Lessons Learned from 2008

The year 2008 may go down in history as the year of many lessons learned but
soon forgotten. For the oil industry, it is important to reflect on what in fact those
main lessons were and what their relevance is to the future.

One answer should not surprise most oil professionals. The industry discovered
that it had been operating at a production capacity plateau for several years and
no longer can provide the supply elasticity required by global oil demand given
the cost and complexity of the oil-supply chain.

The oil price surge that started in 2003 and collapsed in 2008 had its roots in
1998. At that time, oil prices had sunk to USD 10/bbl, which resulted in the drying
up of capacity investment across the world. In time, low oil prices resulted
in runaway oil demand that could not be matched by increases in supplies. This
shortfall resulted in the rapid increase in oil prices that eventually contributed to
the global recession and the price collapse of 2008.

Even though the industry returned to making massive investments between
2003 and 2008, it could not match the tide of rising oil demand. Ultimately, it
was unable to exceed a production plateau of 85 to 86 million BOPD in spite of
the best efforts by OPEC and non-OPEC producers alike.

The attendant surge in oil prices to USD 147/bbl was, therefore, hardly surprising
given these structural realities. These oil-supply limitations could not
help but fuel the speculative fervor and hedging that occurred in the financial
markets.

In hindsight, all of these events should have been predictable. While the global
economy can shift its rate of growth within months, the energy industry is too
complex and too mature to respond effectively, even under the most favorable
economic circumstances. Politics, logistics, basin maturity, and technological
limitations all converge to create an oil-supply plateau that cannot satisfy the
growth of unconfined energy demand.

The existence of this ultimate supply ceiling will not recede under the current
prospect for reduced upstream investments. In fact, there are good reasons
to believe that this production plateau will become even more restrictive in the
coming years.

Society of Petroleum Engineers [PDF]