Management: Uncertainty and Volatility in Today's Energy System: Stability, Security, and Sustainability Through Mutual Interdependence
- Ivo Bozon (McKinsey & Co.)
- Document ID
- Society of Petroleum Engineers
- Journal of Petroleum Technology
- Publication Date
- March 2006
- Document Type
- Journal Paper
- 47 - 49
- 2006. Copyright is retained by the author. This document is distributed by SPE with the permission of the author. Contact the author for permission to use material from this document.
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Many have argued that the oil and gas industry has entered a final era of very scarce resources—a new equilibrium of bottlenecked supply, steep cost curves, continued demand growth, and, as a result, continued very high price levels (Fig. 1). It is hard to believe, however, that resources are the constraint, given the enormous potential still available, including currently known and booked reserves, the increased scope for recovery of existing fields with new technologies, further potential discoveries, and the new frontier of vast oil sands and oil shales reserves that are in the money at cur-rent oil prices. In essence, according to the majority of the industry’s research, we have enough resources left to sustain current production levels for between 40 and 60 more years.
Indeed, the core challenge is not one of resources but one of putting reserves into production and delivering energy to markets. This is evident already today. The expected near-term growth in production is barely enough to meet rising demand, let alone restore the spare production capacity to historic levels of 3–5 million BOPD, which helped maintain stable price levels in the past decades.
Thanks to this tight market, the outlook for demand and supply is as uncertain and volatile as it was in 1998, when oil was U.S. $10 a barrel, the industry’s other big period of upheaval in the last quarter century. Moreover, this level of uncertainty is likely to continue in the coming decade. In particular, there are two specific time periods in which the current balance of supply and demand could shift dramatically: in the short term (over the next 3 years) and in the long term (after 2015).
In contrast to the 1970s, when power generation was still a significant component of demand, today transportation fuels dominate. So far, high prices have not reduced consumers’ thirst for transportation fuels, and total demand has remained more robust than in the earlier periods of price increases.
However, the evidence is growing every week that demand will begin to fall in the near term. Recent increases in government-regulated fuel prices sparked large drops in demand for oil products in Indonesia (30%) and Thailand (20%). China and other countries with regulated fuel prices are considering similar moves. In the Organisation for Economic Co-operation and Development (OECD) countries, the evidence is less clear cut. Nevertheless, the transport sectors in the U.S. and Europe exhibit early signs of a slowdown in demand growth (e.g., the slowdown in U.S. sport-utility vehicle sales, the shift to lower-priced petrol grades in Germany, and the slowdown in diesel and especially gasoline sales growth in 2005 in Europe).
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