Upstream Economics and the Future Oil Supply

A multitude of factors, both geological and economic, point toward a peak in the world’s oil supply by 2015. Today’s sermon focuses on sharply rising upstream finding and development (F&D) capital costs that jeopardize ongoing and future oil projects. It does not appear, as most economists believe, that higher oil prices and Adam Smith’s invisible hand will bring forth abundant new oil supplies to meet rising demand, as happened in the North Sea and Prudhoe Bay in the 1980’s. Inflation is hampering the global oil industry’s ability to ease a tight market that has little spare capacity.

High Oil-Field Costs Crimp Search for New Supplies (Wall Street Journal, August 1, 2007) explains how inflated capital costs are impeding new oil & gas developments.


But during the current four-year rise in oil prices, inflation for equipment, labor and other crucial oil-field needs has largely kept up with the rise in oil prices. In recent quarters, this has crimped results at the world’s oil producers, including Western majors such as Exxon Mobil Corp. as well as the world’s biggest state-run oil companies, and has also led to delays and cancellations of major projects. While plenty of activity remains in place, the high prices are nibbling away at other projects that were expected to bring significant new supplies of oil and natural gas to the world.

“Supply is going no place, and demand is rising 2.5% to 3% a year,” says economist Philip Verleger Jr. of Aspen, Colo.

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