Are high crude oil prices here to stay?

While oil demand is projected to increase significantly, supply may struggle to keep pace. The production from the existing fields is declining by 4 per cent per annum which means that that around three mbpd of new capacity needs to be added every year just to offset the decline in existing production. In order to meet the demand projections of 100 mbpd, the annual supply increment requirement would be 7 mbpd by 2015 (the average annual increment rate during 1971-2006, considering a 4 per cent decline, was 3.5 mbpd).

The majority of the incremental supplies would have to be contributed by major OPEC reserve holders such as Saudi Arabia, Venezuela, Iran, Iraq and Nigeria. The emerging geopolitical dynamics continues to raise concerns about the ability of these countries (other than Saudi Arabia) to raise production significantly. In addition, the growing mismatch between the incremental nature of crude from Saudi Arabia (heavier and sour) and the growing demand for lighter products is expected to exert further pressure on the refining capacity which is already strained, resulting in greater price volatility.

Going forward, a significant portion of the incremental production is expected to be contributed from frontier, deepwater and unconventional sources, which are expected to be brought on-stream at higher prices, particularly in light of the increase in the prices of upstream equipment and services.

Business Standard