fellow at Harvard Kennedy School, Belfer Center for Science and International Affairs, in his recent paper, “Oil: The Next Revolution.”

Maugeri opens with the looming possibility of oil overload. “Oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption,” he says. “This could lead to a glut of overproduction and a steep dip in oil prices.”

An additional 17.6 million barrels per day (MMb/d), or a total of 110.6 MMb/d of oil production is foreseen to be tacked onto the world’s oil market by 2020. If these expectations prove true, the world will see the largest boost in production since the 1980s. In fact, Maugeri believes that only four countries will see a decline in production by 2020-- Norway, the U.K., Mexico, and Iran. Four strong players-- Iraq, the U.S., Canada, and Brazil-- will more than make up for what these other countries lack, making the Western Hemisphere the new oil hub.

Maugeri credits the possible flood of fresh production to a combination of new exploration in mint areas with enormous conventional oil potential and the growth of unconventional oil.

The unconventional industry has entered the big league, with a worldwide forecast of 9 trillion barrels of unconventional oil potential and a 300-billion-barrel recovery rate, according to the U.S. Geological Survey and the World Energy Council. As more conventional fields become exhausted, Maugeri says a series of “de-conventionalization” of oil reserves will occur that will ultimately drive unconventional production.

The frontrunner for the world’s unconventional focus is the U.S. shale-oil and tight-oil market. The Bakken shale is making headway in the production sphere, with an estimated 500 billion barrels of oil and a 50% recovery rate. Maugeri also mentions the Permian Basin and the Marcellus as key U.S. shale plays. The U.S. has other untapped shale resources, which could also aid to the world’s production, he estimates.

Maugeri adds, “High oil prices, advanced technologies that were once uneconomical, and restricted access to conventional oil resources in the major oil-producing countries are pushing private oil companies to explore and develop unconventional oils on a broader scale.”

Reserve growth

Advanced recovery methods are vital in the extraction of these new reserves, but as Maugeri points out, “Knowledge of already discovered oil resources is not static, but increases over time through the expansion of scientific understanding of the fields.”

A solid example of a field that just keeps giving is the Kern River oil field in California. Maugeri says in 1942, the field was assumed to have 54 MMbbl of oil left for production. The field topped this and produced 736 MMbbl. The field was then estimated to contain another 970 MMbbl. Chevron surpassed these numbers in 2007, when combined field production hit 2 billion barrels. Kern River is only one example of a host of potential super-fields.

The more fields that replenish their resources, the higher the world’s present and future oil supply will be. Maugeri says that analysts largely dwell on the rates at which over-consumption is draining producing fields, without acknowledging the profound influence of reserve growth. In predicting tomorrow’s oil supply, reserve growth should be a prime factor in determination, he says.

World oil demand

There has been a cycle of demand overestimation in the past decade, according to Maugeri.

The average growth of world oil demand from 2001 to 2010, which had a compounded average growth rate of 1.4%, was similar to that of the 1990s, he says.

In 2001 and 2002, oil demand plummeted as a result of the global financial crisis, according to the paper. Demand, however, revved up in 2003.
After demand curtailed late in the decade because of the global financial crisis, it rebounded in 2010. In all of the bounce-back years, demand surpassed 3% growth.

“During the first decade of this century most forecasts grossly exaggerated demand growth, feeding the perception that the world’s appetite for oil—particularly that of China and other emerging countries— was insatiable,” Maugeri says.

In 2011, the International Energy Agency (IEA) predicted that oil consumption would grow by 1.3% from 2011 to 2016. However, 2011 demand only increased by 1.1%. The IEA has lowered its consumption bid to 0.9% for 2012, which Maugeri thinks is still overestimated.

Maugeri lists three key reasons why demand is unlikely to surpass the necessary 1.6% to meet the estimated production surge: innovative technology has increased energy efficiency, therefore lowering oil use per GDP; times of high oil prices breed reduced oil consumption; and developed countries can afford to use less energy because they have more efficient and economical technologies.

“We are living in a transformational age where energy efficiency legislation, climate change policies, technological advance, and the dissemination of energy alternatives will reduce the impact of oil in global economics,” he says.

Regardless of the rates of future oil demand, Maugeri theorizes that it is inconceivable that worldwide demand will exceed production.

“There is a hiatus between the global perception of oil demand growth, the alarming vision of an insatiable demand for oil promoted by mainstream media, and its effective growth,” he says.

Oil investment

The issue will come to a head when overestimated demand meets underestimated supply. Part of this potential production surplus will be fueled by a steady influx of cash flow from investors, says Maugeri. He attributes this investment frenzy to the sharp rise in oil prices, companies attempting to replenish reserves, and the misconception that oil will become a rarity.

He says the world’s oil investment cycle “reached the status of a boom between 2010 and 2011, when the oil industry invested more than $1 trillion worldwide to explore and develop new resources.” This burst of funding was the highest amount of E&P investment since the 1970s, according to Barclays Capital Inc.

Once investments are set into motion, they are nearly impossible to stop, according to Maugeri. Whether oil prices crash or market conditions shift, “The industry behaves like an elephant running: it starts very slowly, but once it gets going, no one can stop it,” he adds.

If future demand is not taken into consideration, new investments will come in and be difficult to slow.

Lastly, Maugeri cautions that the concept of asynchronicity between future oil supply and investments must be recognized. He says that there is an undeniable lag between the two, largely due to the gap between initial exploration and development investment processes and the launch of production. The investment cycle is around eight to 12 years, which leads to a delay in production. In order to properly estimate demand, this lag time is an integral part of the equation.

The oversaturation of supply and seemingly unparalleled demand should be a red flag to the industry and consumers. Ignoring the potential future unbalance between supply and demand will only lead to an even more unstable market for investors, oil companies and consumers.

Maugeri says, “While opinion-makers, decision-makers, the academy, and the financial market seem to be caught up in the ‘peak-oil’ mantra and an excessive enthusiasm for renewable energy alternatives to oil, oil prices and technologies are supporting a quiet revolution throughout the oil world.”