OUTLOOK 2006: United States

Simmons: What a difference 20 years make in crude oil prices

I began writing World Oil’s annual Crude Oil Outlook article on New Years Day, 13 years ago, when prices had just fallen below $14/bbl for the first time since 1986. At the time, conventional wisdom was certain that the world market had entered a new paradigm of ample, diverse supply. This was deemed to have removed a $10 “fear premium” that had been a structural aspect of pricing since the 1973 Oil Shock. Hence, most observers felt that prices ought to trade within a $10-to-$13/bbl range for the foreseeable future, bringing prices back to levels only briefly experienced in 1986, when a genuine supply overhang existed.

LESSONS LEARNED FROM HISTORY

My first article was entitled, “It is not 1986: The oil markets are tight!” I pointed out that global oil demand had risen steadily for a decade following a plunge in demand between 1979 and 1983. Only the collapse of Former Soviet Union (FSU) oil usage created the illusion that global crude demand was peaking at 66 million to 67 million bpd.

I also reminded World Oil readers that oil supplies were not growing as robustly as most energy economists believed. The impressive North Sea growth was a rebound after the Piper Alpha platform accident stalled new supply additions. Once a few sizable new fields went onstream, all future North Sea fields would be small, setting the stage for regional oil output to peak by the end of the 1990s. I also took issue with a widely believed assumption that modern oilfield technology was eliminating dry holes, and reducing finding and developing costs to a fraction of decade-earlier levels.

Instead, technical breakthroughs in 3D seismic, horizontal drilling, multiple well completions and subsea tiebacks allowed tiny oil deposits to be drained rapidly, thereby speeding up depletion of easily producible reserves. Thus, decline rates in many regions accelerated.

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