Oil’s Lost Decade Is About to Be Repeated

(Bloomberg Opinion) — For as long as most of us can remember, a rule of thumb has held true: Every year, the world’s production of oil goes up by one million barrels a day.

In 1983, the figure stood at 56.6 million barrels. In 2023, 40 years later, it was 40 million barrels more: 96.3 million. Annual figures may jump around thanks to wars, recessions, and the rise and fall of economies, but averaged over the longer term, every decade we’ve added an extra 10 million daily barrels to the headline total.

But you have to look closer than that. Much of what’s labeled “oil production” isn’t oil at all, but gases such as ethane, propane and butane as well as biofuels. If you consider only crude oil — the stuff subject to OPEC’s quota policies, with prices quoted on the nightly news — production is barely increasing at all. Global output this year will be just 360,000 daily barrels greater than in 2015, according to the latest outlook from the US government’s Energy Information Administration.

Even looking forward to 2026, crude output is likely to remain below the production peak the world hit in 2018. This will be the first time the industry hit a lost decade since the 1980s, when it was buffeted by the aftermath of the 1970s oil crises and decline of the Soviet bloc. As electric vehicles take more market share and climate damage grows, subsequent decades will be even worse.

That’s certainly what you’d expect from the way the oil industry is investing. Upstream oilfield spending will fall 6% this year to $420 billion, the International Energy Agency wrote last week, less than the $450 billion going to solar. Fossil fuels as a whole will receive $1.1 trillion of investment, just half the $2.2 trillion for clean energy.

Those figures suggest reports of the death of ESG have been greatly exaggerated. Spending on new supplies of oil and gas did indeed increase after Russia’s 2022 invasion of Ukraine, but only slightly. The growth wasn’t enough to lift investment even to the levels seen in the late 2010s, let alone the fat years in the early part of that decade.

Inflation makes the picture even more stark. Clean technology is getting cheaper, with the price of the best standard solar modules falling 20% over the past year to 9 cents per watt, according to BloombergNEF. That means each dollar spent is buying more energy than in the past.

The opposite is happening in the oil patch — particularly in the US, where President Donald Trump’s 50% steel tariffs are making it far more expensive to buy pipes and machinery. After adjusting for costs, activity levels in the upstream oil and gas sector are set to fall globally by about 8% this year, according to the IEA, the first drop since 2020.

That’s being felt most sharply by US shale players, some of the highest-cost and most price-sensitive producers out there. They’re retrenching rapidly as the Organization of the Petroleum Exporting Countries pumps extra barrels into an oversupplied market.

The signs are showing up throughout the chain, from exploration to development. Since the end of March alone, about 5.6% of all operating drill rigs in the US have been pulled from the fields, according to global energy technology company Baker Hughes, leaving the drill fleet almost a third smaller than at its last peak in late 2022. That suggests companies are spending less on exploration. The number of wells being actively fracked is also the lowest since 2021, in the teeth of Covid-19 — evidence that they’re not rushing to get production out of the fields they’ve already discovered, either.

In previous eras, slumps in those measures were often justified by the large backlog of developed wells being kept in reserve until prices recovered, but even this so-called fracklog is shrinking. The number of such drilled but uncompleted wells now stands at 5,332, about half the level in early 2020. December’s figure was the lowest on record.

If you thought the Gulf would come to the rescue, don’t hold your breath. These days, Saudi Arabian Oil Co. is spending more on gas than on crude. Its largest development project is the Jafurah gas field, due to start production later this year. Riyadh’s decision last year to cut Aramco’s maximum oil capacity target only makes sense if prospects for crude demand are dimming.

Look to China, and you can see why. Apparent oil consumption has been falling ever since September 2023, based on government data. Even the more granular estimates by state-owned China National Petroleum Corp. suggest demand will hit its ceiling this year, five years earlier than expected. Consumption of gasoline and diesel will be 400,000 barrels a day lower than in 2021, according to the IEA, as EVs, more-efficient vehicles, and shifts to public transport cause usage to evaporate. The situation in India, as my colleague Javier Blas has written, may be even worse.

As we’ve argued, the oil industry is already past its peak. The decades to come will only be worse.

Oil’s Lost Decade Is About to Be Repeated

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