The first half of the 20th centurys last decade ends with wraps coming off an oil supply trend that has turned the market inside-out. Supply from outside the Organization of Petroleum Exporting Countries is surging.
If noticed at all in its early years, the rise in oil supply from selected areas outside of OPEC tended to be dismissed as temporary. The standard belief was that non-OPEC reserves couldnt sustain steady gains in production. Until recently, moreover, plummeting output from Russia offset increases elsewhere in the non-OPEC world.
Increases continue
In addition to masking the volumes involved, Russias production problems diverted attention from impressive jumps in supply from places such as the North Sea, Latin America, Asia, and the non-OPEC Middle East. Now the Russian slide is ending, and increases continue elsewhere.
As an article on p. 35 shows, those increases show every sign of continuing through the end of the century. David H. Knapp, of the International Energy Agency in Paris, projects an increase of 5.5 million b/d in non-OPEC supply in the last half of the decade.
The most visible effect of all this is the problem it creates for OPEC. A few years ago, OPEC was expected by now to be enjoying steadily rising demand for its crude. Instead, if IEA projections for next year hold true, an expected increase of 1.8 million b/d of oil from outside of OPEC will exceed by 200,000 b/d the forecast rise in total worldwide demand. To the extent that stocks dont absorb the surplus, that 200,000 b/d will have to come out of demand for OPEC crude and natural gas liquids.
The market lesson: Even for OPECs high-volume producers, the oil market is a tough place. Over time, though, market effects will prove not to have been the most important dimension of current supply patterns.
The market effects will not endure. While supply gains from outside of OPEC and Russia have been larger and more durable than anyone thought possible just a few years ago, they cant go on forever. OPEC members do possess the lions share of global reserves and all of the worlds surplus production capacity.
Furthermore, demand growth will eventually ease pressure on OPEC, notwithstanding next years projected erosion in the call on OPEC oil. Scale, global population growth, economic development, and time all work in OPECs favor. In markets, no trend lasts forever.
More important than current market effects in the long term are the two main reasons that non-OPEC supply has been able to rise so significantly without the stimulus of rising crude oil prices.
One of those reasons is a general improvement since the late 1980s in availability of exploration and production rights and in the fiscal terms that apply to those rights. Investments stimulated by access to natural resources under potentially profitable conditions are paying off in increased oil supply.
The other reason for the supply surge is efficiency. Technological advances and streamlined organizations have enabled companies to reduce the costs per barrel of finding and developing oil and gas reserves, even as operating environments turn increasingly harsh.
A broad trend
It is important that the supply response to these two crucial factors is geographically broad. Although the North Sea receives most attention in discussions about non-OPEC supply gains and indeed leads the trend in terms of volume, output is growing elsewhere as well. In its Monthly Oil Market Report for October, IEA listed 17 individual countries where production is expected to rise significantly next year.
Most important of all, none of this would be happening if investors were not making money on production investments. And the first half of the 1990s has hardly been a period of robust crude prices. For the oil industry, profitability is no longer a sole function of price. This is the lesson of 1995 with the greatest implications for years to come. Copyright 1995 Oil & Gas Journal. All Rights Reserved.